handbook best practices agri rural finance

8/7/2019 Handbook Best Practices Agri Rural Finance

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Handbook on Best Practices

in

Agri/Rural Finance

Agricultural Credit Department

State Bank of Pakistanwww.sbp.org.pk


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The Team

Name Designation Contact

Muhammad Ashraf Khan Director(92-21) 9217216

[email protected]

Kamran Akram Bakhshi Joint Director(92-21) 9217241

[email protected]

Abdus Saboor Assistant Director(92-21) 2455934

[email protected]

Syed Ali RazaAgricultural Credit

Officer

(92-21) [email protected]


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Preface

The provision of affordable financial services to the rural population has been a prime

component of development strategy for several decades. Governments, development

agencies, and other donors have supported various agri/ rural financial institutions to

accelerate the rate of growth and alleviate poverty, especially in the rural areas.

Financing development in rural areas, where majority of the poor in developing

countries lives, is one of the most pressing concerns of governments. The agri / ruralsector in developing world not only generates employment, income, and foreign

exchange from agriculture and off-farm rural activities, but also provides markets, labor

& raw material inputs to manufacturing and other urban industries. Failure of the agri/

rural sector to grow along with other sectors impedes the overall progress of an

economy.

Like many developing countries, agriculture is the backbone of Pakistans economy.

Agriculture in Pakistan provides food to consumers and fibre for domestic industry; it

provides livelihood and employment to the majority of the countrys population, and is

the major source, directly and indirectly, of the countrys export earnings.

State Bank of Pakistan, in line with governments declared priority for agriculture sector,

has been endeavoring for the past so many decades to ensure flow of sufficient, timely

and cost effective funds to agriculture sector. While substantial progress has been made

in this respect, there is still ample room for further improvement. With the expansion in

the size of the agriculture sector, the financing needs of the sector are also increasing

and there are significant opportunities for banks to deploy their funds in such

remunerative avenues. SBP has created a Development Finance group for the

development of banks financing in the areas of agriculture, SME, microfinance, and

infrastructure & housing. Further, Development Finance Support Department has beenestablished at SBP-BSC for the effective implementation of policies/ schemes in the

areas at grass root level. Under restructuring, the role of ACD has been enhanced to

meet farm as well as non farm credit requirements of the people living in rural areas. For

awareness building and research on international best practices vis--vis Pakistans

experience in agri/rural finance, the Governor, State Bank of Pakistan has desired the

publication of a handbook by the Agricultural Credit Department (ACD). This

Handbook provides an overview of the policies and strategies of some of the successful

institutions in the field of agri/ rural finance and highlights their key achievements in

terms of vast outreach, high rate of recovery, sustainability as well as profitability, and

most importantly the increasing level of confidence of their clients in those institutions

which is depicted in their vertical & horizontal expansion. This Handbook will help

banks to revise and devise their lending strategies to grasp the vast untapped agri/ rural

market.

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Table of Contents

1. Introduction............................................................................................... 12. Conceptual Framework ........................................................................... 22.1. Rural Finance ......................................................................................... 22.2. Agriculture Finance............................................................................... 22.3. Agricultural Microfinance .................................................................... 22.4. Rural Finance Innovations ................................................................... 22.5. Best Practices ......................................................................................... 22.6. Financial Sustainability ........................................................................ 32.7. Client Outreach ..................................................................................... 33. Paradigm Shift .......................................................................................... 43.1. Old Rural Finance Paradigm ............................................................... 43.2. New Rural Finance Paradigm .............................................................. 53.3. Value Chain Approach ......................................................................... 54. Agri/ Rural Finance Institutions in Pakistan ......................................... 64.1. Historical Background .......................................................................... 64.2. Importance of Agri/ Rural Finance .................................................... 74.3. SBPs Initiatives in Agri/Rural Credit ................................................ 74.4. Impact of SBPs Initiatives ................................................................... 84.5. Constraints Issues in Agri/rural Financing ........................................ 84.6. Future Outlook ...................................................................................... 95. International Best Practices ................................................................... 105.1. Bank for Agriculture and Agricultural Cooperatives (BAAC),Thailand ......................................................................................................... 105.2. Land Bank of the Philippines ............................................................. 145.3. Bank Rakyat Indonesia ....................................................................... 175.4. Grameen Bank, Bangladesh ............................................................... 205.5. BANRURAL S.A. Guatemala ............................................................ 235.6. ACLEDA Bank, Cambodia ................................................................ 256. Conclusion ............................................................................................... 287. Summary of Operating Methods, Performance, etc. of FinancialInstitutions ..................................................................................................... 30


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Acronyms

ABL Allied Bank Limited

ACD Agricultural Credit Department

ADB Asian Development Bank

BAAC Bank for Agriculture & Agricultural Cooperatives

BRI Bank Rakyat Indonesia

FAO Food & Agriculture Organization

FBC Federal Bank for Cooperatives

GB Grameen Bank

HBL Habib Bank Limited

MCB MCB Bank Limited

MFIs Micro Finance InstitutionsMINFAL Ministry of Food, Agriculture & Livestock

NBP National Bank of Pakistan

PPCBL Punjab Provincial Cooperative Bank Limited

RF Rural Finance

RFIs Rural Finance Institutions

SBP State Bank of Pakistan

SMEs Small and Medium Enterprises

UBL United Bank Limited

WB World Bank

ZTBL Zarai Taraqiati Bank Limited


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Handbook on Best Practices in Agri/ Rural Finance

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1.IntroductionNotwithstanding a worldwide recognition ofthe fundamental importance of rural sector

in an economy, the state of rural financialmarkets in developing countries ischaracterized by low and decreasingavailability of financing for both agriculturaland non-agricultural activities. Indeveloping countries and transitionaleconomies, only a very few rural masseshave access to financial services. Ruralareas are often characterized by a paucity ofviable financial institutions and lack ofvariety of financial services available. Ruralcommunities often do not have access to

saving options, credit services, insurance, ortransaction services. Besides, limited accessto long-term financing needed foragriculture, land improvement and otherrural activities is also a hindering factor inthe improvement of agri/rural sector. Withthese odd features, the agri/rural sectorpresents a real challenge to the design ofsustainable financial intermediaries.

Since the emergence of financial inclusionas an effective tool for sustained

economic growth, social stability andpoverty reduction, it has becomeimperative to devise a result orientedagri/rural finance strategy in developingeconomies. With the aim in mind, StateBank of Pakistan is striving to develop asound and sustainable agri/ rural financialsector in the country. It stands to reasonthat SBP has taken many initiatives tocreate an enabling environment for banksto adopt agri/ rural credit as a viablebusiness line. These initiatives have

resulted in substantial increase in agri.credit in the last 6-7 years; however,outreach remained almost stagnant. Thisappears to be only one manifestation ofbanks reliance on traditional lendingapproaches and their lack of awareness

regarding international best practices inagri/ rural finance. Therefore, for capacity

building of financial institutions, thisHandbook has been prepared comprisingof some very important lessons that havebeen learnt from the experiences ofdifferent financial institutions, which canprovide such useful guidelines to banksthat could help them adopt agri/ ruralfinance as a viable business line.

The information has been taken fromvarious publications of World Bank, FAO,ADB, and other International

Organizations in addition to websites offinancial institutions. The Handbookexamines the lessons from best practices inagri/ rural finance. It identifies recentadvances, current issues, major gaps,challenges, opportunities and efforts toexpand and strengthen banks financing torural community. It is hoped that it willhelp and enable banks working inPakistan to improve the services andproducts they offer to rural clients in thecountry.

The Handbook is divided into six sections.After Introduction, the second sectionbriefly describes the terminologies ofagri/rural finance. Section three elaboratesdifferent paradigms and emerging policyframework in rural finance. The fourthsection provides an overview of Pakistansagri. financing structure, issues andconstraints in enhancing agricultural creditthrough financial sector, followed by thefifth section, describing successful practices

of financial institutions in agri/ ruralfinance. Conclusion has been drawn at theend comprising of summary of key learningsfrom the financial institutions, which canbenefit the banks likely to go in a big way inagri/rural finance in the country.


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2.Conceptual FrameworkThere has been a tendency amongresearchers and practitioners to

interchangeably use the terms rural finance,agriculture finance and microfinance.Nevertheless, there is an agreement on theterm rural finance as covering the broadrange of financial services to the ruralmasses i.e. the finance is not limited tocredit only. The range of services includesthe following:

Intermediation, which involvesmobilizing and transferring of savingsfrom surplus to deficit units.

Safe, liquid and convenient savings(deposit) facilities.

Access to credit facilities tailored tothe needs of rural population.

Systems for effecting payments andtransferring remittances as well asgeneral insurance cover againstvariability in output, price and marketuncertainties.

