Institutions in rural development : the case of rural banks in Sierra Leone
Over the last four decades Sierra Leone established several credit schemes to help farmers increase production, productivity and incomes. This was motivated by several factors including the high proportion of the population in agriculture, the relative poverty of farmers and their subsistencele vel of production. Cheap credit was seen as the appropriate instrument to achieve market-oriented production. But these schemes failed due mainly to concessionary interest rates, high default, lack of savings mobilisation, mismanagement and poor economic policies. In March, 1985, a rural banking scheme was launched to replace these failed schemes; and by 1994, eight rural banks were in operation. The main objectives were to mobilise savings and to provide credit to agriculture and other rural enterprises. In early 1990, it was realised that these banks were far from achieving these objectives. This study examines and identifies the factors responsible for their low levels of achievement. The study reveals that huge losses were made due to several reasons among which are low interest rates for savings and loans which were typically below market rates and inflation suggesting negative returns on interest income, high default, poor economic environment and poor market infrastructure. These factors made rural banks unsustainable and highly subsidy dependent. The study further reveals that informal financial sources (i. e. moneylenders and osusu clubs) have been rendering services for which rural banks were not designed, In addition, rural banks and their clients were incurring relatively higher transaction costs compared to the informal sources and their clients. The study therefore recommends a restructuring of rural banks and suggests policies to improve their operations. In the main, institution-building is recommended, and that the operational flexibility of the informal financial sector be incorporated into the policies of rural banks. We recognise that Sierra Leone is going through a period of internal conflict. But these recommendations need to be urgently implemented to forestall the collapse of these rural banks.