Knowledge Bank

International donors have strongly encouraged the creation of specialized credit institutions in the last decade to service the needs of agricultural development. These institutions have a portfolio highly concentrated in agriculture and further in medium to long-term loans, little if any deposit or savings services and an expensive infrastructure to service loan targeting requirements of donors. Analysis of the data from the National Agricultural Development Bank in Honduras show that, contrary to donor expectations, an increasing share of donor targeted funds for agriculture in the bank's liabilities has not led to an increased participation of agricultural loans in the total portfolio of the bank nor to an increase in the share of small sized loans in the agricultural portfolio. This must reflect the fungibility of finance. At the same time, regression analysis performed on the development bank's cost function indicates that there is a significant lagged ratchet type effect of donor and central bank targeted funds on the intermediation costs of the bank. These derive from increased resources devoted to accounting, monitoring, record-keeping and reporting requirements of targeted credit programs. International donors and local governments should seriously consider reducing their loan targeting policies in light of the limited portfolio impact and the significant cost increasing effects these policies have on financial intermediaries.