This paper reviews trends in GDP and other macroeconomic variables since independence. It assesses the performance of the different sectors of the economy and expenditure categories. The paper identifies a number of products that could contribute to maintaining the high growth rate that nontraditional exports have experienced. The medium-term fiscal sustainability analysis provides a useful quantification of the impact of the shocks experienced on fiscal performance. Ghana's social insurance system, stock exchange, divestiture program, rural finance, and poverty are also discussed.


This paper reviews trends in GDP and other macroeconomic variables since independence. It assesses the performance of the different sectors of the economy and expenditure categories. The paper identifies a number of products that could contribute to maintaining the high growth rate that nontraditional exports have experienced. The medium-term fiscal sustainability analysis provides a useful quantification of the impact of the shocks experienced on fiscal performance. Ghana's social insurance system, stock exchange, divestiture program, rural finance, and poverty are also discussed.

VII. Rural Finance in Ghana61

A. Introduction

181. The economy of Ghana like those of many other developing countries is rural-based and strongly oriented towards the production of primary commodities. The agricultural sector employs about two-thirds of the total labor force in the country and contributes about 40 percent of GDP. The small but growing industrial sector also depends on agriculture as a source of important raw materials. The overall growth of economy is therefore largely determined by growth in agricultural sector, which is also crucial for poverty reduction.

182. The Ghanaian agriculture is well diversified and offers considerable potential for growth through intensification and productivity increases. The agricultural sector is dominated to a large extent by small-scale farmers employing traditional methods. Large-scale farming contributes only about 5 percent of total food production. There is also very little irrigated farming. Yields of most crops grown by smallholders can be tripled with currently available technology and with access to financial resources. Even relatively simple improvements in crop husbandry would allow substantial productivity gains, but these often require some form of credit to poor segments of the population. There is scope for sustainable expansion of tree crops in the forest and transition zones, and of cereals, cotton, tobacco and vegetables in the transition and savanna zones. Expansion of irrigated agriculture is feasible, and in the livestock subsector, significant productivity gains can be achieved with relatively modest investments in animal health and improved stocks.

183. While rapid agricultural growth is critical to future poverty reduction, the missing link has been the lack of efficient financial services in many communities, making it more difficult for farmers to adopt new technologies, invest in new products, or process production on-farm. Since agricultural credit is a major factor of sustainable agricultural growth, rural financial institutions play a very important role.

184. This chapter reviews the performance of the rural financial sector in Ghana and discusses how it can better contribute to the success of poverty alleviation and economic growth. Section B provides a brief history of the evolution of rural finance in Ghana, covering, in particular, the recent sector reforms. Section C deals with constraints to the provision of financial services to the rural sector. Sector D describes the next steps that government and development partners intend to take to foster the development of rural finance in Ghana. Section E summarizes the main conclusions of the chapter.

B. Evolution of Rural Finance in Ghana


185. In the first half of this century, Ghana’s rural areas were generally denied access to banking services. Almost all banking activities were concentrated in the cities, and an average rural Ghanaian businessman was usually unable to satisfy the British62 banking criteria for credit: he was considered a poor credit risk. Formal agricultural credit started in October 1946, when the Gold Coast Co-operative Bank was established; however this bank went into liquidation after fifteen years of operation. Its lending function was transferred to the United Ghana Farmers’ Co-operative Council (UGFCC), which became the sole marketing agency for cocoa and other crops in 1961. Loans given out by the UGFCC were made in-kind through the provision of insecticides, empty cocoa sacks, fertilizers, and even tractor hiring services. These loans were deducted at source after the farmer had harvested his cocoa. In 1966, the UGFCC was also disbanded because of mismanagement of funds. The lending to the agricultural sector was then transferred to the newly created Agricultural Development Bank. A further attempt to promote formal rural finance was the establishment of rural banks since the mid-1970s.

186. Currently, Ghana’s financial sector is dominated by the formal banking system, which accounts for over 80 percent of the total financial assets. The country’s banking and financial institutions consist of the Bank of Ghana (BOG), which is the central bank, 17 deposit money banks (DMBs) including the Agricultural Development Bank, and 132 rural/community unit banks. The DMBs had a total of 315 branches in March 1998. However, this branch network was biased in favor of the urbanized southern regions. Greater Accra alone accounted for 30 percent of the total number of bank branches, while the three northern regions (Northern, Upper West and Upper East) together had just 9 percent of the total branches. Box 8 highlights this point by describing the limited rural financial intermediation in Upper East Region.

187. Credit extension by DMBs is primarily focused on manufacturing and commerce, with agriculture in third place in 1998.63 The Agricultural Development Bank (ADB) is the only DMB with a strong emphasis on the agricultural sector, which accounts for 70 percent of its loan portfolio.