In this book, the following operational

distinctions of various terms used, havebeen adopted:

2.1. Rural FinanceRural finance, as defined by the World Bank(WB Report-2004), includes a range offinancial services such as savings, credit,payments and insurance to rural individuals,households, and enterprises, both farm andnon-farm, on a sustainable basis. It includesfinancing for agriculture and agro-processing/ agribusiness.

2.2. Agriculture FinanceAgriculture finance is defined as a subset ofrural finance dedicated to financing foragricultural related activities viz. inputsupply, production, processing, andmarketing.

2.3. AgriculturalMicrofinanceMicrofinance is the provision of financial

services for poor and low income peopleand also covers the lower ends of both ruraland agriculture finance. It includes financingboth in rural and urban areas. Consistentwith these operational distinctions,agricultural microfinance can be defined asreferring to the overlap of agriculturefinance and microfinance dedicated toproviding financial services to pooragricultural households.

2.4. Rural FinanceInnovations

A financial innovation can be defined assomething new that resulted from adeliberate change to an existing financialproduct, process or delivery system. Theinnovation can take the form of a newfinancial product or financial service(product innovation), a new process ormethodology (process innovation) or a new

organizational form or structure of deliverysystem (system or institutional innovations).

The innovation is understood to haveoccurred or have operated within aparticular context or environment. Theparticular relevant context may be at macro(national level) or meso level (at theimmediate environment, e.g. communitieswhere the organization operates). Aparticular innovation needs to becontextualized under these particularenabling conditions (or constraints) in whichit operates.

2.5. Best PracticesAn innovation is considered a goodpractice if such innovation has producedpositive outcomes in terms of financialsustainability and improved client outreach.Best practice on the other hand is


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understood as the outstanding practice in theparticular process or function, i.e. producingthe best results, among those in the sameindustry.

2.6. Financial SustainabilityFinancial sustainability means that theorganization is able to continue the financialservices on a long term basis. Two core

measures in this regard are; sustainability ofoperations, and sustainability of fund base.

2.7. Client OutreachClient outreach would include either or bothbreadth (number of rural clients serviced)

or depth (how poor the clients were thatare being serviced).


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3.Paradigm ShiftSeveral paradigms and policies have beenused in developing countries to address thedifficult and costly problems of providing

financial services in rural areas. The oldrural finance (RF) paradigm dates back to1960s and 1970s. Based on lessons learntfrom the old paradigm and revised financialsystems approach, the new RF paradigmemerged in the late 1980s which gained abroader consensus in the 1990s.

3.1. Old Rural FinanceParadigm

Rural Finance got momentum in 1960s and

1970s all around the world, particularly inAsia and Latin America. Many rural creditprojects were taken up under publicsectors. Since the special costs and riskswere involved in RF that made formalfinancial institutions reluctant to extend &expand credit facilities in rural areas,therefore, governments and donors wereurged to intervene in rural financialmarkets. Following types of interventionswere advocated by the researchers/practitioners under this paradigm:

lending quotas on banks and otherfinancial institutions,

refinance schemes, loans at preferential interest rates, credit guarantees, targeted lending by development

finance institutions (DFIs)

These targeted RF programs were expectedto promote agricultural development. Theinterventions were intended to increase

rural lending by reducing costs and risks tolenders that made loans preferable to ruralclients and sectors. Subsidized interestrates and loan waivers or write-offs werealso used to reduce the debt burden ofpriority-sector borrowers, especiallyfollowed by natural calamities such asfloods, droughts, and periods of low farmprices. Credit was regarded as an importantmeans to speed up agricultural

development, promote small farmers,reduce poverty, and ensure cheap foodsupplies to urban areas. This approach was

invariably supported by multilateral andbilateral donors.

This approach helped some developingcountries, especiallyinAsia, toimproveagriculturalyields in the short-term.Butit was not sustainable over the longterm. It was also costly, and failed toreach the majority of rural households.As such, it was unable to achieve theintended objectives of increasing ruralincomes, reducing rural poverty andstimulating asset formation. The focuson lending to agriculture sector, forfarming purposes only, ignored thepotential benefits of supporting growth-intensive investments in rural areaswhich would be more appropriate forthe rural poor or small non-farm ruralenterprises/ activities.

Subsidizedinterestratesdidnot cover thecosts, as such rural financial institutions

(RFIs)became unviableandtheylosttheconfidence of depositors. There was ahuge build up of non-performing loanssince cheap credit encouragedunprofitable investments and led to aconcentration of loan portfolios in handsof the rich and powerful. Subsidizedagricultural credit often resulted inproductioninefficienciesby targetingthewrong products and creating artificialpreference for capital-intensive

investmentsthat crowdedoutabundant

labor in rural areas. In some casesborrowersintentionallydefaultedbecausethey believed that governments wouldwaiveor write-offtheir loansornottakeaction against defaulters in prioritysectors. Financial discipline wasdamaged and intermediaries weakened.Several development finance institutionsbecame insolventandwereclosedorhadtobe reorganized.


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3.2. New Rural FinanceParadigm

After the ill-fate of majority of the RFprograms under the old paradigm,microfinance providers, such as NGOsand credit unions emerged in the late1970s. They targeted theunbankedpoor,who had been left out by the hugeinvestments made in financial marketunder old paradigm. These microfinanceinstitutions in fact brought about therevolution by proving that the poor arebankable, but the customary bankingsystem had failed to serve themappropriately.

Basedon the lessons learnt from theold

paradigm and the emerging microfinancerevolution, the new RF paradigm begantoemerge in the late1980s whichgainedmomentum in the mid 1990s. The newparadigm adopts a financial systemsapproach, using market principles todeliver financial services in rural areas.This system is aimed at facilitating ruraldevelopment that, in turn, will promoteasset creationandpovertyreduction.Thenewparadigm treats finance as away toexpandandintegrate markets,ratherthan

as a policy tool for targeting a specificsegment of the market. The new RF

paradigm isbasedon theprinciple that acommercial and market-based approachis most likely to reach largenumbersofclientsonasustainedbasis.It recognizesthat financial services are part of aninteractive system of financial

infrastructure and social and culturalnorms.Governmenthasa role toplay inestablishing a favorable or enablingpolicy environment, infrastructure &information systems, and supervisorystructures to facilitate the smoothfunctioning ofruralfinancialmarkets,butit should play a more limited role indirectinterventions.

3.3. Value Chain ApproachThe value-chain approach is currently

emerging as an important tool to studythe new production and marketingrelationships that have evolved due toeconomic globalization and thecommercialization of agriculture. Thevalue-chain approach considerseconomic activities, clusters, and sub-sectors as a continuouschainwithvalueadditionateach successive link. Ithelpsanalyze the value added at each chainlink related to the rural economicactivities and clusters of activities thatconvert raw materials into finishedproductsand then marketthem.


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4.Agri/ Rural Finance Institutions inPakistan

4.1.Historical Background

In Pakistan, agricultural credit marketconsists of formal and informal providersof credit. Formal lenders are: specializedbanks like Zarai Taraqiati Bank Ltd.(ZTBL) and Punjab ProvincialCooperative Bank Ltd. (PPCBL) andcommercial banks, while the latercomprises of illegal money lenders,friends and relatives, village shopkeepersand commission agents, etc. Thepredominant share of credit is provided

by the informal sources of credit in thecountry.

In order to overcome this inadequacy, twospecialized institutions i.e. AgriculturalDevelopment Finance Corporation andthe Agricultural Bank were established in1950s. Subsequently, these institutionswere merged to form the AgriculturalDevelopment Bank of Pakistan (ADBP)in 1961 (Now called ZTBL).

Prior to 1972, commercial banks loansportfolio in agriculture was nominal andbulk of the credit to this sector wasprovided by ADBP. With theintroduction of banking reforms in1972, several institutional and policychanges were made with the objective ofa more equitable distribution of bankscredit among various sectors and groups.Towards the end of 1972, SBP startedassigning mandatory agricultural credit

targets to five big banks viz. ABL, HBL,MCB, NBP and UBL with provision forpenalizing institutions that do not meetthe targets.

The legislation on Co-operative CreditSystem was introduced in thesubcontinent in 1904. At the time ofindependence, co-operative banks weremainly engaged in financing commercial

activities and neglected the financing toco-operative societies. In 1976, withenactment of Co-operative BankingOrdinance, the Federal Bank for Co-operatives (FBC) was established tofinance provincial cooperative banks forfurther lending to cooperative societies.Subsequently, provincial cooperativebanks were amalgamated to provideagricultural credit at grass root level andto encourage the cooperative societiesstructure in the country. However, the

system did not achieve its goals due todefault of the provincial cooperativebanks and a number of fake cooperativesocieties. Various steps undertaken by thegovernment over subsequent years failedto revive the role of cooperatives infinancing the agriculture sector.Resultantly, FBC was liquidated in 2001followed by liquidation of provincialcooperative banks except PPCBL. Afterliquation of FBC, financing to PPCBLwas diverted to SBP under the guarantee

of Punjab Government.

