Financial Performance of Rural and Community Banks (RCBs) in Ghana

Abstract

Purpose: This paper examines the determinants of financial performance of Rural and Community banks in Ghana.

Design/methodology/approach- The study considers Rural and Community banks (RCBs) in Ghana as they are the major microfinance service providers. Thirty (30) rural and community banks across the country were purposefully selected for the period 2006-2010 and panel data was used in regression analysis model to examine the variables that could affect the performance of RCBs. The variables of the regression include credit risk, capital adequacy, portfolio composition, bank size, operational efficiency, gross domestic product as well as inflation (consumer price index).

Findings- Results from the paper reveals that credit risk, non-interest expense, bank's capital strength, gross domestic product, and annual rate of inflation are significant drivers of RCBs' profitability in Ghana. However, bank size and portfolio composition did not have any significant impact on their profitability.

Practical implications- The results suggest that like the traditional (commercial) banks in Ghana, credit risk can affect Rural and Community banks and hence managers are expected to do more as they try to give more loans as a means of attracting or retaining customers. Also, as RCBs become large, measures should be put in place to check inefficiency and ensure economies of scale through proper supervision.

Originality- As most of the earlier studies on financial performance focused on the commercial banks, this study conversely focused on Rural and Community Banks (RCBs) and from Ghanaian perspective.