Published on International Journal of Economics & Business
Publication Date: March, 2019
Umar Lawal Aliyu
Faculty of Management, Department of Business Administration
LIGS University Hawaii, USA
Journal Full Text PDF: Role of Community Banking in Economic Development.
“The Community Bank (CB) is a unit bank, “a self-sustaining financial institution owned and managed by a community or group of communities for the purpose of providing credit, deposit banking and other financial services to its members largely on the basis of their mutual group responsibility, self-recognition and merit.” The thrust of the research paper shall be on the role of community banking in economic development. Community banks tend to focus on the needs of the businesses and families where the bank holds branches and offices. People who understand the local needs of families, businesses and farmers make lending decisions. Certainly, community banks have a critical role in keeping their local economies vibrant and growing by lending to creditworthy borrowers in their communities. The lending by Community Bank (CB) helps foster the economy by allowing businesses to buy new equipment, add workers, or sign contracts for increased trade or services or even aid the members of the community with capital to start a business. Research in this recent times have shown that Community Bank (CB) offer on average, better interest rates on savings and better terms on credit cards and other loans to small businessmen and institutions compared to the commercial banks. In fact, Most locally owned banks i.e. Community Bank (CB) and credit unions offer the same array of services, from online bill paying to debit and credit cards, at much lower cost than big banks. In light of this, the study revealed that Community Bank (CB) not only brings about economic development but also typically provides more personal service than big banks and Community banks are an excellent option for most banking needs.
Keywords: Bank, Capital, Credit, Community, Community Bank, Economy, Financial Institution, Money.
The thrust of the research paper is on the role of community banking in economic development. By the time Community Banks were introduced in 1990, the Peoples Bank of Nigeria was already in operation providing credit to small-scale operators in both rural and urban areas. Nigerian Community Banking is essentially built on the broad concept of sustainability. The federal government of Nigeria 1990 budget speech decided to establish community bank in order to strengthen its programmes of grassroots economic development and to promote productive activities in the rural area. Nigerian Community Banks are privately owned, self-sustaining financial institu- tions owned by a community, or a group of communities to provide financial services to members of the community.
In Nigeria, the first community bank that was opened was the Alheri Community Bank in Kaduna by the then president commander in Chief of the Armed Forces of Nigeria, General Ibrahim Badamasi Babangida on 31st December 1990 and within three years, community banks where everywhere all over the country. The Decree 46 of 1992 created the National Board for Community Banks, which was granted the power to license community banks. Thus, The National Board for Community Banks was vested with powers to license, monitor and regulate all community banks in operation in Nigeria.
The research work intends to determine the type of services that are rendered to the public by the community banks and to determine if it has promoted productive activities in the rural area. The fundamental concepts of a Community bank is it is self-sustaining financial institution owned and managed by community or a group of communities for the purpose of providing credit deposit, banking and other financial services to its members, largely on the basis of their self-recognition and credit worthiness. Community banks were created to promote rural development through provision of banking and financial services, enhance rural productive activities, and improve economic status of small-scale producers in rural and urban areas.
The major findings of the study are that Nigeria Community Banks have played a very important role in Nigeria’s economic growth and development.
2. LITERATURE REVIEW
2.1 Community Bank
Most locally owned banks and credit unions offer the same array of services, from online bill paying to debit and credit cards, at much lower cost than big banks. Studies show that small financial institutions also offer, on average, better interest rates on savings and better terms on credit cards and other loans.
A community bank is a locally owned and operated financial institution. They address the needs of a community by offering loans to small-business owners or personal loans to individuals. A community bank is a depository institution that is typically locally owned and operated. Community banks tend to focus on the needs of the businesses and families where the bank holds branches and offices. There is no legal definition of a community bank, but according to Federal Depositor Insurance Corporation (FDIC) in a December 2012, a “community bank” is a bank, which has specialized knowledge of their local community and customers and “base credit decisions on local knowledge and nonstandard obtained through long-term relationships”. In addition they obtain most of their deposits locally and make many (if not the majority) of their loans to local businesses. The FDIC considers such banks particularly important to small businesses.
