Agricultural Development Banks: Latin American experiencesLatin American experiences

Carolina TrivelliHildegardi Venero

December 2007

I. ContextI. Context

Conceptual Framework

Old Paradigm

Agricultural Public Banks (sectoral loans, with subsidized interest

rates, low impact)

Microfinance revolution

Profitable financial services for “poor”

clients

New rural finance paradigm (still in debate)

Sustanaible, efficient and competitive institutions serving a growing number of clients traditionally

unattended by the financial system.

Regional Context and Rural Finance

• Latin America is an heterogeneous region � rural financial markets development and depth difficult to generalize.

• Total credit to the private sector is in average near 31% of the GDP.

• In almost all countries, the financial system places a smallpercentage in agriculture (less than the agricultural sector’spercentage in agriculture (less than the agricultural sector’scontribution to the country’s GDP).

• Loans to the agricultural sector are a small fraction of the total creditportfolio.

• Development institutions are more important (as credit providers) inrural finances than in other sectors.

Regional Context and Rural FinanceLoans to the agriculture sector re lated to GDP

- 2003 -

18.4

18.2

17.5

9.1

7.1

4.4

30.8

Paraguay

Guatem ala

Mexico

Argentina

Venezue la

El Salvador

M ean

92.7

71.7

49.0

48.1

38.6

38.2

32.8

28.3

21.0

20.3

20.0

19.2

18.4

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0

Panam a

Chile

Uruguay

Bolivia

Honduras

Republica Dom inicana

Bras il

Costa Rica

Peru

Nicaragua

Ecuador

Colom bia

Paraguay

Cou

ntrie

s

%

Regional Context and Rural FinanceAgriculture sector’s contribution to the country’s GDP and Loans to the agriculture sector

related to tota l portfolio - 2004

Panam a

Rep. Dom inicana

Peru

Ecuador

Chile

Mexico

Mean

0.0 5.0 10.0 15.0 20.0 25.0 30.0

Paraguay

Guatem ala

Nicaragua

Bolivia

Honduras

Colom bia

Argentina

Bras il

El Salvador

Cos ta Rica

Panam a

%

Agriculture GDP / Total GDP (%) Agriculture loans / Total loans (%)

Regional Context and Rural FinanceLoans from development institutions related to Loan s from financial system

- 2004 -

5.3

5.1

3.3

1.9

1.4

1.1

0.6

0.5

Colom bia

Paraguay

Ecuador

R. Dom inicana

El Salvador

Panam a

Honduras

Mexico

Cou

ntrie

s Agriculture loans from development institutions rel ated to Agriculture loans- 2004 -

39.6

19.8

17.0

12.4

12.0

11.2

6.9

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0

Cos ta Rica

Argentina

Bras il

Chile

Guatem ala

Nicaragua

Bolivia

Cou

ntrie

s

%

65.3

63.2

58.0

51.5

51.4

48.7

45.4

39.9

37.5

32.0

31.7

29.1

19.2

11.3

8.6

4.0

1.4

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0

Uruguay

Costa Rica

Colom bia

Bras il

R. Dom inicana

Argentina

El Salvador

Bolivia

Mexico

Ecuador

Panam a

Chile

Guatem ala

Paraguay

Nicaragua

Venezuela

Honduras

Peru

Co

untr

ies

%

Development Finance Institutions in Latin America

• In Latin America there are 108 development finance institutions (DFI’s).

• 32 of them offer rural and/or agricultural credit:�10 are specialized. �11 lend less than 30% to the agricultural sector (in �11 lend less than 30% to the agricultural sector (in

average, 11.5% from their portfolio’s total).

�11 lend 51% to agricultural sector.

Development Finance Institutions in Latin America

• These institutions have different scales (assets):� 11 are small.� 11 are medium size.� 10 are large.

• The large institutions have better operational efficiency, higher • The large institutions have better operational efficiency, higher ROA, lower delinquency rate and lower administrative and personnel costs in relation with their profitability.

