Elements of a New Approach

As the material in this chapter has shown, new approaches have evolved in response to the failure of the old ones. In considerable measure, the new approaches will be implemented by NGOs and the private sector without government intervention, but the experiences of Bangladesh, Thailand, Indonesia and other countries have shown that there can be a useful supporting role for government in rural microfinance. The main unresolved question is how to strengthen the mechanisms for agricultural finance.

It also is clear that favorable macroeconomic policies and policies for sector development are crucial for the sustainability of agricultural finance. Profitability of the sector's production is a basic requirement for the viability of financial approaches and institutions in the sector.

There is a consensus that the new set of policies for promoting rural finance includes the following principal elements:170

168. J. Yaron, M. P. Benjamin and G. L. Piprek, 1997, p. 25, citing results from Rodrigo Chaves and Susana Sanchez, 'Mexico: Rural Financial Markets', Report 14599-ME, The World Bank, Latin America and the Caribbean Department, Natural Resources and Poverty Division, Washington, DC, USA, 1995.

170. Most of these recommendations, and others, are summarized in M. Wenner, 2001, pp. 10-16.

(1) An appropriate overall legal and regulatory environment, especially concerning interest rates, bank supervision capacities, more secure property rights and the legislative framework for contracts and collateral. Among other benefits, such a framework will promote lending to agriculture on the part of non-bank intermediaries such as input suppliers and marketing agents.

(2) Transitory, selective subsidies for microfinance and rural finance institutions that show sufficient management capabilities and appropriate governance structures to assist them in attaining the scale and capacity required for sustainability and in targeting the poor.

(3) Emphasis on savings mobilization by rural financial institutions, large and small.

(4) Use of new techniques of lending on the basis of intangible collateral, to extend the outreach of rural financial institutions to poor households. In some cases, the techniques are applied by institutions that deal largely with the poor, and in other cases, they are used by specialized units of commercial banks.

(5) Greater attention to gender issues in the design of rural finance programs.

(6) In programs of technical assistance and funding for the sector, greater attention to the structure of rural financial institutions, with emphasis on governance issues and, in some cases, the role of second-tier institutions. Creation of supporting institutions such as credit bureaus to improve financial information.

(7) Emphasis on training farmers and rural households in financial management.171

The bulk of the innovation in recent years has concerned methods of reaching low-income households, thus addressing a crucial need of long standing that was not adequately satisfied by the traditional approach. It must be emphasized that, although a great deal has been learned and the new approaches are very promising, the reach of formal rural finance is still very slight in comparison with the needs for it. The learning and implementation process must continue, with constant adaptations of experiences that have proven successful in one context or another.

One promising development that has not been stressed in this chapter so far is the increasing interest on the part of commercial banks in microfinance. Some lend directly to low-income clients (the Centenary Bank in Uganda, the Multi-Credit Bank in Panama, Bancosol and the Caja de Ahorro y Crédito Los Andes in Bolivia, and the Banco del Occidente in Honduras), others have independent or semi-independent units that deal with such lending (Banco del Desarrollo in Chile, the Unit Desa of the Bank Rakyat Indonesia, the Social Enterprise Program of the Bank of Nova Scotia in Guyana, and the Institute of Private Enterprise Development of the Demerara Bank in Guyana), and yet others lend to microclients indirectly through NGOs (Banco Wiese in Peru).172 This is a trend that appears to be accelerating as commercial banks observe the success of microfinance institutions in capturing new segments of the market.

What has not been stressed in the literature is the need for adaptation of bank regulatory frameworks to the special conditions of agricultural finance. As mentioned above, Fiebig's monograph has made it very clear that virtually all elements of bank regulation and supervision require modification for the agricultural sector in developing countries, including capital requirements, portfolio classification rules, liquidity rules, documentation and reporting requirements, and branch regulations. It now is widely recog

171. On this topic, see the monograph by Jennifer Heney, Enhancing Farmers' Financial Management Skills, Agricultural Finance Revisited No. 6, FAO and GTZ, Rome, August 2000.

172. Most of these references are taken from Mayada Baydas, Douglas Graham and Liza Valenzuela, 'Commercial Banks in Microfinance: New Actors in the Microfinance World', Development Alternatives, Inc., Bethesda, MD, USA, summarized in Focus, Note No. 12, The Consultative Group to Assist the Poorest, Washington, DC, USA, July 1998. Others are drawn from this author's experience.

nized that microfinance institutions need their own regime of regulation and supervision. What has not been sufficiently recognized is that agricultural and rural banking institutions, microfinance or otherwise, need their own regulatory and supervision framework as well. In many countries, laws have been proposed or passed to create a special regulatory regime for microfinance, but comparable steps have not been taken for agricultural finance. The implications of the need for a new regulatory framework are developed further below.

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