The Effect Of Community Banks In Rural Development

THE EFFECT OF COMMUNITY BANKS IN RURAL DEVELOPMENT (A CASE STUDY OF ULI COMMUNITY BANK ULI).

HISTORICAL DEVELOPMENT OF COMMUNITY BANKS

Development and continuous development is a goal which every nation aspires to achieve and when it is achieved everyone shares in the glory. In most nations development tends to concentrate in the urban areas but a nation is rated highly when its development extends to the rural area.

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In Nigeria, life in rural area is synomous with poverty and socio economic deprivation.  The people are predorminantly peasant farmers who produce the highest percentage of the significant development of the rural areas.  There are no good roads, electricity, good water supply, among other things.

The banking industries help in no small measure in bringing development in any country, therefore, in a bid to extend this development to the rural area, the community banking system was introduced in Nigeria in 1990.

The poor messes in the rural areas who are majority involved with agricultural production need finance and social amenitieswhich are supposed to make their work and life easier.  Therefore, there is need for more emphasis to be laid on establishment of community banks to see if those problems encountered in the rural areas could be solved and rural exidus brought to a standstill.

Adekanye (1984) in his book ‘Elements of banking” stated that the “ideas of development banks was conceived immediately after the second world war”.\

In Nigeria, development banks were established to increase agricultural output and productivity.  The creation in the use of scarce land and water resources.

To enhance more efficiency in the use of capital, resources, equitable distribution of in come, all of which gear up to raise the standard of living of the rural population.

The objectives of the community banking in rural areas is in a nutshell to facilitate the economic development of the rural areas which is the need for study: “the role community banks in rural development”.

Stome economists believe that the economics status of any nation depends to a large extent on how effective their banking industries are.  It is in the view of this rational reasoning that the then Babangida administration inaugurated the National Board for community Banks in 1991 which its sote function is to guide and assist communities in establishing their own banks in their area.  This measure is geared towards the use of banking industries in realization and actualization of the development of much neglected rural areas in the community.

It is in view of these problems that I decided to carryout a project work on the role of community banks so as to prove to the people  especially those in the rural areas that community banks do more or a  lot than they think hence, to appreciate the importance for better economic situation in the rural areas.

Community banking services in rural areas are dynamic rural support system needed for an increase in productivity of both small and large scale farmers, local businessmen and social amenities needed for better economic situation in the rural areas.

The possibility of an easy access to the services of community banks can be possible by an effective and well organized rural community banking policy.

Rural and urban shifting could be discouraged by encouraging mechanized farming in the rural areas which will hopefully lead to development of agro-based industries to the benefit of the unemployed people in the rural areas and it will also motivate more people to appreciate settling in the rural areas.

Community banking services has a big role to play in mobilizing and orgainsing rural devellers into efficient, active, co-operative groups and is also capable of motivating the establishment of integrated rural communities by its active services.

The rural banking scheme was instituted in 1997 by the federal govt. through the central bank of Nigeria (CBN). This was part of the recommendation at Okigbo commission of 1977 which reviewed the nations finacial system.

The objectives of the scheme were structured to be development oriented, these include improving on the banking habits of the populace, mobilizing savings in the areas and by the extension, generating capital formation.

Ughamadu in the article rural banking scheme to be or not (Business times 4:6:90 pages 7) viewed critically the scheme and concluded that the number of bank branches in the country increased tremendously. Also, the banking habits in the rural areas have relatively improved.

However, what he could not ascertain was to what level the scheme has given a boost to economic activities in the areas. Over the years, the prime lenching rates of the banks relate to what the  rural dwellers could afford remained appreciably high, that such could not generate any meaningful returns on any economic investment.

Ughamadu (1990) traced the poor performance of the scheme to central Bank of Nigeria. It was because of CBN’s poor management that the towns chosen for rural branches were politically motivated, instead of giving adequate consideration to economic factors.

In the height of schemes failure, the community banking was conceived and fully established in 1990.

The conventional banks were first established by the colonial masters whose priority was to promote the economic interest in their country.           Consequently, they were not interested in the promotion of indigenous entrepreneur. The offices of the banks were located very close to the administrative headquarters which were always in the urban centres.

As a result, they were interested mainly in mobilizing resources from the indigenous population to meet the economic development programme of their home country.

