International Banking Risks in China

Introduction
Back in 1970s, the implementation of various economic reforms was the focus of China. These reforms in turn resulted to a number of effects not only to the country itself but to other foreign countries as well. Before these reforms were implemented, China originally practices the command-type of economy where a significant portion of the Chinese economic outputs are regulated and distributed by the administration. The Chinese government used to be in charge of controlling market prices, establishing production objectives and allocating resources as well. While implementing this economic approach, China encountered several problems especially when the industrial period arrived. In order to cope with this period’s challenges, the country allocated large scale investments on its human and physical resources. Due to this movement, majority of the country’s industrial production was operated by state-owned enterprises (SOE); this however, prevented foreign investors and other private companies to operate in China. The purpose of letting the state own most of the economic resources is to prevent China from depending from foreign support, making the country self-sufficient. International trade was then limited to the importation of goods that was not available or produced in the country.

The constrictive Chinese policies however led to economic inactivity and inefficiency; there were limited profit incentives derived from both business and agricultural sectors. In addition, with this type of economic system, no competition was observed. As a result, progress was unattainable. This system also made the living standards in the country lower than other developing nations. The outcome of the traditional economic system then encouraged the Chinese government to come up with effective reforms that will augment the people’s living standards and the overall economic state. With the implementation of reforms, China’s major economic sectors naturally went through significant changes and development. While the reforms could have resulted to positive outcomes, certain risks are still likely to affect it and its neighboring countries. In this research, focus will be placed on the country’s financial sector, particularly on its foreign banking opportunities. The different risks involved in establishing foreign banks in the country as well as the ways on how to address them will also be highlighted in this discussion.

The Chinese Financial Sector
It was during the early 1980s when China first implemented reforms on its banking sector. This reform was focused mainly on the creation of four specialized banks separate from its central bank. The banks worked under monopolistic operations, concentrating the competition on acquiring more depositors. Eventually, bad loans started to affect the system, which resulted to quality deterioration of assets, excessive risk-taking and inflationary credit expansion (Cheng & Cheng, 1998). China then implemented new banking reforms in 1993. This time, the focus is on asset quality improvement, reestablishment of public confidence and development of genuine commercial banks. Though several analysts noted that the current Chinese banking status and general financial sector are still underdeveloped, the reforms had given the country several benefits like increased GDP and foreign direct investment. With these changes, international countries are very mush interested in putting up businesses like foreign banks in China. In addition, the country’s entry to the World Trade Organization (WTO) further increases the opportunity of foreign countries in accessing the large Chinese market. Nonetheless, analysts warn foreign investors of the different risks involved in establishing banks in the country.

Operational Risks
Among other types of risks, the operational aspect is perhaps the most complex as several factors (e.g. management, political, governance) are involved. One of the main operational risks that foreign investors can encounter in putting up banks in China is the problem on extensive administrative influence as well as the instability of regulations. As claimed by various foreign investors, the success of firms in China appears to be connected to government relations rather than to the market forces. Moreover, due to inadequate rules and regulation, problems such as investment misallocation, financial speculation as well as corruption had been rampant. International firms, particularly those in the west, usually encounter difficulty in operating in China due to lack of consistent laws. The improper enforcement of the contract as well as the lack of protection granted for intellectual properties are typical concerns as well (Morrison, 2005).
While banking entrepreneurs become attracted to the Chinese market economy, they must prepare themselves to various legal risks and issues. As pointed out earlier, the Chinese government has a significant authority over the country’s businesses. Policies and regulations applied in the Chinese business industry are subject to changes; hence, foreign entrepreneurs must be prepared to adjust. Considering that the country’s economic regulations and bureaucratic framework are still developing, changes are then inevitable (Humberg, 2003). The legal and regulatory aspects of the Chinese banking business are relatively unstable despite the reforms and developments conducted (Hu & Hope, 2005). Some legal practices in China are also different from the other common international practices. The issuance of a contract for instance, is a final matter in western cultures. However, contracts can change unexpectedly in China (Overby, 2000).