….larger, multi-sectoral institutions, with less agricultural sector loans seem to do better, as do

second-tier institutions…

Development Finance Institutions in Latin AmericaAsset scale and Average loan allocations in agricul ture sector

141 801

13,80378.2

47.8

24.4

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Ass

ets

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

% a

gri

cultu

re lo

an

s

Average assets scale versus average ROA

801

13,803

1.1

0.9

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Ass

ets

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

RO

A

1410

Smalls Medium Large

0.0

10.0

Assets Agriculture loans

10 Institucio nes11 Inst itucio nes11 Inst itucio nes

801141 -0.30

2,000

Smalls Medium Large

-0.4

-0.2

Assets ROA

11 Institutio ns 10 Institutio ns11 Institut io ns

Average assets scale versus Average delinquency rat es

141 801

13,80313.0

5.8

4.0

0

2000

4000

6000

8000

10000

12000

14000

16000

Smalls Medium Large

Ass

ets

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Del

inq

ue

ncy

Ra

te

Assets Delinquency rate10 Inst itucio nes 11 Inst itutio ns 11 Inst itutio ns

The second-tier option

• In theory, second tier options are atractive…• 8 of the 32 DFIs lending to the agricultural sector work exclusively under the

second-tier modality (but they have only the 6.6% of the assets).

Number of public development financial institutions with an agriculture portfolio

• These 8 entities do better than the rest…

1/ Represents the number of institutions working in 19 Latin America Countries

Source: Public Banks web sites & ALIDE

First tier banks

Second tier banks

First and Second

tier banks

Total DFIs

banks 1/

80's decade 22 4 1 2790's decade 19 10 1 3000's decade 15 9 8 32

The Second-tier optionAssets and ROA by kind of model

1,015 560

3,741

0.6

1.2

0.32,000

7,000

12,000

17,000

22,000

Ave

rage

Ass

ets

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Ave

rage

RO

A

Assets and delinquency rates by kind of model

3,741

1,015

560

11.0

5.0 4.4

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Ave

rage

Ass

ets

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Ave

rage

del

inqu

ency

rat

es

-3,000 First tier First and Secondtier

Second tier 0.0

0.2

Assets ROA14 Ins titutions 8 Ins titutions7 Ins titutions

First tier First and Secondtier

Second tier

Assets Mora

8 Ins titutions14 Ins titutions 7 Ins titutions

Assets and % Staff expenditures/ (average) income b y kind of model

3,741

1,015

560

27.8

27.8

11.2

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

First tier First and Secondtier

Second tier

Ave

rage

Ass

et

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Sta

ff ex

pend

iture

s/

(ave

rage

) in

com

e

Asse ts Gaspery8 Ins titutions7 Ins titutions14 Ins titutions

Development Finance Institutions in Latin America

So, these agricultural development institutions are a relevant group, as well as, important (regarding portfolios, number

of clients and outreach) they are , also, here to s tay. Of course, they face a number of problems and critics.

The question is, how to help them to carry out bet ter work The question is, how to help them to carry out bet ter work and lead (promote) developments in rural finance.

(¿multi-sectorial, mixed ownership, larger DFIs, second-tier?)

II. Some Latin American experiencesexperiences

Some interesting cases for discusion

• We chose 8 cases, in 7 countries in the region– with different financial systems and diverse agricultures.– with how heterogeneous responses, each country selects an old

problem to face and how to promote their rural financial market.

• These 8 cases offer valuable lessons to discuss and enrich the conceptual debate over role and potential of the conceptual debate over role and potential of development banking.

• 3 central topics:– operation modality (1st and 2nd tier)– governance and independence from public sector interference, and– outreach in the small farmer sector.

Some emblematic cases

Institution Type of entity Directors Number Model Targe ted Public Capital

Argentina - FONCAP SAPrivate with mixed

capital (private-public)

Between nine and thirteen members

(4 from public sector)

Second tier Micro enterprise Mixed

Chile - INDAPDecentralized Ag.

Ministry officeDoesn’t have a

directoryFirst and Second

tierAgriculture sector Public

Colombia - Banco Agrario

Private with public capital

seven members First tier Agriculture sector Public

Ecuador - CFNIndependent public financial institution

Seven members (2 from the private

sector)

First and Second tier

Multi sectorial Public

Guatemala – Banrural SA PrivateTen members (7 from the private

sector)

First and Second tier

Rural areas Mixed

Mexico - Financiera Rural

Decentralized organism from the

Federal Public administration

Fifteen members (6 from private sector)

First and Second tier

Rural areas Public

Peru - AgrobancoPrivate with mixed

(public)Seven, actually only have three

First and Second tier

Agriculture sectorPublic (Could be

mixed)

Peru - COFIDEPrivate with mixed

capital

No less than six or more than eleven

(at least one is private)

Second tier Multi sectorialMixed (But Public

sector has the98.2%)

1st and 2nd tier

Foncap SA Cofide CFNFinanciera

Rural Banrural SA Indap Banagrario

Kind of model over the 8 cases

Foncap SA Cofide CFN Rural Banrural SA Indap Banagrario Agrobanco

Only OnlySecond tier First tier

Second and First tier

Institutional Proposal

Key consensus in rural finance

Rural orientation (or multi sectorial) and not only

agricultural

Offers other financial services (rural clients)

and not only loans

Operational and financial

sustaintability (High recovery rates (+90%), market interest rate)

Foncap SA +++ ● +++

+++: applies completely; ++ adopted in part; + is being adopted; ● not adopted.

