Ghana’s rural banking industry has seen another year of consolidation, keeping with an established trend that has seen the sector becoming the driving force of the country’s poverty. Alleviation.
B&FT’s SETH KRAMPAH takes a look at the activities of RCBs in Micro Finance that have the propensity to alleviate poverty in Ghana.
The Oxford Advanced Learners Dictionary defines ‘poverty’ as “the state of being poor”. In this context being poor means having little money with which to buy one’s basic needs.
It could also mean having something only in very small quantities.
The United Nations defines poverty or the state of being poor to a person who earns less than a dollar or two a day.
Past and present governments all over the world have tried every available means to reduce the level of poverty in several years past, but have not succeeded due to several factors, including illiteracy, lack of vision, apathy and self-centeredness among the people.
In doing so, governments have adopted some measures or tools all aimed at reducing poverty to appreciable levels, but the impact have not yet been felt in most countries, especially in the developing economies.
One very important tool that has been adopted and tried by governments to help reduce the incidence of poverty is micro financing. To a large extent, micro financing as a tool has not yielded the necessary impact due to some constraints.
What is Micro Financing?
People in different parts of the world have given diverse meaning to micro finance.
Some define it as ‘a financial product that is designed and targeted at the poor and low income person, which has the tendency to improve the lives of people’.
The African Development Bank, which has been at the forefront of fighting poverty on the African continent defines micro finance as ‘the provision of broad range of financial services such as savings and deposits, loans, insurance and money transfers (ADB 2006).
Another school of thought describes micro finance as the provision of financial services to the poor, aiming at encouraging the lower-income populations by empowering them with access to credit and other financial products to enhance their living standards.
Micro finance world-wide recognition is credited to Dr. Muhammad Yunus, founder of the Grameen Bank of Bangladesh and recipient of the 2006 Nobel Peace Prize.
Although the idea of micro finance was not his original idea, he pioneered the implementation of joint-liability groups as a substitute to tangible collaterals demanded by the traditional banks. (Yunus 2007)
Rural Banking and Micro Financing
There is a misconception by some individuals and institutions describing Rural Banks as Microfinance institutions. To a greater extent, I beg to differ.
Rural and Community Banks are banks in the real sense of the word. Such banks are licensed under the Banking Law 673 as amended to play specific roles in our rural communities and the peri-urban centres of the country.
There is a thin line of definition when it comes to the core functions of the Rural Banks and the Universal banks. These banks are Unit banks as defined by the Bank of Ghana. But as result of the dynamism in the financial service industry and competition some of these banks have branches (agencies) throughout the country. It is high time that the Bank of Ghana looked again at the description of Rural Banks in their vocabulary.
These banks specialize in domestic banking whilst the universal banks do both domestic and international banking.
Microfinance is a product or a service that has been introduced to help reduce poverty in both rural banks and in some universal bank. Rural banks are therefore not microfinance institutions.
In the rural banks, micro financing is seen as a vehicle through which financial services are brought to the doorsteps of the productive poor.
Rural Banks adopt appropriate methodologies in mobilizing savings from the productive poor and lending to these clients (both groups and individuals) under the micro finance package.
Under the group lending methodology, the following guidelines are followed:-
- Membership to the group is by self-selection
- Members of the group must know and understand each other for at least a minimum period of two years
- The group members should preferably be of similar capacities and engaged in similar activities
- Members must understand the concept of joint and several liability for the full settlement of the amount loaned out to them.
- The group size must also be manageable (between five and fifteen members in a group)
With the individual methodology, clients who have gone through the basic training requirements and graduated from the groups are considered for financial assistance under the package.
Such categories of individuals include: –
- Food vendors
- Dressmakers, and
- Others engaged in micro activities
In best practice, the general requirements for micro finance clients are that; –
- They must be Ghanaians, who have stayed and known in their locality for at least five years
- They should be seen as engaged in any productive venture for at least five years
- They must be saving with the rural bank for not less than three month
- In addition, they must maintain a savings balance of at least one-fifth of the amount being requested.
- Such persons must also be in the position to adopt sound business practices, and above all
- Ready to accept the concept of joint and several liability when loans granted them are due for repayment.
As regards the development of clients, group members are taken through a minimum period of eight weeks training, during which period members save up to 20% of the loan request.
