Abstract
Financial Sustainability is a primary issue for successful rural and community banks’ services. Establishing a system of sustained provision of modern financial services has, however, been challenging and most controversial. Several studies have been conducted on the determinants of sustainability of institutions in various countries. However, the levels of significance of the factors that influence financial sustainability of banks vary with studies. In addition, the results are mixed and empirical evidence regarding the determinants of rural and community banks’ sustainability is also missing. The objective of this study therefore was to develop a model which could be used to identify likely future rural and community banks that are non-sustainable. This study examined the determinants of financial sustainability of Rural and community banks using discriminant analysis (LDA) and logistic regression (LR) models.
Highlights
The first Rural and Community Bank (RCB) was established in a farming community in the central region of Ghana in 1976 [1]
This paper is based on a review of various published and unpublished documents, interviews with key respondents, and an analysis of data collected from the Bank of Ghana (BoG), the Association of Rural Banks (ARB) Apex Bank, and a sample of rural banks
A discussion of the determinants of financial sustainability of RCBs which are measured by using Linear Discriminant Analysis (LDA) and logistic regression (LR) is presented
Summary
The first Rural and Community Bank (RCB) was established in a farming community in the central region of Ghana in 1976 [1]. In 1981 about 30 existing RCBs formed an Association of Rural Banks (ARB) to serve as a networking forum. As a network of institutions sharing a common mission, the ARB promoted and represented the RCBs and provided training services to member RCBs. The financial performance of many RCBs started to decline, for several reasons, including a drought that affected the country in 1983 (leading to high loan default rates), weak governing ability, conflicts within boards of directors, and ineffective management in many RCBs. Several reforms were undertaken to curb the deteriorating situation—exposure to risky sectors (mainly agriculture) was limited, distressed banks were closed, supervision by the Central Bank was strengthened, and RCB managers and boards of directors were offered training. RCBs continued to be relevant rural finance service providers, and the Government of Ghana has consistently provided support to the RCBs by financing capacity building (in partnership with several donors), restructuring programs, and undertaking regulatory reforms
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