Effect of Automation On The Efficiency And Productivity of Rural Banks
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This article is a review on the thesis/dissertation, "The Effect of Automation On the Efficiency and Productivity of Rural Banks in Ghana"
Researcher: E.
E.
Introduction
Rural
banking in Ghana has over the years experienced transformation in its operation
from a total manual method of operation to automation in recent times. It is
believed that this transformation has also led to efficiency and high
productivity of staff and the rural banking sector in general.
The
clarion call for rural development started many years ago. Governments in most
developing countries have come to the conclusion that the best method of
alleviating people from poverty is to help them find meaningful employment.
If
governments can assist rural people in rural areas to access credit facilities,
and help with logistical arrangement of their goods, poverty would be reduced
significantly. One of the means for
people in rural areas to access funds is through rural
banking.
The
concept of rural banking was borne out of the unwillingness of the traditional
banks which were established as profit-oriented banks to open branches in rural
communities (Asiedu-Mante, 2011). Thus, setting-up in rural and low income
communities where the banking activities are low and revenue to be generated
from their operations would not be able to cover their operational expenses,
has resulted in these banks shunning the rural communities over the years.
Olomola (1997) concedes that for economic
development of rural communities, there is the need for provision of
institutional credit to these rural communities to undertake the economic
activities.
Rural banking is the process of
carrying out banking transactions out in the country where bank branches are
too far away to be of use. Rural banking is
peculiar to very small towns and farmers who live far away from areas of larger
population and so cannot make the journey to these localities whenever there is
the need to use banking services (Ofori-Dwumfuo and Botchway-Anang, 2012).
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The concept of rural banking was thus
introduced to bridge the rural-urban gap of financial transactions (Addo,
1998). The concept was tested on the field at Agona Nyakrom, a farming
community in the Central Region. This piloting attempt gave rise to the Nyakrom
Rural Bank. Any wonder in 2001, when the Rural Financial Services Project
Launch Workshop needed a location, Agona Swedru, a neighbouring town of Agona Nyakrom,
where the rural banking concept was first experimented, was chosen to be the
hosting town (Addeah, 2001).
The rural and community banks (RCBs)
have unique characteristics in terms of ownership
structure, management structure and operations features. As opposed to
the large commercial banks, RCBs are community-owned and community-run unit
banks. According to Bank of Ghana (2006), the key roles of RCBs are:
- To mobilize savings in the rural communities and channel them into the provision of credit to rural microenterprises, agro-based firms and cottage industries.
- Monetize the rural communities by way of inculcating in rural folks the culture of formal banking.
- Serve as tools for the growth and development of microenterprises in the rural communities to facilitate rapid rural industrialization for the overall enhancement of the national economy.
Rationale
With the advantage of automation
coupled with the need to increase customer base, it became common to see big
commercial banks extend their activities to cover target markets reserved for
rural banks. This development brought keen competition
to the rural banks, a case of David versus Goliath.
To improve the way the rural banks
operate, the Rural Financial Services Project (RFSP) in
Ghana was launched. This project was initiated and funded by the
International Fund for Agricultural Development (IFAD), the World Bank and the
African Development Bank (Ofori-Dwumfuo and Botchway-Anang,
2012). The aim of the project was to promote growth and reduce poverty
by the instrumentality of strengthened rural banks. A key component of the
project, RFSP, was the creation of an apex bank that will be the “mini central
bank” for the network of rural banks and provide financial, managerial and
technical support to them for their strengthening. In 2000, with the consent of
the central Bank of Ghana, ARB Apex Bank Ltd was
incorporated as a public limited liability company to serve as the mini central
bank for the network of rural banks. This move was set to usher the rural banks
into a new era.
As it turned out, the creation of the
ARB Apex Bank Ltd had become the harbinger of better things to come for the
rural banks, especially in the area of automation. To make it possible for the
Apex Bank to efficiently and effectively reach out to the rural banks, the RFSP
project comprised a major component targeted at computerizing and
interconnecting the Apex Bank headquarters, its regional branches and clearing
agencies, as well as the headquarters of all the member rural banks
(Ofori-Dwumfuo and Botchway-Anang, 2012). This component also required the
installation of banking software, a funds transfer interface via SWIFT and an
electronic link between the Bank of Ghana and the Apex Bank headquarters (a project
called the Ghana Rural Bank Computerization and Interconnectivity Project,
GRBCIP).
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The Ghana Rural Bank Computerization
and Interconnectivity Project (GRBCIP) is an important aspect of strengthening
and improving the capacity of the rural banks to deliver financial services.
The GRBCIP allows the rural banks to offer and support new banking services,
credit services and financial instruments. The project was to train and assist
the rural banks in transitioning to automated and standardized banking
operations.
In 2012, automation of rural banking was declared finished.
Two years on, however, very little or no data can be found in literature on the
role that the automation has played on the efficiency and productivity of the
rural banks in Ghana, as well as trends in investment in automation by rural
banks. There is therefore the need to fill this gap in knowledge. Filling this
gap in knowledge will give an indication as to whether rural banks have indeed
been strengthened by automation to better carry out their operations.
Strengthened rural banks means enhanced growth and reduced poverty in their
target area of operation.
Objective
The broad aim of this study was to
assess the effect of automation on efficiency and productivity of rural banks
in Ghana. The study will address the following specific objectives.
