State-Owned Agricultural Development Banks: Lessons and Opportunities for Microfinance

This paper examines the potential role of state-owned agricultural development banks as providers of microfinancial servicesIt finds that:

• Successful restructuring of development banks can only occur in an environment of structural adjustment, with macroeconomic and financial liberalization;
• A healthy and dynamic agricultural sector facilitates the emergence of a reformed rural development bank;
• Most successful development bank reforms have begun with the shift from outside (donor) to internal (deposit-based) funding;
• Decision-making should be decentralized to the branch level, to take advantage of local information for screening and monitoring;
• Portfolio diversification should be sequential to decentralization and deposit mobilization;
• An important legal change required to implement delegated decision-making and performance-based remuneration for branch managers and loan officers is the ability to hire, promote, and fire staff free from civil service regulations;
• Eliminating the role of any non-financial ministry on the board appears to be a necessary though not a sufficient condition to avoid strategic behaviour at the board level;
• Recapitalization should be considered following partial or complete cleaning up of the balance sheet.

Finally the document concludes that:

• Strategic implementation issues would have to reflect initial conditions in each country;
• It is important to understand the political economy context of the transformation;
• Unless strong coalition favours restructuring, nothing can be accomplished. An important task for donors is to promote and nurture such coalitions;
• Once agreement has been reached, the donors most important contribution would be technical assistance for the upgrading of policies, technologies and organizational design.