21214

STUDIES IN RURAL AND MICRO FINANCE

No.6

Nsoatreman Rural BankI -Ghana

Case Study of a Microfinance Scheme

Mark Owusu Ansah

June 1999

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闐之閱 鬨闐 州州 他絨 碼

細， 必 擊鹹 Z 的 網

i藝 i 蔔用 滅舛 闔州 《《 鰓O的汰

Studies published in this series are a joint effort between MFI networks in Africa and the ActionResearch task team of the World Bank. For information on this series contact:

Shimwaayi Muntemba, Task Team LeaderTel: 2024587370Fax: 2024738185E-mail: Smuntemba@worldbank.org

For further information on the institution studied contact:

Ghana Microfinance Institutions Network (GHAMFIN)P. 0. B ox AH 13 92, Achimota, AccraGhanaTel/Fax: 233-21-770322E-mail: mfinet@ghana.com

The views expressed in this document are those of the authors and do not necessarily represent theopinions of the World Bank or any of its affiliated organizations.

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FOREWORD

The purpose of the World Bank's Action Research Program on Sustainable Rural and MicroFinance Institutions in Africa is to strengthen local rural and micro finance institutions andcontribute to mechanisms for supporting sustainable grass-roots institutions which providefinancial services to the poor. Action Research emphasizes capacity-building at the nationallevel, by distilling and disseminating "best practices" and strengthening local networks ofmicrofinance providers.

The program adopts a participatory approach to capacity-building or strengthening.Leading rural and micro finance institutions, mainly NGOs, oversee the process through a coregroup, the "champion", one of which is normally the coordinating agency. In Phase 1 of theprogram, diagnostic studies of practices in two or three selected institutions are conducted anddiscussed at a national workshop, which typically leads to formation of a national network.During Phase 2, the network may opt for more in-depth studies, as in Phase 1, or it may focus onone issue or delivery mechanism drawn from four or more institutions. These are discussed at asecond national workshop. The program also supports a newsletter and periodic meetings of thenetwork to encourage wider participation, dissemination of international best practices, furthersharing of experiences, development of guidelines and policy dialogue with the government. Atthe end of three years, networks are encouraged to become self-supporting. Sub-regionalworkshops then facilitate networking and information-sharing across national boundaries.

This report on Nsoatreman is one in a series of diagnostic studies carried out in sixcountries. It is one of the many efforts by rural and micro finance institutions throughout Africato reach poor entrepreneurs normally ignored by the large, commercial institutions. Nsoatremanis a non-bank financial institution (rural bank) which provides financial services to individualentrepreneurs and to groups. It's major target group is smallholder farmers. It acts as anintermediary between the Government and cocoa producers by purchasing government paymentcheques from farmers. In this way Nsoatreman both provides the needed financial backdrop andsaves farmers their time which would normally be spent in travelling to the city to cash theircheques.

The Action Research Program is funded by the Swiss Agency for Development and Co-operation and is managed in the World Bank by a cross-sectoral team comprising ShimwaayiMuntemba (team leader, Environment), James Coates (Resident Representative, Mozambique),William Steel (Private Sector Finance), Carlos Cuevas (Sustainable Banking with the Poor) andAlexander Amuah (Consultant). The team has collaborated with a Bank-wide initiative:"Sustainable Banking with the Poor," and with a team of colleagues at headquarters and residentmissions working on microenterprise issues and with NGOs. In conducting this study,TechnoServe received comments and responses from a multi-disciplinary and cross-sectoral teamof experts, which has brought strength to this grassroots-focused initiative.

Cynthia CookSector ManagerEnvironment

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TABLE OF CONTENTS

FOREW ORD ............................................................................................................. ***.**.. **.... IvACRONYMS AND SYMBOLS ............................................................................................ viiiEXECUTIVE SUM M ARY .................................................................................................... ix

1. BACKGROUND ....................................................................................................... 1

Initial Objectives And Evolution................ .................. ............ 1

Initial Organization And Resources ............................................. 1

Social And Macro-Economic Context......................2..... ............. 2

Financial Services Sector.................................................. 6

2. STRUCTURE AND ORGANIZATION...............................................7

Organizational Structure and Conduct ................................ ........ 7

Legal and Organizational Structure .................... 9...... ............... 9

Management and Institutional Organization ................................... 10

Human Resources ..................................................... 11

3. MODES OF OPERATION...................................................................................... 13

Deposit Services ...................................................... 13

Lending Services ...................................................... 13

Other Financial Services................................................. 14

Non-Financial Services.................................................. 14

4. OUTREACH, ACCESS AND IMPACT ............................................................... 16

Economic Outreach and Impact ............................... ............. 16

Gender and Poverty Awareness ..................... ................. 19

Savings Awareness and Opinions of Clients................................... 20

Credit Awareness and Opinions of Clients.................................... 20

Impact on Individual Capacity ............................................... 21

Impact on Institutional and Community Capacity ............................... 22

5. FINANCIAL PERFORMANCE ............................................................................. 23

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Sources and Uses of Funds .......... 23

Profitability ......................................................... 24

Challenges and Future Plans..............................................24

6. INNOVATIONS AND LESSONS LEARNED ......................... 27

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ANNEX

ANNEX 1: .................................................................. 28-29

BOXES

Box 1: NRB's Board Of Directors ............................... ......... 8Box 2: Decision Making, Communication And Training Policies......................11Box 3: Best Practices Of NRB For Deposit Mobilization............. .............. 14Box 4: Best Practices For Lending ....................................... 15

TABLES

Table 1: Services Provided ........... 2................................2Table 2: Macro-Economic Data 1984 And 1997..................3.......3Table 3: Socio-Economic Conditions In Region Of............................3Table 4: Sources Of Funds From 1994 - 1997 (0 Millions) ........... 4.......4Table 5: Productivity Ratios, 1994-97............. .................. ..... 12Table 6: General Outreach.............................................16Table 7: Number Of Clients Per Sector....................7.... ............ 17Table 8: Number Of Loans Per Industry ............................. ...... 17Table 9: Number Of Depositors Per Sector.................................18Table 10: Value Of Deposits And Loans..............................18Table 11: Financial Performance Of NRB ......................... ......... 23

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ACRONYMS AND SYMBOLS

APPLE An NGO based in the Eastern Region, Ghana

ARB Association of Rural Banks

BoG Bank of Ghana

CIDA Canadian International Development Agency

ENOWID Enhancing Opportunities for Women in Development (of PAMSCAD - see below)

FFH Freedom from Hunger

GoG Government of Ghana

IDA International Development Association

IFAD International Fund for Agricultural Development

NCWD National Council for Women and Development

NGO Non-Governmental Organization

NRB Nsoatreman Rural Bank

PAMSCAD Program of Actions to Mitigate the Social Costs of Adjustment

RFP Rural Finance Project, funded by IDA

SCIMP Smallholders Credit Input and Marketing Project, funded by IFAD

WID Women in Development

Cedi (the Ghanaian currency)

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EXECUTIVE SUMMARY

This report is part of a World Bank sponsored applied research initiative which examines best

practices in microfinance institutional development in a number of African countries. The

objective of the research is to analyze and document the experiences of leading rural and micro

finance institutions (RMFIs) that have developed innovative approaches to providing financial

services to the rural and urban poor. It is hoped that the research findings will provide

information that can help RMFIs to develop more effective and sustainable operations. The

Nsoatreman Rural Bank (NRB), Ghana, is one such institution which has significant experience in

providing microfinance services.

Establishment and Evolution

The Nsoatreman Rural Bank was established in October 1984 during a period of national

economic decline which resulted in generally poor performance of financial institutions in Ghana.