Rural Financial Intermediation in Upper East Region (UER)

Six banks, viz., the Ghana Commercial Bank (GCB), the Standard Chartered Bank, the National Investment Bank, the Social Security Bank, the Ghana Cooperative Bank and the Agricultural Development Bank (ADB), operate in UER. Out of the six DMBs, only the GCB, Ghana’s largest commercial bank, and ADB undertake rural microfinance and have participated in the implementation of IFAD funded activities. ADB operates in UER through a branch at Bolgatanga and a farm loan office at Bawku. The opening of more farm loan offices to improve the bank’s network in UER is under consideration by ADB management GCB participated in the implementation of IFAD-supported group credit activities through one of its three branches in UER. With the experience gained in handling microcredit, GCB is planning microcredit activities in all its three branches in UER, including Bolgatanga in Bolgatanga district, Bawku in Bawku East district and Navrongo in Kassena-Nankana district.

The participation in micro-credit delivery under the IFAD project has helped both GCB and ADB to build up their loan portfolio, and the profitability of their branch units. As of October 31, 1998, almost 50 percent of the total outstanding loans and advances of the participating branches in UER of the two banks consisted of group credit disbursed under the IFAD project.

Two rural banks (RBs), Naara with headquarters at Paga in Kassena-Nankana district and Bessfa based at Garu in Bawku East district, have participated in the implementation of group credit supported by IFAD. A third RB which started operating from October 1996, Builsa Community Bank at Sandema in Builsa district, will join them soon. The Naara RB has established within its area of operations, three agencies (at Navrongo, Kandiya and China), to facilitate deposit mobilization and credit management. Similarly, the Bessfa RB has two agencies at Bawku and Nakpanduri. The Action Aid Ghana, an NGO, has been assisting the rural community in Bawku West district to set up a RB at Zebilla. Although BOG’s present policy is not to issue a license to new RBs, an exception is being made in the case of the proposed Zebilla RB based on an appraisal recently carried out by BOG. This new RB would, therefore, be a candidate to operate under the IFAD funded project and, in that event, it would be the fourth RB to assist with the implementation of the project.

Prior to the effectiveness of the IFAD-funded project in UER, i.e., at the end of 1990, both Naara and Bessfa RBs did not conform to BOG’s capital adequacy requirements and were operating at a loss. Subsequently, the Naara RB was included in the first group of 20 RBs restructured under the IDA-assisted Rural Finance Project (1989–94). The Chief Executive of the Bessfa RB, who was facing charges of alleged misappropriation, was replaced. Both these RBs have benefited from IFAD support. They, along with the newly established Builsa RB, are operating at a profit, complying with BOG’s prudential criteria and maintaining loan recovery rates of nearly or above 90 percent.

188. Two successive financial sector adjustment programs (1988–98) supported by the World Bank have helped restructure the DMBs. The reform programs included improvement of banking legislation and supervision, deregulation of administered interest rate structure and credit allocation, removal of subsidized lending rates of interest on credit to “priority” sectors, deregulation of foreign exchange market, establishment of a non-performing assets recovery trust and privatization of state-owned banks. Before deregulation of administered credit quotas, commercial banks were required to allocate at least 20 percent of their total credit to the agricultural sector. After the liberalization of this requirement, their credit to the agricultural sector has dropped sharply, from 31 percent of total lending in 1983, to less than 13 percent in 1998.

189. In addition to formal institutions, mainly the branches of ADB and rural banks (RBs), the rural financial sector in Ghana consists of informal institutions such as susu collectors, individuals who mobilize short-term savings; susu groups, which are rotating savings and credit groups; and traders and moneylenders. There are also some providers of semi-formal financial services. These consist of savings and credit cooperatives, also known as credit unions, some agricultural cooperatives, and a few nongovernmental organizations (NGOs) involved in rural microfinance.

Agricultural Development Bank

190. The ADB was set up in 1965 to lend mainly to the agriculture sector. It was the first bank established solely for agricultural credit in Africa, catering primarily to small-scale farmers.64 It was first called the Agricultural Credit and Cooperative Bank, but changed its name to Agricultural Development Bank in 1979. The ADB is fully owned by government and it is run by a nine-member board appointed by the Minister of Finance. Loanable funds for the ADB came initially from government and external sources, but in 1968 the ADB embarked on deposit mobilization and is now a full-service bank.

191. Owing to inappropriate lending policies and procedures, and insufficient loan supervision and recovery arrangements, ADB had by 1987 accumulated a high percentage of non-performing loans. It was restructured in 1988 with a substantial injection of capital from the government. Since then, ADB improved its performance and has made profits, while still maintaining an agricultural focus and rural clientele.

