Analysis of Rural Credit Policies in Ghana, Case Study Seko Odumase Area. Schriftenreihe der Bundesanstalt für Agrarwirtschaft Nr. 53.

Plange, E.


The basic objective of the study was to find out what opinions small scale rural entrepreneurs in the Seko Odumase area of Ghana hold about the rural financial market in which they operate and how they perceive changes to eradicate its short comings. It was noted that current problems in rural financial markets centred around interest rate, infrastructure and other distorted policies which are at best counterproductive and inimical to the interest of the majority of participants in rural financial markets.

This paper used factor analysis to study the interrelationships between the opinions, preferences and actual data relating to socio-economic background and activities to respondents in the rural financial market. 10 factors were obtained but only 4 were used in subsequent analysis and discussion. The results show that only a small fraction (13,7 %) of respondents were receiving all their credit requirements from FFM (mainly from Commercial and Development banks). The majority (86,3 %) were relying in varying degrees on agents in IPM (in order of importance moneylenders, relatives, rural traders and landlords) for their credit requirements. With the exception of a negligible 3,0 %, the degree of reliance is tilted more towards IFM than FFM. The results further show that efforts by policy makers to relegate IPM and promote more rural entrepreneurs into FFM have not had the desired effect. The popularity of IPM in terms of the number of respondents who patronise its services (72,0 % i.e. those who obtain more than 50,0 % of credit from this market) compared to those catered for by FFM (21 % i.e. including those who obtain at least 50,0 % of credit) shows its importance in rural financial markets. Further to this was the finding that out of the 57 respondents who were having any dealings with rural banks, only 10,5 % were receiving 50,0 % or more but less than 100,0 % of credit requirement from them. These have shown that under current rural credit policy directives rural entrepreneurs are not at all better served by formal institutions. Multiple borrowing by respondents within the IFM is completely absent showing a lot of discipline in this segment of the rural financial market. On the contrary, multiple borrowing within FFM was rampant with 97,2 % of respondents who obtain credit from it having alternative sources of credit in the formal sector. Opinions expressed by respondents show that the two segments of the rural financial market both have their strength and weaknesses. informal credit sources in their opinion are more flexible, timely, easily accessible and general credit are more adapted to local needs and more responsive, to the special problems of the rural entrepreneur. Its weak point are that credits are highly inadequate and respondents mentioned dissatisfaction with repayment procedures and high interest rates charged by agents here was implied. On the contrary, respondents perceived FFM as having adequate resources and especially in instances where agents in this market commit themselves fully to financing a client. The low interest rate element was also perceived by most respondents to be positive. Formal institutions were, however, criticised for mounting formidable institional barriers which make it difficult to obtain credit. Their speed of advancing credit is perceived to be unsatisfactory. A majority of respondents were of the opinion that they would be satisfied with FFM if they would manage credit from that source. How then can the average rural entrepreneur obtain credit from FFM especially when he can scarcely satisfy the required demands?

Most of the respondents were of the opinion that their chances of obtaining credit and strengthening of the rural economy could be improved, if government improves infrastructure (i.e. good roads, storage systems attractive prices and good marketing outlets). Also removal of stringent requirements and tailoring security requirement to meet what most of them can offer. Most respondents did not think, however, that direct intervention by government through the creation of more banks and enforcing existing credit directive would improve their chances of obtaining credit.

The evidence in this study suggests that benefits from a combination of incentive policies aimed at distributing income and making credit accessible to the poor accrue disportionately to a few rural entrepreneurs. This stresses the wide divergence between the intent of government policies on rural credit and what actually obtains in reality. The results also highlights the conflicts between policy directives and economic forces, and that rural entrepreneurs obtain credit easily in the segment of the rural financial market where economic forces prevail. The implication here is that competitive rates of interest can help more rural people gain access to formal credit. Deregulation of interest rates on formal markets will encourage formal institutions to improve their performance in the rural economy and enable them to innovate to meet the peculiar credit needs of rural households. Rural credit policies should limit their roles to removing obstacles which hinder financial intermediation in rural financial markets. Important areas such as problems associated with interest rates, product prices, yields, technology, vague and uncertain land titles and rural infrastructure. objectives of such policies should be to find ways and means to reduce cost of financial intermediation instead of concentrating on the use of subsidies which have their obvious limitation.

It is recommended that in order to reduce transaction cost of credit to participants (both on the demand and supply side) in rural financial markets, and make credit widely accessible, a better recognition must be given to suitable low cost intermediaries such as indigeneous savings clubs, financial self help groups, private individuals, rural deposit collectors, money lenders and other rotation savings associations with strong local identity. Such financial intermediaries are already present in rural areas and known to rural people; these intermediaries could then through suitable policies be linked to the formal market. Given the popularity of such informal institutions it should then be easier through them to mobilize rural savings and remove the distrust some rural people have about formal financial markets. Under such an arrangement the government should provide a strong extension service to help in advising the rural entrepreneur especially in preparing loan proposals. Such an arrangement, although cannot solve all problems of rural credit overnight, it is hoped it can help minimise them. However, more research will have to be done on how beet to integrate the positive aspects of the two presently segmented markets. Such research should concentrate more on the informal sector with which rural people are more identified, but about which little accurate information is available. The intricate connections the informal sector has with the culture and customs in rural areas points to its potential in the rural economy.