The NRB is headquartered in the town of Nsoatre in the Brong-Ahafo Region of Ghana. Prior to

its establishment, the concept of saving with financial institutions was almost unheard of in the

predominantly agricultural community of Nsoatre, and bank credit facilities were almost non-

existent. The bank was established to meet a dual objective of financial intermediation and

poverty alleviation within the Brong Ahafo region.During the early years of its operations, NRB experienced setbacks, including lack of

financial support, inefficient management, ineffective operations, and poor patronage. However,over the years, it has effectively combined external assistance with internally generated,

community adapted strategies to become one of the most sustainable RMFIs in the country.Currently, the bank operates branches in the four adjacent rural centers of Sunyani, Yamfo, Chiraaand Jinijini.

Operations

The NRB offers both financial and non-financial services to members of the communities it

serves. Financial services include lending, savings and other banking services' such as chequeclearing for cocoa farmers. Non-financial services include supply of agricultural inputs to farmersand farm extension services through a subsidiary organization created for this purpose.

Approximately 50 percent of NRB's clients are engaged in agricultural activities, 30percent in commerce and trading activities and 20 percent in cottage and other industries. Thebank provides loans ranging between US$75--US$400 at commercial rates of interest. It isimportant to note that currently, most rural banks in Ghana do not provide more than minimalcredit for agricultural production and processing, given the negative experiences from suchlending. The fact that NRB successfully lends 50 percent of its total credit portfolio to theagricultural sector is therefore unique.

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Access, Outreach and Impact

Between 1992 and 1994, the bank's clientele grew at an average of 55 percent per annum. In1994, it had a total of 12,940 depositors and 15,620 borrowers. By 1998 it had a total of 22,236depositors and 17,137 borrowers. During the period 1992--1994, the bank's deposit baseincreased from 0123million (US$102,885) to 0688million (US$572,978), and reached01,1663million (US$831,391) by 1998. The number of loans grew by an average of 60 percentduring this period and by 1998 had reached 17,137. In 1992 NRB provided a total ofapproximately 1,390 loans valued at 0120million (US$99,600), in 1998 it made about 17,137loans with a total value of 01,757million (US$878,802).'

Financial Performance

Nsoatreman Rural Bank benefits from the financial and technical support of international agenciessuch as the International Fund for Agricultural Development (IFAD) and the InternationalDevelopment Association (IDA). Profitability increased between 1995 and 1998; the ratio ofoperating income to the total operating expenses increased from 114 percent to 123 percent. Thebank's loan repayment rate varied between 85 and 90 percent in 1994, and increased to 99.5percent by 1998.

Innovations and Lessons Learned

The NRB has a strong, highly qualified management staff and Board of Directors, all of whom arelocal community members with a personal stake in the community's development. The rate ofturnover of board members and management personnel has been very low. This has been a majorfactor contributing to the bank's consistent policy formulation and implementation, resulting in itsability to overcome problems and show a positive performance.

Among the lessons learned by this institution are:i. The bank has learned to combine flexible operations with diligent supervision of projectsand loans. Through research and experimentation with various minimum deposits, the banksettled on a minimum deposit amount which was lower than the minimum deposit requirementsof the commercial banks in the catchment area (e.g. 03,000 versus 05000, in 1994). The result hasbeen a tremendous increase in deposit mobilization. Recent minimum deposit requirements arepresented in Appendix 5.ii. The bank's lending practices have been equally innovative. For example, the bank lendsto salaried workers, which has ensured high recovery rates because repayment can be deducted atsource. Group borrowers are also required to use salaried workers as collateral for loans. Inaddition, the bank requires borrowers to maintain a minimum of 25 percent of outstanding debtsin their savings accounts as partial collateral. To encourage high and prompt loan repayment, theNRB has successfully offered a 5 percent interest rebate on early loan repayments.

Average exchange rate in 1994 was 01220/US$ and had increased to 02000/US$ by 1998.x

iii. To help attract new customers and increase profits, the bank has introduced new services

such as the establishment of a subsidiary, Consumer Services Ltd., which enables customers topurchase agricultural and consumer goods on hire-purchase terms. In addition, NRB has engagedin share-capital mobilization campaigns and education to raise its capital structure. As a result, its

share-capital increased from 02 million to 011 million between 1990 and 1994, and to 056 millionby 1998.iv. The NRB has developed collaborative arrangements with NGOs to help improve itscapacity to monitor loans. Several NGOs have been identified nationwide to liaise with the bankin extending financial services to smallholders. The NGOs help identify, mobilize and educate

rural groups about how to access the services of rural banks. The original terms of reference for

the NGOs are modified to include loan monitoring and recovery roles to ensure higher loanrepayment rates. The NRB and NGO staff visit borrowers regularly to avert the diversion of loanfunds and to provide credit education on efficient fund utilization and the mechanics of loanrepayment. The NGOs earn a modest commission on such loans.

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1. BACKGROUND

Initial Objectives and Evolution

The Nsoatreman Rural Bank was established in October 1984 with the objective of mobilizingsavings and providing credit services in Nsoatre and the surrounding communities; andalleviating poverty through credit for productive activities that enhance customers' incomes.

The initial mission of the bank's board members and management staff was to improvethe area's standard of living by mobilizing resources to support economic activities and bydeveloping local infrastructure such as electricity, potable water and education. While the NRBcontinues to pursue these broad goals, its focus has shifted to ensuring its own profitability andlong-term sustainability in order to be able to realize its larger objectives.

The initial successes of other rural banks in Ghana, such as Nyakrom and Biriwa RuralBanks, founded in 1976 and 1977 respectively, served as a catalyst for the establishment ofNRB. The creation of these banks, in turn, was influenced by the rural banking modelsdeveloped earlier in the Philippines and Mexico. In particular the pioneer rural banks in Ghanaadopted the unit banking aspects of these models.

The NRB experienced early organizational, technical, and social difficulties. Thesestemmed from the fact that the Bank of Ghana (BoG), the initiating and supervising authority,did not prescribe a detailed operational model to guide management in the implementation ofthis new concept. Staffing also posed a problem, as the NRB began with a skeleton staff of fourpersons: the manager, an accountant, a clerk/typist and a cashier/cleaner. The manager was thesole staff person with any technical background, and, apart from participating in initial trainingorganized by the Bank of Ghana, he received little other support or guidance regarding bankingoperations. Thus, the bank staff and board members were left largely to their own devices indetermining how best to move forward.

The bank also experienced socio-political and economic problems which affected itsoperations. The major problem was the loss of confidence in the banking system as a wholebecause of undue interference by Government, most notably its decision in 1982 to freeze allbank accounts above 050,000. Internally, there was rivalry between sections of the communityregarding candidates for Chairman of the Interim Management Committee (as governing bodieswere then called). This led to dissension between the various factions in the town andaggravated the general loss of confidence in NRB and the banking sector as a whole.

Initial Organization and Resources

Table 1 indicates the array of services that NRB provides.

Table 1: Services Provided

Initial Financial Services Deposit Taking and Payment;Provision and recovery of credit.

Additional Financial Business advice to customers to enhance their profitability andServices consequently credit repayment;

Financial management training of women customers in conjunction withNCWD - a prerequisite under IFAD on-lending terms.

Non-Financial Services Consumer credit services, as for agricultural input supplies andconsumer durables.

The NRB's initial financial resources consisted of its own equity contribution of 0250,000, aBank of Ghana equity contribution of 0 125,000 and an annual deposit liability of 0 1.5 million.Of this amount, only 70 percent was available for lending since the Bank of Ghana required allrural banks to maintain a reserve requirement of 30 percent of deposits. The demand for creditfar exceeded this amount, which further undermined the NRB's local reputation.

Social and Macro-Economic Context

The general economic situation of the country in 1984 and recently is presented in Table2. At that time there was no banking facility in the community itself. A predominantlyagricultural community, savings in financial assets were low and most of the people had notbeen exposed to bank credit concepts and facilities. The social conditions that existed at thetime (specifically during the period 1987 and 1997) are reflected in the socio-economicindicators presented in Table 3 below. Comparative figures for the Brong Ahafo Region andnational figures are presented in Appendix 1.