Informal credit market is characterized bylow transaction costs, very high interestrates and rapid disbursement of credit.Although, its share in total credit hasdeclined, it is still a major source of agri.credit in the country. The close familiarityof borrowers with informal lenders inconjunction with coercive loan recoverymethods and the inability of formalinstitutions to reach to the poor have

brought about heavy dependency of therural population on the informal markets.This trend has continued despite higherinterest rates ranging from yearly rates of50% to 100%. Most informal lenders havelimited loan portfolios and operate withinthe narrow area of their influence.


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4.2. Importance of Agri/Rural Finance

Availability of agri/rural credit is aprerequisite for enhancing productivity andimproving standard of living by breakingthe vicious circle of poverty of smallfarmers. It has been observed that farmersusually utilize the credit facility to meetshort term credit needs mostly for purchaseof inputs. The banks are also interested inextending short term credit. The experienceof developed economies shows thatagri/rural credit for investment in the formof machinery, equipment and infrastructurehas played major role in increasingproductivity and future cash flows.Therefore, banks need to increase the

supply of credit in the form of medium tolong term investment in the farm and nonfarm sector. Farmers can also avail theopportunity to transform their lands intomechanized farming units to reduce costand increase profitability.

4.3. SBPs Initiatives inAgri/Rural Credit

With the liberalization of financial sector,there was a paradigm shift in the roles of

SBP and banks. Under the new paradigm,SBP was committed to creating anenabling environment for banks to adoptagri. / rural finance as a viable businessline. The major initiatives taken during last7-8 years are briefly described as under: -

Inducted 14 Domestic Private Banksinto Agri Credit Scheme apart from 7Banks (5 Major & 2 Specialized)

Guidelines for Livestock, Fisheries,Poultry and Horticulture Financing

were issued to diversify banks creditto non-farm sector activities.

Introduced three years revolving creditscheme, with one time documentationand automatic renewal on annualcleanup of principal plus mark-up forproduction loans to farmers.

Issued draft Guidelines for IslamicAgri Finance to facilitate banks todevelop their own Shariah compliant

products for financing to agriculturesector.

Strategy in place to Expand AgriFinance to 3.3 Million Borrowersfrom the Existing 2 MillionBorrowers, to Meet 75% of the Credit

Needs (from Existing 45%) in next 3-4 years.

To mitigate the risk of losses tofarmers due to natural calamities andrisk of nonpayment to banks in suchcases, Crop Loan Insurance Scheme(CLIS) has been introduced from RabiCrop 2008-09. This scheme will notonly safeguard the interests of banksand farmers, but it will also save hugeamount of funds spent by theGovernment of Pakistan in the shape

of frequent write-offs / waivers ofagri. loans of ZTBLs borrowers.

Allowed banks to finance against twopersonal sureties upto 500,000 inaddition to passbook of the land.

Issued Financing Scheme for SmallFarmers on group based lendingmethodology whereby members of thegroup can borrow up to Rs 200,000/-without any collateral from financialinstitutions.

Compiled and released district wisedata of agri. credit for the first time tofacilitate the policy makers.

For effective implementation of SBPsinitiatives, a separate DevelopmentFinance Support Department (DFSD)and its subsequent units wereestablished at SBP BSC Offices.These units would focus ondeveloping a network in collaborationwith local banks and farmingcommunity.

In order to increase the rural branchnet-work, SBP has made it mandatoryfor banks to open at least 20% ruralbranches while opening their newones.

To reduce operational / administrativecosts of agri/ rural financing andincreasing outreach of financialservices to rural community, SBP hasallowed banks to adopt concepts ofbranch-less banking and open sub


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branches, special booths and servicecenters in remote areas.

Published Handbook on Agri. FinanceProducts of banks for guidance ofbanks and other stakeholders.

Special Training and AwarenessPrograms underway for farmers andbankers.

Updated report for estimation of agri.credit by including 150 additionalitems eligible for financing i.e.complete value chain from productiontill export by the farmers/growers.

Rationalized agri. credit data returnsto facilitate banks and otherstakeholders.

Booklets & Brochures of SBPsschemes and policies have been

translated & published in Urdu &other regional languages

Separate Prudential Regulations forAgri Financing issued.

4.4. Impact of SBPsInitiatives

The initiatives have paid dividend in theform of robust increase in agri. creditdisbursements to Rs. 212 billion in FY08from Rs. 39 billion in FY01. The target

for FY09 has been fixed at Rs. 250billion. The number of borrowers has alsoincreased to 2 million from 1.3 million.

With the induction of 14 domestic privatebanks into the agricultural credit schemein 2002 and the removal of mandatorycredit targets for five big banks, viz.Allied Bank Ltd, Habib Bank Ltd, MCBBank Ltd, National Bank of Pakistan,United Bank Ltd, from 2005, the share ofcommercial banks has shown significantrise in the overall agri. creditdisbursement. The share of specializedbanks, viz. ZTBL & PPCBL in agri.credit has declined from 73% in FY01 to38% in FY07. The trend shows that banksare continuously surpassing theirindicative credit targets, since 2003-04and the actual disbursement in 4 years hasincreased by 186% from FY03 to FY07.

4.5. Constraints Issues inAgri/ Rural Financing

Notwithstanding, the sharp increase inagri. credit disbursement, banks aremeeting only around 45-50% of the agri.credit requirements and the number ofborrowers are around 2 million out of 6.6million farmers in the country. The creditis highly concentrated in crop sector(production loans), which is around 75%of the agri. credit disbursement and thereis an uneven geographical distributionwith more than 80% of the credit going tothe province of Punjab. Moreover, agri.credit is only 6% of the credit portfolio ofbanks. As a result, there is lack ofownership and commitment among the

banks management and non-availabilityof innovative lending products.

Banks do not seem keen on acceptingagri. finance as a viable business due tointrinsic risks and weird nature ofagriculture, non-viability of farmers, non-availability of collateral with most of thefarmers, subsidized credit, frequentannouncement of write-offs & waivers bythe Government, etc. Besides, the lateissuance of pass book and non-

cooperation of revenue authorities withbanks / farmers for creation of charge &verification of documents of pass books,and non-availability of one windowoperation in Sindh and Baluchistan aremaking access to credit a difficultproposition for banks. There is noautomation of land record and the existingmanual system of revenue authorities israther erratic. The ratio of non-performingagri. loans is terribly high due to theculture of write-offs/ waivers. In case of

defaults, the sale of agri. land forrealization of banks outstanding loansalmost become impossible for banks. Thissector is also susceptible to risks onaccount of natural hazards, unreliableinfrastructure, poor pricing policies,insufficient & improper marketingmechanism, low quality of seed, low yieldper acre and lack of coordination amonggovernment agencies which dampen


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down banks interest in expansion ofcredit to the farming community.

4.6. Future OutlookIn response to the initiatives taken bySBP to create an enabling environment

for agri. finance, banks are also in theprocess of revamping/restructuring theiragri. financing infrastructure e.g. ZTBLhas planned to open 200 online branchesin the rural areas, 5 major banks arehiring agri. graduates to strengthen theirfield force, domestic private banks areestablishing separate agri. creditdepartments and most of the banks aredeveloping specialized products for

agriculture, livestock, fisheries, etc.

The Government is also investing for thedevelopment of agriculture sector andrebuilding the revenue departmentsthrough automation of land record.

Farming community and theirrepresentative forums/associations havealso become instrumental in sharing theirrequirements and issues with theauthorities and banks.It is hoped that the success stories in thefollowing section will facilitate allstakeholders and will ultimately establisha well organized market based agri.finance sector in the country.


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5. International Best PracticesDuring the past two decades several ruralfinance institutions (RFIs) have emerged

as success stories. They have not onlyachieved the primary objectives of highoutreach and self-sustainability, but havealso been very helpful in reducing thepoverty. In this chapter we will brieflydiscuss the strategies and achievements ofa few top performing RFIs. Among them,BAAC and Land Bank of Philippines havea holistic approach of lending, withemphasis on agri. finance, while BRI,Grameen, BANRURAL, and ACLEDABank are micro finance institutions with a

wide array of activities in differentsectors.

5.1. Bank for Agriculture andAgricultural Cooperatives

(BAAC), ThailandBank for Agriculture and AgriculturalCooperatives (BAAC), Thailand is one ofthe biggest names among the mostsuccessful agri/ rural finance institutions(RFIs). BAAC was established under the

Bank for Agriculture and AgriculturalCooperatives Act in 1966 as agovernment owned bank to stimulateagriculture by extending financial servicesto the agriculture sector. It replaced theBank for Cooperatives, whose fundingwas limited and whose lending activitieswere restricted to agriculturalcooperatives.

