Financial Services through State Banks

State banks, particularly recently privatised state banks with large rural branch networks, have the potential to offer low-cost access to a range of financial services on a wide scale. This Agricultural Investment Note from the World Bank explores ways in which these institutions can best be taken advantage of, in terms of their infrastructure, systems and services, to provide improved access to a range of viable, demand-driven and low-cost financial services to rural populations reliant on agriculture. State-owned banks that may have extensive networks of rural branches include agricultural development banks, regional development banks, savings banks and postal banks.

The Note does not advocate a return to unqualified support for state banks or putting lines of credit through state banks. It proposes three main options for engaging with these types of banks and gives recommendations on how the options can best be pursued. They are:

  1. A management-led turnaround of the bank – which is the most ambitious and costly proposal. It assumes the complete reform of the bank, such as took place in the Agricultural Bank of Mongolia (AgBank) and the National Microfinance Bank (NMB) of Tanzania. The turnaround in these banks was achieved by contracting a consulting firm to provide temporary foreign senior management, intensive technical assistance, systems and infrastructure improvement, together with new product development and marketing aimed at diversifying the financial services and improving branch viability.
  2. The creation of a specialized, autonomous micro or rural finance unit within a state bank structure, that utilizes state bank branches and systems but is insulated from political interference and can be given the freedom to operate on the lines of internationally accepted good practice. Cited examples are Banco do Nordeste in Brazil and Bank Rakyat in Indonesia.
  3. The creation of linkages with other financial providers to improve access to a better range of financial services for agriculturally dependent populations. An agreement with a postal savings bank, for example, may allow a financial institution to provide money transfer services to their customers and NGOs that are not allowed to offer deposit services could negotiate access to savings schemes through a state bank.

The Note goes on to review the benefits of these ways of improving state bank operations and assesses a number of policy and implementation issues. The authors recommend that that donors should only consider working with state banks if there is sufficient long-term protection from government influence. They also suggest that it is important to proceed ambitiously but cautiously.

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