192. At present, ADB operates in every region of Ghana through 3 regional offices and 32 branches. As of December 31, 1998, its total assets amounted to 490 billion (US$209 million) and its outstanding loans and advances stood at 223 billion (US$95 million). While agriculture accounts for most of ADB’s loans and advances, a major portion of agricultural loans goes to large farmers, traders and processing units. Loans to finance food crops, which are predominantly grown by smallholder farmers, were only 12 percent of the loans to agriculture and allied sectors, and 9 percent of the total loan portfolio (Table 21).

Table 21.

Outstanding Agricultural Portfolio of ADB per Sub-Sector, 1998

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Source: ADB Annual Report, 1998.

193. The African Development Bank (AfDB), the European Union, IDA and IFAD have been key supporters of ADB. AfDB first granted a line of credit to ADB in 1980, then again in 1985 and in the early 1990s; a fourth line of credit is presently active. In 1980, EU also gave a line of credit to ADB. Under the IDA-assisted Rural Finance Project (1989–94), ADB was the bank that used the project’s line of credit most extensively. A substantial portion (nearly 75 percent) of the total rural credit portfolio under IFAD projects has been handled by ADB. ADB is committed to allocating up to three-fourths of its loanable resources to the agricultural sector including associated activities. However, the ADB has tended to focus on the commercial agricultural sector and on larger regional centers. It has provided little support to the needs of small farmers, and has been unable to link up with the informal financial sector.

Rural Banks

194. The BOG promoted the establishment of RBs in the mid-1970s because Ghana’s vast rural areas were devoid of adequate banking facilities. The key objectives were to institutionalize financial intermediation in the rural areas, inculcate the banking habit among rural households, and mobilize rural savings for onlending to agriculture, forestry, fishing, and other agro-based industries.

195. In July 1976, the first rural bank of Ghana was established at Agona Nyakrom in the Central Region. Since then, the number of RBs has grown steadily, from 20 in 1980 to 122 by 1990, and further to 132 by 1998. In June 1999, there were a total of 111 rural banks located in nine regions (Tables 22 and 23), after the decision of BOG to close down 21 distressed banks. RBs are widely dispersed, but their regional coverage is unequal. There is a high density of rural banks in Central, Eastern, Ashanti and Brong Ahafo regions, while the northern regions (Upper East, Upper West and Northern) are not well served.

Table 22.

Regional Distribution of Rural Banks in Ghana

(Number of banks; end of period)

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Source: Bank of Ghana.
Table 23.

Important Financial Indicators of Rural Banks, 1993–98

(In billion of cedis; end of period)

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Source: BOG Annual Reports.

196. Essentially, RBs are unit banks incorporated as limited liability companies. They were initially owned jointly by the people in their catchment area and the Bank of Ghana. The local people owned ordinary shares, and the Bank of Ghana, preference shares. Since 1994, the BOG no longer participates in the ownership of newly created rural banks. However, it continues to retain shares in most of banks that were set up before 1994. In general, the ownership of RBs is broad-based and confined to communities within which they are located.67 Their area of operation is generally about 20 miles (32 km) around their headquarters. The distinctive features of RBs are a rural base, private character and community identity and patronage. Although RBs are supposed to function as unit banks, some of them have opened resource mobilization agencies in nearby urban areas. They are usually managed and operated by the residents of the locality who have the advantage of familiarity with prospective clients and local conditions.

197. For any RB to qualify for a license from BOG, it must: (a) collect a minimum share capital of 50 million; (b) ensure that no single individual or company holds more than 10 percent and 20 percent of the share capital, respectively; and (c) submit for BOG review a feasibility report of its business prospects.68

198. RBs are subject to the same degree of BOG supervision as the DMBs. Like the latter, they have to operate in conformity with the Banking Act of 1970 as amended in 1989. In addition to compliance with capital adequacy requirements, RBs have to: (a) maintain a primary reserve in the form of cash and balances with other banks of not less than 10 percent of deposit liabilities and a secondary reserve in the form of treasury bills and other money market instruments of not less than 52 percent of their deposit liabilities; (b) transfer a minimum of 50 percent of their annual net profit after tax to their reserve fund; and (c) seek ratification of BOG’s Rural Finance Inspection Department before disbursement of loans of 2 million or more to a single party and all loans to directors or companies in which they have an interest.

199. The Association of Rural Banks (ARB) was founded in 1981 to promote and strengthen the RBs. All but one rural bank are currently members of the ARB. Its main role is to serve as an advocate for rural banks and to provide supporting services to them, including technical assistance. In some cases, the Association has been called upon to mitigate conflict between managers and boards—usually over remuneration and exercise of authority. However, the ARB has limited influence on banks. It provides banks with advice but if the banks do not accept it, the ARB can only initiate concrete actions through the Bank of Ghana. With no legal authority to enforce its recommendations, the association has to resort to moral suasion.