Between 1984 and 1987, the Brong Ahafo Region was the highest producer of maize(21 percent of national production) and the second highest in cassava (23 percent), two primarystaple foods in Ghana. In terms of agricultural employment, the proportion of the populationengaged in agricultural activities (15 years and over) was 51.3 percent of men and 48.7 percentfor women. Of those engaged in agriculture, 13.6 percent produced for subsistence only, 53.6percent produced mainly for subsistence, and 32.8 focused on cash crop production.

Since 1987 three main programs aimed at alleviating poverty of targeted beneficiarieshave been implemented in the NRB catchment area. These are (i) the Enhancing Opportunitiesfor Women in Development (ENOWID) Project, funded largely by Canadian InternationalDevelopment Agency (CIDA); (ii) the Rural Finance Project (RFP), funded by IDA; and (iii)the Smallholders Credit Input and Marketing Project (SCIMP), funded by IFAD.

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Table 2: Macro-Economic Data 1984 and 1997

INDICATOR 1984 '199.7

Real GDP per capita (US$)* 383 411

GDP growth rate (%, 1984-89, 1990-98) 5.1 4.2

Inflation rate (%) 18 35

Formal sector lending Interest rate (%) 20 40

Informal sector lending interest rate (%) 40 50

Exchange rate (O/US$) 131 2000

Population Density (persons per sq. km) 52 80

* GDP at constant 1987 prices1

Table 3: Socio-Economic Conditions In Region OfCatchment Area (1987) And National (1987, 1997)

SOCIO-ECONOMIC INDICATOR 1987 Local 1987-National 1997 National

Population (millions) 1.2 12.0 18.0

Population Density (persons per sq. 30 52 80

km.)

Life Expectancy Rate (years) 55 55 58

Infant Mortality (per 1000 life births) 65 NA NA

The ENOWID project, which was implemented by the Ministry of Local Government

and Rural Development, did not involve the NRB and has not been sustained after CIDA and

other donors withdrew their support. This is largely because it did not forge strong links with

any formal banks which could have taken over the clientele developed.

Under IDA's Rural Finance Project, NRB was granted a total re-finance loan of 092.1

million between 1993 and 1994 which enabled it to disburse loans to about 3,900 beneficiaries.

The project also provided some funding for staff training. By the end of 1994, NRB had

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maintained an average overall recovery rate of about 85 percent for these funds. The projectfacility has become part of the NRB's lending assets, and has also increased its liabilities, as theinstallments due have to be repaid to the BoG.

The SCIMP was in operation from 1990 through 1997. Under this scheme, NRB'sannual budget for agricultural and women's income generating loans are approved and fundsreleased for onlending to mixed groups (men and women) and women's groups that meet theproject's eligibility criteria. By the end of 1994, NRB had disbursed a total of 0 130.0 million totwenty-one mixed and forty-nine women's groups. The total membership of the mixed groupsand women groups was 210 and 400 respectively with an average of ten people in a group.During that period, NRB achieved a 100 percent recovery rate on IFAD loans due to highsupervision and monitoring of borrowers by its credit officers. Their mobility was facilitatedby the provision of a vehicle and two motorcycles by IFAD. Furthermore, IFAD providedquarterly reimbursement of the basic salaries and fringe benefits of the NRB credit officersassigned to IFAD projects.

Even though NRB was able to obtain access to external resources from 1992 onwards,the effective demand for credit still exceeded its net resources available for lending. While totalapplication for loans was 0651.7 million at the end of 1994, NRB's total amount of availableresources after meeting its mandatory BoG reserve requirements, was only 0400.4 million.Table 4 shows the resources of funds available to NRB.

Table 4: Sources Of Funds From 1994 - 1997 (0 millions)

Total Equity 50 98 110 158

Bank of Ghana Loan - - 121 119

Deposits 512 809 1,181 1,789

Donor Loanable Funds 222 325 458 1,267

Grants

Total Funds 784 1232 1870 3333

The Period after 1992

Between 1992 and 1994, macro-economic policies and legislation created a challengingenvironment for efficient operations of financial institutions. The policy with regard to grantingcredit has in some cases resulted in more formalities and rigidities in the delivery of thatservice.

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The restructuring and divestiture of local banks led initially to some loss of confidencein the system by certain sections of the public. Coupled with other issues, such as significantincreases in yearly nominal cocoa prices, petrol and petroleum products, these changes havemade it difficult for NRB to meet the cash demands of customers. National budgetary deficitsand the rapid depreciation of the currency have contributed to high circulation of currency inthe system, leading to excess liquidity problems and inflationary pressures on the economy.

The above led to high interest rates and negative real rates of interest, making depositmobilization extremely difficult. Despite these conditions, however, NRB was able to achievea five-fold increase in deposit mobilization between 1992 and 1994 in nominal terms. In realterms, there was an average annual growth rate of about 55.5 percent in the deposits of NRB.(Refer to Appendix 2 for details of real growth in NRB's deposits.)

In terms of the delivery of financial services, the people of Nsoatre and its environs arenow aware of banking services, and many more people have cultivated the habit of savings.Available data indicate that the number of depositors increased from 5,570 in 1990 to 12,943 bythe end of 1994.

Government and donor policies have to a large extent facilitated the operations of NRB.For instance, government policy which exempts rural banks from tax for a period of ten years

has helped to generate enough income to cushion the capital base of the bank. Likewise,training programs offered under the auspices of Bank of Ghana as part of financial sectorreforms initiated in 1987 have enhanced the productivity of NRB staff. As mentioned earlier,the assistance provided by IDA and IFAD have also helped to reduce the gap between localdemand for credit and the NRB's ability to respond. In addition, the promulgation of thenational Banking Law (PNDC LAW 225 of 1989) has had an impact on the functioning and re-orientation of NRB. Under this law, rural banks are expected to operate competitively andprudently, to maintain adequate liquidity and profitable operations. They are scrutinized moreclosely by the BoG than previously.

Internal initiatives undertaken to ensure the continued functioning of NRB include:human resource development, internal financial re-structuring, and strengthening of theorganization's governing body. High calibre staff and management trainees have been recruitedand staff receive training on a regular basis. Moreover, the bank has introduced more income-generating strategies, such as the establishment of a subsidiary, Consumer Services Ltd., whichenables customers to purchase consumer goods on hire-purchase terms. In addition, NRB hasengaged in share-capital mobilization campaigns and education to raise its capital structure. Asa result, the value of shares increased from 02 million to 0 12 million between 1990 and 1994,and then to 056 million in 1998.

The impact of these interventions has been positive. Donor support has increased theamount of loanable funds. To the extent that donor funds by IFAD and IDA are on-lent byBoG at market rates, the flow of such funds is not in direct conflict with self-sustainability. Onthe contrary, through the provision of such donor funds to customers, NRB has been able toincrease its outreach and consequently its deposit mobilization significantly. Recentgovernment legislation requires strict adherence to regulations and prudent practices. As aresult, NRB has had to change its mode of operations. Regular training has resulted in betterservice. This change has helped to alleviate the initial disappointment that certain sections ofthe population showed when NRB became more stringent in its operational and loan

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disbursement procedures in order to comply with the standards mandated by the financialsector reforms.

Social services and other assistance presently available to the population have alsoimproved. On the national level, the Ghana Living Standards Survey (GLSS) for 1991/92indicates that 49 percent of adults in Ghana are literate in English or a local language. Maleliteracy rate was 60.8 percent while female literacy rate was 38.5 percent. Since theimprovement in social services is nationwide, it would be safe to assume that the Brong AhafoRegion in which NRB is located has experienced similar gains. Nsoatre is now connected tothe national electricity grid and the road from Nsoatre to Kumasi (about ninety miles away) isof good quality. Nsoatre also has a Senior Secondary School (SSS) and a government healthpost.

Financial Services Sector

Currently, NRB has its head office in Nsoatre and operates branches and agencies in foursurrounding communities -- Sunyani, Yamfo, Chiraa and Jinijini. A wide range of otherfinancial institutions and entities also operate in this area. These include commercial anddevelopment banks and non-bank financial institutions, such as insurance companies, a buildingsociety and a cooperative credit group, the Tata Special Susu (TSS).