Some
Key Findings
Based
on the sample, it may have taken Communities and
locales some time to fully accept the rural banking concept, as evidenced by
the fact that the youngest rural bank in the sample was locale-owned.
Based on the sample, it appears generally rural banks seem to have a strong
preference for seven (7) as total number of branches irrespective of how old
they are; five (5) rural banks representing 50% of sampled rural banks have the
number of their branches being seven (7), even though the ages of these banks
ranged from 30 – 35 years old.
The
rural banks seem to employ a cost-saving strategy of keeping number of branches
to a minimum preferably a maximum of seven (7) so as to not increase the number
of employees, based on the sample.
Based
on the sample, under the intermediation approach,
eighty percent of the rural banks registered more than 50% levels of
efficiency, indicating strong performance. Levels of efficiency of the banks
were greatest in the years 2012 and 2013 (both post-computerization periods).
Based on the sample, under
the intermediation approach, Atwima Kwanwoma Rural Bank and Shai Rural Bank
were the most efficient. Amenfiman Rural bank recorded the lowest level of
efficiency, suggesting a possible need for this rural bank to be given some
form of capacity building in its intermediation function.
Using
the intermediation approach, between 2009 and 2013, mean technical efficiency
ranged between 65.1 and 80.9%., based
on the sample This suggests that rural banks needed only between 65.1 and
80.9 per cent of actual deposits to generate maximum output in terms of loans
and investment.
Based on the sample, Ada
Rural Bank, Atwima Kwanwoma Rural Bank, Dangme Rural Bank and Shai Rural Bank
made the largest contribution (100%) to efficiency gains under the value-added
approach.
Based on all the three different
approaches, Shai Rural Bank was the most technically efficient. The second and
third most technically efficient rural banks were Ada Rural Bank and Atwima Kwanwoma
Rural Bank respectively. Finding is based on the sample collected.
Based
on all the approaches and years, the overall efficiency score was 0.69 (mean of
0.731, 0.776 and 0.562) higher than that reported by Moffat (2008) which was
0.62 for financial institutions in Botswana.
This implies that rural banks in Ghana seem to utilize resources more
efficiently than financial institutions in Botswana. Finding is based on the sample collected.
Based on the sample, automation has
therefore increased efficiency levels of rural banking operations by a factor
ranging from 7.4% to 13.2%.
Based
on the sample, productivity of rural banks depended largely on technological
change than on technical change. In the post-computerization period, 80% of the
rural banks observed that TEC > TC.
Based on the sample, automation seemed
to have rather decreased productivity in the rural banking industry. Rural
banks were not getting all the productivity that they could obtain from
automation. The mean Malmquist index of the rural banks, pre-computerization
period (1.491) was observed to be significantly greater than the mean Malmquist
index they registered, post-computerization period (1.254). This situation
could have possibly been due to excessive inputs caused by high costs
associated with purchase of IT infrastructures and maintenance.
Summary
The main aim of this study was to assess the effect of
automation on efficiency and productivity of rural banks in Ghana. A
mix of simple random sampling and purposive sampling methods were used to
sample 10 different rural banks.
Primary data was collected using questionnaire
administration. Secondary data (in the form of real accounting
data) was obtained also from the rural banks for quantitative analysis.
Efficiency and productivity levels of the rural banks before and after
automation were respectively calculated using DEA and the Malmquist
productivity index.
Eighty percent of the rural banks registered more than 50 %
levels of efficiency, indicating strong performance. Levels of efficiency of
the banks were greatest in the years 2012 and 2013 (both post-computerization
periods). Another key finding of this study was that automation increased
efficiency levels of rural banking operations by a factor ranging from 7.4 % to
13.2 %. Productivity of rural banks depended largely on technological change
(TEC) than on technical change (TC).
In the post-computerization period, for
example, 80 % of the rural banks observed that TEC > TC. Majority of
respondents considered electronic funds transfer the most important area of
automation that has produced the greatest level of efficiency and productivity
for the rural bank. The second and third most important area of automation was
Cheque clearing and Wide Area Network respectively.
Eighty per cent (8 out of
10) of respondents agreed that rural bank expenditure was on the rise. Seven
out of this number felt the expenditures were worthwhile. Only one felt it was
not worthwhile. Based on the findings,
automation has indeed increased the efficiency levels of rural banks; however,
there was no clear-cut evidence that automation has indeed improved the
productivity levels of rural banks.
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1. Abor,
J. (2003). Technological innovations and banking in Ghana: an evaluation of customers’
perceptions. University of Ghana: Legon.
2. Addeah,
K. (2001). The legal and regulatory framework of micro and rural finance
institutions in Ghana. Paper presented at the Rural Financial Services Project
Launch Workshop, Agona-Swedru, Ghana, November 8, 2001.
3. Addo,
J. S. (1998). A feasibility study and business plan for the establishment of an
ARB Apex Bank, Accra. Revised Report for the Association of Rural Banks. Africa
Region, the World Bank (1997), Technoserve/Ghana, Washington, D.C. World Bank,
Africa Region Studies in Rural and Micro Finance No. 2.
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O. (2008). Adopt robust ICT, Banks Chief Tells MFBs. Nigerian Tribune,
Wednesday, 1stOctober, 2008. Pp35.
5. Agboola,
A. A. (1998). Computers in business
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A. (2001). Impact of Computer Automation
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Accounting, Obafemi Awolowo University, Ile-Ife.
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A.A. (2003). Information Technology,
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