200. There has been considerable increase in rural financial intermediation by RBs in recent years (Table 24). However, growth in RB outstanding credit was somewhat weaker despite considerable amounts of lending under externally assisted projects. This was due to some extent to an increase in reserve requirements. Moreover, with the treasury bill rate near or slightly below the average bank lending rate for agriculture, manufacturing and trading, RBs actually maintained a high share of their deposits as primary and secondary reserves, ranging between 65 and 80 percent of deposits in 1994–98, and with interest rates on deposits being highly negative, they had no problems in ensuring their financial viability in a highly inflationary macroeconomic environment. Since then, interest rates have declined endangering the RBs financial viability, because of the high secondary reserve requirement.

201. Initially rural banks were required to comply with sector guidelines in respect of their loan portfolio composition. In the mid-1980s, the loan requirement for agriculture was 45 percent and for cottage industry 30 percent of total loans. These requirements were however discontinued at the beginning of 1990s. An analysis of the distribution of loans and advances during 1996–98 period reveals that the share of credit accruing to agriculture is only 13-16 percent, while the share of the category “other credit”, which comprises mainly loans to salaried workers is about 50 percent of the total (Figure 20). The extension of a disproportionate amount of credit to salaried workers stems from the low risk associated with such loans, which are potentially deductible at source from the worker’s steady flow of income. However, most salaried workers live in urban centers.

Figure 20.
Figure 20.

Ghana: Distribution of Outstanding Loans and Advances of Rural Banks by Sector, 1996–98

(In percent of total; end of period)

Citation: IMF Staff Country Reports 2000, 002; 10.5089/9781451814811.002.A007

Source: BOG Annual Reports.

202. The majority of the RBs can only claim a small number of clients and they mobilize modest amounts of savings and disburse few credits, either directly or indirectly—especially when compared to total rural population numbers and total savings and credit needs in Ghana. Nevertheless, RBs have been reasonably successful in mobilizing rural deposits, mostly in the form of savings and time deposits. The total number of deposit account holders rose from 625,000 in 1995 to 780,000 in 1997, a growth of over 25 percent. RB deposits include funds of informal deposit takers, such as susu collectors, which play an important role in bridging informal and formal entities. While RBs deposits grew in nominal terms nearly nine times from 13.2 billion in 1993 to 114.0 billion in 1998, they account for only three percent of deposits with the formal banking system. However, RBs have ample potential to expand their client base, since 68 percent of Ghana’s population is located in rural areas.

203. The BOG has an annual grading process for all the RBs, based mainly on the capital adequacy ratio (CAR), size of paid-in capital (minimum of 30 million), net worth, and profitability. The CAR is essentially the proportion of the RB’s capital base to risk assets. The capital base consists of paid-in capital, reserves and accumulated profit less fixed assets, preference shares, subsidiary investments and accumulated loss. The risk assets represent the total assets less cash and balances with other banks, investment in treasury bills and other money market instruments and fixed assets. RBs with a capital adequacy ratio of 6 percent or above are classified as “satisfactory” banks; those with capital adequacy ratio between 1 percent and 6 percent are “mediocre”; while those with a capital adequacy ratio of less than 1 percent are referred to as “distressed banks.” As at December 1998, 52 RBs out of a total of 132 were classified as “satisfactory,” 64 as “mediocre” and 16 as “distressed.”

204. Until 1990 RBs received very little institutional support. The first comprehensive support to the RBs was through the IDA-assisted Rural Finance Project (1989–94). This project helped restructure RBs, strengthen their internal control systems, and initiate training activities managed by the ARB. As a result of the project, the number of RBs adjudged as satisfactory increased from only 5 in 1990 to 55 by the time of project completion in 1995. Post-project support for training and capacity building has come from IFAD and Danida. Assistance provided by donors has been generally limited in scope and scale, often circumscribed to specific regions and lacking clear plans for expanding support in case of success. Nevertheless, the lessons from these initiatives fully justify a continued support for reform and revitalization of Ghana’s rural banking system.

205. Overall, RBs have substantial potential to contribute to rural growth and poverty reduction. With the advantage of their rural orientation, they are in a position to offer simple and flexible banking services tailored to meet the peculiar needs of predominantly small rural depositors and borrowers, and increase flow of funds, through both deposit mobilization and lending, to assist rural economic activities. Having the advantage of community identity and patronage and being rural-based and community-owned, RBs are well suited to promote improved linkages with informal rural institutions and better financial intermediation in support of agricultural and rural development, while providing financial services to rural women and other disadvantaged. However, the strengthening of RBs is essential as more than 60 of them are classified as mediocre.