According to Hu and Hope (2005), the internal operations of Chinese banks are also problematic. The corporate governance of the country’s banks for example, is not very conducive for checks and balance systems. This problem is mainly rooted on the inadequacy of effective board members and independent directors. The banks’ culture on full disclosure should also be developed based on best and effective standards. This problem can greatly affect foreign bank operations since it is likely that its main workforce will be derived from the Chinese workforce pool, considering that it is less costly this way. If this will be done, employees and the board will expect usual corporate governance practices. Though foreign entrepreneurs can do some changes on its own banking governance once they start operating in China; the problem is whether these changes will be allowed or tolerated.

Interest, Credit and Liquidity Risks
China is relatively weak in terms of its credit or loan systems, considering its observed poor performance. The banking sector of the country is neither appropriately regulated nor properly managed. For instance, greater than 22% of the loans held by the state commercial banks are bad; young stock markets are also suffering the same state (Wu, 1998). Due to the poor state of China’s banking sector, Chinese reformers became even more hesitant to offer its banking sector to foreigners. In banking and loans, political connection is an important element; this in turn worsens the corruption within the country’s banking system. In addition, this practice widens the economic inefficiency of China as savings in general are not allocated based on the possibility of returns (Morrison, 2005). If no improvements will be done for China’s financial sector, instability is a possibility.

In order to resolve its problem on bad loans, China had decided to implement a new loan system (five-classification loan-grading system) that is based on international standards. Initially, China practices the four-classification system, which gravely defective. With this old system, endless speculations had been raised primarily on non-performing asset levels and inadequate provision of loans. While the new loaning system may benefit the country and resolve some of its financial issues, the effect of which is yet to be observed and evaluated. The possible success of this new approach is largely dependent on how Chinese regulators can effectively administer its execution (Hu & Hope, 2005). For new entrepreneurs, new systems that are not yet fully tested and guaranteed can be risky. It is then difficult to believe on the efficacy of this alternative unless concrete outcomes have already been obtained.

In terms of interest rate, regulations tightly control this banking aspect for foreign banks, making them less attractive for the market. In addition, the People’s Bank of China, the country’s central bank, is greatly protecting local banks particularly the four major banks developed during the initial reform for the financial sector. This then allows the country to cover about ninety-percent of the total lending activity (The Banker, 2001). The risk for liquidity is also a matter of concern for entrepreneurs planning on investing a banking business in China. Considering that the country had just gone through a major financial crisis during the latter part of the 1990s, liquidity in the country was greatly reduced, along with the decreasing GDP, falling export rate, declining retail price index and the slowing down supply of currency.

Market Risks
The market risks involved in foreign bank establishment in China is mainly caused by the country’s entry to the WTO. Before China joined the WTO, foreign banks that have renminbi (yuan) licenses were only supposed to lend renminbi from their deposits; access of these banks to interbank market was also prohibited, which greatly affects their capability to make loans. However, when China entered the WTO, the right to lend renminbi became limited to foreign banks that had been allowed to do this type of business. The provision of the licenses however, was only given to few selected banks. This in turn, makes the access of foreign banks to the Chinese market very restricted (The Banker, 2001).

The access to market is also greatly affected by China’s protection to its domestic firms. Local companies, including banks, had been complaining to the Chinese government and claimed that the policies implemented by the administration greatly favor foreign firms. For example, if a major foreign bank operates in China, most of the local companies offering similar financial services have no option but to close down. Eventually, as more foreign investors enter the country and operate within its banking industry, majority of the players will be foreigners. The Chinese administration is then concerned that if this will continue, more domestic industries will suffer (Chen, 1998). Hence, the government decided to control the entrance of the foreign firms in the country.

This in turn led the government to reduce the policies in favor of the foreign enterprises. In 1996 for example, the Chinese administration decided to cut down the value-added tax refund among foreign companies for exported goods from 17% to 9%. China has even planned to take out the privileges granted to foreign investors for importing capital equipment tax. This clearly implies that the country’s government has been more selective in accommodating foreign firms, which greatly limits foreign banks’ access to market (Chen, 1998).

Banking Risks in other Nations
Establishing a bank in other parts of the world such as those belonging in the European Union may be more advisable for some entrepreneurs. There are many reasons for this judgment. One of which is the fact that the European Union is a vast region of countries whose level of development varies. This means that EU offers business areas that are less developed than the other, giving better opportunities for foreign banks. Rules and regulations are likely to be more stabilized in some European regions as compared to the Chinese business setting. Tariffs or barriers to entry like taxes may also be lower in other European countries, making foreign entry less difficult. Most importantly, market diversity in EU is far larger than in China, making access to opportunities and market growth easier.