Early attempt by Nigerians in the year to establish their own banks, that would later for their own needs met with initial failure.  However, when they eventually succeeded in establishing indigenous banks,  they too decided to use strategies and techniques similar to their foreign competitor. In effect, they operated in the same urban areas where business was thriving. With such development, a large part of the rural areas were unattended to resulting in lack of banking services.

Besides, the indigenous banks insistence on collaterals and protracted formalization of borrowing instruments put off all but big individual businessmen and companies.

Archibald’s 1963 and 1965 study confirmed the real problems of access to  credit  in most developing countries.  Out of 225 enterprises covered in the study,  only 2 percent of the initial capital came from loans and advances from the banks.

Another world bank study in 1989 (world Development Report 1989) confirmed that a large number of small scale activities employing the majority of the labour in most developing countries do not have access to institutional credit, for e.g  in idea, it was not until the end of 1981 that the government was able to encourage and authorize leading banks to appoint a deputy manager in charge of credit to assist small and collage in dustries.

The same can be said of countries like Indonesia and Bangladesh, where governments had to establish non-formal banks to lend money out to the poor and small scale entrepreneurs in informal sector in many other developing countries all over the world.

In an attempt to solve this problem in Nigeria the federal govt. adopted a variety of strategies to provide access to credit to the poor and small business.

Among the programmes  introduced to solve the problems are the establishment of the Nigerian bank for commerce and industries (NBU) in 1993 and the introduction of rural banking scheme. In 1977.  when the scheme failed,  the problems of  the rural banking  and the limited impart which the scheme  had on the rural economy, however, encouraged and predicted the establishment of the peoples bank of Nigeria (PBN) in 1990.

Government in 1990, felt that the activities of the peoples bank were not enough to encourage  the desired type of economic activities that would enhance rural development and established the community Banks.  In actual sense, peoples bank and community banks were established for the purpose  of eliminating the problems of collaterals lending, partial distribution of bank branches and high interest rates.

 

  • RELATED ROLES OF DEVELOPMENT INSTITUTION BANKS

It becomes clear that there was an urgent need  for financial institutions capable of providing medium and long term capital to fill a serious gap in the financial structure.

It was initially thought that merchant banks  could fill the gap and provide medium and long term financial assistance to industries, but it was found that merchant banks are by tradition small although they dealt with substantial sums of money but they depend almost solely on short term funds.

In attempt to guaranteeing development, there two development banks were established, the Nigerian Industrial Development Bank  (NIDB) and the Nigeria Bank for Commerce and Industries (NBCI)

Both NDB and  are important instrument  of achieving increased investment growth and development, both provide soft loans through equity participations.

NIDB caters, for the medium and large scale industries and some small seale units with total investment and working capital up to n570,000 under its scope of financing.

The moratorium for loans, advance by NIDB is usually two years.

The nature of NBCI in the last several years essentially make it the apex institution for small and medium seal enterprises (SMES)

The moratorium for loans advance by NIDB is usually two years, while the repayment period is usually five years in (20)  equal instaments for most projects.

NIDBN also grants working capital intensive projects over extending (10) years.

In the period 1980-1988,NIDB assistance to SMES covered seventeer industrial sub-groups. Aggregate  disbursement during years was N2277 million.  The NIDB assistance to SMES was concentrated on consumer goods sector which received about (60) sixty percent of total disbursements during the period under reference (CBN Report, 1989, Lagos).

Both BIDB and NBCI assistance to SMES increased over the years, but it could not solve the development problems because of their concentration in the urban centers.

Other schemes that have been initiated like Federal loans Baoard (FLB) was constituted to make all types of loans available to the SMES.

With the first National development plan (NDP) 1962-1968,  the position of the FLP was strengthened  and rationalized with grater accent on its roles in promoting small enterprise development.  It was to offer financial assistance to small Nigerian businesses  in the field of industry, trade and construction that Federal Loans Board (FLB) made appreciable impact in promoting small sale industries, however, it died with the first National development plan (NDP). The scheme failed because its scope of operations and resources base were so limited that the FLB would neighher give loans to set up near  enterprises nor assist fast-growing prosperous on the grounds of experience or lack of business expertise  on the one hand and availability of the other normal source of capital on the other hand.

