Access to Financial Services Via Rural and Community Banks ...

Journal of African Development (2017) 19:67?76

Access to Financial Services Via Rural and Community Banks and Poverty Reduction in Rural Households in Ghana

Michael Danquah*, Peter Quartey, and Abdul Malik Iddrisu

Abstract This paper examines whether financial services provided by Rural and Community Banks to rural households in Ghana has a significant impact on the wellbeing of the households. The analysis utilizes data from the Round 6 of the Ghana Living Standard Survey (GLSS) and it employs several econometric techniques. We find that access to financial services via Rural and Community Banks exerts a positive and significant influence on the standard of living of rural households, suggesting that Rural and Community Banks can play a significant role in reducing poverty rates in rural households in Ghana. Keywords: Africa; Financial Services; Ghana; Poverty Reduction; Rural Community Banks

JEL Classification: G00 ? G2? I3

1. Introduction

The financial sector plays a multidimensional role in the process of development. It mobilizes and concentrates resources for investment and allocates them based on an assessment of risk and return, judging creditworthiness and monitoring performance. It offers risk-reduction and risk-pooling services that have both direct effects on poverty (by providing insulation from shocks) and indirect effects on growth, by making riskier--but potentially high-yield-- investments in human and physical capital accessible (Honohan, 2008). Households may be said to have access to financial services if they are able to use formal or semiformal financial services in an appropriate format at reasonable prices when such services are required (see

*Michael Danquah (Corresponding Author), Department of Economics, University of Ghana, P.O. Box LG 57, Legon, Accra-Ghana. E-mail: mdanquah@ug.edu.gh Peter Quartey, Department of Economics/ISSER, University of Ghana, P.O. Box LG 57, Legon, Accra-Ghana. E-mail: pquartey@ug.edu.gh Abdul Malik Iddrisu, Department of Economics, University of Ghana, P.O. Box LG 57, Legon, Accra-Ghana. E-mail: abdulmalikiddrisu@

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Fernando, 2007). The broad based delivery of banking and other financial services at affordable cost to the poorest sections of society can be termed as financial inclusion.

Access to finance in developing countries has been considered as a necessity just like safe water or primary education (Senbet, 1996; Beck and de la Torre, 2006; Leeladhar, 2005; AfDB, 2013; Triki and Gajigo, 2014). Whilst in developed countries, financial services covers a majority of the population, only 20 per cent of the population has access to formal financial services in developing countries (World Savings Bank Institute, 2004). A large section of the population in developing countries predominately households in rural areas remains financially excluded.

Recent literature highlights financial inclusion as a key aspect of financial sector development (see Saunders and Senbet, 1992; DFID, 2006; Claessens and Feijen, 2007; World Bank, 2008, AfDB, 2013). Financial inclusion, within the broader context of inclusive development, is viewed as an important means to tackle poverty and inequality, and to address the Millennium Development Goals (MDGs) as well as the post 2015 development agenda. Both theoretical and empirical evidence suggests that access to financial and banking services at affordable costs to the disadvantaged section of population has the potential to reduce poverty, and that it promotes pro-poor growth and enhanced private investment (see Sackey, 2005; Quartey, 2005; Beck et al., 2007; Baye, 2013; Danquah and Iddrisu, 2016; Quartey et al., 2017). Access to financial services in a region is typically measured by the number of people who have access to bank accounts (see Beck and De la Torr, 2006; Littlefield et al, 2006). This is because bank accounts enables people to perform important financial functions like access to savings schemes, access to credit, taking loan, insurance, money transfer among others. Thus, bank accounts may determine access to many other financial services (see Mohan, 2006).

Generally, some studies have provided evidence that the rural financial markets in many developing countries are often fragmented and unable to meet the finance needs of the rural population, especially for those involved in agriculture--the predominant sector (see Gajigo, 2013). In the light of the difficulties associated with access to conventional financial services, the rural and community banking concept was initiated in most developing countries including Ghana to provide institutional credit and other formal financial and banking services to the people living and working in the rural areas. In Ghana for instance, financial intermediation in rural Ghana was at a very low level compared to the situation in urban areas. The absence of institutional credit undoubtedly created a huge problem for rural dwellers. This resulted in poor yields which translated into poor incomes for farmers who are predominately rural dwellers (see Asiedu-Mante, 2011).

