Agricultural Development Banks: Close Them or Reform Them?

Agricultural development banks were established to extend credit and other financial services to customers not considered creditworthy by commercial banks. Although frequently unprofitable, they can play an important role in the fight against rural poverty. This article discusses the question of whether agricultural banks should be closed or revamped.

The author notes that despite the difficulties that have beset agricultural development banks in most parts of the world, they have continued to provide important financial services through their branch networks. In regions where these banks have been closed, their market share has generally not been filled by other financial institutions.

The experiences of the Bank for Agriculture and Agricultural Cooperatives (BAAC) in Thailand and Bank Rakyat Indonesia (BRI) are examined and used to support the contention that reforming agricultural development banks is feasible but only if certain preconditions exist to facilitate their rehabilitation. In many cases, reform will mean financial and organisational restructuring, including staff retraining and cleaning up any portfolio of bad debts. Then the banks must concentrate on demand-driven financial products tailored to the needs of rural customers.

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