Effectiveness and Contribution of Rural Banks in Alleviating Poverty Through Development of Small and Medium Scale Enterprises

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Published on International Journal of Economics & Business
ISSN: 2717-3151, Volume 2, Issue 2, page 1 – 12
Publication Date: 12 February 2019

Atianashie Miracle & Chukwuma Adaobi
Catholic University College of Ghana
Ghana

Journal Full Text PDF: Effectiveness and Contribution of Rural Banks in Alleviating Poverty Through Development of Small and Medium Scale Enterprises (Case Study of Drobo Community Bank Limited in Ghana).

Abstract
The effectiveness of rural and community banks towards the alleviation of poverty through development of medium and small scale enterprises in Ghana. Most especially the Drobo community bank limited have been highly recommendable. Before the establishment of the first rural bank in 1976, the availability of formal credit in rural communities predominantly made up of small farmers and fishermen and small and medium scale enterprises was extremely limited. Small and Medium Scale Enterprises (SMEs) form the majority of the private sector which is considered as the engine of growth in the Ghanaian economy. Rural and community banks are therefore expected to focus attention on the provision of quality banking services to the people in their catchment mellitus including the SMEs. It is as a result of this that this study seeks to examine the effectiveness and contribution of Rural and Community Banks through development of SMEs, taking cognizance of the role and contribution of drobo community Bank Ltd. In Brong Ahafo region of Ghana. The study discovered that micro and macro finance loans is very popular among services provided by rural and community banks to SMEs due to the fact that most SMEs do not have the collateral to access commercial loans from banks. The researcher also found out that it was very difficult for SMEs to access start-up capital from banks. This study therefore recommends among other things that SMEs should also use loan taken from banks for its intend purpose, in alleviating poverty wholly. And contribute greatly to the nation enterprises as well rural banks should take insurance cover for loans granted to new SMEs as start-up capital to reduce the effect of loan and services default in their book and operations and also reduce the risk of granting loans to new SMEs.

Keywords: Drobo community bank, alleviation, development, poverty, Ghana.

1. INTRODUCTION
The effectiveness and contribution of rural and community banks in the alleviation of poverty through development of small and medium scale enterprises in Ghana cannot be underestimated since the introduction of the financial institution by the bank of Ghana. Before the establishment of the first rural bank in 1976, the availability of formal credit in rural communities predominantly made up of small farmers and fishermen and small and medium scale enterprises was extremely limited. The main sources of credit were moneylenders and traders charging exorbitant interest rates. The Government of Ghana had taken some policy measures to improve access to finance these sectors of the economy. These measures included a requirement that commercial banks lend at least 20 percent of their portfolio for agricultural uses and the establishment of the Agricultural Development Bank (ADB) in 1965 with an exclusive mandate of lending for agriculture and allied industries in rural Ghana. Though, commercial banks opened their door to small and medium scale enterprises, nevertheless, lending to these enterprises remained low. Commercial banks demanded higher deposit accounts and stronger collateral requirements to provide loans to small and medium scale enterprises. In view of this situation, the Government of Ghana (GOG) considered supporting the establishment of rural and community banks that would be dedicated to providing financial services in those areas. It asked the Bank of Ghana (BOG) to send a delegation to the Philippines to study the rural banking system there and afterward decided to facilitate the opening of banks in rural farming and fishing communities.
Rural and community banks were first established in Ghana in 1976 to provide banking services to the rural population, providing credit to small and medium scale farmers and businesses and supporting development projects, with the first being in Agona Nyakorm in Central Region. As of January 2013, Ghana could count a total of 137 rural and community banks in the country. Small and medium scale enterprises sometimes called a small business are businesses which employ a small number of workers and do not have a high volume of sales. Such enterprises are generally privately owned and operated sole proprietorships, corporations or partnerships. The legal definition of a small-scale enterprise varies by industry and country. As contained in its Industrial Statistics, The Ghana Statistical Service (GSS) considers firms with less than 10 employees as Small Scale Enterprises and their counterparts with more than 10 employees as Medium and Large-Sized Enterprises. However, the National Board of Small Scale Industries (NBSSI) in Ghana applies both the `fixed asset and number of employees’ criteria. It defines a Small Scale Enterprise as one with not more than 9 workers, has plant and machinery (excluding land, buildings and vehicles) not exceeding 10 million Cedi, currently 1,000.00 Ghana cedi’s (US$ 9506, using 1994 exchange rate). Small and medium scale enterprises have been recognized as the engines through which the growth objectives of developing countries can be achieved. They are potential sources of employment and income in many developing countries. Therefore, this study seeks to examine the contribution of these rural and community banks to the development of small and medium scale enterprises in the country with a case study of drobo community bank limited.

1.1 STATEMENT OF THE PROBLEM
Though, commercial banks extended their branches, rural communities to meet the financial needs of small and medium scale enterprises, nevertheless, lending to these enterprises remained low. Other banking services, like credit, were not provided as initially envisioned. Small and medium scale enterprises have been recognized as the engines through which the growth objectives of developing countries can be achieved. They are potential sources of employment and income in many developing countries. It is estimated that SMEs employ 22% of the adult population in developing countries (Daniels, 1994; Daniels & Fisseha, 1992; Fisseha& McPherson, 1991; Gallagher & Robson, 1995).
Due to their flexible nature, SMEs are able to withstand adverse economic conditions. They are more labor intensive than larger firms and therefore, have lower capital costs associated with job creation (Anheier & Seibel, 1987; Liedholm & Mead, 1987; Schmitz, 1995) Commercial banks demanded higher deposit accounts and stronger collateral requirements to provide loans to small and medium scale enterprises. In view of this situation, there was the need for the Government of Ghana (GOG) to consider in supporting the establishment of rural and community banks that would be dedicated to providing financial services in those areas. In view of the above, this research seeks to find out the provision of financial services by rural and community banks to small and medium scale enterprises. Again, it will have determined the level of financial support that small and medium scale enterprises can access from rural and community banks and also find out how these financial services are impacting on alleviating poverty through small and medium scale enterprises………