State-Owned Agricultural Development Banks: Lessons and Opportunities for Microfinance
MetadataShow full item record
Publisher:Ohio State University. Department of Agricultural, Environmental, and Development Economics
Series/Report no.:Ohio State University. Department of Agricultural Economics and Rural Sociology. ESO (Economics and Sociology Occasional Paper). No. 2245
This paper examines the potential role of state-owned agricultural development banks as a source of microfinancial services. It first discusses elements of a new consensus on microfinance, including the importance of formal and informal finance for the poor, the consequences of credit rationing, and progress in microfinancial technologies. While key lessons are identified from past experiences of government intervention in financial markets and from new experiments in microfinance, no dominant organizational model emerges among examples of best practice. The paper provides a conceptual framework to interpret the failure of state-owned agricultural development banks, their lack of success in reaching the poor, and their lack of viability. Key defining dimensions deserve special attention: (a) their specialization in agricultural credit, with the accompanying instances of market failure and high monitoring costs as well as the negative impact of policies that penalize agriculture; (b) their development orientation and lack of profit motive; (c) their possession of a bank charter which authorizes deposit mobilization; and (d) state ownership, with the resulting inadequate level of internal control and incentive problems. Attention is given to the consequences on financial transactions of the special material conditions that characterize agriculture. The results from these defining features are lack of viability, borrower domination, and a disappointing performance of most development banks. In a secondbest world, there may be reasons, however, to restructure a few of them, in order to protect information, human, physical, and clientele capital. The paper discusses preconditions for success in restructuring these banks and elements of the ideal type framework for the transformation. Histories of development banks illustrate the issues while some lessons are derived from assessments of more or less successful restructuring attempts.