Although, RCBs in Ghana have been providing affordable financial services to the rural population over the last three decades, there are no empirical studies assessing the effects of RCB services on the welfare of the rural population in Ghana. In this paper, we contribute to the literature on financial inclusion and poverty reduction by using the recent GLSS 6 dataset and different econometric techniques to examine whether rural households access to financial services by RCBs has any effects on their wellbeing in Ghana. Our results indicate that the rural households' access to financial services via RCBs exerts a positive and significant influence on the wellbeing of the rural poor in Ghana. The findings therefore provide robust empirical evidence on the importance of wider financial development and services that meets the needs of the poor.

The remainder of the paper is organised as follows: In section 2, we present an overview of levels and trends of poverty and rural and community banks and in Ghana. We discuss the methodology and data used for the study in sections 3. Empirical analysis of results is considered in section 4. We conclude in section 5.

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2. Overview of the Incidence of Poverty Across Urban and Rural Areas, and Rural Community Banks in Ghana.

2.1. Overview of levels and trends of Poverty across localities in Ghana

Overall, the poverty profile of Ghana shows declining levels of poverty across the country: the share of the population living in poverty fell from 51.7 percent in 1991 to just about a quarter (24.2%) of the population in 2012/13, indicating that only about 6.4 million people in Ghana are currently poor. Between 2005/06 and 2012/13, however, the incidence of poverty in Ghana has reduced by 7.7 percentage points (GSS, 2014). Indeed, Ghana's performance on poverty reduction is noteworthy, especially when compared to its peers like Nigeria.

Further breakdown on declining levels of poverty suggest significant differences across localities (rural and urban area). Considering the upper poverty line of GH?1,314, the headcount poverty declined from 12.4 percent in 2005/06 to 10.6 percent in 2012/13 for urban dwellers, and from 43.7 percent in 2005/06 to 37.9 percent in 2012/13 for rural dwellers. The incidence of poverty for the rural areas has however remained higher than that for the national over the years. For instance, in 2012/13, the rural population comprised 50 percent of the population of Ghana, yet it accounted for 78 percent of those in poverty. This is in line with previous poverty profile reports (GSS 1998/99 and 2005/06) where above 80 percent of the total population living below the poverty line in Ghana were living in the rural areas (GSS, 2014).

Among rural localities where poverty is prominent, the poverty incidence has been much higher among those living in rural savannah over the last two decades. In 2012/13, the contribution to poverty incidence in rural savannah is found to be higher than in rural coastal and forest combined. Notably, rural savannah contributes more than 40 percent to the overall poverty in Ghana. In contrast, Greater Accra Metropolitan Area (GAMA) recorded the lowest poverty incidence of 3.5 percent among all the geographical areas in 2012/13. This phenomenon confirms previous poverty reports which indicate that the poverty decline in Ghana (from 1998/99 to 2012/13) has not been evenly distributed geographically (GSS, 2014; 10).

Extreme poverty on the other hand has been falling consistently over the years. Given the extreme poverty line of GH?792.05 per adult equivalent per year in 2012/13, an estimated 8.4 percent of Ghanaians are considered to be extremely poor. The revised extreme poverty line based on the current basket of food consumed by Ghanaians in 2005/06 indicates that the incidence of extreme poverty reduced by 8.1 percentage points from the 2005/06 revised extreme poverty incidence of 16.5 percent. Although the absolute number living in extreme poverty has reduced over time, it is still quite high given the fact that Ghana is considered to be a lower middle income country (GSS, 2014). Estimates of extreme poverty are far lower in the urban areas (1.9%) compared to the rural areas (15%). Extreme poverty in the rural areas is about twice that of the national average of 16.6 percent for the 2012/13 period. Extreme poverty is therefore a rural phenomenon, with as many as over 1.8 million persons living in extreme poverty in rural areas based on 2010 PHC projections (GSS, 2014; 12).

