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

Publication Date: 1995
Published by: MIP - Microenterprise Innovation Project
Document Type: Paper

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Is it possible for agricultural development banks to make the change?

Examines the potential role of state-owned agricultural development banks as providers of microfinancial services

Finds that:

• successful restructuring of development banks can only occur in an environment of structural adjustment, with macroeconomic and financial liberalisation
• 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 decentralised to the branch level, to take advantage of local information for screening and monitoring
• portfolio diversification should be sequential to decentralisation and deposit mobilisation
• 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

• 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 organisational design