Challenges of rural financial intermediation. The experience of rural banks in Ghana


Financial Intermediary can be defined as financial institution such as rural banks, commercial banks, savings and loans companies, credit union that accepts deposits from public and make loans to those needing credit.  Rural banks acting as a middleman between cash surplus units in the economy (savers) and deficit spending units (borrowers), financial intermediaries makes it possible for borrowers to tap into vast pool of wealth in federally insured deposit accounting for more than half of financial assets held by all financial services companies-in banks and other depository financial institutions. Financial Intermediation involves mobilizing and transferring savings from surplus to deficit units and provides safe, liquid and convenient savings (deposits) facilities and access to credit facilities tailored to the needs of the rural populations.

History of Rural Financial Intermediation in Ghana

The history of rural financial intermediation started when Agona Nyakrom rural bank, the first rural bank was established in the Central Region of Ghana in 1976 to provide banking service for the rural population, providing credit for small-scale farmers and businesses and supporting developmental projects. From 1976 to date there has been an increased in the number of rural and community banks serving the rural population by providing quality banking services

In the case of rural financial intermediation: the experience of rural banks in Ghana. the rural banks acts as middlemen between savers and borrows by accepting deposits from the rural public and make loans out of these to those needing credit in the rural communities

Basically, financial intermediation is the root institution in the saving-investment process. Ignoring it would seem to be done at the risk of irrelevance. So the view point of this paper is that financial intermediaries are not a veil, but rather the contrary. In this paper, I survey the result of the recent academic research on financial intermediation.

Traditionally, banks play an important role in allocating resources from those who have a surplus of funds (deposits) to those who have a shortage of funds (borrowers) by transforming relatively small liquid deposits into illiquid loans

During the intermediation process, banks also provide other services, such as payment and delegated monitoring. Since the 1970s, deregulation, technological development and globalization have significantly transformed the banking sector. Banks have to face increasing competition from both rivals in banking sector and in the non-bank firms.

Although this article is specifically focusing on the rural banks in Ghana, it is necessary to address the broad role of financial intermediaries in the market, as rural bank at first are special group of financial intermediaries. In order to understand what banks do firstly we should make it clear why financial intermediaries exist.

Traditionally, understanding the existence of financial intermediaries starts from market imperfections. Financial intermediaries perform as agents that transfer funds from people who have surplus of funds to people who have a shortage of funds .In a perfect market where borrowers and lenders had perfect knowledge and there were no transaction costs. Financial intermediaries would be unnecessary. However, these assumptions are not present in the real world. There are frictions such as transaction costs and information asymmetries occurring in the market, and this makes the existence of financial intermediaries rational

Financial Intermediation Strategies and practice of Rural Banks in Ghana.

The basic functions of Rural Banks are the mobilization of savings and the extension of credit to deserving borrowers or customers in their area of operations.  It is also the belief of the Central Bank of Ghana that through their financial intermediations roles, Rural Banks will act as catalysts for economic development in rural Ghana.

A lot of progress has been since its establishment in 1976. Deposits have been mobilized, loans have been granted, habit of savings and thrift have been inculcated in the minds of the rural dwellers, jobs have been created to the rural people as managers, accountants, project officers, cashiers, drivers, cleaners etc.

Rural Banks in Ghana have a long term and short term strategic plans of mobilization from depositors of the bank and in the course of performing their financial intermediation roles lend to borrowers of the bank in need of financial assistance to operate their business. The lending to borrowers from the depositors, the Rural bank seeks secure methods of repayment at the same time meeting the depositors demand of their deposits.

However the financial intermediation roles and practice of Rural Banks have challenges in the contemporary rural financial market. The bank uses as practice both short and long term strategies mobilizing funds from depositors for good short term good loaning to borrowers of the bank. As the mobilization of funds forms the main core function for onwards lending to borrowers the management intensifies various mechanism and marketing strategies for mobilizing more funds from the depositors.

The Rural bank has Five year strategic plans on mobilization of funds from public giving them out as loan to prospective loan customers or borrowers.