The sharp geographic variations that characterize absolute poverty are found to be more pronounced with extreme poverty, with the incidence of extreme poverty being highest in rural Savannah. Extreme poverty is particularly high in rural Savannah at 27.3 percent and this locality accounts for nearly three-fifths of those living in extreme poverty in Ghana . The incidence of extreme poverty is virtually non-existence in urban localities, with Accra (GAMA) contributing only 0.9 percent to the incidence of extreme poverty. Urban localities contribute 11.2 percent to the national incidence of extreme poverty (GSS, 2014; 12).

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2.2. Overview of Rural and Community banks in Ghana

Rural and Community Banks (RCBs) are entities owned by the people in a rural community in which they operate and are set up to conveniently cater for the financial needs of rural financially excluded entities. Rural banking does provide financial intermediary services which are tailored to meet the needs of rural dwellers as the absence of institutional credit certainly generates a huge problem for rural dwellers. The key objectives for establishing RCBs in Ghana are the mobilization of savings and advancing of credits to deserving deficit spending units in order to stimulate economic activities in their catchment areas. The major credit products of RCBs are microfinance loans, susu loans, salary loans and commercial loans. They also carry out transfer of remittances through Apex Money Transfer system.

The concept of rural banking in Ghana was first conceived in the late 1960s and the first rural bank, Nyakrom Rural Bank Limited, was established in Agona Nyakrom in the Central Region of Ghana in 1976 (Aseidu-Mante, 2011). Just after 1976, the invaluable banking services rendered by the RCBs made the concept of rural banking popular. As a result, the number of Rural and Community Banks has over the years increased tremendously from 20 in 1976-1980 to 135 in the period 2008-2010 (see table 1).

From the initial number of 20 rural community banks established within 1976?1980, the tremendous jump to 106 banks in 1981?1985 could be explained by the sudden rush by most rural communities to establish a bank which bears the name of the community. From about 134 rural banks in 1998, the number of banks has been oscillating and reached 135 as at June 2012. Besides the tightening of the supervisory and regulatory functions of the ARB Apex Bank, factors such as poor financial intermediation practices, weak management and staff capacity, low capitalization, difficulties in integrating into the financial system through their correspondent commercial banks have been identified as important in explaining the deceleration in the growth in the number of established banks per year (Asiedu-Mante, 2011; Danquah et al., 2013). These difficulties led to the liquidation of as many as 23 RCBs in 19992000 by the Bank of Ghana.

The trends in intermediation outcomes on per capita basis show an oscillatory trend in the performance indicators for RCBs in Ghana over the 2001?2012 period. There is a consistent

Table 1. Evolution and Growth of Rural and Community Banks in Ghana (1976-2010)

Year/Period

Total Established

Cumulative Total

1976?1980

20

20

1981?1985

86

106

1986?1990

16

122

1991 ?1995

3

125

1996?1998

8

133

1999?2000

23

110

1999?2003

7

117

2004?2007

9

126

2008?2010

211

135

[] for opening of additional RCBs; [] for closure of some existing RCBs

Source: Compiled from BoG Annual reports & liquidation notices

% Change 430 15.1 2.5 6.4

17.3 6.4 7.7 7.1

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Table 2. Trend in Intermediation Activities by RCBs (2001-2012)

Years

Deposit per Bank Loans per Bank

(GH)

(GH)

Depositors per Bank

Borrowers per Bank

2001

331,565

126,000

9,820

1,212

2002

580,000

196,174

10,325

1,289

2003

811,282

297,778

12,453

1,665

2004

1,145,630

477,059

14,460

1,968

2005

1,395,041

640,661

18,038

2,316

2006

1,856,230

943,443

20,434

2,935

2007

2,345,840

1,376,960

21,365

4,721

2008

2,749,841

1,788,413

22,437

5,402

2009

3,512,672

2,006,412

23,398

5,648

2010

5,129,023

2,508,947

25,464

5,896

2011

6,897,121

3,573,561

28,532

6,294

2012

9,274,725

5,089,920 B

31,670

6,719

Source: Compiled from the consolidated balance sheets of RCBs (2001-2012)