Four commercial banks, Standard Chartered Bank (SCB), Barclays Bank (Gh) Ltd(BBG), Social Security Bank (SSB) and Ghana Commercial Bank (GCB) are engaged mainlyin the delivery of commercial banking services such as the acceptance of deposits, payment ofcheques and granting of loans/overdrafts. The SCB also provides clearing services to ruralbanks (RBs) in the region, while SSB offers consumer credit facilities to its customers inaddition to its regular business.

The development banks -- National Investment Bank (NIB), Agricultural DevelopmentBank (ADB) and Bank for Housing and Construction (BHC) are engaged in the financing ofshort, medium and long term projects in various activities as indicated by their names. Forinstance, NIB is engaged largely in funding industrial projects; BHC focuses on the financingof infrastructure projects such as buildings and roads; while ADB finances smallholder farmersand fishermen, agriculture and its allied industries.

The insurance companies -- State Insurance Corporation (SIC), Great African InsuranceCompany (GAIC) and Vanguard Insurance Company (VIC) offer insurance services to clientsin the region. The Social Security and National Insurance Trust (SSNIT) undertake theprovision of old age security through the payment of end of service benefits/pensionemoluments to its contributors who are mainly workers. First Ghana Building Society (FGBS)is engaged in financing real estate development. And TSS is engaged in cash/savingsmobilization for market women and local traders.

The NRB is presently engaged in the mobilization of resources from the low andmiddle-level income groups and advancing credit to them. In future, NRB intends to broadenits scope of operation to attract the upper income level group in an attempt to widen its capitalbase.

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2. STRUCTURE AND ORGANIZATION

Organizational Structure and Conduct

The current structure of the organization is depicted in Figure 1 below.

Figure 1.

BOARD OF DIRECTORS

MANAGER

PROJECTS BRANCH OPERATIONS ACCOUNTS

SUB- CLERKSPROJECTS AGENCIES/BRANCHESOFFICERS

Noteworthy adjustments that have occurred in the structure of the NRB during its ten years ofexistence, include increasing the number of management staff positions and re-orienting theeligibility criteria and -responsibilities of the bank's governing body. The NRB hasimplemented these and other changes in order to address some of the major problems itexperienced during its early days. These included the following:

i. Inadequate staff training. The bank did not provide staff training before the RuralFinance Project was implemented in 1990.

ii. Limited geographic presence and operations. The NRB's branch operations wereoriginally restricted to its headquarters (Nsoatre), where deposit mobilization and bankingbusiness were limited because of the small size of the town, population and level of commercialand economic activities.

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iii. Non-competitive remuneration for staff. Salaries and benefits were lower than thosepaid by other banks, which made it difficult for NRB to attract and retain highly qualified andexperienced staff.

Changes in the NRB's policies and procedures were also stimulated by the promulgation of theBanking Law and the need to comply with new capital adequacy ratios, reserve requirements,banking supervision reporting requirements, etc. (Box 1).

Box 1: NRB's Board Of Directors

The governing body of the bank has been re-organized from an Interim Management Committee to apermanent Board, with more technically qualified, experienced members, that represent the communitymore effectively. The Chairman of the Board is a successful timber merchant who is ably supported bya retired banker and accountant as well as a professional teacher. The other Board members are all wellexperienced in their various fields.

All the Board members are from the community and have been selected on the basis of theirprofessional competence and experience. The majority of Board members have served for over nineyears, which has engendered greater cohesion and understanding to achieving a common goal ofbuilding a viable and sustainable community bank. Over the years, the NRB Board has developed anumber of programmatic banking practices and strong sense of financial discipline among staff.

The Board concentrates on policy making, and leaves the day-to-day running of the bank to itsmanagement, which is required to give a monthly report to the Board. Since the bank is communitybased, most of its clients are also shareholders, and are represented on the Board. Through thisarrangement, any operational lapses are detected and addressed quickly.

Liberalization of the financial system has also led to increased competition from the eightcommercial and development banks in NRBs operational area. This has compelled the NRB tostrengthen its internal management policies and to re-orient its approach. The new approach tomanaging the organization has the following principles:

i. ensuring effective, long-term planning by NRB's senior staff and board members;

ii. expanding the number of branches and geographic areas of operation;

iii. restructuring the NRB staff so as to manage new obligations;

iv. improving the conditions of service of staff to ensure motivation;

v. providing attractive borrowing and savings rates;

vi. offering regular staff training; and

vii. ensuring good staff/customer relationships.

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As a result of these changes, the number of management staff positions increased from two toeight over the ten-year period (1984-1994). Currently, NRB has the following professionalpositions: Manager, Trainee-Manager, Project Officer, Accountant, Senior Clerk and three Sub-Accountants. The current employees have good educational backgrounds and adequateworking experience.

In addition, recruitment procedures are overseen by an appointments committee of theBoard which ensures that certain minimum qualification requirements are met. For instance,the minimum qualification for a clerk is a Diploma in Business Studies. In addition, a trainingschedule for all categories of staff has been developed and is maintained. Both internal andexternal training are undertaken. Internal training includes in-service training, attachment todepartments within NRB, seminars and workshops conducted at the week-ends for staff.External training is organized periodically for different categories of staff by the Association ofRural Banks (ARB). Staff of NRB participate in these external programs at least once everythree months.

The improved incentives for staff include basic entertainment, out-of-station, travel andtransportation and housing allowances. In addition, the NRB occasionally pays a"bonus"/honorarium to staff members who perform exceptionally well.

Legal and Organizational Structure

The NRB operates under the Banking Law (PNDC Law 225) of 1989, and the Bank of Ghanais the overall supervisor of its operations. It is also linked to the mainstream commercialbanking sector, specifically Standard Chartered Bank (SCB), through the check clearingsystem. In addition, it has linkages to the Ministry of Agriculture through the IFAD-supportedSCIMP Program. As an agent of credit disbursement under various external donor assistanceschemes, NRB has linkages to external donors such as IFAD, IDA and, more recently, FreedomFrom Hunger (FFH), a U.S. based nongovernmental organization (NGO) that offers credit topoor women in combination with health and education services.

Nsoatreman Rural Bank also collaborates with the District Assemblies (localgovernment) in the provision of infrastructure to communities. It operates in threeadministrative districts -- Sunyani, Berekum and Tano Districts. By 1994, there was one headoffice located in Sunyani, and four area branches, one of which is in an urban area. Out ofthirty-seven employees, nine were women holding mainly secretarial and clerical positions;there was no woman credit officer. The reason NRB senior management cites for not havingrecruited female credit officers is that very few women living in the bank's catchment area hadthe required minimum qualification of a university diploma or degree in agriculture, economicsor business administration. The NRB has since sought and recruited women credit officersspecifically to oversee the Women In Development (WID) component under the IFAD-fundedSCIMP project.

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Management and Institutional Organization

The NRB management has authority to initiate policies and implement procedures providedthat such policies and procedures are within the framework of the Banking Law.

The NRB has effective management information systems in place that are adequate. Theseare designed to conform to the reporting requirements of the BoG regarding liquidity, assetquality, debt exposure, sectoral distribution of credit, capital adequacy, maturity/ageinganalysis, capital expenditure, and the compensation and benefits provided to bank directors andofficers.

The frequency of reporting has been structured in such a way as to facilitate the flow ofinformation for management decision-making on a weekly, monthly, quarterly and half-yearlybasis. Management is thus able to respond quickly to the information needs of clients, the BoG,and donors. The work of the NRB field staff is also enhanced by the efficient reporting andrapid feedback system that management has developed. However, while the managementinformation systems have been adequate for the bank's past needs, they are very labor intensiveand have become increasingly burdensome given the rapid increase in the number of customers.