Semi-Formal and Informal Financial Services

206. The semi-formal financial services sector in Ghana mainly consists of savings and credit cooperatives known as credit unions (CUs). The CUs are voluntary self-help associations mostly organized in a community or workplace. They are registered cooperatives whose main activities are encouraging savings among members and lending to a limited number of their members. There are about 250-300 CUs in Ghana affiliated to the Credit Union Association. Only about 50-60 percent of them are reported to be active and most of these are urban-based. Box 9 provides a summary of semi-formal and informal financial services in the Upper East Region of Ghana, the least developed area of the country.

207. The informal financial services are provided by susu collectors, susu groups and moneylenders/traders. Susu collectors are mobile bankers primarily engaged in savings mobilization. Individual savers place an agreed amount with the collector at regular periodic intervals (usually a day or a week) for a specified period of time, after which the deposits (less a small commission) are returned to the depositor. The depositor may, in an emergency, request that his or her money be paid out earlier than agreed. Susu collectors usually deposit the money they mobilize with a bank. In some cases, they may invest the money in their own business, or lend to others.

Semiformal and Informal Financial Services in Upper East Region (UER)

There are 11 savings and credit cooperatives or credit unions in UER. However, most of them are made up of industrial and salaried workers and none of them is engaged in providing financial services to rural communities. Among the semi-formal financial service providers in UER, some NGOs are important as promoters of rural savings-cum-credit groups. Some examples of their operations include:70

  • Action Aid Ghana: Organized 140 groups of rural poor in Bawku West district, of which 80 percent are women’s groups. Credit activities include seed credit and credit for informal group associations (IGAs). Groups must save up to 20 percent of credit required.

  • Bawku East Women’s Development Association (BEWDA): Serving 33 women’s groups in Bawku East district. Credit activities cover rainy season crop production, dry season vegetable gardening and petty trading. Groups’ own savings is essential to qualify for credit.

  • World Neighbor Program for Strengthening Community Organization: Serving 10 groups of women and men. Credit is for IGAs. Groups must save up to 10 percent of credit required.

The group savings-cum-credit activities of NGOs are constrained by lack of funds. The preference of NGOs also is to disengage from direct administration of loanable funds and concentrate on training and capacity building activities.

The system of susu collectors is developed in the main towns of UER—Bolgantonga, Bawku, Navrongo and Sandema. In these towns, moneylenders also operate mainly to meet emergency demands of cash, but charging high interest rates of up to 200 percent. In rural areas where susu collectors are usually absent, susu clubs or rotating savings and credit associations/clubs are the most common form of group to person financial management arrangements, especially among rural women. These clubs have the advantage of being user-owned and non-profit entities.

208. Susu groups are also engaged primarily in mobilizing savings, but group members organize the arrangements for collection and payment collectively. A variation of the susu system is what is described as rotating savings and credit associations/clubs (ROSCAs). Under this arrangement, a number of people come together (through a self-screening process) and decide on how much each member should contribute on a regular basis. Total collection for each period is given to one member in rotation. This system is popular in many rural areas, especially among rural women who seek to establish an IGA, including a farm other than the collective family plot. The expression “susu” is used for both susu groups and susu collectors. The susu groups or ROSCAs offer a ready-made and sound foundation for organizing and developing self-help savings-cum-credit groups and linking these informal channels with formal banking institutions to enable the latter to undertake cost-effective rural financial intermediation.

209. Moneylenders/traders are usually rich farmers who have their own cash to lend or have access to the formal financial system. Their local knowledge enables them to provide ready credit. However, they usually collect interest at a high rate, are not involved in savings mobilization, and may not necessarily lend to finance a productive activity. They also often have a narrow capital base.

C. Constraints

Rural Banks

210. Rural banks have been operating within a macroeconomic environment with very high inflation since 1992. This is a major constraint since rural financial services cannot meaningfully develop in a climate of high inflation, which particularly affects the poor owing to their lack of diversification into non-cash assets.71 Although reasons for mixed performance vary from bank to bank, the key underlying features are poor management, compounded by inadequate oversight from the board of directors, low staff quality, which is exacerbated by the poor location of the banks with respect to the money market centers, and weak internal controls.

211. Because of the isolated nature of the communities in which rural banks operate, with limited social services, these banks face severe difficulties in recruiting qualified personnel. As a result, the majority of directors are often recruited from the ranks of local citizenry in the catchment areas of the banks and may lack knowledge of banking and finance, a situation which has contributed greatly to the poor management of these banks. Rural banks also face a lack of infrastructure and logistic support, which hamper their operations. Specifically, banks have very weak legal instruments for debt recovery, which impedes the recovery of overdue loans, and undermines a revival of confidence in the rural banking system. Poor management and weak legal instruments have impacted negatively on regulatory controls and the financial viability of the banks.

212. Lack of experience and capacity in effectively mobilizing customers has lead to the financing of artificial groups of producers, many of which disintegrate after the credit is disbursed. In addition, the quality of feasibility studies required for establishing rural banks has been generally low, thereby leading to the improper location of some banks.

