Ford Foundation, FAO, and GTZ have recently stirred the rural finance pot. Now the Inter-American Development Bank is also sticking a toe into the water. Those who are interested in resuscitating rural finance may enjoy reading the following: Mark Wenner and others, "Managing Credit Risk in Rural Financial Institutions in Latin America," Inter-American Development Bank, May 2007. I assume one can download a copy from the bank's website: www.iadb.org/sds/msm. Authors note that only about 5 percent of the rural firms and rural households in Latin America have access to formal financial services. They also argue this access has contracted over the last couple of decades. They point out that risks and costs constrain the expansion of formal and semi-formal financial services in rural areas. The bulk of their discussion focuses on the risk issue. The study is based on information provided by 42 financial institutions in Latin America, plus four case studies of lenders in Peru and Guatemala, that do some rural lending. The primary objective of the study was to determine how these institutions dealt with the added risks of agricultural lending. For me, at least, the two most important findings of the study were: (1) They isolated five risk-managing techniques that were commonly used by these lenders: a. Collecting more information on riskier loans b. Developing added incentives for employees and risky borrowers c. Diversification of the loan portfolio so agriculture did not make up the bulk of the loans d. Putting portfolio limits on the portion of the loan portfolio made up of agricultural loans, and e. Additional provisioning for agricultural loans. (2) Few of the institutions surveyed were using mechanisms to transfer some of the risk to third parties. Third-party loan guarantees were used by only a few of the lenders. The authors wonder if formal agricultural lending could be substantially expanded if more creative techniques were used to transfer some of the associated risk to 3rd parties. I'm underwhelmed by the prospects of expanding loan guarantee programs for agricultural loans. Perhaps there are other 3rd party techniques that can be used, but I wonder about scale problems. Most of these techniques emerge in relatively large financial markets: swaps, derivatives, securitization. Nonetheless, the authors' proposals are worth mulling. If I'm not mistaken, the successful reform of development banks in Indonesia (BRI), the Khan Bank in Mongolia, and Ranrural in Guatemala were done without significant use of 3rd party risk sharers. In all three cases, however, the banks substantially broadened their lending activities to encompass non-farm enterprise, realized economies of scale and scope, and also got busy mobilizing deposits. They also sidelined governments and donors from their efforts. Fortunately, the sun set during the 1980-90s on government owned, specialized, highly subsidized, agricultural development banks. Their demise left a huge gap in the rural financial infrastructure, however, especially regarding deposit services. This gap has been only partially filled by informal finance, ngos, financial cooperatives, and a few reformed development banks. Agriculture can persist without huge amounts of formal agricultural credit but it can't modernize and move ahead substantially without some sizable term-loans that ngos will likely never provide. I liked the Wenner et. al piece because it takes a step forward in systematically diagnosing the agricultural credit problem. I'd like to see other similar studies on the lending cost issue and also on the costs of mobilizing rural deposits............jane