Profit per Bank (GH) 31,565 32,609 57,949 65,042 76,033 72,705 101,520 125,079 181,603 201,053 275,682 378,013

evidence of huge growth in intermediation efforts by RCBs. From a low value of GH330,000 in 2001, total deposits per bank grew to reach GH927,400 in 2012. Similar phenomenal growth is registered in the volume of loans, profit levels, the number of depositors and the number of borrowers per bank. From a low of GH126,000 in 2001, the total loans granted by a bank grew to reach GH5.1 million in 2012. Each bank had on average 9820 depositors in 2001, this customer base increased significantly to reach 31,670 customers by 2012. There was also vigorous growth in the number of borrowers who benefited in terms of loans and advances they sourced from RCBs. While each bank had on average 1200 borrowers in 2001, the borrowers' base increased considerably to reach 6720 customers by 2012 (see Table 2).

3. Methodology and Data

3.1. Model Specification

To examine the effects of rural households' access to financial services provided by RCBs on their wellbeing in Ghana, we follow the specification by Honohan (2008):

lnWelfarei 0 1AccessRCBi j jZij ui

(3.1)

where, lnwelfare is the log of the dependent variables capturing rural households' standard of living, AccessRCB represents rural households that have access to financial services provided by RCBs and Z1 denotes a vector of all other potential control variables that are likely to affect the dependent variable. Our choice of control variables is based on factors that are likely to exert an influence on household welfare aside their access to financial services provided by RCBs. As well, we account for any potential endogeneity problems in the selection of the control variables. In this vein, control variables that may be reversely affected by household

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welfare were excluded. Consequently, we include only exogenous variables, focusing on "household attributes", which determine household welfare. Specifically, the paper employs variables such as age of the household head, sex of the household head, household size and educational level of the household head as control variables. u1 is the error term and i represent individual rural households.

Poverty or lower levels of welfare can also cause low demand for organised financial services and financial exclusion causes poverty. Therefore, there can be a bidirectional cause and effect relationship between poverty and financial inclusion. Because of the potential endogeneity of AccessRCB, we use an instrument, distance of the rural household to the nearest RCB (DistRCBi) which explains part of the variation in AccessRCBi but uncorrelated with welfare as:

AccessRCBi 0 1DistRCBi j jZij ui

The predictions are formed as:

(3.2)

AccessRCBi 0 1DistRCBi j jZij ui

and the second and final stage regression model is:

(3.3)

lnwelfarei 0 1AccessRCBi j jZij ui

(3.4)

Most studies on financial inclusion and poverty reduction have employed only the OLS estimation technique (see Honohan, 2008 among others). In this study, we employ two different estimation techniques to ensure robustness of the results across various econometric techniques. First, equation (3.1) is estimated directly using OLS technique. Then as indicated above, because of potential endogeneity of the right hand-side variable (i.e. AccessRCB) we also adopt the enhanced instrumental variable (IV) approach (see Baum et al., 2007) to estimate equation (3.4) using distance of the rural household to the nearest RCB as an instrument. Using the enhanced IV approach, we are able to establish the validity of the instrument, in other words, whether the instruments are correlated with the error term using the Sargan or Hansen test for overidentifying restrictions. A Sargan or Hansen test p -value greater than 0.10 (10 percent) indicates that instruments are valid in that they are not correlated with the error term and vice versa.

3.2. Description and source of data

The study utilises the recent GLSS 6 dataset conducted in 2012/13 by the Ghana Statistical Service. The GLSS 6 covered a nationally representative sample of 18,000 households in 1,200 enumeration areas. Of the 18,000 households, 16,772 were successfully enumerated leading to a response rate of 93.2 per cent. The GLSS is a multi-purpose household survey which collects detailed information on the Demographic characteristics of households, Education, Health, Employment, Migration and Tourism, Housing conditions, Household Agriculture, Household Expenditure, Income and their components and Access to Financial Services and Assets.

The dependent variable, lnwelfare is the value (expressed in Ghana cedis) of the standard of living measure. Welfare is measured as the total household consumption expenditure per adult equivalent, in the constant prices of Accra in January 2013. Following from the literature, AccessRCB is measured by rural households who have bank accounts at RCBs. Educational level of household head (Education_head) is measured as whether the household head has any level of education. We use the education of the head of the household to capture the human

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