Nonetheless, it should also be considered that certain risks can also hinder the development of a foreign bank within EU. For instance, the presence of higher competition level is likely, considering that multiple local and foreign banks will be operating within the region. Moreover, though laws and regulations may be stable, differences in banking policies, operational practices and other relevant factors may make market access not as easy. From this standpoint, it becomes clear that establishing a bank in any foreign country has its advantages and downsides. This suggests that foreign entrepreneurs must be skilled in handling this possible business risks.

Means of Addressing the Risks
China and its banking sector have a lot to offer for foreign investors; however, the country and its administration must improve some of its banking aspects not only to make China more appealing to entrepreneurs but also to prevent business issues. One of this means would be the stabilization of its business laws and banking legislations. The country must have a definite ruling for both domestic and foreign banks in such a way that both will benefit from. While the Chinese government is protecting its local banking sector, it must also employ means that will make foreign bank investors less cautious. The restrictions should also be implemented at a reasonable level (Chen, 1998).

China has in fact, conducted several changes so as to be more open for foreign banks. For instance, it has attempted to improve its corporate governance by requiring and encouraging banks to introduce governing boards. Moreover, approved accounting firms are now used for auditing. Operational risks are also being handled by strengthening balance sheets; financial statement definitions are also slowly being accomplished based on international standards (Moreno, 2002).

The foreign investors themselves can apply certain means to safeguard their businesses from these recognized risks. One of the important strategies that firms should consider is to operate alongside a local business partner (Overby, 2000). This will help the firm adapt easily to the Chinese business environment. A local partner can also assist in learning the Chinese culture, practices, regulations and means of interaction. More importantly, a Chinese business partner can also help in achieving progress faster. Training the staff becomes even more important in foreign business ventures. The workforce must be supported fully particularly in adapting the business’ new concepts, standards and technologies. The management should ensure that the local staff is also well-adjusted to the new system so as to encourage them to contribute more for the business (Humberg, 2003).

In general, the investors can start off by analyzing the business environment they wish to invest on. It is important that business entrepreneurs are aware of the distinct features of each foreign setting; in this way, the investors will know how to address in the most effective way. If for example the foreign bank entrepreneur is from the West, establishing a bank in China will naturally make western and eastern difference apparent. As discussed by Ambler and Witzel (2003), Western and Chinese origins have distinct differences on various aspects like politics, philosophy, society and history. Hence, it is imperative that entrepreneurs understand their foreign prospects well. From this aspect, learning and adaptation are perhaps the two most important factors that should be present.

Conclusion
China is very appealing for entrepreneurs particularly because it offers low labor costs and a large market; similar factors have also encourages foreign banks to operate and establish branches in the country. Nonetheless, operational, credit, liquidity, interest and market risks are present, which can greatly affect foreign investors’ business goals. If banks will be established to other regions, the type and degree of risks may be different; however, risks in the banking business, irregardless of the environment, are omnipresent. For this reason, the foreign countries open to international trade as well as the investors themselves should have the appropriate qualities that will promote harmonious business relations. In conclusion, successful foreign business operations are not solely dependent on capital, connections and people but on the ability to learn, change and adapt as well.





References:
‘Knock Knock’, 2001, The Banker, May 1, viewed 4, January, 2006, .

Ambler, T & Witzel, M, 2003, Doing Business in China, Routledge, London.

Chen, R, 1998, ‘An analysis of China's economic development policies and prospects’, Business Economics, July, pp. 29-34.

Cheng, E & Cheng, Y, 1998, ‘Banking Reform and the Separation of Policy and Commercial Loans in China’, MOCT-MOST, no. 8, pp.5-21.

Hu, F & Hope, N, 2005, 'Can Foreign Entry Transform China’s Banking System?', SIEPR Policy Brief, November.

Humberg, C, 2003, ‘Successfully Moving In and Setting up Business in China’, TUV Rheinland World News, pp. 4-5, viewed 4, January, 2006, .

Moreno, R, 2002, ‘Reforming China’s Banking System’, FRBSF Economic Letter, no. 200-17, May 31.

Morrison, W, 2005, ‘China's Economic Conditions’, CRS Issue Brief for Congress, July 1.

Overby, S, 2000, ‘Taming the Dragon’, Inc.com, viewed 4, January, 2006 .

