The financial performance of rural banks in Ghana: The generalized method of moments approach

Abstract

Purpose

Rural and community banks (RCBs) provide financial services to small enterprises in rural and sub-urban areas. The purpose of this paper is to examine their financial performance through a case-specific evaluation of a small bank situated in the northern part of Ghana.

Design/methodology/approach

The authors employed a triangulation method comprising relative ratio analysis, bivariate and generalized method of moments (GMM) techniques for the evaluation of the audited annual financial statements of the bank covering a period of 15 years.

Findings

The relative ratio analysis show that the bank's financial performance has generally been above the average of the rural banking industry. The bivariate analysis indicates that although the loans portfolio is positive, it is not properly fitted. That is, some of its loan portfolio deviates from the path of expectation. The GMM analysis indicates that its financial performance is significantly influenced by liquidity management, bank capital and size which have enhanced its expansion and intermediation to rural households and microenterprises. However, an increase in the government treasury bill rate has a declining effect on the bank’s profitability.

Practical implications

The findings have significant policy implications for the management and supervision of RCBs. RCBs should deal with the spillover effects of the banking and MFIs’ crisis by educating and re-assuring their customers of their financial integrity. Most importantly, they differentiate their services from the other financial institutions within the space of the rural financial architecture.

Originality/value

Majority of research into this area has focused heavily on large commercial banks. This research adds value to the literature by re-focusing the searchlight on the financial performance of small banks.

Citation

Awo, J.P. and Akotey, J.O. (2019), "The financial performance of rural banks in Ghana: The generalized method of moments approach", World Journal of Entrepreneurship, Management and Sustainable Development, Vol. 15 No. 1, pp. 2-18. https://doi.org/10.1108/WJEMSD-02-2018-0012