2.2 Services offered By Community Bank
Community banks offer many services and some of the services are:
a. Business loans: A business loan is a loan specifically intended for business purposes. As with all loans, it involves the creation of a debt, which will be repaid with added interest.
b. Checking accounts: A checking account is a deposit account held at a financial institution that allows withdrawals and deposits. Also called demand accounts or transactional accounts, checking accounts are very liquid and can be accessed using checks, automated teller machines and electronic debits, among other methods.
c. Savings accounts: A savings account is an interest-bearing deposit account held at a bank or other financial institution that provides a modest interest rate. They also may charge fees unless you maintain a certain average monthly balance in the account. In most cases, banks do not provide checks with savings accounts.
d. Debit and credit cards: A debit card is not a credit card. When you use a debit card, the money is deducted from your checking account. With a credit card, you’re borrowing money to be repaid later. ATM and debit cards allow you to use ATMs, a safe and convenient way to manage your money.
e. Merchant services (credit card processing, reconciliation and reporting, check collection)
f. Cash management (payroll services, deposit services, etc.)
2.3 Establishment of a Community Bank In Nigeria
According Community bank act obtained from center for laws of Nigeria: laws of the federation by LawNigeria; An Act to provide for the establishment of Community Banks and for matters connected therewith commenced on 28th April, 1990 as follows:
(1) A community or group of communities may establish a Community Bank (in this Act referred to as a “bank”) for the purpose of-
(a) promoting rural development through the provision of finance and banking services;
(b) enhancing the rapid development of productive activities, especially in the rural areas; and
(c) improving the economic status of small-scale producers, both in the rural and urban areas.
(2) A community or group of communities desiring to establish a bank shall apply, in writing through the National Board for Community Banks, to the Governor of the Central Bank of Nigeria (in this Act referred to as “the Governor”) for the grant of a license.
(3) An application for a license under subsection (2) of this section shall be accompanied with the following, that is-
(a) a draft copy of the memorandum and articles of association of the proposed bank;
(b) documentary evidence that-
(i) the applicants are able to raise the minimum equity share capital;
(ii) the premises sought to be used are constructed and equipped to such a standard as the National Board for Community Banks may prescribe;
(c) a list of the shareholders, directors and principal officers of the bank and their particulars;
(d) the prescribed application fees; and
(e) such other information and documents as the National Board for Community Banks and the Central Bank of Nigeria may, from time to time, specify.
(4) Where an application is made through the National Board for Community Banks in accordance with the provisions of subsection (2) of this section and is accompanied by such information and documents as are required under that subsection, the National Board for Community Banks shall, if satisfied-
(a) as to the adequacy and suitability of the premises sought to be used; and
(b) that the applicants are-
(i) capable of complying with such conditions as may be imposed or attached to the license;
(ii) in all other respects suitable persons to be granted a license, recommend to the Governor the granting of license, subject to such conditions as may be imposed or as may be attached thereto.
2.4 Benefits of Community Bank
In every country, irrespective of its economic and political policies Community bank benefits a country and its citizens in numerous ways and some of the ways it benefits a country and its citizens are as follows:
a. The Community banks are dedicated to serving the small business market and people are so fond of Community banks just because of that. They are dedicated to serving small businesses, small traders and small markets as a whole. Community Banks channel most of their loans to the neighbourhoods where their depositors live and work, helping to keep local communities vibrant and growing. Many larger banks may take deposits in one state and lend in others. Thus small businesses, small traders and small markets are always patronizing the Community banks and that is just the tip of the iceberg.
b. Banks focus attention on the needs of local families, businesses & farmers. Larger banks are structured to place a priority on serving large corporations. In fact Community Bank officers are generally accessible to their customers on site. Larger banks are often headquartered in office suites, away from daily customer dealings.
c. Community banks align Interest Rates to Community Needs. Most financial institutions seek deposits by paying higher interest rates to savers unlike the Community banks that provide low interest rates to customers to the extent of align Interest Rates to Community Needs.
d. Community banks form personal relationships with their clients and offer personalized service to them. According to Kylee Wooten, Community banks have become more advanced in their technology and resources, and they now offer many of the same benefits to that of big banks, such as mobile banking and increased protection against fraud. A national survey of more than 600 community banks by the Federal Reserve and the Conference of State Bank Supervisors in 2017 found that 87 percent of respondents offer mobile banking, and another 7 percent plan to introduce these services in the future. Additionally, community banks continue to focus on providing customer service that can set them apart.
e. Community Bank officers are deeply involved in local community events. Large bank officers are likely to be detached from the community and Community Banks understand the needs of small business owners. The concern for large banks is corporate America.