The BAAC enjoys substantial autonomyin setting its operational and financialpolicies. It has focused mainly on lendingto borrowers in the low- to medium-income range. This strategy has beensupported by a progressive cross-subsidizing interest rate policy, withhigher interest rates charged on largerloans, ceilings placed on loan amounts,and loans offered to small farmers withouttraditional collateral through joint liabilitygroups. At first, BAAC lent mostly

through large agricultural cooperatives,but repayment problems led the bank to

increase its direct lending to individualfarmers.

During the past four decades, BAACunderwent transformation from aspecialized agricultural lending institutionto a diversified rural development bank. Itunderwent a gradual process of reforms:

1966-74, laying the foundation forindividual lending to farmers through

joint liability groups;

1975-87, expanding its lendingoperations through access tocommercial bank and donor funds andconsolidating its operations bysubstantially reducing loan channelingthrough cooperatives;

1988-96, striving for viability andself-reliance, under conditions ofcontrolled interest rates, through

savings mobilization, improved loanrecovery and increased staffproductivity;

Since 1997, adjusting to prudentialregulation by the central bank anddiversifying into non-agriculturallending.

The result of these gradual reforms hashelped the bank in enhancing outreach tosmall farmers. It provides credit access to

98% of total farmers in Thailand, whilemaintaining the institutional viability.

Presently, it has 908 branches and 945field offices which cover the entire ruralarea of the country. It is also known to bethe largest formal Micro FinanceInstitution (MFI) in Thailand with anoutreach of 5.68 million farm households(98.1% of total farm households). The


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loan outstanding is 12,245 million US$ ason 31-12-2007. Its main source of funds isthe deposits from general public which is87.7% of the total operating funds of thebank.

5.1.1. Financing PolicySince its establishment in 1966, and upto2005, BAAC was only allowed to provideloans to Agriculture sector-individualfarmers for their agricultural activities, oragricultural cooperatives for onwardlending to their members. From 2006onwards, it has also been allowed by wayof an amendment in its Act, to provideloan to non-agriculture sector, but thevolume of loan to non-farming borrowersmust not exceed 20% of the total loan

volume at any point of time.

5.1.2. MethodologyAmong the lending approaches of BAAC,the most extensively used is retail loansthrough Joint Liability Groups (JLG).Under this scheme, BAAC extends non-collateralized loans through groups offarmers who are made co-liable for eachothers loan. A typical group has 12 to 15members. In addition to JLG, BAAC also

finance farmers against individuallandholdings and may require the deed forsafekeeping of produce as added loansecurity. Loan size is set at about 60% ofthe projected revenue from sale of thecrop.

5.1.3. Risk ManagementStrategy

Despite being solely concentrated to farmhouseholds, BAAC was able to maintain a

non-performing loan ratio withinmanageable level. Starting 1999, BAACalso began to rationalize its interest ratepolicy, adopting a risk-based loan pricing-that is, pricing interest rates based onrepayment performance classification ofborrowers, instead of the previous systemwhere small loans were charged sub-economic price and cross-subsidized forlarger loans.

But apart from loan diversification andrisk-based loan pricing, BAAC hasoperated a unique unconventional riskcontingency system to address loandelinquency. The system allows re-structuring of accounts not paid due to

force majeure, principal and/or interest,up to three times. BAAC may be providedeither a grant or subsidized loan by thegovernment to compensate for the loanloss. BAAC is also compensated for thedifferences in interest rates between whatBAAC normally charges and the lowinterest rate offered to farmers as part ofrehabilitation program for farmers in casesof large scale natural calamities. In otherwords, BAAC has a built-in insurancesystem that protects itself from

excessive loan loss that may arise due tocovariant risks (climatic and economicrisks) faced by its agricultural borrowers.

5.1.4. Distinctive FeaturesBAAC has achieved some remarkableresults in terms of agri/rural finance,which are as under:

Outreach: The most notableachievement of BAAC is its largest

outreach. It provides credit access to5.68 million farm households (98.1%of total farm households). BAAC has908 branches and 945 field officeswhich adequately deal with the needsof the entire rural community of thecountry. More than 80% of its clientsare small farmers.

Collateral Free Lending: One of themajor achievements of BAAC is itsextension of loan without obtaining

tangible collateral/ security. Around70% of BAAC loans portfolio iscollateral free based on Joint LiabilityGroup methodology.

Recovery: Recovery rate of the bank is95% of the total disbursement. Themain reason for high recovery rate isbanks tight monitoring, follow-up andrecovery policies and good risk


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management systems like funeralfunds, insurance, peer pressure under

joint liability group scheme, etc. Thebank keeps close & regular interactionand also holds meetings with farmingcommunity by way of its field officers.

It not only facilitates in the resolutionof community issues relating tofarm/non-farm activities, but it alsokeeps track of the cash flows andproper utilization of loans by theborrowers which help them getrepayment in time. To keep track ofcash flows, the field officers makecollection/ recovery from the salepoints of products directly, and forproper utilization of loans, the loans aregenerally disbursed in installments,

with the disbursement of every newinstallment depending on the proper &optimal utilization of previousinstallment.

Sustainability: Over the years,BAAC has been successfullyproviding the necessary banking &credit services to rural community onsustainable basis. The loanoutstanding is 12,245 million US$ ason 31-12-2007. Its main source of

funds is the deposits from generalpublic which comes to 87.7% of thetotal operating funds of the bank.

Financing for Rural Development:BAAC has played a vital role in ruraldevelopment of the country. It notonly provides the required agriculturalloan to farmers for cropping, but hasalso promoted non-agriculturaleconomic activities in rural areas,

which has been extremely helpful inreducing poverty and uplift of ruralcommunity. This, in return, has alsoattracted more private investmenttowards rural areas.

Character Building: BAAC tries toinculcate in its clients a respect formoral values. In this regard, it alsoobtains the services of Monks

(spiritual leaders) to persuade peopleto adopt good habits. It motivates theexisting or prospective borrowers toabstain from adopting bad habits orinvolving in unhealthy activities; likegambling, drinking or any other social

evils.

Farmers Education, Coaching andTraining: BAAC aims to be a strongfinancial based rural developmentbank with modern management toenhance the quality of life of farmersand rural entrepreneurs through theprovision of financial assistance in theform of loans for agriculturalproduction, investment and marketingpurposes. BAAC has launched a live

radio program called BAAC-Friendsof Farmers which is broadcasted everyweek. This 30 minutes program is fullof knowledge and information aboutBAAC activities and projects. BAACalso supports the development ofproduction and marketing network toassist farmers and other entrepreneursat the grass root level. It is a marketphenomenon that prices are lowest atthe time of harvest and farmers haveto suffer in case of forced sale of their

produce. Therefore, to facilitatefarmers from forced sale of produce,BAAC provides loans to meet theirfinancial needs in the meantime. Italso coordinates in formulation ofmarketing cooperatives/ committeesand also provide them financing forthe purpose. It also supports rurallearning process which strengthenscommunities. BAAC providestechnological advices to farmers as tohow they can reduce their cost ofliving & cost of farming, and as tohow they can improve theproductivity. Loans are not providedfor activities which have negativeeffect on natural resources andenvironment. It promotes cleanfarming technology amongst thefarmers, and also advise (give signalto) them about sunset and sunrisecrops / farm products.


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Incentives for Regular Borrowers:In order to encourage borrowers inregular repayment of their loans,BAAC has a policy to give discount toregular / old borrowers on theirprevious repayment performance. This

has benefited BAAC not only inreducing its Non-performing Loans(NPLs) but also in increasing thesaving of its clients.


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5.2. Land Bank of thePhilippines

Land Bank being the largest government-owned bank is also the fourth largest bankin terms of assets in the Philippines. It isalso one of the biggest government-ownedor controlled corporations in thePhilippines. Land Bank has an extensiverural branch network. It serves many ruralsector clients in areas where banking iseither limited or is non-existent. Banksperformance has been remarkable and ithas continued to serve a large and diverserural clientele successfully for 45 years.

5.2.1. HistoryLand Bank was established on August 8,

1963 as part of the Agricultural LandReform program, especially to help thepurchase of agricultural estates fordivision and resale to small landholdersand the purchase of land by theagricultural lessee.

By 1973, Land Bank was in financialdistress. It lacked the resources and thecapital needed to implement the landreform programs and lacked the structure

to implement the programs efficiently. OnJuly 21, 1973 President signed a Decreewhich revitalized the bank. The decreegranted Land Bank a universal bankinglicense (the first bank in the Philippines tobe issued such a license) with a socialmission to spur countryside development.The decree expanded Land Banks powersto include lending for agricultural,industrial, home-building and home-financing projects and other productiveenterprises, as well as lending to farmers'

cooperatives and associations to facilitateproduction, marketing of crops andacquisition of essential commodities.Land Bank was also required by thedecree to provide timely and adequatesupport in all phases involved in theexecution of agrarian reform and alsoincreased its authorized capital to 3 billionpesos. It also became exempted from all

national, provincial, city and municipaltaxes and assessments.