The NRB senior staff have a positive orientation towards capacity-building, particularly inthe following areas: management, resource mobilization and prudent/productive lending. Inthis regard, funds are consciously budgeted and used for staff and client training activities. Inaddition to the training that bank staff receive from the Association of Rural Banks, they arealso trained in conjunction with NGOs such as APPLE (which also participates in the IFAD-SCIMP Program), Freedom From Hunger (FFH) and quasi-government institutions for women,such as National Council on Women and Development (NCWD). Clients receive training toexpose them to the -advantages of the various financial services that NRB offers.

In this effort, NRB field staff help to identify potential activities and geographical areas forloan financing. They meet with potential beneficiaries and facilitate group formation. Theanimation of the groups is then undertaken by selected NGOs until the groups are ready toqualify for credit. This typically occurs within a period of six months. The groups electexecutives to open and operate group bank accounts, and the group members receive trainingfrom the partner NGOs in basic book-keeping, group dynamics and credit management skills,as a precursor to receiving bank loans. Regular meetings are held with groups by projectofficers to ensure adequate communication and continuous efforts to address their problems.

Since inception, NRB's significant achievements include:

i. expanding the number of branches from one to five within the five years;

ii. increasing the number of depositors from 5,570 to 12,943 and the number ofborrowers from 5,754 to 15,618, within five years;

iii. developing linkages with institutions and donors in order to enhance the bank'scapital base and training capabilities. NRB has developed active linkages with two donors (IDAand IFAD), two NGOs (APPLE and FFH) and a quasi-government agency (NCWD).

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Despite these achievements, initially NRB failed to take advantage of several new financialproducts that would have improved its ability to increase the scale of its deposit mobilization andcredit activities. For example, the NRB offered depositors ordinary savings and current accountservices while it could have offered time deposits and negotiated certificate deposits services, asdo many commercial banks in Ghana. Furthermore, it did not take advantage of the increasinglypopular inventory credit schemes that the Agricultural Development Bank (ADB) offered forseveral years to small-scale grain farmers in neighbouring districts of the Brong-Ahafo Region.

Human Resources

The NRB branch structure, community representation on its Board, and its number of staffallow the organization to interact effectively with its clients, especially those living close to thevarious branch offices, (Box 2). However, clients living in more remote areas do not enjoythese services, as the ratio of its field credit officers to agricultural and rural customers is verylow. This does not allow for effective project supervision, monitoring and recovery of creditsto the agricultural and rural sector, and explains the lower recovery rate2 associated with theagricultural sector. The bank's average recovery rate for agricultural loans were typicallybetween 65 percent and 75 percent, compared to personal loans recovery of between 90 percentand 96 percent for the same period.

Box 2: Decision Making, Communication And Training Policies

The full board of twelve members meets monthly to review the bank's operations, while a smallerexecutive board (of three members, including the manager) meets once every two weeks to considerloan requests above the branch manager's approval limits. Board/Management decisions are conveyedto staff through circulars, memoranda and staff meetings.

Staff meetings are held monthly to apprise staff of current developments in the bank. Circularsare also issued periodically to inform staff about management policy decisions.

Both staff and directors are given periodic training by resource persons engaged by theAssociation of Rural Banks (ARB). Areas of training include resource mobilization, capital re-structuring and share-holding. Training for staff includes accounting, book-keeping, project/creditevaluation, reporting and management information systems. In addition, staff also participate in jointtraining programs with local NGOs engaged in common donor-funded credit programs. Periodic in-service staff training programs also ensure continued efficiency.

Borrowers are given some training in lending procedures, savings and their obligations to thebank at regular fora and at Annual General Meetings (AGM) with shareholders and Board of Directors.

While the recovery rates for agricultural loans have been quite low, the NRB's experience hasnevertheless been quite impressive when compared to most other rural banks and the bankingsector in general. Most rural banks in Ghana and virtually all the commercial banks havediscontinued lending for agricultural activities, especially by small-scale producers, as theyhave had very negative experiences, both in terms of loan recovery and the cost of providingloans. These days, most rural banks lend only to salaried workers living in rural areas and to

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merchants and other business people in such locations. They also tend to keep most of theirfunds invested in treasury bills rather than take the risk of lending for agricultural activities.The fact that NRB has 50 percent of its loan portfolio in agriculture and maintains a highrepayment rate, is therefore noteworthy.

In order to improve the performance of its agricultural and rural loans, NRB decided torecruit additional field and management staff. It also expressed interest in exploring inventorycredit and loans to groups of women as another means of improving its performance. Table 9shows the productivity ratios of staff from 1994--1997. In 1994, the productivity ratios of 351depositors per staff member, loan volume of 09.3 million/staff member and ninety-five loanbeneficiaries per staff member, were low by MFI standards and indicative of under-utilizationof staff, leading to higher than necessary overhead costs. The figures have since improved.

Table 5: Productivity Ratios, 1994-97

Loans and Deposits Per Staff Member

Year 1994 1995 1996 1997Deposits: Client/Staff 351:1 540:1 572:1 378:1

Volume/Staff NA 17.2m :1 15.1m :1 38.1m :1

Loans: Client/Staff 95:1 272:1 325:1 292:1

Volume/Staff 9.3m : 16.1m :1 24.2m:1 40.9m:l

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3. MODES OF OPERATION

Deposit Services

The factors that constrained the capacity of NRB with regard to deposit services include:

i. competition from commercial banks in the catchment area;

ii. inability of staff to develop new products;

iii. logistical constraints for deposit mobilization in the catchment area, notably lackof vehicles for staff to travel to rural communities or to operate mobile bankingschemes;

iv. high transaction costs for depositors and borrowers in terms of transportationcosts and time required to make deposits or withdraw funds in the branches;

v. unfavorable macro-economic conditions, such as an inflation rate of about 35percent in 1997 and continuous depreciation of the Cedi, resulting in negativereal rates of interest being paid on deposits, while increasing operating expenses.

Lending Services

The NRB lends both to individuals and to groups. It expects that, over time, group borrowerswould "graduate" from the group lending program to become individual borrowers as the scaleof their enterprises grows. For instance, when smallholder farmers attain loan sizes that aresufficient to cover the cost of producing more than ten acres of maize, the NRB would then bewilling to lend to them as individuals. To date, however, very few farmers have managed tograduate from group borrowing to become individual borrowers, as the great majority still haveland holdings below the bank's threshold.

Although the NRB's ability to monitor loans closely is constrained by its very highcustomer to project officer ratio and lack of vehicles, it has developed collaborativearrangements with NGOs to help improve its capacity in this regard. Under IFAD-supportedcredit programs, several NGOs have been identified nationwide to liaise with rural banks inextending financial services to smallholders. Initially, the NGOs helped identify, mobilize andeducate rural groups about how to access the services of rural banks. Subsequently, severalbanks, including NRB, modified the original terms of reference for the NGOs to include loanmonitoring and recovery roles to ensure higher loan repayment rates. The primary NGO thatthe NRB has collaborated with is APPLE which earns a 2 percent commission on the loans thatthe groups it assists receive (i.e. the groups pay the additional 2 percent to the NRB which thenpays APPLE, for its services). This collaborative strategy ensures that NRB and NGO staff

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visit borrowers regularly to avert the diversion of loan funds and to provide credit education onefficient fund utilization and the mechanics of loan repayment before the loans mature.

Partly as a result of monitoring constraints, the NRB has concentrated on lending tocustomers who live in or close to the towns in which it has branches. The NRB managementrealizes that its ability to lend more extensively to rural smallholders would depend upon itsability to develop relationships with viable village groups and cooperatives through whichindividual loans can be wholesaled so as to reduce the bank's lending transaction costs.

Box 3: Best Practices Of NRB For Deposit Mobilization

Best practices for increasing deposit mobilization by NRB include:

i. lowering of the minimum deposit requirement as compared to that charged by commercialbanks in the catchment area; which has attracted many customers;

ii. enforcement of 25% cash collateral as deposit for all loans, overdrafts approved anddisbursed;

iii. payment of nominal interest rate on savings, which though representing a negative real rateof interest, was attractive to savers than no interest at all as bysusu collectors, who are the next bestfinancial intermediaries for the majority of rural bank customers.