f. Community banks provide greater sense of security because their most operations and services are mainly in the grassroots typically concerned with small businesses, small traders and small markets as a whole. This Community banks the ability to “reach out and touch one’s assets” – actually knowing the identity of borrowers or seeing tangible evidence of where the funds are being utilized.
g. According to Kylee Wooten, In early January 2018, Bank of America customers protested a rule change making it harder for consumers with low balances to receive free checking. According to a study by the U.S. Public Interest Research Group (PIRG), less than a quarter (24 percent) of big banks offer completely free checking, which 63 percent of community banks and 60 percent of credit unions offer free checking. If you are banking with a community bank or credit union, you will probably receive better interest rates and lower fees, according to Bank rate. In addition to having less (or lower) fees, community banks tend to offer some benefits for those seeking loans. Smaller banks have more latitude to make decisions based on personal knowledge of their customer and their potential for growth beyond what is written on the loan application.
h. Community banks services causes local economic stability in a country because when investors keep their money in local financial institutions that invest in local businesses and people, they are insulated to some extent from events outside the community.
i. According to Michael Lewis, Community-based banks are generally invested in their borrowers to a greater degree than most national lenders, and may provide substantial assistance through advice and contacts that national banks often lack. Being familiar with its borrowers’ products, services, and operations, a local banker can assist its customers to identify local suppliers and markets that they may have overlooked. Relying on a community banker while serving local residents strengthen community ties and may result in additional customers and clients who prefer to deal with community entities.
j. Community Banks offer nimble decision-making on business loans because decisions are made locally. Larger banks must often convene loan approval committees in another state.
k. Community banks are relationship bankers, characterized by local ownership, local control and local decision-making. Employees of community banks often take part in community organizations, too, making them better equipped to understand the needs of the customers and businesses that they serve.
Certainly, community banks have a critical role in keeping their local economies vibrant and growing by lending to creditworthy borrowers in their regions. Such lending helps foster the economy by allowing businesses to buy new equipment, add workers, or sign contracts for increased trade or services.
3. RESEARCH METHODOLOGY
3.1 Research Design
This research work is specifically designed to study the role of community banking in economic development. The research design is meant to guide the researcher in the use of the best method of collecting data in the course of the study. The research design used in this study is the simple survey approach. The researcher is interested in observing what is happening by using secondary data in order to ascertain the role of community banking in economic development.
3.2 Population of The Study
The population of the study defines the limit to which the research findings are acceptable. The population comprises of only the role of community banking in economic development. It will however be good to note that the secondary data collated was carefully analysed. This was all in view to ascertain a viable result and avoid fallacious conclusion.
A community bank is a locally owned and operated financial institution. They address the needs of a community by offering loans to small-business owners or personal loans to individuals. Nigerian Community Banks are privately owned, self-sustaining financial institutions owned by a community, or a group of communities to provide financial services to members of the community.
Most Nigerian Community banks were created to promote rural development through provision of banking and financial services, enhance rural productive activities, and improve economic status of small-scale producers in rural and urban areas. In addition most locally owned banks and credit unions offer the same array of services, from online bill paying to debit and credit cards, at much lower cost than big banks. Studies show that small financial institutions also offer, on average, better interest rates on savings and better terms on credit cards and other loans.
1. A Community Bank Management Book by Edmond E. Pace
2. Bankruption: How Community Banking Can Survive Fintech Book by John Waupsh
3. Benefits of Community Banks By Kylee Wooten April 11, 2018
4. Community Bank Advantages By Citizens Bank
5. Community Bank Incentive Compensation Plans Book by Dale A. Arahood
6. Community Banking Strategies: Steady Growth, Safe Portfolio Management, and Lasting Client Relationships Book by Vince Boberski
7. Community Banking: From Crisis to Prosperity Book by Timothy W. Koch
8. Impact Of Community Banks In Economic Growth And Development Of Nigeria: A Case Study Of Ndi Afia Community Bank In Enugu Urban 2000 – 2004
9. Importance of Community Banks and How They’re Threatened by Dodd-Frank By Michael Lewis
10. The role of community banks in economic development: a Nigerian case study O. Felix Ayadi, Ladelle M. Hyman and Johnnie Williams Savings and Development Vol. 32(2008), No. 2, pp. 159-173