State-Owned Agricultural Development Banks: An Untapped Infrastructure for Microfinance?
This article is available on pages 90-91 of this compilation document.
Historically, agricultural development banks have been unsuccessful in reaching the poor and have lacked financial viability. Many have become insolvent and required additional capital to continue operations. Eventually, they lost donor support and fell prey to political interests.
Despite these problems, agricultural development banks are now being considered potential institutions for the delivery of microfinance services, particularly in rural areas. Their personnel and physical infrastructure could be harnessed to serve the poorest, rather than creating specialised microfinance institutions.
Looks at the preconditions for success in restructuring these banks and elements of the ideal framework for the transformation.
The banks must:
- Operate in a country with at least a moderate degree of macroeconomic equilibrium and a sound fiscal system committed to financial reform;
- Have or be developing an effective framework for prudential regulation and supervision;
- Have access to legal recourse to enforce financial contracts;
- Have a portfolio with a low rate of default (for example, non-performing loans should amount to no more than 20 percent of the total) and past default problems should not be the result of staff incompetence or corruption;
- Be placed in a dynamic agricultural sector.
Concludes that only a few state-owned agricultural development banks may be viable candidates for successful restructuring and that success depends on a strong combination of several preconditions.
[Author's abstract]
