Effficiency of Rural Community Banks in Ghana: An Application of Data Envelopment Analysis

Abstract

Rural financial markets in Ghana remain underdeveloped, largely because of the legacy of glaring failures in government-led programs. The basic functions of rural banks in Ghana are the mobilization of savings and the extension of credit to deserving customers in their areas of operation. Through their financial intermediation roles, rural banks act as catalysts for economic development in rural Ghana. Despite their role in the Ghanaian context, these banks have not been the subject of academic studies. The purpose of the study is to measure the efficiency and performance of the rural banks using Data Envelopment Analysis (DEA). The use of DEA is demonstrated by evaluating the management of 137 rural community banks in Ghana for the period 2004 to 2014. The estimation process explicitly, modelled for all the parameters especially efficiency using the non- parametric Data Envelopment Analysis (DEA). ROA was used as a performance measurement. The study pleaded in favor of investment to total asset, the total operating expenses to total asset and loan to total asset; and to be the main drivers to rural banks profitability measurement in Ghana since they were significant.  The study registered liquidity (LIQ), total asset and inflation to be insignificant. The DEA results reveals 92.70% of RCBs to be inefficient. For RCBs to be more efficient and profitable the  RCBs must strengthen effective credit administration by way of credit appraisal, monitoring the progress of loans and their efficient recovery. Important policy implications of these findings include the need to enhance confidence in the Ghana’s rural banking system, to encourage savings in regional rural banks, and to ensure efficient transfer of resources from savers to investors.