History of Rural Banks in Ghana

1. The Rural Banking Concept in Ghana

Banking penetration ratio in Ghana is still currently low by international standards at about one bank branch per 54,000 people (Ofori-Dwumfuo and Botchway-Anang, 2012). For instance, even though the Greater Accra region represents only 13% of the country's population, it accounts for 35% of the total national commercial bank concentration (Buchs and Mathisen, 2003). Even at the urban centres, most of the potential microfinance clients could not access the services of the commercial banks because their conditions are outside the means and capacity of the poor.

In 1976, the central Bank of Ghana issued a regulation allowing rural communities to establish locally-owned unit banks with a much lower minimum capitalization than regular commercial banks (Nair and Fissha, 2010). Thus introducing the rural banking concept to bridge the rural-urban gap of financial transactions (Addo, 1998).

Since their introduction, the rural banks have been at the frontline of developing pro-poor innovative financial products and modifying their operations to suit the specific needs of the rural farmer, the underserved micro-enterprises and other low-income players of the rural economy (Obeng, 2009; Owusu-Ansah, 1999). With focus on rural clients, one of the tasks that face rural banks is how to manage risk associated with doing business with the poor whilst maintaining a balance between its poverty alleviation mandate and staying profitable as a business (Anin, 2001; Tsamenyi and Uddin, 2008).

The rural banks were expected to operate in an atmosphere of high illiteracy rate and financial crudeness (Ofori-Dwumfuo and Botchway-Anang, 2012). Largely, they were expected to rely on total manual method and mobilized deposits instead of government funds in order to avoid high transaction cost and default rates linked with such government backed funds.

As rural development institutions, rural banks require effective participation of the locales, hence they are to be owned and managed by the communities within which they operate. The rationale behind the community ownership is to promote community identity, encourage local patronage and support the processing of requests for facilities and loans (Bank of Ghana, 1997).

2. Growth of Rural Banking in Ghana

With the initial bank established in 1976, the number of rural banks rapidly increased to 34 by 1982, 117 five years later and 133 by 1998 (Osei-Bonsu, 1998). The rapid rise in the number of rural banks and their proliferation throughout the country could be linked to the enthusiasm and the keen interest shown in the concept by the rural communities.

The period between 1999 and 2000, however, saw a drop in the number due to the central bank closure of 23 of them described as "distressed" banks (Ampah, 2010). As at 2007, 125 rural banks were in active operation with a total of 460 branches nationwide. The total number of rural banks operating in the country now is 132 with 564 branches (Kowubaa, 2000). In 1981 a non-profit and non-governmental organisation, Association of Rural Banks, (ARB), was formed to serve as a forum for the rural banks. The ARB has the key function of giving various training to their various target groups.