Wu, R, 1998, ‘Which Way for the Chinese Economy?’, World and I, vol. 13, no. 10, pp. 40+.

Effect of TQM in Banking Industry

Introduction

Banks play significant role in the economic system because they are financial intermediaries which involve the transfers of funds in and outside the country. The services offered by the banks include the quality, speed, efficiency, and innovation which make the delivery of services and products unique from other bank competitors. In considering the quality of the services in the banks, the strategic management and total quality management are considered that distinguishes the ideal quality of the banks.

Background and Problem Statement

In the action of the banks in paying attention to their quality services, there is a significant effect of the total quality management or TQM in terms of the competition. But there is no doubt that the foreign banks can be ahead of the competition because of various factors. From the technological aspects of the foreign banks, there can be certain advantages that can be gained. However, through the use of the TQM, it is identified that there will be systematic methods, like in data collecting and credit risk management, that will implement a more quality-centered services in terms of banking operation (Naeem, Saif, & Qasim, 2008). Since the banking sector is getting competitive every time, the TQM is proposed to increase the successful rate of the business by taking the integral part of the strategic management. However, what would be the effects of the TQM in the banking businesses?

Research Aim and Objectives

The aim of the study is to investigate the effectiveness of TQM in the banking industry, particularly in Tanzania. In order to achieve this aim, there are four objectives that should be considered. First is to recognize the existing strategic management being employed in banks. Second is to identify the strengths and weaknesses of the strategy that banks employ in their system. Third is to study the TQM implementation on different commercial banks in Tanzania. And fourth is to develop and propose a quality model of TQM for the banking services.

Literature Review

In the competitive environment of banking industry, the quality implementation of a strategy is indeed necessary. Of all the types of banks in Tanzania, the commercial banks are identified to be the most type of institution that is engaged with the complexities. The operation of such banks may indicate the introduction of TQM as one of the highlights in banking operations (Naeem, Saif, & Qasim, 2008). TQM, as a total organizational approach is made to meet the customer needs and expectations. This kind of approach includes both manager and employees to continuous improve the organization’s processes, products and services. With the help of TQM, the organization is associated with the creation of such system between the people and products and/or services. Therefore, in order to improve the organizational competitiveness and effectiveness, it is proposed that TQM is a great foundation on an organization’s system. In addition, the TQM invites and targets the management and techniques together with the organizational concepts and principles. If the kind of strategy is implemented in the banking organization, the services can be fashioned and are expects to lecture more advantages in the competition. The quality improvement is not the specialization of TQM but it can deliberately make an impact towards the work and responsibilities of the employees and managers to create the improvement needed in their industry. To improve the financial sector and the entire economy, the banks and their methods should also the address the problems in the society, in which the TQM can be applicable (Psychogios & Priporas, 2007).

Methodology

The suggested method in the study is the use of the secondary information and interview, which is more appropriate if the study, is conducted in different commercial banks of Tanzania. In order to achieve the study level of TQM, it is better if the researcher/s is oriented regarding the implementation of TQM in a certain bank. Then, the researcher will develop an interview guide and conduct a scheduled interview among the five members of the bank. The participants can be the executives, bank manager or supervisors, senior managers, and employees. It is advised that the said participants are included in the interview. The data collected will be presented in an organized manner, such as the use of tables, which indicates the bank name and the level of TQM implementation. The researcher/s can thereby analyze all the collected information and determine its effectiveness in the banking businesses. At the end, the study can generate a comprehensive model for the quality implementation of TQM.

References:

Naeem, H., Saif, M.I., & Qasim, S., (2008) Total Quality Management – A Recommended Strategy for The Pakistani Banking Sector, International Business & Economics Research Journal, 7(11) [Online] Available at: http://cluteinstitute-onlinejournals.com/PDFs/912.pdf [Accessed 09 Aug 2010].

Psychogios, A.G., & Priporas, C-V., (2007) Understanding Total Quality Management in Context: Qualitative Research on Managers’ Awareness of TQM Aspects in the Greek Service Industry, The Qualitative Report, 12(1) [Online] Available at: http://www.nova.edu/ssss/QR/QR12-1/psychogios.pdf [Accessed 09 Aug 2010].