The second NDP (1970-1974) possessed the unique features of embodying the leftiest ideas in developing the Nigerian economy.  The governments Nigerian enterprises promotion decreee 1972 as amended in 1977 Decree revered exclusively for Nigerians certain small medium and light technology enterprise that were to be.

Similar other scheme were adopted in the third and fourth National Development Plans, all in an attempt to assist small and medium seals industries, in 1980 government, shifted the  burden of financing SMES to the NBCI.

As earlier mentioned, the NBCI was set up properly to finance for Nigerians in acquiring the affected alien enterprises under the Nigerian Enterprises promotion Decree and carrying development multi-purpose banking functions which have recently shifted focus on small/medium enterprises development.

 

2.3.    THE ROLE OF CENTRAL BANK OF NIGERIA IN THE ESTABLISHMENT OF COMMUNITY BANKS

The central bank of Nigeria is the highest body that controls or regulates the activities of  Community banks.  The CBN plays its role directly through circulars and guidelines issued to the community banks. Of great importance is the introduction of prudential guidelines in 1990 to ensure that community banks comply with prudent banking practices.

Powers and actions within the community banks derived from the central banks of  Nigeria decree 24 and  Banks and other financial institutions Decree (BODFID)  no. 25 of 1991, which substantially revised and replace the earlier CBN act and Banking Decree. Among other things, CBN oversees the community banking programme and branch expansion.

As a primary organ for projecting community banks, monetary policies, the central bank of Nigeria has been instrumental in promoting the development of wholly Nigerian enterprises particularly in the small scale sector.

Moreover, CBN in a spirited more to encourage banking habits and rural development amongst the rural population, mobilizes savings rural area and transforms the rural economy through modern agricultural practices and establishment of rural based agro-industries and drew up a rural banking programme in 1977.

First, CBN has played essential role in ensuring that small scale business are adequately funded. On observing that expertriate banks which controlled more than eighty (80 percent of their credit to indigenous  borrows was raised in subsequent years to forty (40) percent in 1972/73 April 1977 and fifty (50), sixty (60%), seventy (70%), eighty (80%) and ninety (90)%) in the years 1978, 1979, 1982 and 1984  respectively (CBN Bullion vol.  15. n0 3 page 38)

Even though the CBN raised the proportion of loans to be advanced to indigenous borrowers, the bank concentrated on large scale business and granted very small  loans. To  SMES because of the perceived high risks involved and due to some of the problems stated earlier.

The central in its monetary policy, circular no 11  of 1977 observed that it was possible (for the banks) to achieve full compliance without necessarily extending credit  facilities to small scale enterprises which are wholly Nigerian-owned and for which  the policy was originally designed.

In fiscal year, 1979/80, the CBN having realized what community banks had achieved the minimum prescribed targets, but little or no credit facilities were extended to SMES, the CBN directed that at least 10% of the loans advanced to indigenous borrowers should be allocated to small and medium industries.  This percentage was increased in the subsequent years.

Unfortunately this policy was not proved as effective as expected in channeling credits to those sectors concerned, judging by the commercial and merchant banks lending to these sectors.

However, the CBN monetary policy circular 1994 number 28 on monetary credit, foreign trade and   exchange policy guideline for 1994 fiscal year stipulated that the loan to rural borrowers  and loans to small scale enterprises remain at a minimum of 50% and 20% respectively of those need to accelerate rural development.

It is hoped that the financial institution would oblige to this policy to the later.

Another development approach by CBN is on the area of rural banking programme.  The programme was to be implemented in phases.

Under the 1st phase, a total of 200 rural bank branches were expected to be opened between 1/7/77  and of 31/12/78. but only 188 branches were opened within this period.

The second phase ran between Aug. 1980 and December 1983 during which 1st branches out of a target of 266 were opened.  The third phase commenced in Aug. 1955  and was to last till July 1989. An rural branches were expected to  be opened. As at December 1988, only 144 branches were opened leaving an outstanding figure of 156 (central bank of Nigeria 1989 Report).

In order the endure that the resources mobilized in rural areas are of benefit to them, the CBN fine-tuned this policy in 1981 when it specified that at least 30% of resource mobilized in rural areas must be lent a  project and programme areas.