213. The physical isolation of the banks from the money market centers, coupled with communication and other infrastructure problems, has adversely affected the banks’ abilities to invest their surplus funds on a daily basis, and thus has limited their profitability. These issues have limited the array of services available to clients, such as check clearing, and have constrained the adoption of new technologies and contributed to the high transaction costs.

214. Inadequate bookkeeping, nonobservance of internal control measures, and lack of regular internal auditing are the main regulatory problems facing the banks. A high level of secondary reserve requirement (52 percent of deposits) has acted as a disincentive for rural banks to invest in the rural sector and instead forced them to hold risk-free and high-interest bearing treasury bills. Consideration could be given to reducing the secondary reserve requirement once the share of bad loans in RBs’ portfolio falls to a reasonable level.

215. Most of the rural banks are inadequately capitalized, which has constrained their ability to perform at the optimum level. Their customer base tends to be narrow, and their deposit base is correspondingly low owing to limited business opportunities in the rural areas. This situation has tended to make some of the banks depend mainly on the handling of payment of cocoa purchases, meaning that when the cocoa season is over, the rural banks become idle. This results in a drastic reduction in the mobilization of funds and hence considerably reduced profits.

216. The financial viability of rural banks rests on a combination of institutional strength, operational feasibility and adequate regulatory controls, since these affect the banks’ capacity to mobilize and distribute funds, as well as ensuring that money is well managed while in the bank’s possession. Key requirements for the upgrading of Ghana’s rural banking system are the improvement of the management of banks and an increase in the volume of transactions conducted by them, as well as widening their range of services by deepening the linkages with the informal sector.

Community Groups

217. As mentioned previously, the rural poor in Ghana, as in most of Africa, face many problems which limit their access to credit from formal providers. Physical location in relation to the financial institution, combined with problems of transport, limits the accessibility of financial institutions. These in turn encourage the poor to rely on informal networks which are closer to home, despite the fact that these lend at higher rates of interest and thereby perpetuate the cycle of poverty. Another factor forcing the rural poor to rely on informal lenders is their lack of collateral. Informal financial services tend to be more flexible than the formal ones in terms of collateral requirements, and therefore attract more clients from the ranks of the poor. Lack of literacy is another limiting factor facing the rural poor in their quest for credit. Finally, the terms of the loan are more easily negotiated with flexible informal lenders, than with rural banks, thereby further encouraging the borrowers to remain with the informal providers.

218. The World Bank’s experience with the Ghana Microfinance Institution Action Research Network highlights the specific problems facing female beneficiaries with respect to participation in development initiatives. Though the problems outlined above are also true for men, women tend to experience them more acutely, since they are exacerbated by women’s lower levels of education, increased workload owing to both their reproductive and productive roles, and their lower position in society. Women therefore rely on informal suppliers such as susu collectors, and semi-formal suppliers, such as NGOs and community-based organizations, to a greater extent than their male counterparts, though the size of the loans that they receive are usually smaller than those given to men. Savings mobilization and credit provision are the core services provided by these semi-formal institutions to women.

219. Within a rural context, microfinance institutions target rural women using the group lending mechanism to ensure joint liability for securing loans. This strategy is cost-effective in increasing the number of clients to credit staff ratio. This is important in order to reduce the cost of reaching isolated rural communities. Group development training also equips rural women with decision-making and leadership skills. They select group members, make loan decisions, and are active within microfinance operations.

220. Key means of addressing the constraints facing women in terms of access to credit include the linkage of susu collectors with banks and collaborative arrangements with other financial networks. These are discussed in more detail in the Section IV.

Informal Sector

221. The informal sector is large and disparate, with little cohesiveness, factors that limit its effectiveness. The informal sector is often perceived negatively by outsiders; images of exploitative moneylenders and exploited cultivators have formed powerful arguments for the provision of cheap targeted credit and the establishment of formal financial institutions for rural finance. These groups do, however, offer a range of services, which are invaluable to disadvantaged client groups.

222. Individually, informal entities are small and lack impact, particularly because of their low asset base, and they have high transaction costs. Their savings mobilization and lending activities are often not sustainable over the long-term. They do, however, represent a key to the viable operation and greater effectiveness of Ghana’s rural banking system through increased linkages between the two. Promoting these linkages between the formal and informal financial sectors, which would include improving the assessment of loan suitability, could address the issue of sustainability of the activities financed by loans from the informal sector, which otherwise would remain in doubt.