These practices have enabled NRB to increase its deposit base from 102,885 million in 1992 to0511.978 million in 1994, and to 0831,391 in 1998. In real terms, NRB recorded an average annualgrowth rate of about 60 percent in deposit mobilization.

Other Financial Services

The NRB provides financial services to cocoa farmers by purchasing and honoring paymentcheques (Akuafo cheques) for cocoa sold to buying companies. Apart from this, the bank doesnot engage in any other financial service such as insurance, leasing and loan guarantees.

The effectiveness of this payment delivery service relieves the farmer of the high transactioncosts likely to be incurred from cost of transportation and waiting time. The main constraint tothe performance of this service is the lack of logistics to expand it.

Non-Financial Services

Other services that NRB provides are aimed at improving the financial management capacity ofits customers by way of business and investment advice. However NRB is constrained in itsability to do this on a formal basis by its lack of technical staff to carry out this task.

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The NRB also provides its customers with facilities such as:

i. agricultural inputs to farmers;

ii. education on improved farm practices and techniques; and

iii. consumer credit services through its subsidiary, Nsoatreman Consumer ServicesLimited.

The bank also provides social services to the community, such as the financing of street lightingand provision of school furniture. These services are provided out of the bank's profits as a formof public relations. The provision of these services increases the customer base, thus enhancingthe bank's profitability.

Box 4: Best Practices For Lending

The interest rates set by NRB at any time, depends on the prevailing macroeconomic conditions, such asthe rate of inflation. Financial sustainability is a major factor in determining interest rate policy becauseall the costs of capital, administration and possible loan loss through delinquency and default must becovered. NRB's policy also takes into account the need to make profit and to keep the value of its moneyintact. The charging of a positive real rate of interest is best practice which could lead to financialsustainability. Other best practices for lending include:

i. Lending to salaried workers has ensured high recovery rates because repayment installmentsdue are deducted from salaries, paid through NRB by government and other quasi- governmentalinstitutions. Average recovery rate of 92% has been recorded for salaried workers;ii. Restricting loans only to those cocoa farmers who encash their cheques at NRB branches hasensured about 90 percent recovery rate for cocoa farm maintenance loans;iii. A 5 percent rebate on interest rate on early loan repayment is also an incentive for high loan

repayment; andiv. Automatic loan renewal or repeat loans with upward adjustment for group loans has alsoensured good loan repayment.

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4. OUTREACH, ACCESS AND IMPACT

Economic Outreach and Impact

General Outreach

Although NRB does not set outreach targets regarding the percentage of the local populationthat are customers, the number of its clients has continuously increased over the years. Thenumber of rural clients increased by about 66.7 percent between 1992 and 1993, 42.9 percentbetween 1993 and 1994, and 22 percent between 1997 and 1998. While women constituted 45percent of the bank's clients in 1992, this figure increased to 55 percent in 1993, and hasincreased to 70 percent by 1998 (Table 6).

Due to paucity of data, it was not possible to disaggregate type of clients into poor, middleincome, and rich peasants/traders.

Table 6: General Outreach

Total Number of 25,380 28,388 20,009 24,456Clients

Number of Female 17,766 19,872 14,006 17,119clients

Number of Male 7,614 8,516 6,003 7,337clients

Number of Rural 14,720 16,465 11,605 14,184Clients

Number of Urban 10,620 11,923 8,404 10,272Clients

Average 25,380 28,388 20,009 24,456Percentage

The distribution of clients per sector between 1995 and 1998 is shown in Table 7 below. Thereis consistency in the areas for which clients were served over the years. Most clients were inthe service sector, then agriculture, commerce and trade, and then cottage industry.

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Table 7: Number Of Clients Per Sector

1995 1996 1997 1998Agriculture 8,122 8,604 5,692 7,116

Commerce and 5,076 6,877 5,778 6,667Trade

Cottage Industry 761 807 534 668

Services 11,421 12,100 8,005 10,006

Total 25,380 28,388 20,009 24,436

Loans

The total number of loans increased from 1992 to 1994 and continued to increased from 1995to 1996, then decreased in 1997 and picked up again in 1998. The primary reason for theincrease in the first three years was availability of funds from the IDA-RFP and IFADprograms.

While the number of clients in the agriculture sector represented about a third of thebank's total clientele in 1995, the percentage of agricultural loans in the portfolio constitutedabout three quarters of bank's total loan portfolio within the same period. By 1998 thepercentage of agriculture in the portfolio had reduced to about 60 percent. Though there werefewer clients in cottage industry, the volume of loans ranked second after agriculture,conversely there were several commerce and trade clients but a corresponding low loan volume,Table 8.

Table 8: Number Of Loans Per Industry

I995 1996 1997 1908Agriculture 9,618 11,490 10,282 12,852

Commerce and 3,206 3,830 3,427 4,284Trade

Cottage Industry 8,977 10,724 9,597 11,995

Services 3,847 4,596 4,113 5,141

Total 12,825 15,320 13,710 17,137

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Deposits

As from Table 9, most depositors are from the service sector followed by agriculture. Thenumber of depositors has not increased since 1995, however the total value of deposits has, asshown in Table 10.

Table 9: Number Of Depositors Per Sector

1995 '1996 1997 1998Agriculture 8,122 8,604 5,692 7,116

Commerce and 5,076 5,378 3,558 4,447Trade

Cottage Industry 761 807 534 668

Services 11,421 12,100 8,005 10,006

Total 25,380 26,889 17,789 22,236

Table 10: Value Of Deposits And Loans

1995 1996 1997 1998Total Value of 660,813 709,782 807,674 831,391Deposits

Total Value of 630,989 697,744 868,836 878,802Loans

Social Impact

Client Participation

Clients participate in NRB decision-making largely through their representatives on the bank'sBoard of Directors. Though all board members are NRB customers, three of the twelvemembers represent three important client constituencies, namely salaried workers, farmers andthe traditional council (chiefs and influential people of the area). Furthermore, client feedbackand suggestions are provided at public fora, group meetings and at the Annual General

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Meetings (in which the bank's management participate). These help the bank to determineclient needs and improve the quality of its service delivery.

Gender and Poverty Awareness

While NRB has no written policy specifically targeting women or the poor as customers, it isincreasing its efforts to lend to women largely due to the good repayment experience it has hadwith female customers through various special projects (namely, the IDA Credit Facility foragricultural production, agro-processing and marketing and the IFAD Program that specificallytargets women farmers).

The NRB hopes to increase the number of female customers in the future. It isencouraged in this regard by recent interviews with female customers who came into contactwith the bank through donor-supported projects that indicate that the women are nowsufficiently confident in the bank to conduct business with it on an individual basis (as opposedto the group lending basis specified under the donor-supported programs). These interviewsfurther indicate that these new female customers are encouraging other women to use thebank's services.

The bank's recruitment practices have generally not reflected gender sensitivity. Out ofthe bank's employees, women are mainly employed as secretaries, clerks and cashiers, and feware employed as loan officers.

To some extent, collaboration with other organizations in the implementation ofprojects has reflected the NRB's awareness of gender and poverty issues. For instance, thebank works with officers of the National Council on Women and Development on the IDAProject. The bank's role is to organize, train and facilitate credit for the processing groups thatare assisted through the IDA project. It also collaborates with officers of the Department ofAgricultural Extension to provide training for poor farmers. Under this project, the bank worksthrough a female agricultural extension officer to provide services to groups of farmers inChiraa district, one of its catchment areas.

The bank has been encouraged by donors to recruit female field agents and bankofficers. It plans to improve its ability to provide services to female and poor clients by makingstaff more poverty and gender-sensitive. The bank hopes that its participation in a new gender-sensitive nutrition and income-generating assistance project with Freedom From Hunger wouldfacilitate this. Its management intends to incorporate the lessons learned from this associationinto its plans for the expansion of its regular banking operations in the future.