In 1977, Land Bank was reorganized andit was divided into three sectors to betterassess the needs of its customers. It was

divided into Agrarian, Banking andOperations sectors to strengthenoperations and ensure long-term viability.

In 1982, the Agricultural CreditAdministration (ACA) was also mergedwith Land Bank. ACA's function was toextend credit to small farmers. Land Bankbecame the financial intermediary for theComprehensive Agrarian Reform Program(CARP) in 1988.

5.2.2. Financing PolicyLand Bank of the Philippines wasestablished with a special focus on servingthe needs of farmers and fishermen. Whileit provides the services of a universalbank, it is officially classified as a"specialized government bank" with auniversal banking license.

In the last one decade, Land Bank hasfocused its efforts on diversifying and

expanding its loan portfolio withinidentified priority sectors, includingfarmers and fisherfolk, micro and smalland medium-sized enterprises (SMEs),income-generating projects, commonlyknown as livelihood projects,agribusiness, agri-infrastructure, and otheragri-related and environmentalconservation projects.

To strengthen and expand its creditprogram, Land Bank grants developmentassistance to farmers and fisherfolkcooperatives. The Bank provides variousforms of technical assistance to promotetechnology transfer and to improveproductivity, product quality, and value-adding operations. The Bank alsoprovides marketing capability-buildingassistance to enhance the competence ofbank-assisted cooperatives in preparingand implementing a marketing plan.


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Presently, Land Bank is recognized as oneof the top universal banks in the country -offering a complete range of commercialbanking products and services - with solidfinancial resources to back its operations.In 2007, Land Bank was among the top 5

Philippine commercial banks.

5.2.3. MethodologyLand Bank has both retail and wholesalelending programs, depending on type ofclientele. It provides retail loans directlyto individual SMEs and institutionalborrowers including Local GovernmentUnits (LGUs) through its own branchnetwork/ field offices located all over thecountry. On the other hand, Land Bankalso provides loans indirectly to

individual small farmers, fisherfolk, andmicroenterprises through wholesale loansto cooperatives and Corporate FinancialInstitutions.

The diversification of Land Banks loanportfolio catering to a wide array ofclients has been made possible throughthe intensified implementation of variedlending facilities and arrangements. TheBanks credit facilities vary, depending on

the type of projects, clients, delivery(wholesale or retail), and source of funds.Despite the diversity, these programs arenonetheless deemed consistent with itskey mandate of stimulating countrysidedevelopment and targeted to prioritysectors with economic activitiesconverging in rural areas.

5.2.4. Distinctive Features Capability-Building Assistance

Programs: To strengthen and expandits credit program, Land Bank grantsdevelopment assistance to farmers andfisher-folk cooperatives. The Bankprovides various forms of technicalassistance to promote technologytransfer and to improve productivity,product quality, and value- addingoperations. The Bank also providesmarketing capability-buildingassistance to enhance the competence

of bank-assisted cooperatives inpreparing and implementing amarketing plan. The aim of the bank isto support the governments thrusts ofpoverty alleviation and jobsgeneration.

Deposit Mobilization: Land Bank is amajor deposit service provider in ruralareas. Land Bank has almost 180billion pesos ($3.2 billion) on depositin just more than 2 million accounts(with foreign currency deposits addinganother 10 percent). Because of LandBanks role as a governmentdepository, government entities -mainly, local government units -account for about two-thirds of the

Banks peso deposits. The privatesector holds the remaining one third ofdeposits.

Revenues and Profits: Over the last14 years i.e. from 1993 to 2006, LandBank generated annual gross atmodest growth of around 9 percent perannum. (www.landbank.com)

Loan Availability & Access to SmallBorrowers: With the availability of

microfinance services in the ruralareas, small scale borrowers such assmall farmers and micro-entrepreneurswere able to easily access loans tofinance their micro-enterprises andsmall businesses. Moreover, it hasallowed farm households to diversify,so as to enable them to raise theirincome levels and improve theirquality of life.

Simplified Lending Procedures:There is increased accessibility tomicrofinance loans due to minimaldocumentary requirements andsimplified lending procedures. Loanborrowers are exempted fromsubmitting the usual documentaryrequirements for credit evaluation andapproval, e.g., audited financialstatements or statements of incomeand expense which borrowers find


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hard to comply. Loans are given evenwithout collateral, and loan repaymentis adjusted to the cash flow of theborrower to encourage timelypayment. The incidence of borrowingfrom formal sources among small

farmers has increased significantlymainly because of the increasedaccessibility of microfinance servicesin the rural areas.

Zero Tolerance for Loan Defaults:A common denominator of successfulMFIs operations is their zerotolerance for loan defaults. Thisensures borrower discipline andsustainability of the MFI. Prior tolending, borrowers undergo social

preparation and are given technicalassistance to assist them in handlingmicrofinance loans. Furthermore,MFIs use a variety of lendingmechanisms such as group lending,individual lending, and market-basedincentives to motivate good financialdiscipline among clients and loanofficers. Other mechanisms such asthe use of collateral substitutes likepeer pressure and joint liability as wellas focus on lending to women clients

are key factors in the success of MFIsand the Program.

Avoiding behest loans: Acombination of strong leadership,board structure and its orientation asan agricultural reform bank with aconstituency of restive farmers helpedshield the Land Bank from corruptpoliticians using the public bank tomake behest loans.

Moreover, the market orientation offinancial and credit policies, asmandated under the Agriculture andFisheries Modernization Act of 1997and a subsequent Executive Order(1999), reduced political pressure on

Land Bank to provide subsidizedlending itself.

Portfolio Diversification: Learningfrom the experience of the costlybailouts of Philippine National Bank(PNB) and Development Bank of thePhilippines (DBP), the Land Bankscapitalization was increased, and itwas given free rein to diversify itsloan portfolio. Thus, Land Bank hasseized opportunities to create new

loan products and to develop lendingprograms for LGUs, local housing,and rural infrastructure.

Good risk management and internalaudit and control: Land Bank hasadopted good risk managementpractices and internal audit andcontrols, as required by the BSP in thewake of the 1997 Asian financialcrisis. To its credit, Land Bank wasespecially serious about these aspects

of effective bank management evenbefore the Asian financial crisis. Itslong association with the donorcommunity has strengthened thiscrucial aspect of Land Banksmanagement and operations becauseloan covenants with multilateral andbilateral lenders require the presenceof effective risk management andinternal audit and controls as acondition for financial assistance.


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5.3. Bank Rakyat IndonesiaBank Rakyat Indonesia (BRI) hasaccumulated more than 100 years ofexperience in serving the micro-bankingneeds of the people. It has over 300branches and over 4,000 BRI Units and

Village Service Centers across thecountry. With latest technology, BRI hasbeen able to streamline its nationwideinfrastructure to accommodate thechanging business requirements of agri /rural community.

BRI is one of the largest commercialbanks in Indonesia, and the mostprofitable and efficient bank. Itsrepayment rate has been over 99%. Non-performing loans level is less than 6%,while for microcredit, it is less than 3 %.BRI successfully realized an Initial PublicOffering and share listing on the 10thNovember 2003, with sharesoversubscribed by 15.4 times. In 2003,BRI issued a 10 years subordinated notefor US$150 million, and a subordinatedbond of Rp. 500 billion.

5.3.1. Brief HistoryBRI's ancestor, the Priyayi Bank of

Purwokerto, was created in 1895 byRaden Wiriamaadya, a Javanesegovernment official. In 1897, the Dutchadministration reorganised it as acooperative bank, following the exampleof those that appeared in Europe after1850. In 1946, it changed its name toBank Rakyat Indonesia (BRI) and in 1950it became a state-owned commercial bank.At the beginning of the 1970s, 3,600 BRIUnit Desas (village banks) were created aspart of a government program calledBIMAS, whose aim was to provideinputs for the rice-green revolution. ThoseUnits were then used as channellingagents for different subsidizedgovernment lending programs, but all ofthem failed to reach sustainability. In1984, the Unit Desas were completelyrestructured: each unit became anindividual profit centre and adopted acommercial approach to microfinance (no

subsidies, sustainable interest rates,efficient management, savingmobilization) which led them to financialprofitability from 1985 onwards. Today,BRI's microfinance system is the world'slargest and most profitable microfinance

network in the world. In 1992, BRIbecame a limited liability corporation anda public company in 2003.

5.3.2. MethodologyBRI is divided into four StrategicBusiness Units: Micro Banking, RetailBanking, Corporate Banking andInvestment Banking. Its microfinanceservices are provided through the MicroBanking Unit, also known as BRI Unit.