D. Next Steps

Apex Bank

223. The apex bank initiative evolved out of the operational constraints currently faced by the unit rural banks and from experience of past donors’ assistance in the rural/microfinance sector in Ghana. Given the unit nature of the rural banking system, individual banks lack the economies of scale to address the constraints which limit their operational efficiency, undermine depositors’ confidence, and hamper the development of innovative tools and products for serving the rural clients. To alleviate these problems, the Association of Rural Banks (ARB) proposed the setting up of an apex bank, which would serve as a banker to the rural banks, while also providing them with financial, managerial, and technical support.

224. The apex bank would have a banking license. It would be owned by the member rural banks through share subscriptions and have an independent board of directors. With headquarters in Accra, it would have three strategically located branches (Kumasi, Takoradi and Tamale) to provide broad coverage to rural banks in all parts of the country. However, the apex bank is seen as more than a financial institution: it would serve as a vehicle for developing, testing and disseminating new and innovative products for serving rural clients, disseminating best practices in rural/microfinance, and assisting the rural banks to better deal with risks.

225. The apex bank would be expected to enable the rural banks to (a) expand financial intermediation in Ghana’s rural areas by diversifying products, instruments and related services, and strengthening linkages with the informal sector; (b) mitigate rural banks’ operational constraints, such as check clearing, specie supply, and liquidity management; and (c) promote institutional reforms leading to the overall development of a sound and sustainable rural financial system that would underpin rapid economic transformation of the rural area.

226. The first technical assessment of the apex bank was undertaken by consultants from the Philippines in 1996. After this initial study, a much broader feasibility and business plan was prepared by local consultants in 1997. This study defined the administrative, legal and financial roles and responsibilities of the apex body, its relationship with member rural banks, management requirements, and profitability. Based on this report, the ARB intensified consultations with key donors, notably the World Bank and IFAD, to provide support in developing and operationalizing the concept. Nevertheless, not all operational details of the apex bank have been clarified. During the September 1999 Roundtable Conference on the apex bank, there was general agreement that substantial work remains to be done in better defining the legal and institutional framework, clarifying the relationships between the individual rural bank and the apex bank, and between the apex bank and the rest of the banking sector.

227. As mentioned before, the three main constraints identified by rural bank managers as hampering their operational efficiency are check clearing, specie supply, and liquidity management. Rural banks currently clear checks and seek specie replenishment through commercial banks such as the ADB and the Ghana Commercial Bank. The rural branches of these larger, Accra-based commercial banks are themselves competitors of the rural banks in activities such as cocoa purchasing, agricultural credit, and consumer loans to rural civil servants. Because rural banks depend on their competitors for the provision of these core services they are at a competitive disadvantage. Rural banks checks are often held for periods exceeding 30 days by the banks in which they held their accounts. Specie supplied to them are a combination of old, tattered, and small denomination notes and large quantities of coins. Specie is also not supplied in time, leading to chronic liquidity problems within the rural banks. Procurement of treasury bills by the rural banks, a service also entrusted by rural banks to commercial banks, are often subject to similar delays, in addition to the high fees charged. The cumulative effects of these problems are high transaction costs of rural bank operations, inefficient support of clients, uncertainties, and low depositors’ confidence.

228. Beyond these factors, the establishment of an apex bank would lead to substantial economies of scale in the provision of common services. For example, the apex bank would represent all rural banks as a single entity in the national clearing system. Thus, the deposit of 200 million required per bank for participation in the national clearing system—which is high for any individual rural banks—will be shared between the 100 or more participating rural banks, thereby making it more affordable. Additionally, the apex will provide more cost effective training by pooling resources and gaining leverage in negotiating with training centers.

229. Also, grouping all rural banks under an apex structure, with similar reporting standards and evaluation criteria, would lead to improved and timely monitoring by the Banking Supervision Department (BSD) of the central bank. Under the current situation, BSD maintains a fleet of vehicles and staff to visit each rural bank at least once a year. Given the geographical dispersion of the rural banks in all the ten regions of Ghana, the current monitoring program is proving significantly costly for the central bank, and as more banks are licensed, will be unsustainable. Other common services which could be provided by the apex include a deposit insurance scheme for rural depositors and a human resource development and personnel policy to enable rural banks attract and retain good caliber staff.

230. The apex bank project is being developed under a Transition Apex Steering Committee (TASC) chaired by the Governor of the Bank of Ghana and with broad representation from the Bank of Ghana, the Ministry of Finance, the Association of Rural Banks and the private sector. It is being supported under the IDA/IFAD Rural Financial Services Project (RFSP).72 The project is estimated at US$16 million over five years. IDA and IFAD will contribute about US$5 million each, and other donors will be responsible for the remainder.

231. IFAD support will focus on strengthening informal/formal linkages, development and training of informal financial sector groups and associations, and capacity building within the rural banks to better link them to their rural agencies and clients. The World Bank will focus on policy and institutional reforms in the rural financial sector, and the strengthening of the BOG areas in charge of rural banks and their supervision. GTZ and Danida will provide technical support, training and capacity building within the rural banks. Assistance from the Rabobank, a community-based banking group in the Netherlands, is being sought to develop sound operational and managerial practices at the apex bank.

