Successful Experience of Government-owned Banks in Rural and Microfinance: The Case of the Land Bank in the Philippines

The Land Bank is a universal bank owned by the Philippine government. The government established the Bank to provide financial services to a wide array of rural clients and to give special attention to promoting rural development, assisting small farmers, supporting rural infrastructure, and providing a variety of services to agrarian reform beneficiaries (ARBs). The Land Bank does this not only directly at a retail level but also at the wholesale level through a variety of financial intermediaries, including rural banks, credit cooperatives, and a few thrift banks.

The performance of the Land Bank is remarkable considering it has survived for 40 years without requiring bailouts to avoid bankruptcy, and it continues to serve a large and diverse rural clientele. This study looks closely into the Land Bank and attempts to determine the factors that have driven its successful performance.

This paper is organized as follows: The executive summary comprises section I. Section II presents the Philippine economic and political environment in which the Land Bank has operated. Section III discusses the institutional performance of the Land Bank and identifies the internal and structural factors that have driven it. Lessons, conclusions, and future challenges, are presented in the final section.

The main areas of focus in recent years for the Land Bank have been mobilizing deposits, diversifying and expanding the loan portfolio, lending to small farmers and fisherfolk, and building capacity through technical assistance programs.

In terms of financial performance the bank has done quite well, with 9% growth per annum in revenues (up to 21 billion pesos, approximately $382 million) and 51% growth per annum in profits (2 billion pesos in 2004). Total resources of the Land Bank have been increasing steadily at a yearly rate around 8%, capital funds stand at roughly 21 billion pesos, and deposits make up 72% of the liabilities. The Land Bank’s Return on Equity (ROE) in 2004 was close to 11%, better than the industry average. Net interest margin in 2004, reported at roughly 5%, was also slightly higher than the industry average. Meanwhile the Land Bank’s registered capital adequacy ratio has been at par with the industry standard of not less than 10% but still fell short of the industry average.

The major lessons learned from this study are the following:

  • A good policy environment was essential to the Land Bank’s success.
  • By changing its focus from solely ARBs to a more universal approach the Land Bank has increased its viability and diversified its risk.
  • Through a combination of strong leadership, rural orientation, and a board structure which balances competing interests, the Land Bank has managed to shield itself from the demands for loans by corrupt polticians.
  • The Land Bank has developed its own financial muscle through a combination of good performance, client support, and deposit mobilization.
  • The Land Bank maintains good risk management and internal audit and control practices.

The main challenge for the Land Bank in the future will be resolving the tension it has in its operations as both a retail and wholesale lender.

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