BRI has only one micro-loan product,KUPEDES, designed for working capitalor investment purposes. Carefullyselected, the borrowers are given loanswhose amount depends on the borrower'scurrent income flow and always requiresome form of collateral (a SIMPEDESaccount, land, furniture, motorcycle, etc.).The minimum amount is Rp.25,000(US$3), and the maximum isRp.50,000,000 (US$5,000). The minimum

loan term period is one month and themaximum is 24 months for workingcapital loans or 36 months for investmentloans. Loans can be repaid in monthly,quarterly or bi-annually installments. Theinterest rate increases by 0.5% if therepayment is not made on time. Therepayment rate is very high: 98.34%.

The main saving products available are:

SIMPEDES or Simpanan Pedesaan(Village Savings), a depositinstrument allowing an unlimitednumber of transactions and, therefore,favoured by low-income householdsthat need full liquidity. There is no feeto open an account, and except for thesmallest balances (less than $10), ithas a positive real interest rate. Aimedat attracting new customers, lotteriesare organized every six months with


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prizes in kind. 75.7% of BRI micro-banking accounts are SIMPEDES.

SIMASKOT is the equivalent ofSIMPEDES for urban areas with anemphasis on security.

TABANAS BRI, a government savingprogram, offers similar features thanSIMPEDES but is not as popular. Itcan be explained by the fact that untila few years ago, no more than twowithdrawals per month were allowedand, moreover, its lottery offers prizesin cash whereas most depositorsfavour prizes in kind.

In order to encourage more clients to open

saving accounts, BRI launched bi-annuallotteries for SIMPEDES accounts' holdersin 1984. Each saver receives free lotteryticket depending on their minimummonthly account balances. As the lotteriesare held in the branches, winners arelocated within a small area, so mostpeople either won or know someone whowon and it makes these lotteries verypopular.

BRI also introduced unlimited

withdrawals for savers in Indonesia afterfield studies showed that a limit was themain obstacle preventing people to opensaving accounts in rural banks. Contraryto what many people feared, the numberof withdrawals did not increase as a result.It showed that savers didn't want towithdraw more frequently but simply tohave the freedom to do so.

Since 2002, BRI started to put online itsunit network, with already around 10%(450) effectively on-line by August, 2004.BRI introduced a new facility calledSimpedes Berkartu, or Simpedes with acard in 2004.

5.3.3. Distinctive FeaturesThe founding objectives of the BRI-UDwere to replace directed agricultural creditwith broad-based credit for any type of

rural economic activity; to replacesubsidized credit with positive lendingrates with sufficient spreads to cover allfinancial and operational intermediationcosts; and to provide a full range offinancial services (savings as well as

credit) to the rural population. All theseobjectives were achieved only a few yearsafter the program's inception. Followingare the key features of BRIs success:

Effective Management: Themanagement of each unit is extremelyeffective. Functioning as individualprofit centers, their performance ismonitored and specific staff incentivesimplemented. In addition, the Unitsare allowed to move their excess funds

to BRI branches, where they are wellremunerated, encouraging savingmobilization in Units.

Incentive for repayment: Units havean excellent repayment rate of over98%, partly thanks to an incentivesystem for repayment. Indeed, 25% ofthe interest paid is repaid to theborrower when installments are madein time during the six consecutivemonths. Also the borrowers, who do

not fail to pay, have had the possibilityof being granted bigger loans.

Savings Mobilization: The emphasison savings is another secret of BRI'ssuccess: four savings instruments wereavailable from the beginning, eachaiming at different targets, filling agap for the poorest households. Thisallowed the Units to increase thenumber of loans and to be more

sustainable. Deposits went past theoutstanding loan portfolio in 1989 andthe deposit-to-loan ratio is now over225%. The BRI-UD's phenomenalsuccess in the mobilization of itssavings is a distinguishingachievement.

Sustainability & Profitability: BRIhad succeeded in attaining financial


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sustainability while providing creditand savings services to the rural lowincome families that previously hadno access to formal financial services.Moreover, it had achievedunprecedented level of profitability

while providing such services to therural poor. The most fundamentalpolicy change in the BRI villagebanking program was the shift fromdisbursing credit to motivatingloan recovery and mobilizingsavings.

Poverty Focus: The BRI-UD is anationwide network of small villagebanks which target the extremely pooramong Indonesia's rural population.

At the end of September 2004, BRIhad 87% of its loan portfolio in micro,small and medium enterprises, whilethe corporate lending represented theremaining 13%. A large proportion ofBRIs clients are in the middle andupper end of the poor class inIndonesia. The Income GeneratingProgram for Small Farmers andFishermen (P4K) is supervised andadministered by BRIs branches,which targets explicitly poor farmers.

Autonomy of Village Bank System:Key to the operational success is theautonomy of the village bank systemto operate as an independent profitcenter. Village banks are free to set

their own loan terms with transferprices as the ones negotiated with themanagement. Loan processing isquick- taking only about a week fornew borrowers and less time for repeatborrowers.

Operations Standards: BRI imposedrigid standards on its operations. Loanloss provisioning of BRI is higher thanmost state owned banks in othercountries, e.g. general loan lossprovision of 3% (compared to 2% inother countries), 100% reservesagainst loans that are three months andabove overdue. As to attainingfinancial sustainability, BRI only tookthree years to shed off its subsidies.

Wide Network: BRI has the widestnetwork in Indonesia with 13Regional Offices, 324 DomesticBranches, 4,049 BRI Units (96% ofwhich are profitable), 148 Sub-BranchOffices and 240 Village Service Posts.

Full Range of Financial Services inRural Areas: One of the key featuresof BRI is its full range of bankingservices to its clients in rural areas.Along with lending facility, it acceptsdeposits both short term & long term- from the customers and also providesall sorts of remittance services togeneral public.


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5.4. Grameen Bank,Bangladesh

Bangladesh is one of the poorest countriesin the world. In 1994, annual per capitaincome was US$223, and more than 70percent of the population lived in poverty.However, over the past few years,Bangladesh has shown steady economicgrowth (5-6 %) and its per capita GDP hasrisen to US$ 475 in 2007.

Most of the population lives in rural areas:agriculture accounts for around 20 percentof the GDP and more than 60 percent ofemployment. However, the population isgrowing at a rate of 1.8 (Fig:2008) percentper year, resulting in increasing pressure

and decreasing farm size.

Professor Muhammad Yunus started theGrameen Bank (GB) as an experimentalproject in 1976 in the village of Jobra.The project was financed by a commercialbank and was personally guaranteed byProfessor Yunus. In 1983, Grameen wasestablished as a specialized financialinstitution under the Grameen BankOrdinance. The Grameen Bank is notsubject to the Banking Companies

Ordinance or to any other law related tofinancial institutions in Bangladesh, nor isit subject to interest rate ceilings. It hasalso been partially insulated from othergovernment policies. Lions share of theGrameen Bank is owned by members; andthe rest is owned by the government.

5.4.1. MethodologyThus far, the Grameen microfinancemethodology has been the most popular

and widely replicated model in Asia withconsiderable consistency in attainingsuccessful results, particularly inachieving greater outreach and highrepayment rate. Grameen Bank, as ofDecember 2006, has $475 million in loanoutstanding, 6.9 million borrowers from74,462 villages and repayment rate of98.8% (source: www.grameen-info.org).The Grameen Trust alone has helped out

replication projects in 37 countries aroundthe globe. Among countries where therehas been considerable replication of themodel are: Philippines, Malaysia, India,and Indonesia. Microfinance in China alsostarted with a pilot replication project on

the Grameen model.

David Gibbons (2006), one of thepioneering replicators in Southeast Asia,cited the following as the essentialGrameen: (a) exclusive focus on the poorwith priority on the poorest women, (b)financial services delivery that facilitatesparticipation and ensures timelyrepayment (small loans payable inperiodic, mostly, weekly installments;formation of solidarity groups, self-choice

of loan activities, loans for incomegeneration only, eligibility of succeedingloans based on repayment of previousloans); and (c) attainment of financialself-sustainability. Gibbons recognizedthat replication is an art and mostreplicators adjusted the model to fitparticular local contexts. However, hecited that operational sustainability inpoverty density areas and freedom tocreate self-employment are among theessential conditions for successful

replication of the model.

The new innovation in Grameen is in thetransfer of technology. In the early 1990sthe mode of technology diffusion wasexposure-then-training i.e., earlyinnovators in one country were sent forexposure followed by training inBangladesh. These innovators thenbecame the resource institutions inextending the technology to otherfinancial institutions in their respectivecountries. The new mode of technologytransfer is Build-Operate-Transfer thathas been piloted by Grameen Trust(Morshed, 2006). The approach was notedto have contributed to the expansion ofmicrocredit in the countries where themodel does not exist and where there arevery few rural financial institutions. TheGrameen Trust reported good results withtheir pilot Build - Operate-Transfer


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projects in Turkey, Myanmar, Kosovo andZambia over the last nine years. Myanmarproject, for instance, has reached 95,000clients as of 2006.

