The Rural Banking Scheme

The rural banking scheme was introduced in June 1977 by Central Bank of Nigeria (CBN) with
three phases: 1977-80, 1980-85 and 1985-1989. The Rural banking scheme aimed at bringing
banking facilities to the door step of rural dwellers. The first approach used by the Central bank
of Nigeria was mandating the commercial banks to open branches in the rural areas. For example
to open 198 branches in the rural areas within a period of three years, July 1977 to June 1980.
By 1992, 765 bank branches had been opened out of 766 stipulated. By 1996 CBN stipulation,
50% of deposits mobilised in the rural areas were to be loaned to rural borrowers. The Nigerian
government and CBN had tried various methods to achieve rural development. This included:
Obtaining approval before opening any bank branch (which must be opened with a rural branch);
Opening of the Nigerian agricultural and cooperative bank Ltd in 1973; Launching of operation
feed the nation in 1973; and Introduction of agricultural guarantee scheme, 1977. Rural
branching of banks was to aid in achieving rural development by promoting economic activities
in the hitherto neglected areas or regions.
Some gaps were observed before the inception of this scheme. Some of these problems were:
1. Low level of rural savings mobilisation
2. Inadequate use of banking services
3. Lack of credit for rural people.
The rural banking scheme of 1977 had the following objectives:
A. Cultivation of a banking habit among the rural dwellers.
B. Mobilisation of savings from the rural areas for the purposes of
channeling same to profitable ventures.
C. Creation of credit by way of equity and loans for small scale industry.
D. Development of agriculture and agro allied industries in the rural areas
for food sufficiency.
E. Reducing to a comfortable size, the drift of young men and women from
the rural to the urban areas.
F. Provide employment for rural dwellers.
In order to achieve the above objectives, the CBN introduced the following incentives for the
participating banks:
 a. Waiving the requirement for feasibility survey report as a prerequisite for the
establishment of rural bank branches.
b. Allowing the banks the monopoly of providing banking services in the allocated centers
for a period of 3 years and allowing the banks to write off the capital cost of erecting
office blocks and staff quarters within 3 years.
The government saw the establishment of bank branches in rural areas as an integral part of its
policies aimed at promoting the bank habits of the rural poor and enhancing rural development.
This made sense given the fact that then, the majority of Nigerians lived and worked in the rural
areas. It has been argued that the dearth of banks in the rural areas impedes the development of
the banking habit and the mobilisation of savings. It also limits the amount of deposits in the
banking system and the money creating powers of the banks. This is so since a large part of the
transactions and loans have to be consummated in cash, which constitute a leakage from the
banks’ credit multiplier.
The CBN ensured that there was one commercial bank branch in each local government area.
The branch should not close down without permission. At least, 50% of the deposits in the rural
branch should be loaned to rural dwellers.

Advantages Of Rural Banking:

 Customer Outreach: It is the wish of majority of banks in Nigeria to reach more
customers. One way that they can do this is by establishing more banks in the rural
areas as the banking needs of rural dwellers continue to increase in Nigeria. The more
these banks create rural branches, the more customers they will be able to reach. The
information released by World Bank on rural banking in Nigeria shows that the rate of
banking by rural dwellers will increase by 5 times what it used to be in the past 10
years. Nigerian banks can apply this information effectively by creating more
branches of their banks in the rural areas. Their customer outreach will then improve
when they do this.
 Employment: More banks certainly means more employment as there is need for
people to man every bank branch in Nigeria. The creation of more banks in the rural
areas will definitely improve employment opportunities for Nigerians. This is also a
 good way of fighting unemployment in Nigeria. The more these rural branches are
created, the more people tend to get employed.
 National Economic Development: The creation of more rural banks will develop the
economy of Nigeria as the banking sector remains among major factors for the
development of the Nigerian economy. The Nigerian government can encourage the
creation of these banks as this will surely help the Nigerian economy.
 Agricultural Development: Yes, rural banking promotes agriculture as the majority of
agricultural activities in Nigeria take place in the rural areas. The creation of loans in
Nigeria is not enough without bringing these banks closer to those who are in more
need of them. It is not enough for the Nigerian government to create agricultural
subsidies without taking more measures to bring these banks closer to these farmers
who are mostly in the rural areas. Bringing these banks closer will surely promote
agriculture in Nigeria.

ng program achieved considerable success in the sense that the number of branches planned for the first phase was
and the second stage would in the same wise have been met. However, many banks retained such branches just to project
te image. Most rural branches performed minimum banking services, and in most cases they did not reach out to the
ural areas so that small-scale business they were supposed to support did not feel their presence. As such, this program and
stitutional arrangements meant to relegate the “usurious” money lenders could not succeed. The credit needs of the rural
d to be met largely outside the organized financial markets. Apart from the specific reasons why each of the above efforts
are a number of other micro-economic explanations that relate to the basic nature of the rural economy. Some of these
e:

