Facilitators from ISSER, Naara Rural Rural Bank and META Foundation in a group photo with participants
Across Ghana's rural landscape, a financial challenge threatens the institutions designed to fuel economic growth. Rural and Community Banks (RCBs) throughout the country struggle with high loan delinquency rates – a persistent problem where borrowers fail to repay loans on schedule. This issue not only undermines the stability of these banks but also undermines financial inclusion efforts for thousands of rural Ghanaians.
"Loan delinquency extends beyond banking – it's fundamentally a community development challenge," explains Prof. Fred Dzanku, Principal Investigator. "When rural banks face high rates of non-performing loans, they become more risk-averse, limiting credit access for community members. This creates a cycle that restricts financial inclusion precisely where it is most needed."
The impact is evident. Rural Ghana lags behind urban areas in financial inclusion, with limited access to formal banking services acting as a barrier to economic advancement.
Digital Finance: transforming rural banking
The study, "Digital Finance as a Tool for Reducing Leakages in Rural Retail Banking," explores the potential of mobile money (MoMo) as a solution to loan delinquency. It specifically examines how digital finance can address common challenges such as loan repayment inefficiencies, fund diversion, and security risks associated with cash transactions.
"While digital financial services have transformed urban banking, their full potential in rural settings remains largely untapped," notes Prof. Dzanku. “Our research investigates how mobile retail digital financial services (DFS) can improve loan repayment and expand financial access in underserved communities."
Rigorous testing for real-world solutions
To assess the impact of mobile money on loan repayment rates, the research team implemented a cluster-level pilot randomized controlled trial (RCT) across nine communities served by Naara Rural Bank (NRB) in the Kassena-Nankana West district of Upper East Region, Ghana. The study employed a three-pronged approach:
Treatment group 1: Mobile money fees and charges were absorbed.
Treatment group 2: formal arrangements with MoMo agents were established, with free transfers for participants.
Control group: Standard loan repayment conditions were maintained.
Each arm comprised three communities, with at least one solidarity group receiving group loan from NRB. All participants received training on mobile money usage for loan repayment, associated risks, mitigation measures, and how to use the bank’s merchant number for repayments.
"This scientific design allowed us to isolate the specific impact of MoMo on loan repayment rates and establish clear cause-and-effect relationships that can inform future banking policies,” explained Dr. Michael Kodom, a co-investigator on the project.
Significant improvements in loan repayment
The results demonstrated a significant increase in the uptake of MoMo, leading to improved loan repayment rates and a reduction in both loan delinquency and diversion. Additionally, the intervention enhanced the security and efficiency of financial transactions, mitigating the risks associated with cash handling in rural settings.
The study highlights mobile money’s potential as a scalable financial inclusion tool. If widely adopted, digital finance could transform rural banking, promoting economic stability and growth.
Four important ways mobile money is reshaping rural banking in Ghana
- Improved loan repayment rates: The increase in MoMo usage suggests that rural borrowers are more likely to repay loans on time, which can enhance the overall financial stability of RCBs. This could encourage more lenders to extend credit to rural areas, knowing that repayment rates are likely to improve.
- Reduction in loan delinquency and diversion: Better transaction security and efficiency decrease the risks of loan misuse and delinquency. This could lead to a more trustworthy lending environment, fostering a culture of accountability and responsible borrowing among rural communities.
- Enhanced security of transactions: The shift from cash to digital transactions reduces the risks associated with handling cash, such as theft and loss. This increased security can give rural residents more confidence in engaging with financial services, potentially increasing their participation in formal financial systems.
- Greater financial inclusion: The findings indicate that mobile money can serve as an effective tool for financial inclusion in rural areas. By facilitating access to financial services, MoMo can empower marginalized populations, enabling them to participate more fully in the economy.
Bridging the rural-urban financial divide
This research directly addresses Ghana’s financial inclusion gap by targeting communities where banking services are most needed but least available. The study engaged 160 customers—63% female, 53% smallholder farmers, and 36% with limited English literacy—yet with a remarkable 92% mobile phone ownership rate. These demographics underscore the potential for mobile-based solutions to break traditional barriers to financial inclusion.
The findings demonstrate that mobile money can significantly reduce loan delinquency while expanding financial access in rural Ghana. As part of the next steps, two forthcoming publications—a technical blog and a peer-reviewed journal article—will contribute to the growing body of knowledge on financial inclusion in developing economies.
For more information, contact Prof. Fred Dzanku (fdzanku@ug.edu.gh) or Dr. Michael Kodom (mkodom@ug.edu.gh)