Effectiveness of Database Processing and Application

Introduction

Because of the influential aspect of globalization, the banking industry’s services and products are now in a more advanced phase. The technological and systematic approach of the banks are also identified to be the most beneficial and efficient banking transactions. For the past years, the transactions held by the banks changed. Significantly, there is an introduction of Automated Teller Machines (ATM) in which an individual can withdraw the money without going to the bank and wait for the line. Next to this approach is the creation of credit cards or debit cards in which an individual can pay their expenses even without cash. The banks are also now offering various loaning services that aimed to improve the lives of the people. Because of this multi-functions of banks in serving the clients, how did the banks manages all the transactions in an organize way? Furthermore, how effective does their application of technology help their ongoing transactions and services for the people?

Maybank with Databases

The paper seeks the effectiveness of utilization of databases in most of the banks and in order to gain the appropriate information, the study will look on the internal function of one of the most accredited banks – Maybank.

Maybank is a well known organization that consistently provides their shareholders with a superior returns and exerting services for their customers that can deliberately meet their demands. Moreover, the bank is more focused on the sustainable and superior growth of their business through the guidance of their sound financial discipline and applied strategies. The bank maintains its operation in a most efficient and effective manner that is why they are trusted by the biggest corporations and managed to operate in diversified countries (Maybank Annual Report, 2004). Aside from the performance of people, Maybank is also using the database to properly organize their everyday transactions, in which can create a significant impact in the bank’s good financial performance.

The systematic and quick search and retrieval of information is important for the bank to serve the people with accuracy and quality. The databases address the issues of security, accuracy, and consistency among the records the organization holds. The processes involved in the databases include the use of computers through the networks. The application of all the data are inputted in the computers in which the databases collected, organized, stored, and retrieved if needed. To secure all the information, the databases have a limited access and allotted for the authorized people.

Reliability

The various transactions and activities of the banks include the collection of deposits and guaranteeing the loan applications. All of the information coming from the transaction is not only organized through the use of paper but also through storing them in the database with wide memory capacity (Feyzioglu, 2009). In addition, the bank’s procurement system enables the integration of the organizations data to perform quality management systems and can limit the transparency and accountability. In the procurement system, the entire organizations strategies have changed toward the effective process (Wright, 2008).

The strength and effectiveness of the databases are not only based on how they handle the physical transactions but also the interactive transaction or online-banking. Internet banking refers to the utilization of the Internet for performing transactions and payments by accessing a bank's secure website and pertains to the application of financial services and markets through the use of electronic communication and computation (Humphrey, Pulley, & Vesala, 2004). Most of the clients prefer this transaction to secure their funds and because it is more convenient for them, In this case, the databases are reliable.

Conclusion

Maybank is continuing its effort in enriching the experiences of the customers in their services. The bank is also looking forward in a strong relationship that can be beneficial in both of the parties. In addition, to gain the full trust of all their clients, the bank is engaged placing high value on their client’s privacy and financial security through the application of the databases that can support their needs. Maybank is an organization that is committed to excellence in every transaction they are in. Besides, the team is in support for the foster develop of the banking industry which is very beneficial to the entire organization. The corporate social responsibility of the bank is also on strict monitoring and creating a significant competitive advantage as well as placing high levels of integrity and ethical values in their transaction settings. Therefore, aside from the traditional business transactions, the bank can recognized it major role and effectiveness in the market through their corporate goals.

References:

Feyzioglu, T., (2009) “Does Good Financial Performance Mean Good Financial Intermediation in China?” Accessed 05 Aug 2010, from http://www.imf.org/external/pubs/ft/wp/2009/wp09170.pdf

Humphrey, D.B., Pulley,L., & Vesala, J.M., (2004) “Cash, Paper and Electronic Payments: A Cross-Country Analysis”, Journal of Money, Credit and Banking, Vol. 28, No. 4.

Maybank Annual Report, (2004) Accessed 05 Aug 2010, from http://www.maybank2u.com.my/maybank_docs/aboutus/inv_relations/annualreport/AU03.01_report_2004_eng.pdf

Wright, P., (CITRIS) 2008. Information Technology for Emerging Economies, Center for Information Technology Research in Interest of the Society, Accessed 05 Aug 2010, from http://www.citris-uc.org/files/tee.pdf

The Effect of Fraud & Irregularities on Banks Performance in Nigeria and its Control

Introduction

Organized crime and other violent behaviors became synonymous in many of the banks. This includes the money laundering, internet fraud, credit card and identity fraud. As an action of the government, they proposed a special committee that can address the rising problems in terms of fraud and irregularities in the performances of the banks. All of the stained processes of the banks will create difficulties for the financial sector therefore, it is important to pay attention on the appropriate management within the banks.

