Agricultural Development Banks: Close Them or Reform Them?
The author sees changes in the landscape of rural finance that have been prompted by the rise of microfinance institutions and a relative failure of agricultural development banks. He states that, 'Innovation should not necessarily imply establishment of new organizations when it might be more cost effective, although at times politically more sensitive, to reform existing ones.
These larger banks have been weakened and experiences show that:
- Providing credit rather than accepting deposits has undermined self-reliance and viability;
- Providing bigger loans to bigger farmers to reduce transaction costs has limited outreach;
- A focus on agricultural production has emphasized risks from seasonality at the expense of risk-reducing strategies such as diversification and nonfarm activities;
- There has been a lack of external monitoring and supervision yet strong external influence over operational decisions such as interest rate regulation.
The article proposes the reform of agricultural development banks and cites successful examples of Bank for Agriculture and Agricultural Cooperatives (BAAC) in Thailand and Bank Rakyat Indonesia (BRI). A framework of reform would, "Transform agricultural development banks into viable and sustainable providers of financial services to all segments of the rural population, including the poor." It suggest that steps along this path should be:
- A political will to reform or close banks with adequate reform strategies such as privatization;
- Operational autonomy and freedom from political interference;
- An appropriate legal and regulatory framework with prudential norms, effective internal control and external supervision;
- Financial and organizational restructuring together with an effective planning process;
- Human resource development, including staff re-training;
- An effective delivery system possibly utilizing decentralized networks of branches as profit centres;
- Demand-driven deposit, credit, and other financial products;
- Financial sustainability.
