FINANCIAL PERFORMANCE OF RURAL AND COMMUNITY BANKS (RCB) IN KUMASI METROPOLIS USING CAMEL METHOD

Abstract

From the inception of Rural and Community Banks (RCBs) in 1976 the network of RCBs has experienced tremendous growth in the rural areas of Ghana. Yet, RCBs face insurmountable challenges in their operations and many are faced with financial distress. Formidable competition from other banks operating in rural areas is another major challenge RCBs face currently. Many studies were conducted on the performance of RCBs worldwide but scant in Ghana. Declining performance of RCBs require an investigation to examine their safety, soundness, and ability to mitigate the potential risks RCBs face. Studies conducted in developing countries on performance of rural banks used various financial ratios of the CAMEL model, non-financial bank specific characteristics, and other macro-factors. No such study has been conducted in recent years in the context of Ghana. This study seeks to fill this gap whiles utilizing return on assets (ROA) and return on equity (ROE) as the measure of financial performance. RCBs sampled for this study were ten (10) using annual reports for the five-year period of 2008 to 2014. Mean, standard deviation, correlation, and regression analysis were employed to measure the effect of CAMEL ratios, bank age, size of board of directors, GDP, inflation, and interest rate on the financial performance of the RCBs. Findings show that the ROA and ROE of the selected RCBs has improved over the five-year period with an average of 15.4% and 33.4% respectively. The regression analysis showed that capital adequacy, asset quality, management efficiency, and the sized of board of directors were significant determinants of financial performance. However, the size of board of directors was inversely related to performance of RCBs. The remaining variables in the CAMEL did not significantly influence their performance. Whiles the explanatory power of the ROA model is significant, it was not significant for ROE. Though RCBs in Kumasi Metropolis have good asset quality and earnings quality. There is the need for RCBs to vi improve upon their liquidity and corporate governance as a way of enhancing their overall efficiency.