Background and Problem Statement

Nigeria has the second largest financial services sector in Sub-Saharan Africa, after South Africa. It is also considered to have the fast growing financial sectors that can compete internationally because Nigeria is identified to gather the opportunity to become an influential player for providing financial services in low income countries. Aside from oil, Nigeria has also a favorable domestic background because of the growth of their population along with the growth of other non-oil products and services. However, Nigeria remains clouded with several of challenges like the poverty, limitations in financing accessibility, poor infrastructures, and high levels of corruption. These are the barriers for the total growth of the country and are associated with their banking sector (Becker, et al., 2008). In order to make Nigeria an attractive country, the financial institution should have the strengths and ensure the improvements in the business processes. Therefore, the study will address the negative effects of bank fraud and other irregularities in Nigeria.

Research Aim and Objectives

The aim of study is to minimize the incidence of fraud and irregularities in Nigerian banks. Therefore, there is a mean to improve the risk management in the banking processes and increase the skills of the employees who can facilitate the banking transactions. In order to provide this aim, there are four objectives that should be settled. First is to identify the reasons or causes of fraud in Nigerian Banks. Second is to recognize the type of bank frauds that are typical in Nigerian banking sector. Third is to determine the control level of fraud among the banks. And fourth is to suggest other effective methods in which fraud can be perpetuated.

Literature Review

Fraud can be seen as the intentional misrepresentation, concealment, or omission of the truth for the purpose of deception/manipulation to the financial detriment of an individual or an organization (such as a bank) which also includes embezzlement, theft or any attempt to steal or unlawfully obtain, misuse or harm the asset of the bank. Banks are the most common place wherein fraud and other irregularities can be found and apparently, the incidence of fraud continuous to rise, affecting the entire economic and financial future. Nigeria and its banking sector indicated the high incidence of fraud that deteriorates the credibility of the services and shifted to be the most common problem in the financial industry. In a typical interpretation, when fraud exists within the financial institution like banks, it definitely affects both assets and liabilities of an enterprise (as an example). There is a unreliable trend which shows the reduction of their assets while there is a sudden increase in their liabilities. In this case, the banks may loss their potential to gain clients and results in a scandal such as the crisis in the confidence. In the long-run, the rotten processes of the bank will cause its downfall. Therefore, the action of the government is to investigate in the existence of the fraud and irregularities in the banking sector because it can affect the entire financial stream and increase the poverty in the country. The fraud and irregularities are also representing the loss of strategic management and control and the unreliable employees in banking operations (Abiola, 2009).

Methodology

The method adopted in this study is the use of survey and interview. The survey is done through the use of Likert Scale questionnaire and conducted among the bank employees. The participants involve the personnel in selected banks and in different positions like the bank teller, accountants/auditors, operation manager, and vault authorities. In this way, the study can determine the perceptions of the employees regarding the fraud incidents and irregularities in their workplace. On the other hand, the interview includes the Branch Managers of the selected banks in Nigeria. The study can conduct the method within the selected 10 banks in Nigeria and represent the entire population on banking institutions. The information, afterwards, will be organized according to the objectives and therefore, determine the effects of fraud on the banking services of the country.

References:

Abiola, I., (2009) An Assessment of Fraud and its Management in Nigeria Commercial Banks, European Journal of Social Sciences, 10(4): 628[Online] Available at: http://www.eurojournals.com/ejss_10_4_14.pdf [Accessed 10 August 2010].

Becker, L., Chammard, M.B., Hussein, Z.W., Kotsuji, Y., & Quagraine, N., (2008) Nigeria: Financial Services Cluster Analysis and Recommendations [Online] Available at: http://www.isc.hbs.edu/pdf/Student_Projects/Nigeria_Financial_Services_2008.pdf [Accessed 10 August 2010].

Effective Management of Micro Credit Delivery in a Rural Bank

Introduction

The major approaches in the micro financing continuously changing and described as triggered by credit of rural banks. In addition, the growing masses of Small and Medium Enterprises (SMEs) create an impact in the country’s national economy. The design and process of the micro credit in most of the country resulted in improving the living status of the poor by fighting the poverty. Furthermore, the education of the people within the community is another criterion towards the effectiveness of the micro-financing. The features included in the micro credit policy of the rural banks are however, affected by the effective management scheme in meeting the objectives of the country and can be used for the future.