During the period of training the group is taken through important modules like, the role of the group; importance of internal regulations; duties of group members and election of leaders; the art of savings; record keeping; conflict resolution and loan procedures.
It is after going through the necessary training and orientation that the group is encouraged to apply for the loan facility from the bank.
What micro finance seeks to achieve in rural banking
The Rural and Community Banks see themselves as partners in development in their various communities and therefore constantly liaise with the district assemblies in developmental issues.
Micro finance as a tool in reducing poverty therefore presents a unique opportunity to the banks in product development, marketing and satisfying the needs of the people living in their operational areas.
Micro finance activities also seek to bring banking to the doorsteps of the people, who for one reason or other see banks as a preserve for the elite in our society.
The idea of rural banking and for the matter micro financing seeks to break this jinx and inculcate savings habit in our people at the rural areas.
In mobilizing savings under the micro finance activities, the banks also expand their deposit base and with the concept of the multiplier effects effectively grow their business.
The rural banks, in developing small savers under the micro finance scheme graduate them into small scale industries and then medium scale industries and providing them the opportunity to grow into bigger and viable industries for the growth of the economy.
Rural banks also provide the conduit for savings for the poor towards:-
- Life-cycle needs such as weddings, funerals, etc
- Protection under emergency situations such sicknesses and accidents
- Investment opportunities which are also leveraged for business and other social demands.
- Training offered by the rural banks for the clients which reduces the cost of maintaining customers and the stress of seeking for mainstream customers for the banks
- Decentralization and the simple nature of the micro finance operations which help to reduce cost to the clients as well as the banks.
Once operations under the microfinance activities are simplified, efficiency is introduced and the turnaround times at the banks are reduced considerably.
In what way will Micro Finance help reduce poverty?
African personality of the century, Mr. Nelson Mandela, former President of the Republic of South Africa once said, ‘Poverty is not an accident. Like slavery and apartheid, it is man-made and can be removed by the actions of human beings’.
Poverty is pervasive in Ghana and other developing countries. The World Bank estimates that around 25% of the population in developing countries lives below the poverty line. The United Nation translates this figure to 1.3 billion people living in poverty.
The financial services offered by this innovative tool (micro finance) have powerful implications in promoting economic development among low-income population groups in Ghana.
Micro finance has been found to be reliable and effective in empowering the poor, especially women in decision making in the family.
It also increases the income level of the poor in the society, thus enabling them improve on their living standards.
By providing the poor with access to credit and other financial services, micro finance is able to facilitate the poor’s mobility and enables the low-income population to actively benefit from the establishment of the Rural and Community Banks.
It also provides the necessary entrepreneurial and management skills through the training programmes outlined by the Rural and Community Banks for the productive poor.
In the process of equipping the poor clientele with the required training, the human capital is also improved in our rural communities.
Another important benefit of micro finance is that it provides psychological benefits to the poor by promoting a sense of self-respect and dignity within the rural communities.
What the Rural Banks should do to make micro finance more attractive
Rural banks should respond to changes in the business environment, which have created demand for such products as micro financing and adopt the right measures and attitudes in championing the essence of the product.
Rural banks should look at their internal developments, by building their own resource base and competences to benefit from micro finance.
The Rural banks, in leveraging on technology such the e-zwich can improve on product efficiency and benefits both for the bank and the beneficiaries of the product.
Another benefit that will accrue to RCBs is when they monitor both customer and staff satisfaction regularly through interactions in and outside the office on the performance of the product and how to improve it continuously.
In analyzing the micro finance market trend periodically, the RCBs can plan and deliver the right micro finance products at all times.
In creating the needed awareness of the product, RCBs should maintain and improve on advertising, sales promotion and publicity on the micro finance products.
As a result of the market targeted when it comes to micro finance – the rural and peri-urban areas, RCBs should improve on relationship banking and come to the level of the beneficiaries. It is one thing winning such customers and another thing maintaining and retaining them.
The micro finance product should also be positioned in the minds of the public as one tool that can help reduce poverty in our communities.
The banks should also act as consultants to the micro finance customers by occasionally identifying their problems, determining their needs and helping them solve them. This will surely create a lasting relationship between the beneficiaries and the Bank.