Downgrading Financial Service Delivery and Institutional Sustainability: A Case Study of Akwapim Rural Bank, Ghana

Abstract

Rural financial markets in the developing world are faced with the problem of information asymmetry and are monopolistically competitive. Based on this, one policy option to enhance rural clients’ access is for formal financial institutions to mimic products and services of informal intermediaries. Empirical evidence on impact of mimicry on institutional sustainability can help improve policy choices, yet there is a dearth of studies on this. Using time series data to analyse trends in selected financial ratios and means this study examines the impact that the mimicking of an informal financial product by a formal financial institution (Rural Bank) has on the outreach and sustainability. The time series data was collected from the bank’s financial statements and returns to the central bank between 1996 and 2005. It was found that adoption of informal financial product enhanced outreach and sustainability of the bank. This study, demonstrates that the mimicry policy option if adopted by formal financial institutions can enhance availability of financial services to the productive poor and also lead to long-term sustainability of financial institutions.

Key Words: Downgrading, Rural Finance, Informal Financial Products, Institutional Sustainability, Financial Products and Services