Donor Aid and the Financial Performance of Rural and Community Banks in Ghana

Abstract

Rural and Community Banks (RCBs) in Ghana play a very important role in the financial intermediation agenda for the rural populace in Ghana. The concept of donor aid has been identified as a key sustainable approach to ending poverty in Africa through the injection of funds and the provision of technical support for the thriving of rural activities such as farming and fishing. An understanding of factors that improve the financial performance of RCBs is important for the achievement of the goal of poverty alleviation. This study therefore discusses the two anti-poverty tools mentioned above by measuring the impact that donor aid has on the financial performance of RCBs in Ghana. The main objective of the study is to ascertain the impact of donor aid on financial performance of RCBs in Ghana and to make recommendations for policy making. A panel data of 122 RCBs in Ghana was analysed from 2007 to 2018 using a generalised least squares technique to estimate random effect regression models. The dependent variable of financial performance, represented by Return on Asset (ROA) and Return on Equity (ROE), as well as inflation, exchange rate (macroeconomic factors), donor aid, bank capital, bank size and liquidity were incorporated into the regression model. The result suggests that donor aid has a positive, but not a very, significant impact on the financial performance of RCBs in Ghana. It finds evidence to establish that bank capital and bank size have a positive significant impact on financial performance, whereas liquidity has an inverse relationship on financial performance of RCBs.