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Reforming Agricultural Development Banks

This paper suggests that until around 2000, from which time a new interest developed, agricultural development banks had became the forgotten half of rural finance. It notes, for example, that agricultural development banks had disappeared from the agenda of international conventions and workshops, as attention shifted from agricultural credit to rural finance. Instead two new topics came up: financial systems development and microfinance.

It then poses a concluding question: What should happen to the remaining agricultural banks: ignore them, close them or reform them? It suggests firstly, that ignoring them may be the worst strategy, simply throwing good money after bad. Secondly, a number of arguments are made against the idea of closing the remaining agricultural development banks. These are broadly:

Moral reason: If donor experts were responsible for the flaws in the design of the banks, as was frequently the case, they should now, enlightened by 40 years of development banking experience, not discard them without due diligence.

Theoretically inspired reason: As cheap credit together with a credit bias create dependency on public resources and invite interference by the government and politicians, savings mobilization as the main source of funds and the deregulation of interest rates on deposits and loans might eliminate the material basis for government interference.

Pragmatic reason: Even if the quality of their service is low, their outreach can be vast, in some countries in the millions and even tens of millions; and there is no immediate alternative available, most certainly not in the form of credit NGOs.

An unsolved problem: After closing agricultural development banks in several countries, especially in Latin America, the gap has never been closed by new financial institutions, such as the promising microfinance institutions.

Historical reason: Not all agricultural development banks have failed.

The paper suggests that since around 2000, there has been a new interest in the reform issue: cautious and gradual, but continual.

The structure of this paper is as follows. The introductory chapter gives an overview of the background and the crucial issues. This is followed by a confidence building section (with the evidence presented only in chapter 5). After briefly listing the flaws and ills of the old world of agricultural credit, the new consensus on rural finance is outlined, which overlaps with that on microfinance, and the major lessons taught by international experience is listed in a condensed format. The final issues dealt with here is whether agricultural finance is really as risky and unprofitable as it is usually depicted, particularly by those who stay away from it.

Chapter 3 presents some puzzling insights into agricultural finance from both a supply-side and a demand-side perspective, pre-empting some of the evidence given in chapter 6. There is the usually reported lack of funds in banks and lack of finance among the potential investors (such as farmers, microentrepreneurs, commodity processors and traders) in some cases; but also the abundance of funds and shortage of investment opportunities in others.

Chapter 4, sets the scene for the subsequent presentation of data, coming back to the basic issue of the introduction: ignoring, closing or reforming agricultural banks. Chapter 5 presents the statistical facts as given in the AgriBank-Stat inventory of agricultural banks, amply illustrated by presentations of pre-reform, reforming and reformed agricultural banks in Chapter 6.

The final chapter presents the new recent initiatives at agricultural bank reform, the role played by the agricultural bank associations, and a planning framework for policy and decision makers.