5.4.2. Distinctive Features Collateral free Lending: GB

provides credit to the poor of thepoorest in rural Bangladesh, withoutany collateral. It has reversedconventional banking practice byremoving the need for collateral andcreated a banking system based onmutual trust, accountability,participation and creativity. Becauseof the low incomes of GB clients andtheir lack of access to traditionalcollateral, lending is done exclusivelythrough joint liability groups, tied tocompulsory savings. The GB hasachieved phenomenal success withthis approach thereby inspiring manyother countries to copy its efforts.

Owned by the Poor: Grameen BankProject was initiated in the village ofJobra, Bangladesh, in 1976. In 1983 itwas transformed into a formal bankunder a special law passed for its

creation. It is owned by the poorborrowers of the bank who are mostlywomen. It works exclusively for them.Borrowers of Grameen Bank, atpresent, around 94 per cent of the totalequity of the bank. Remaining isowned by the government.

Banking with Poor: From the start,the bank's main goal has been toimprove the conditions of the ruralpoor by providing them with access to

credit, savings facilities, and somenon-financial social programs. Itsfocus is on the lowest social strata,and the income level of its clientele islower than that of the BAAC and theBRI-UD. At GB, credit is a costeffective weapon to fight poverty andit serves as a catalyst in the over alldevelopment of socio-economicconditions of the poor who have been

kept outside the banking orbit on theground that they are poor and hencenot bankable. Professor MuhammadYunus, the founder of "GrameenBank" and its Managing Director,reasoned that if financial resources

can be made available to the poorpeople on terms and conditions thatare appropriate and reasonable, "thesemillions of small people with theirmillions of small pursuits can add upto create the biggest developmentwonder."

No Collateral/ Guarantee: GrameenBank does not require any collateralagainst its micro-loans. Since, thebank does not wish to take any

borrower to the court of law in case ofnon-repayment; it does not require theborrowers to sign any legalinstrument. Although each borrowermust belong to a five-member group,the group is not required to give anyguarantee for a loan to its members.Repayment responsibility solely restson the individual borrower, while thegroup and the centre oversee thateveryone behaves in a responsibleway and none gets into repayment

problem. There is no form of jointliability, i.e. group members are notresponsible to pay on behalf of adefaulting member.

Outreach: As of March 2008, it has7.49 million borrowers, 97 percent ofwhom are women. With 2,511branches, GB provides services in81,752 villages, covering more than97 percent of the total villages inBangladesh. Total staff is more than25,156.

Sustainability: By the end of March,2008 total deposits in Grameen Bankstood at Tk. 52.45 billion (US$ 764.82million). Members depositconstituted 56 per cent of the totaldeposits. Balance of member depositshas increased at a monthly average


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rate of 0.50 percent during the last 12months. Grameen Bank finances 100per cent of its outstanding loan fromits deposits. Over 56 per cent of itsdeposits come from banks ownborrowers. Deposits amount to 137

per cent of the outstanding loans. Ifwe combine both deposits and ownresources it becomes 152 per cent ofloans outstanding.

Attractive Rates on Deposits:Grameen Bank offers very attractiverates for deposits. Minimum interestoffered is 8.5 per cent. Maximum rateis 12 per cent.

Exceptional Recovery Rate: Loanrecovery rate is 98.22 per cent whichis remarkable/ tremendous by allmeans.

Low Interest Rates on Loans:Government of Bangladesh has fixedinterest rate for government-runmicrocredit programs at a flat rate of11%. It amounts to about 22 per centat declining basis. Grameen Bank'sinterest rate is lower than government

rate. There are four interest rates forloans from Grameen Bank : 20%(declining basis) for incomegenerating loans, 8% for housingloans, 5% for student loans, and 0%(interest-free) loans for Struggling

Members (beggars). All interests aresimple, calculated on decliningbalance method. This means, if aborrower takes an income-generatingloan of say, Tk 1,000, and pays backthe entire amount within a year inweekly installments, she'll pay a totalamount of Tk 1,100, i.e. Tk 1,000 asprincipal, plus Tk 100 as interest forthe year, equivalent to 10% flat rate.

Profit Earning: Ever since GrameenBank has come into being, it has madeprofit almost every year except theyears 1983, 1991, and 1992.

Poverty Reduction: According to arecent internal survey, 65 per cent ofGrameen borrowers' families havecrossed the poverty line. Theremaining families are movingsteadily towards the poverty line frombelow.


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5.5. BANRURAL S.A.Guatemala

BANRURAL is a leading bankinginstitution in Guatemala focused on therural development of Guatemala byproviding loans and credits to small andmedium size businesses throughout thelargest network in Guatemala of 320offices. BANRURAL is now one of thetop 10 banks in Central America and willcontinue its growth in the rural areas.

5.5.1.HistoryBANRURAL S.A. was formed in 1998after transformation of its predecessor,BANDESA which was a government-owned development bank founded in 1970

with the objective to promote and managethe credit aid of the Guatemalangovernment toward the farm sector.BANRURAL S.A. initiated operations inJanuary 1, 1998. It is the most profitablecommercial bank in Guatemala and thethird largest in terms of assets. It has over300 agencies and conducts the majority ofits operations in rural areas. It grew out ofthe reform of a failed state agriculturalbank, maintained a mission to serve ruralentrepreneurs.

5.5.2. Financing PolicyBANRURAL S.A. has as its mainobjective to promote the economic andsocial development of rural areas throughthe stimulus and facilitation of savings,credit services, and other financialservices to credit unions; non-governmental organizations (NGOs);small size farmers associations; micro,small and medium size entrepreneurs;

both directly or indirectly through otherlegally recognized institutions.

5.5.3. MethodologyContrary to most banking institutions,BANRURAL S.A. mission is to generatea fair profitability without neglecting itssocial mission i.e. to promote the integraldevelopment of the country with universal

banking services, preferably directedtowards farmers, merchants, artisans, andsmall and medium size entrepreneurs. Thebehavior of the members of BANRURALS.A. is guided by a set of moral values,which are constantly reinforced. The bank

applies a set of principles to manage andabsorb credit risks. The common elementsare: an appropriate credit evaluationtechnology given the operatingenvironment and constraints; reliance onportfolio diversification; limits onagricultural lending; and adequateprovisioning.

5.5.4. Distinctive Features Successful Transformation: The

process of transformation andprivatization of BANDESA intoBANRURAL S.A. has been extremelysuccessful and according to someobservers, possibly even unique due toits results and the economic, social,political, and especially culturalconditions of the Guatemalanenvironment in which it wasimplemented. During its first decadeBANRURAL S.A. has performedextremely well in terms of

profitability, self-sustainability, andoutreach.

Profitability: BANRURAL S.A. hasexperienced a significant andsustainable increase in its profits. Ithas more than doubled its profitsduring the last four years. Also, afteronly a few years operation,BANRURAL S.A. has become one ofthe most profitable banks of theGuatemala banking system. It is, in

fact, the third most profitable bank interms of Return on Equity (ROE).The profitability registered byBANRURAL S.A. confirms that thefinancial services to the poor, if theyare done correctly, can be profitable;and that promoting micro, small andmedium size enterprises, and ruraldevelopment DFIs must be profitable.


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Self Sustainability: BANRURALS.A. has not only been a profitablebanking institution but also a self-sustainable institution. It did not haveany explicit subsidies over the pastmany years which indicate that

BANRURAL S.A. generates enoughincome to cover its costs and that itdoes not depend on explicit subsidesto survive.

Outreach: BANRURAL S.A. hasbeen profitable, self-sustainable, andvery successful in achieving its socialmission by obtaining very good resultsin terms of the extent, depth andquality of outreach. BANRURAL hasshown that it is possible to provide

credit services to a significant numberof clients and to mobilize a largeamount of savings (especially smallscale savings). Unlike somegovernment owned publicdevelopment banks, BANRURALS.A. has been able to significantlyincrease its geographical coverage.Currently, BANRURAL S.A. is thelargest bank in terms of geographicalcoverage in Guatemala, and the largestbank in terms of number of points of

service in any country in CentralAmerica. The major growth in pointsof service has been in the rural areas.BANRURAL S.A. provides financialservices to different segments of thepopulation. Its clients are not onlyfrom the metropolitan area, but also,more importantly, from the interior ofthe country. Likewise, the extensivecoverage and geographicaldistribution of its points of servicehave been a key factor for thepopularity of the financial services ofBANRURAL S.A. and the financialintermediation between themetropolitan area and the non-metropolitan area.

Growth of the Volume of Services:The high growth in real termsregistered in the average volume ofcredits, suggests that the credit

services by BANRURAL S.A. havehad a high demand due to their goodquality, generating appreciation bytheir clients. Likewise, the real rates ofgrowth registered in the volume ofliabilities also suggests that the

creditors of BANRURAL (mainly thedepositors) not only have trust inBANRURAL S.A. but are satisfiedwith the quality of the financialservices of intermediation offered bythe institution.