Rural banking challenges on financial intermediation,

The research study on generalist investigations revealed 80% of the result the following as challenges of Rural Financial Intermediation: the experience Rural Banks in Ghana


Risk in the rural economy is related to the dominance to agriculture which risk is high and often covariant. The long gestation period of agriculture investments and seasonality of output usually lead to uneven

Information asymmetry

The borrowers of Rural Banks have more information about the out turn of their investment and greater capacity to repay loan than lenders. Access to borrower information is impeded by lack of communication infrastructure and well functioning assets registries and database. Also in rural areas most customers do not keep records of their transactions and do not use payment facilities of the bank.

Weak Institutional capacities

Weak Institutional capacity of Rural Banks is related to limited availability of educated and well-trained people in the rural communities where the bank is operating.

 Lack of suitable collateral

Lack of collateral on part of borrowers of the rural bank has limited access to credit to the rural customers and is related to poorly defined property and land- use rights and weak land and property markets.

Enforcement Problems

Rural Banks experiences enforcement problem even where borrowers have assets that can be used as collateral security, they are often not acceptable to the rural bank because of high cost and long delay in using judicial enforcement mechanism in loan repayment.

 High cost of operation

High operating costs are due to the small size of most of the rural customers’ accounts in relation to service delivery. A low level of economic activity.

 Lack of fund to give out as loan

My research established that most Rural Banks lack funds give out as bank loans to it numerous borrowers or customers. The bank main core function is mobilizing to give back to customers as loans.

Lack of qualified personnel as staff

The study established that only two out of twenty personnel in charge of credit/loans and marketing are graduates and leads to lapses in their work as far credit delivery is concerned creating at times missing of files for borrowers in monitoring and recovery.

 Lack of logistical resources for operations

The rural bank lack logistics for operations to reach out to all operational areas more especially monitoring, marketing, loan recovery and other business assignments


Sex Distribution of the Sample Population.

The research revealed that the customers are dominated by females thus 60% females and 40% males. Out of the 25 customers sampled for questionnaire and interviewed 18 females and 7 males. These customers are borrowers of the Rural Bank.

 Deposit Transformations into Bank Loan

The pie chart below showing how Rural Bank Channels or channeling funds between surplus and deficit agents. Thus the bank transforming the bank deposits from customers into bank loans.

Figure 4.10.8 The pie chart showing transformation of bank deposits by customers into bank loans by Rural Banks

The study revealed that 70% of the total deposits received four customers as bank deposits are transformed into Bank Loan to borrowers in need of financial assistance. 30% of the total deposits are always reserved to meet the demand as of when and where the need arises.

As the core function of the rural Bank mobilizing from customers in a form of deposits, these are transformed into bank loans to customers.

This constitutes channeling of funds between lenders and borrowers indirectly. That is; Savers (lenders) give funds to an intermediation Institution like Rural Bank and that Institution gives those funds to spenders (borrowers). As a result of this the bank depends largely on funds from savers in financing loans

       General Analysis of the finding

It was established from the study that Rural Banks even though contributing meaningfully towards economic development of the rural communities faces certain challenges in financial intermediation role it play. The challenges established from the research affects the effective performance of the bank. The study revealed that Risks, lack of suitable collateral security, High cost of operating, Enforcement problem, lack of logistical resources for operations, lack of qualified personnel as staff, lack of funds, to give out as loans, weak institutional capacity and formal banking procedures and physical access difficulties. The research established these as the main factors affecting financial intermediation in rural financial market.


The rural banks in Ghana have been generally playing its role in financial intermediation in the rural financial markets. The financial intermediations as  Rural Banks accepts deposits from the public and make loans to those needing credit as customers or borrowers.  The study aimed at investigating the actual challenges faced by the rural banks in Ghana.


The research findings and the possible recommendation to addressing the challenges of financial intermediation in the rural economy where the Rural Bank operating is very crucial as the research is to also informed all other rural banks in Ghana creating awareness of the prevailing challenges facing the rural banking industry in financial intermediations for minimization and possibly overcome the said challenges.



 By Richard Attu

Chartered Management Consultant, Chartered Economist, International Executive MBA in Banking and Finance, LLB, LLM Candidate. Currently with Cine plus Consulting Group.