Background and Problem Statement

The formal financial sector in Ghana mostly comprises of commercial banks that operates in number of branches in the country. Recently, the banks and other financial institutions sought to broaden the management in micro-credit or loan to strengthen the SME sector. This behavior attracted the financial users but the threats also increased. Rural banks and other financial institutions are advised to be cautious because of the identified risks associated in the micro-credit sector (Mensah, 2004). Because of this fact, what are the effective management strategies or scheme that can be applied in the micro-credit delivery, particularly among the rural banks?

Research Aim and Objectives

The main aim of the study is to build the capacity in rural banks by unveiling the effective management approach that can be used in micro-credit delivery. In order to fulfill this aim, the study should consider the three objectives. First is to identify the similarities and differences of the informal and formal financial sector in the country. Second, is to recognize the developments in rural banks from the past five years. And third is to describe the influence of growing sector such as the SMEs in the effective management and growth of micro-financing.

Literature Review

The essential approach of Ghana is discovering the potential of rural banks in outreaching the poor while sustaining the savings and credit offers. Micro-finance is defined as the provision of financial services, that includes credit, loans, savings and insurance, to poor, disadvantaged and otherwise under-privileged members of society (particularly in developing countries) who would otherwise not have access to such facilities (Parikh, Ghosh, & Chavan, 2003). In Ghana, the micro-finance has emerged as one of the most effective methods of financial development and poverty alleviation. The micro-financing attempts to unleash the forces by transforming the lives of the individual. The growth of the rural economics is due to effective facilitation of the micro-finance. This action is simply explained from inducing the development to the initiated development that tends to create changes in the role of bank credit, particularly in rural banks (Raghayan, 2006). However, it is identified that the institutions have weak management and internal controls which demonstrated in the experience of Ghana is balancing the various areas in banking. Although the Bank of Ghana has exercised the considerable regulatory which allows the institutions in regulating their system, there’s still system among the micro-financing that failed to achieve the impressive outreach (Steel & Andah, 2003). There are barriers to the rapid development of the financing, for example in SME, are schemes, initiatives, and funding mechanisms of the rural banks to facilitate the effectiveness of micro-credit support. The SME in Ghana is affected of the lack of financial support or the low level of the financial intermediation. Because of the inconsistency caused by the schemes, there is an increase in the financing gap that entirely affects the industry. Furthermore, there is lack of institutional and legal structure that facilitates the management of micro-credit risks (Mensah, 2004). Because of the ineffective management of the micro-finances, the country can move forward to the utilization of the free economic principles such as the idea of information technology (IT) to provide the necessary attention in the rapid growth of the micro-finance (Raghayan, 2006).

Methodology

The suggested method in the study is the use of the secondary information. The important information can be obtained from the case studies, rural bank financial reports, World Bank Association, and other reports that can give details to the effective management approach of various countries. By comparing the micro-financing management schemes of the countries, the study can generate the analysis regarding the applicable solution in micro-credit delivery. In the end, the study can organize the conclusion on the preferred management approach in micro-credit delivery.

References:

Mensah, S., (2004)” A Review of Financing Schemes in Ghana”, Presented at the UNIDO Regional Workshop of Financing Small and Medium Scale Enterprises, Accessed 28 July 2010, from http://www.semfinancial.com/publications/SME%20Financing%20Schemes%20in%20Ghana.pdf

Parikh, T., Ghosh, K., & Chavan, A., (2003) “Design Studies for a Financial Management System for Microcredit Groups in Rural India”, Accessed 28 July 2010, from http://people.ischool.berkeley.edu/~parikh/papers/p0314-parikh.pdf

Raghayan, R.S., (2006) “Micro-Finance – Uplifting Rural Economy”, The Chartered Accountant, Accessed 28 July 2010, from http://www.icai.org/resource_file/102921143-1148.pdf

Steel, W.F., & Andah, D.O., (2003) “Rural and Micro Finance Regulation in Ghana: Implications for Development and Performance of the Industry”, Accessed 28 July 2010, from http://www.worldbank.org/afr/wps/wp49.pdf