The Effective Rates of Interest: Thegrowth in real terms in the volume ofcredits of BANRURAL S.A. is notdue to the fact that this institution ischarging subsidized interest rates but

to the fact that it is chargingcompetitive and effective interestratesthe effective active rate ofinterest charged by BANRURAL S.A.is below the average market rate. Theeffective rate of interest charged byBANRURAL S.A. has always beenlower than the average market rate ofinterest and has moved according to it.

Striking Recovery Rate: To evaluatethe quality of credit services of a bank,

it is not enough for the bank to havepositive growth in their credits;because the positive growth might bedue to the fact that it is chargingsubsidized rates of interest. Thispositive growth may be due to a badselection of its clients, or to adverseselection if the bank is charginginterest rates that are too high.Therefore, it is necessary to evaluatethe institution in terms of the recoveryof its loans. In contrast to the majorityof public banks BANRURAL S.A. hashad good performance in its creditrecovery.

BANRURAL S.A. has managed to reduceits rate of losses in the concept of non-recovered credits to a minimum thusincreased its recovery rate to 98.82% inaddition to decline in defaulted credits.


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5.6. ACLEDA Bank,Cambodia

The mission and vision of ACLEDA Bankis to market a superior nationwidedelivery of high-quality bank products andservices at premium prices to meet theneeds of the financial and commercialsector and the general public throughoutCambodia in a context where suchproducts and services are presently ofindifferent quality and limited to only avery few major towns.

The objective of ACLEDA Bank is tomaximize shareholder value by providingand selling ACLEDA Banks commercialand retail products and services targeted at

the general public and MSE/ SMEsegments as well as selected services suchas Cash Management specially developedfor the larger organizations in thefinancial and commercial sector (e.g.banks, microfinance institutions, NGOs,national, multinationals and government).

5.6.1. HistoryACLEDA was established in January1993, as a national NGO for Micro andSmall Enterprises Development andCredit. From the earliest days ACLEDAreceived the support of a number of majorinternational development agencies. Twofactors, namely expansion of network andability to operate at a profit to ensuresustainability, led the managementinternational partners to conclude thatACLEDA should be transformed into abank. This would not only provide asecure regulatory framework lackingunder previous status but would enable it

to enlarge its range of funding options(e.g. equity injection, taking publicdeposits, obtaining commercial inter-bankloans) to support expansion of its coremicro-finance business.

ACLEDA completed the transformationfrom NGO to a bank and the NationalBank of Cambodia granted ACLEDA alicense on October 7th, 2000. Under the

process, the existing NGO transferred theassets and on-lent its liabilities (long termloans from donors) to the new ACLEDABank. In return, it received 32% of theBank's capital of US$4 million; theACLEDA Staff Association, established a

trust to give its staff an equity interest upto 19% and the remaining 49% has beentaken up in equal parts by four foreigninvestors, namely the InternationalFinance Corporation (part of the WorldBank), DEG-German Investment &Development Company, FMO-Netherlands Development FinanceCompany and Triodos Doeun(Netherlands).

Since transformation ACLEDA has

expanded its business achieving anaverage portfolio growth rate of over15%p.a. since 1997.

5.6.2. Financing PolicyACLEDA Bank is endeavoring to marketa superior nationwide delivery of high-quality bank products and services atpremium prices to meet the needs of thefinancial and commercial sector and thegeneral public throughout Cambodia in a

context where such products and servicesare presently of indifferent quality andlimited to only a very few major towns.

5.6.3. MethodologyACLEDA Bank targets the lower segmentof the market and provides loan to bothindividual (small business loan) and group(micro business loan). It caters to thebanking needs of both urban and ruralpopulation without discrimination. To beeligible for individual loans, theapplicants must qualify according to thefollowing criteria:

a) Land and building or substituteowners

b) Resident in the areas where abranch office is operating.

c) Unwilling to move from the areasuntil the loan is completelycollected.


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d) Their ability to repay their loansthrough profitable businesses orsecure sources of income.

5.6.4. Distinctive Features Outreach Structure:

Geographically, ACLEDA Bank hasexpanded to have the largest networkin Cambodia, which will benefitsavings, transfer, and other financialservices. More district offices andservice posts got established to be atclosed length to the customers in orderto be more convenient and serve themquickly. ACLEDA Banksmanagement believes that havingoffices closed to the customers, theBank can serve the customers betterand faster. It is more convenient toboth ACLEDA Bank and customers.Furthermore, this is the competitiveadvantage of ACLEDA Bank whereother commercial banks cannot do thesame at this stage.

Access to Clients: ACLEDA Bankcan guarantee that the customers canalways have access to ACLEDABanks financial services in both rural

and urban areas. ACLEDA Bank hasnoted that financial intermediation is avital element in developing localeconomies and reduces the relativedependence of the country on foreigncapital by utilizing domestic savingsfor investments.

Customers Benefits: All ACLEDABanks target groups are theentrepreneurs of micro and smallbusinesses, and medium sized

enterprises; and the general publicwho are living in both urban and ruralareas including the farmers inCambodia. The customers of smalland micro businesses can have theplace where they can depend on, interms of financial services, they caneither borrow or deposit with theACLEDA Bank. Furthermore theydon't need to travel from their

business location to the suppliers orthe other way round. If they want topay off the purchase on credit orcollect the sale on credit, ACLEDABank is the meeting point for theservice payment and fee collection for

those entrepreneurs and companies.

Products and Service: ACLEDABank provides loans to service, trade,manufacturing, agriculture, andagriculture related activities. All loansare provided at ACLEDA Bankbranches and offices, and the loanrepayment is also done at ACLEDABank branches and offices. ACLEDABank credit officers only collect theloan repayment after they are

defaulted.

Micro-business or Group Loan: It isa group guaranteed loan whereby themembers guarantee each other. Loanamount shall not exceed US$380. Incase one member cannot pay, theother members will pay for them.

Small Business Loan: It is anindividual loan. Loan size ranges fromUS$380 to US$10,000. In order to

have access to this loan, the customermust have business ideas, technicalskills, permanent location (residenceat least of one year). Small businessloan is a collateralized loan.

Medium Size Business/ Small-scaleIndustry Loan: The loan size is fromUS$10,000 up to US$70,000. It iscollateralized loan.

Training and Education: - After thecustomers have filled in the format ofthe business plan, ACLEDA Bankprovides basic training (businessconsultancy service) on business plandevelopment to the customers of smalland micro businesses. For the matterof convenience, most of the training isdone at the customers' houses. Thetraining is very simple, whereby the


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customers can bring their literaterelative with them to help them withthe reading and writing, andcalculation for those who are illiterate.The training for business plandevelopment lasts about two hours in

total. ACLEDA Bank provides basictraining on business plan developmentthat is used to determine how muchloan each customer should obtain, andexplain the customers the importanceof using banking service to managetheir capital properly (information onsavings/ deposit); fund transfer; andother bank products.

Management Capacity: ACLEDABank executive management is

responsible for the day-to-daymanagement of ACLEDA Bank andtheir policy is guided by the board ofdirectors with a broader range of skillsand experiences. In order to have thebanking operation run smoothly, theexecutive management establishes allpolicies in place, such as: credit,financial, cash management, customerservice, internal control, humanresource, and staff regulation policiesand make sure that all branches and

offices of ACLEDA Bank implement

them strictly. These policies help a lotin decentralizing structure of decisionmaking, especially in thegeographical, far remote outreaches,where infrastructures are limited. Amore sophisticated organization like

ACLEDA Bank requires moresophisticated IT and MIS systems andthe information produced. The ITdemands a more disciplined approachto managerial responsibilities inparticular the use of managementreports. With the sophisticated system,ACLEDA executive management cantrack down the deficiencies and solvethem in time, before the problemsbecome bigger. As for the branchesand offices staff, they can work much

more productively. ACLEDA BankManagement has and continues tofocus on the key management areas:Operational Risk; Asset & LiabilityManagement; Internal Control &Audit and Information Technologyhave all fully justified the effortinvested in them some times in themost trying circumstances. HumanResources of ACLEDA Bank set greatstore by the quality of its training bothfor novices as well as regular refresher

programs for all senior staff.


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6.ConclusionAn assessment is made of the variousstrategies that these case study institutions

use, to manage the specific costs and risksin agricultural lending. Guiding principlesor better practices in agriculturallending have been drawn up from theseexperiences. It is firmly believed thatthere are really no best practices thatcan be applied to all circumstances.Instead, the development of better ruraland agricultural lending technologies isseen as a dynamic and ongoing processthat guides the lending institution towardsmeeting the specific demand

handbook best practices agri rural finance

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