1. Rural dwellers’ lacked collateral and had below-average income;

2. All the previous attempts followed a top-down approach to rural credit management as
regards screening, incentives and enforcement which were imposed from outside without
adequate understanding of the dynamics of the rural economy;
3. With the rural areas banks were selective about who to serve. Most of the beneficiaries of
loans were people with connections who were not necessarily rural residents;
4. The banks presented impossible non-personalized contract arrangements that did not take into
account production and consumption shocks suffered by rural households. Credits were thereby
 constrained and the borrower was prevented from shifting resources to areas of need in the
household/enterprise mix;
5. The rural people did not understand the copious paper work involved in the administration of
the credits by the banks; and,
6. Sometimes the staff of the banks exhibited conducts bereft of empathy with the poor rural
masses, thus alienating them.
The activities of the Banks in rural areas will help achieve self-sufficiency in agricultural and many aspects of
rural industrialization, which will surge a like among different sector of the economy. Commercial Bank are
not finding it easy with the rural banking because of some problems they encounter, such problem include lack
of infrastructure in rural areas, like good road, Housing, Electricity, Communication Network. Others are poor
profit ability in rural Bank because of the relatively low commercial activities in the rural areas and inadequate
supervision of the programme by the authorities concerned. The continuity of the programme is the question
that emerged from two schools of thought. The first which consist of the commercial bank Executives who are
against the continuity of the programme. They believed that the programme does not generate profit and
commercial banks like most commercial enterprises in the country operate with the objective of making profit.
Commercial banks should be employed to open branches in the rural areas only if the feasibility study of that
area show that profits can be generated. Also, the school of thought suggested that branches established in the
first and second phase were not enough for any rural development. The Govt ought to be responsible for
providing infrastructural facilities like electricity, good road, and telephone before asking banks to establish
branches as this will reduce the cost element of the programme. There should be police posts that provides
security for these rural areas. Employing the services of the police on daily basis may not be cost effective.
The second school of thought with domination of CBN to believe that the programme is necessary and as such
should continue. Although the school agreed that there are some problems facing the programme, but with
time, it will be a thing of the past.

Problems Of Rural Banking In Nigeria

Rural banking in Nigeria is still facing a lot of challenges. They are:

 Inefficient support of banks by the central banking system: Nigerian banks are not
getting the best of support from the Central Bank in Nigeria. According to the
information released by World Bank on central banking support on certain countries,
 the support offered by the Central Bank Of Nigeria to run their banks in the most
effective manner is at 48.87% which is yet to meet the pass mark of 50% for banks
worldwide. This is a disturbing fact to the need for banks to expand their branches in
rural areas.
 General low performance of the banking sector in Nigeria: The performance of the
banking sector in Nigeria is generally low. This has an effect on the ability of these
banks to expand to the rural areas. The low performance of Nigerian banks has
disrupted the development of rural banks in Nigeria.
 Poor Infrastructures In The Rural Areas: The poor infrastructure in rural areas in
Nigeria has discouraged a lot of banks in Nigeria from expanding their outreach to
rural areas. Roads and electricity are some factors these banks consider before going
ahead to establish their branches in the rural areas. These facilities are not yet efficient
in the rural areas so that more banks will be encouraged to set up their branches in the
rural areas. When infrastructural development takes place in the rural areas, it will
lead to a corresponding development in the banking sector as it will encourage more
banks in the rural areas.

Solutions To The Problems Of Rural Banking In Nigeria

 Increased support by the Central Bank Of Nigeria: The Central Bank of
Nigeria should increase the support given to banks as stipulated by World Bank in
order to encourage their activities in the rural areas. Banks in Nigeria cannot fully
operate in Nigeria without adequate support from the Central Bank of Nigeria. The
Central Bank Of Nigeria should endeavor to meet the World Bank minimum of 50%
support to banks in Nigeria. Any banking system in any country that has up to 50%
support for its indigenous banks will definitely satisfy the the banking demands of the
citizens of that country.
 Provision of adequate social amenities in the rural areas: The government of Nigeria
should do more to ensure that there are adequate social amenities in the rural areas as
this will go a long way to encourage the banks to establish more branches in the rural
areas. When there are adequate social amenities, it leads to a corresponding
 improvement in rural banking. Roads, electricity and water are good ways of
promoting rural banking in Nigeria. This should be done by the government.
 Increased performance of the no banking sector: Yes, when the performance of the overall
banking sector in Nigeria records adequate improvement, rural banking in Nigeria will
definitely experience it. Rural banking in Nigeria is where it is today because of the low
performance of the banking sector in Nigeria. It is a noted fact that the banking system in
Nigeria will not receive efficient improvement unless the overall banking system in
Nigeria begins to improve in the most dramatic manner. This is necessary to improve rural
banking in Nigeria.
In conclusion, the ineffectiveness of the rural banking system had led up to the government
setting up other financial institutions like People’s bank, Community banks, Micro finance
banks, etc.