Interviews with the NRB's customers reveal that, in general, they find the bank moreconvenient and accessible relative to other financial institutions in the region, primarily due toits multiple branch structure and presence in rural towns, as opposed to being located in themajor cities. Even so, customers did cite the time required to obtain bank services as an areathat requires improvement. At peak periods in the month, customers often have to spendseveral hours conducting their banking transactions. The bank is aware of the problem and it isconsidering the merits of a computerized system to expedite services to its clientele.

A major factor that hinders access to NRB's services for some potential customers is thelack of collateral. The types of collateral preferred by the bank includes savings deposits,

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financial instruments such as treasury bills and government bonds, bank and insuranceguarantees, and buildings.

Because most potential rural bank clients do not possess these assets, the bank hasdecided to encourage the development of a savings habit in order to use customers' savingsaccounts as partial security in lieu of other collateral. Currently, the bank lends up to four timesthe amount that customers who save on a regular basis maintain in their savings accounts.

Although the NRB has a relatively long history of operation and a strong communitypresence in the area, the bank's management employs various methods suitable to its clientele toadvertise its services. To promote its services, it uses mobile information vans and also providesfree products, such as calendars and pens, to customers.

Savings Awareness and Opinions of Clients

Customers are generally well informed regarding the mechanics of operating their savingsaccounts. This is due to the efforts made by NRB staff to promote such awareness at groupmeetings and fora organized for this purpose as well as in client training sessions. Customersalso seemed to be generally satisfied with the way the NRB's saving services are structured.For instance, customers noted that the bank's requirement of a minimum initial deposit requiredto open a savings account was not prohibitive to attracting new members. They are alsogenerally quite satisfied with the interest rate offered on savings accounts. The relatively lowinterest rate as compared to that offered by some large commercial banks, appeared to becompensated for by the proximity and the opportunity to have access to the bank's otherfinancial and non-financial services.

The NRB renders payment services by honoring cocoa farmers' "Akuafo cheques" andby managing the payment of salaries for workers in the formal sector. This saves thebeneficiaries travel costs, time and risk. Non-financial services available to customers includethe provision of various goods and inputs on credit terms.

Credit Awareness and Opinions of Clients

Customers appear to be well aware of the range of credit services the bank offers. Theyidentified various credit facilities for marketing and production activities and personal loans forsalaried workers as those that were used most frequently. All the customers interviewed hadbenefited from one or more of these services and had repaid credit facilities extended to themsuccessfully.

Customers were generally appreciative and complimentary of the services provided bythe bank. They compared the performance of Nsoatreman Rural Bank favorably with otherfinancial institutions that had served the area in the past. Reference was made, in particular, totwo commercial banks which customers found very frustrating because bank staff were onlyavailable to conduct transactions in Nsoatre two days per week. This resulted in customershaving to travel to Sunyani, the regional capital, for their banking needs on the days that staffdid not come to Nsoatre.

Farmers interviewed indicated that the various credit facilities for production wereparticularly useful. They stated that eligibility to benefit from facilities in the future dependedon their repayment records. However, they indicated that various factors could influence their

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ability to repay on schedule, such as weather patterns and market prices of their produce. Theyalso stated that the bank's practice of requesting that loans be paid by December of each yearsometimes made it difficult for them, since prices of produce at that time of the year aretypically low. Farmers expressed the need for intensification of the provision of non-financialservices such as farming inputs.

Traders and producers patronize current account services and the various credit facilitiesfor marketing and production. Salaried workers benefit from personal loan and consumer creditfacilities. Women customers had benefited from various services including savings and groupcredit schemes under various projects. The respondents had successfully repaid facilitiesgranted them. They were also complimentary about the services they received.

In general, NRB's customers perceive two fundamental differences between themselvesand non-customers: bank customers felt they had acquired the savings habit and the disciplineof repaying loans on schedule. However, they also noted that for relatively poorer personsliving in the region's rural communities, traditional sources of savings and credit, such as susucollectors (mobile money collectors who operate in local market places), rotating savings andcredit associations ("ROSCAS") and local money lenders would continue to be moreconvenient than the NRB, or other rural banks, given their closer proximity and more rapid loanapproval procedures. When asked why they did not use these services themselves, customerscited the NRB as being more secure than the traditional mechanisms and as offeringsignificantly lower interest rates on loans than informal money lenders.

Impact on Individual Capacity

Customers indicated that their involvement with the bank has had a positive impact on theirindividual capacities. Farmers indicated that in most cases their production had doubled. Onewoman stated that prior to her benefiting from bank services she had been able to produce onlyten bags of maize per season. Subsequently she was able to produce twenty-five bags. Otherprograms had provided capital equipment including commercial food processors and mills.

Salaried workers indicated that credits from the bank had improved their ability toprovide consumer items for their families, meet family and social commitments and to handleemergency situations without getting into debt. Salaried workers reported a generalimprovement in their families' social well-being and status.

The changes that customers typically cite as indicative of improvements in their well-being as a result of access to banking services include: the purchase of appliances such astelevisions and freezers, the construction or improvement of their houses, and the ability to payschool fees for their children.

Interaction with the bank had also resulted in empowerment for some customers. Awoman agro-processor interviewed had benefited from a group credit facility and doubled heroutput as a result. She indicated that from this experience she has gained the confidence toapproach the bank in her individual capacity for advice and assistance on personal investmentprojects.

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Impact on Institutional and Community Capacity

Beneficiaries of NRB's services indicated that apart from the enhancement of individualcapacity, the presence of the bank has had a developmental impact on the community andorganizations within it. The NRB clients interviewed regarding the bank's impact on thecommunity included various local opinion leaders, such as chiefs (traditional authority),assembly members (local authority), teachers, adult functional literacy coordinators, agriculturalextension officers and leaders of women's groups.

In terms of the NRB's support for general community development, they cited as mostnoteworthy the bank's provision of street lighting, school furniture, cement and other buildingmaterials for public structures, and financial assistance for the construction of the chiefs palace.

In terms of support for local organizations, they cited, in particular, the bank'sassistance to the local private transport providers union (Ghana Private Road Transport Union)to purchase a bus to facilitate transportation to and from the town. They noted that the proceedsfrom the bus's operations have been used to purchase another bus. They also mentioned thatseveral local church groups have acquired loans for their development activities. And theyfurther noted that the loans provided under the IFAD scheme, in collaboration with NGOs, suchas APPLE, have provided agro-processing machinery for groups of borrowers, which, in turn,provide significant time saving for community members, especially women.

In addition to providing support for the development of local infrastructure, the NRBalso plays other important, but often less visible, community development roles. While the bankhas not been formally involved in the resolution of community conflicts, some bank staff, giventheir experience and prominence within the community, often serve in an individual capacity asmediators in conflicts and counselors on social issues.

The bank also provides other services that include the acceptance of documents andother valuables for safe-keeping, training in the preparation of wills, and education on bankingand financial services that customers can utilize in their business dealings and with otherfinancial institutions. In some instances the bank has also served as the executor of clients'wills. Regarding their educational efforts, bank staff have interacted effectively with relateddevelopment projects such as the Functional Literacy Program of the Non-Formal EducationDivision of the Ministry of Education by providing training to participants in investmentdecision making, business planning, feasibility analysis and other related subjects.

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5. FINANCIAL PERFORMANCE

Sources and Uses of Funds

The indicators shown in Table 11 have been applied to measure the financial performance ofNRB.

Table 11: Financial Performance Of NRB

INDICATOR MEASURE

i. Provision for loan loss/volume of loan Quality of loan assetsoutstanding

ii. Deposits as a percentage of total funds Volume of depositsmobilized

iii. Debt: equity ratioLeverage

iv. Operating income/total operating expensesProfitability

v. Net interest marginProfitability

vi. Average employee compensation/GDP/capitaLevel of compensation

Over time improvements made in the assets quality of NRB can be attributable largely to:

i. Lending to salaried workers whose loan installments are deducted at source;

ii. Lending to cocoa farmers who only encash their cocoa cheques at NRB branchesthereby allowing loan installments due to be deducted at source;

iii. Insisting on maintaining a savings balance of at least 25 percent of outstanding loans aspart collateral; and

iv. Providing loans to groups organized, animated and linked to the bank by collaboratingNGOs. Together with the bank staff, these NGOs supervise, monitor and collect loans.