Informal Financial Services

232. Informal financial services can also make an important contribution to rural finance by taking care of rural customers who have no access to banks owing to their location or perceived creditworthiness. The IFAD is working with the government to develop informal financing services and their linkages to the formal financial sector.

233. Interventions aimed at strengthening links between formal (specifically rural banks) and informal financial systems and susu collectors should be considered. The idea is to let susu collectors operate as agents of rural banks to collect rural savings and provide retail credit. A Susu Collectors’ Agency Arrangements Risk Fund could be established, to which participating rural banks would be asked to contribute in order to benefit from risk insurance coverage.

234. Another solution to the lack of interaction between formal and informal financial entities is the possible replication of the financial services associations introduced into Benin by IFAD in 1997. The financial services associations concept is a flexible micro-credit model for delivering low-cost financial services to rural areas by establishing village-level financial structures that are initiated, owned, and operated by the villagers themselves. In this model, savings are mobilized in the form of equity rather than debt, i.e. the financial services associations is an equity-based, shareholding company that can be linked to a formal financial institution, which then acts as a clearing house, depositing bank or as a place to invest surplus funds.

E. Conclusion

235. The rural financial institutions have an important role to play in rural economic development of Ghana. However, their potential is being now stifled by the lack of management capacity, inability to adopt new technologies and other constraints. Key steps to strengthen Ghana’s rural financial sector in the near future are the implementation of the apex bank initiative and deepening linkages between rural banks and the informal sector.

236. Where present, rural banks are an effective instrument to link the villages with the formal banking system and to provide facilities such as savings, shares, transfer of remittances, and loans, while at the same time providing financial services associated with the inflow of civil servant salaries, pensions, and remittances. However, they have a limited ability to deal with remote villages and poor farmers, who constitute the majority of the rural population. Given the RBs’ relatively limited coverage, promoting viable community-driven and locally based financial systems (informal financial services) for the rural population is an attractive approach. IFAD funded operations in Ghana have demonstrated that RBs have the potential to form lasting linkages with informal networks who are dealing with clients who do not have ready access to rural banks. In these cases they increase their impact and improve their service delivery, and are therefore key contributors to alleviating poverty.

237. The proposed World Bank Rural Financial Services Project aims to address the issues presented in this chapter in order to ensure sustainability of the financial system. It provides technical assistance to improve the quality of the staff in rural banks, as well as actions aimed at strengthening of internal controls, enhancing operation efficiency of rural banks, strengthening rural project appraisal, and testing innovative instruments. In addition, the project will support the restructuring of rural banks that have demonstrable potential to succeed. Another key component is the strengthening of operational, informational and technical linkages between informal and formal rural financial sector institutions. The program support would be for collaborative initiatives between rural banks and facilitator NGOs or community based organizations.

238. Given the current state of development of the RBs, specifically their lack of widespread coverage of the rural population, it is necessary for development initiatives to include a focus on the informal sector. Only by addressing Ghana’s financial system in an holistic fashion, and utilizing the most appropriate components from each sector, will the financial system as a whole be improved, and thus contribute to poverty alleviation.


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Prepared by Rudolph Poison (World Bank), Vassili Prokopenko, and Perin Saint-Ange (IFAD).


Out of the four banks, operating in Ghana before the independence, two British-owned banks controlled almost all commercial banking business (Standard Chartered Bank and Barclays Bank Ghana). Their customers were mainly the foreign trading, mining and timber companies.


See “Ghana: Statistical Appendix,” SM/99/269; 11/4/99, Table 48.


The National Investment Bank (NIB), also created in the mid-1960s dealt with medium-and large-scale agricultural and industrial projects.


Includes cotton, groundnuts, oil palm, rubber, and soybean.


Includes cashew nuts, coffee, cut flowers, pineapple and vegetables.


On average, about 300–400 shareholders for a new bank, and up to about 1,000 shareholders for any RB in existence for 5 years or more.


Pending organization of the proposed Apex Bank (see below), BOG’s policy is to be extremely cautious in granting new RB licenses. The minimum share capital was raised to 100 million in October 1999.


Inclusive of funds onlent under externally assisted projects.


Source: GTZ, Microfinance and Poverty Alleviation in Northern Ghana: The Case of the Upper East Region, August 1997.


High inflation also tends to discourage financial savings and reduce monetization in the economy.


Pre-appraisal of the proposed RFSP is expected to begin in October 1999, with a possible appraisal before the end of 1999. The project should be ready for World Bank Board discussion by the first quarter of 2000 and for IFAD Board discussion by April 2000.

Ghana: Selected Issues
Author: International Monetary Fund