This percent has since risen with time and in 1989 it stood @ 45%.  Although laudable, the extent to which the objectives of this programme has been realized do not seem  satisfactory.  This might be due to the fact that the percussions to a successful rural banking programme and promotion and financing of small scale  enterprises have been down/played . as regards  financing of SMES banks have attributed their inability to meet the CBN directives to a number of factors which include inadequate collaterals by the applicants, the uneconomic nature of small loans and the banks inability to undertake the task of scrutinizing applicants  from SMES to assess their technical competence and eligibility for loans, the desire of banks to maximize profits etc.

Given the profit consideration, the banks would give first consideration to loans attracting high rates of interest before lending to those preferred sectors at the stipulated rate of interest.  It was because of failure of the banks to meet the prescribed allocation to these sectors and sub-sectors that  the CBN made it mandatory in 1977  for banks that failed to land up to the prescribed ratios to make the short falls available to the respective  development banks for lending to the sectors and sub-sectors- concerned.

On the other hand, rural banking programme could not be successful because of some inherent problems associated with the programme.  This is education and enlightenment of rural populace about the virtues of banking especially its advantage over the prevailing habit of keeping currency notes and comes at home.

No rural banking programme is likely to succeed until the barrier of illiteracy has been broken. The enlightenment drive should be a joint responsibility between the central, commercial community and merchant.

Another reason for the feasible impact of this programme is that it emphasized only the number of branches that must be open without considering the costs of operating them. To most banks, some rural branches may not be able to cover their costs, hence the persistent  to complete expected number of branches within specification.

It was this gap which existed due to fable impact impact of these programmes,  necessitated the establishment of community banks is wholly commercial owned  and financed.

Decree no 46 of 1990 imposes some restrictions on community banks which include:

  1. Not to open or close any cash office within its geographical area in          Nigeria
  2. Not to engage in any foreign exchange transactions

iii.      Not to participate in the central bank clearing sections tead should be      represented by any commercial bank of their choice.

These restrictions were imposed to ensure that community banks concentrate  in rural projects, mobilizing of savings and applying same to its areas of operations.

 

2.4.    RURAL DEVELOPMENT PROGRAMMES AND COMMUNITY BANKS

Government in its various development plans had instituted different development programmes to  reach the rural  dwellers. Some of these programmes are National Directorate of Employment (NDE), Universal Basic Education (UBE)  etc.

NDE programme launched on 30/1/87 by president Babangidas’ Administration is an agency created by the Federal Government charged with the responsibility of concentrating its efforts on the reactivation of public works, promotion of direct labour, promotion of self employment, organization of artisans into co-operative groups and training the youths to acquire saleable skills.

Many of the secondary school lowers and first school leavers are trained in various trades and occupations such as automobile, engineering, bricklaying, fashion design, watch repairing, radio and television repairing, agriculture etc.

NDE “school of wheef “ which enables it to reach employed school leavers in the rural areas who could not be in the cities for the training given in various business and industries set up “schools on wheef”  involves fully equipped mobile vocational training facilities to rural areas.

The unique assignment  of NDE is to create employment with emphasis on self reliance and entrepreneurship.  This NDE is born out of desperate efforts to curb the alarming proportion of the unemployment situations in the country as a result of worldwide economic depression of the earlier 80s .

Entrepreneurship involves recognizing a business opportunity, mobilizing resources and persisting to exploit that opportunity.  This art is a necessary ingredient for self employment and success in a business venture.

NDE recognizes the importance of developing entrepreneurship thinking and behaviour among Nigerians and decided to establish avenues for inculcating it.

All prospective applicants to the small scale industries.

Scheme (SMES) are given two weeks orientation course under an entrepreneurship development programmes.

The programme covers self evaluation, business identification, articulate research and feasibility studies, obtaining bank loan, managing a business,  legal aspects of business etc.

Another important development that requires mentioning is the      UBE.   This programme is a product of president Olusegun Obasanjo administration.

The aim of this programme is to ensure that education gits to the reach of the common man.  Even when this is interested in the educational sector, yet it is pertinent to say that both UBE and rural awareness of banking activities should work together in the  minds of the rural dwellers to actualize meaning.

Critical examination of the programmes and their functions showed  that they have a close relationship with the function of community banks in guaranteeing speedy rural development.

NDE and UBE are government programmes financed by the government but the community banks will be made to complement the efforts of these programmes where there is proven deficiency in rural development projects.

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