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Profitability

Profitability of NRB has increased as operating income/total non-interest operating expensesincreased. The net interest margin has also declined. The increase in the profitability of NRBcould be attributed mainly to the following:

i. Loans volume increased during the period because IFAD and IDA provided additionalloanable funds. This culminated in higher interest incomes;

ii. The NRB has increased its investments in treasury bills significantly which providedhigher interest/yield incomes than loans.

Challenges and Future Plans

The NRB has conducted an internal institutional assessment and subsequently developed a five-year plan to address identified constraints, consolidate its gains and accelerate its growth on asustainable basis. The plan describes the culture and structure that the bank aspires to createand sets out goals, targets, innovations and action strategies. As a result of this planningexercise, bank staff have decided to seek to transform the institution into a community bank, asthey believe this structure will help to overcome some of the identified constraints.

In its assessment, the bank identified the following weaknesses:

i. low financial resource mobilization culminating in inadequate loanable funds;

ii. slow pace of group formation due to a lack of logistical support (transportation) and ahigh customer-credit officer staff ratio (3500:1);

iii. high financial transaction costs due to inflationary pressures in the economy;

iv. lack of innovation in products for savings mobilization and lending;

v. low human resource development; and

vi. a relatively cost-ineffective, manual management information system.

The NRB has set the following goals within the five year plan for capacity-building and itstransformation into a community bank:

i. higher rates of deposit mobilization;

ii. increased equity share capital;

iii. increased profitability;

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iv. higher reserves; and

v. increased capital adequacy base.

The transformation of NRB into a community bank has the following possible advantages andconsequences:

i. To meet the eligibility criteria, its equity capital base will have to be increased to atleast 020.0 million which would provide the bank with a larger capital base for lendingoperations;

ii. The NRB would have clearing facilities directly with the Central Bank, rather thanthrough local commercial banks and to deal in and hold foreign currencies; and

iii. community patronage is likely to increase as a function of the additional services thebank would be able to provide but also because community members will see the bankas having higher status and credibility.

The five year targets the bank has set for itself include:

i. deposit mobilization: to raise the present level from 0471 million to 03.5 billion;

ii. equity shares: to increase from its present level of 023.4m to 073m;

iii. reserves: to raise the present level of 0121.3m to 0605.5m; and

iv. capital adequacy: to rise from its present level of 072.8m to 0300m.

The strategies for achieving these goals and targets include:

i. expansion of its catchment area;

ii. computerization of its management information systems;

iii. more intensive training of clients on their obligations to the bank to reduce loandelinquency and default rates;

iv. intensive staff training;

v. recruitment of high quality personnel;

vi. better conditions of service for staff;

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vii. forging symbiotic linkages with formal financial institutions, such as the AgriculturalDevelopment Bank and credit unions, and with informal financial institutions (IFIs),such as susu collectors and ROSCAS. The NRB linkages with formal banks willprovide increased funds which it will be able to onlend to its customers. Linkages withIFIs will enhance its deposit mobilization through the lodgements of the IFIs and alsoenable it to wholesale its credit through the IFIs to their customers and patrons. Thewholesaling lending strategy will reduce transaction costs;

viii developing stronger linkages with NGOs active in rural development; and

ix. procuring adequate logistic support, especially transportation.

In its efforts towards reaching full sustainability, NRB intends to pursue the followingmeasures:

i. instituting cost-center accounting for each of its branches/agencies to eliminateunprofitable centers;

ii. encouraging the development of innovative products for deposit mobilization throughthe provision of additional incentives for saving;

iii. paying competitive interest rates for deposit mobilization in order to maintain andincrease its market share; and

iv. levying appropriate interest charges on its credit facilities in order to maintain the realvalue of its capital.

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6. INNOVATIONS AND LESSONS LEARNED

Some unique features of the Nsoatreman Rural Bank include:

i. The bank has a strong, highly qualified management, staff and board of directors, all ofwhom are local community members with a personal stake in the community'sdevelopment. The rate of turnover of board members and management personnel hasbeen very low. This has contributed to the NRB's consistency in policy formulation andimplementation, and to its positive performance in overcoming problems, which stillplague many other rural banks in Ghana.

ii. The NRB has learned to combine flexible bank operations with diligent supervision ofprojects and loans. Through research and experimentation with various minimumdeposits, the bank has settled on a minimum deposit amount which is much lower thanthe minimum requirements of commercial banks in the catchment area (i.e. 03,000versus 05,000). The result has been a tremendous increase in deposit mobilization.

iii. The bank's lending practices have been equally innovative. For example, lending tosalaried workers has ensured high recovery rates because of repayment deductions atsource. The group borrowers that apply to the NRB are also required to use salariedworkers as guarantors for loans. In addition, the bank requires borrowers to maintain aminimum of 25 percent of outstanding debts in their savings accounts as partialcollateral. To reduce the risk of loan defaults in its agricultural lending, the NRBextends credit only to Cocoa farmers, who encash their government-issued checks andmaintain savings accounts with the bank. To encourage high and prompt loanrepayment, the NRB has successfully offered a 5 percent interest rebate on early loanrepayments.

iv. To help attract new customers and increase profits, the bank has also introduced newservices such as the establishment of a subsidiary, Consumer Services Ltd., whichenables customers to purchase agricultural and consumer goods on hire-purchase terms.The NRB has engaged in share-capital mobilization campaigns and education to raise

its capital structure. As a result, its share capital has increased over time.

v. The NRB has developed collaborative arrangements with NGOs to help improve itscapacity to monitor loans. Several NGOs have been identified nationwide to liaise withthe bank in extending financial services to rural smallholders. The NGOs help identify,mobilize and educate rural groups on how to access the services of rural banks. Theoriginal terms of reference for the NGOs are modified to include loan monitoring andrecovery roles to ensure higher loan repayment rates. The NRB and NGO staff visitborrowers regularly to avert the diversion of loan funds and to provide credit educationon efficient fund utilization and the mechanics of loan repayment. The NGOs earn amodest commission on such loans.

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ANNEX

Annex 1: Data

Number of Depositors

1951996 1997 1998Total Number of 25,380 26,889 17,789 22,236Depositors

Number of Female 17,766 18,822 12,452 15,565Depositors

Number of Male 7,614 8,067 5,337 6,670Depositors

Number of Rural 14,720 15,596 10,318 12,897Depositors

Number of Urban 10,660 11,293 7,471 9,339Depositors

Average 25,380 26,889 17,789 22,236Percentage

Number of Borrowers

1995 1996 1997 1998Number of Female 9,618 11,490 10,283 12,852Borrowers

Number of Male 3,206 3,830 3,428 4,284Borrowers

Number of Rural 8,978 10,724 9,597 11,996Borrowers

Number of Urban 3,848 4,596 4,113 5,141Borrowers

Total Borrowers 12,825 5,320 13,710 17,137

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Number of Loans per Industry

1995 1996 1997 1998Agriculture 9,618 11,490 10,282 12,852

Commerce and 3,206 3,830 3,427 4,284Trade

Cottage Industry 8,977 10,724 9,597 11,995

Services 3,847 4,596 4,113 5,141

Total 12,825 15,320 13,710 17,137

Loan Portfolio Distribution per Industry (millions of cedis)

'1994 1995 1996 1997Agriculture 111 154 347 581

Commerce and 144 146 393 689Trade

Cottage Industry 32 70 34 42

Transport 19 135 46 80

Other 51 253 318 532

Ratio of Operating Income to Operating Expenses

1995 996 1997 1998Income 114 106 120 123Expenses _

Loan Recovery Rate

1995 1996 1997 1998Loan Recovery 98.3 98.4 99.5 99.5Rate

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