Foncap SA +++ ● +++ INDAP ● ● ++ Agrobanco + ● ++ COFIDE-PFE + + ++ CFN +++ ● ++ Banagrario ++ +++ ++ Banrural SA +++ +++ +++ Financiera Rural

+ ● +++

Property structures and governance

• Building shielding mechanisms to protect against the public sectorintervention:� Private investors and presence of the private sector in

governance structures (boards of directors).� Independence from the public budget ⇒⇒⇒⇒ their own or “delegated”

capital.� Strong oversight bodies and accountability mechanisms for their

activities, outcomes and procedures.� Other specific recommendations like establishing no more than

half or one thhird of the board of directors be appointed orreplaced at any given time, not to coincide with the political cycle,or directors appointed by the public sector be named by both theexecutive branch and Congress, or by Congress based onrecommendations (candidate lists) from the executive branch.

Property structures and governance

Progress in adopting measures to increase the indep endence of development finance institutions

Mayority private

shareholders

Director (not shareholders)

from the private sector

Own or delegated

capital

Receives public funding (from national

regular budget)

Control and supervision by public sector (pu), private

sector (pr) and civil society (cs)

+++: applies completely; ++ adopted in part; + is being adopted; ● not adopted. N.a. Not applicable

Foncap SA +++ +++ ● pu,pr, csINDAP n.a. + +++ pu,csAgrobanco + +++ ++ pu, csCOFIDE-PFE ● + (1 of the 6) +++ ● pu

CFN ● ++ (2 of the 7) +++ ++ pu

Banagrario ● + (4 of the 7) +++ +++ pu,csBanrural SA +++ +++ ● pu,pr,csFinanciera Rural ● ++ (6 of the 15) +++ ++ pu,cs

Serving small scale agriculture?

Banrural SA17% with loans less than US$ 650

48% with loans between US$ 650 and US$ 2,600

INDAP Clients with 5 irrigated hectares (average).

1.4%

11% (4% is delinquency rate,

the rest non collectable)

Delinquency rate

Banagrario 90% receives less than US$ 4,160

Financiera Rural 90% receive less than US$ 2,400

Agrobanco Loans to small farmers depend on special allocations

Cofide PFE 6 of the 23 PFE have loans less than US$ 10,000 (K+I)

Clients with 5.15 has (average)

4.2%

2.9%

6.2%

0.75%

Products and services for small farmers

• The greatest challenge is still to create competitivemechanisms, products and services able to respondto the financial demands of rural society and smallfarmers.

• Another relevant task in need of being addressed by DFI• Another relevant task in need of being addressed by DFIis the promotion of mechanisms, reforms and processesto improve the operation conditions of rural financialmarkets.

� Policy Dialogue process� Information, dissemination and setting in the public

agenda the rural finance challenges

In closingIn closing

8 messages to share1. Development banks serving agriculture (specially public sector

development banks) are relevant in Latin America and here to stay.

2. As theory recommends, development banks increasingly operate more as second tier banking institutions and operate more as second tier banking institutions and under a multisectoral approach.

3. Development banking serving farmers in Latin America is heterogeneous. There is not a single model for these banks, there are instead responses to the agriculture sector contexts, financial sector contexts. Some proposals are more traditional and others, more innovative.

Eight messages that the study should transmit

4. There is consensus on a series of recommendations about the characteristics of a “good” development bank: operating more as second tier institutions, providing diverse financial services, becoming financially sustainable, and operating in various sectors and not only in agriculture.only in agriculture.

5. While the cases analyzed show that development banking serves significant groups of small farmers, their main challenge is still to broaden their coverage, offering better products and services without sacrificing financial sustainability.

Eight messages that the study should transmit

6. One neglected area regarding development entities, most of which use public funds, is the policy dialogue that should create an environment conductive to the development of the rural financial market.

7. In most of the cases analyzed, institutions have undergone reforms or were created upon the closure of another development entity that had collapsed.

8. There are no adequate instruments for evaluating the performance of development institutions.

Agricultural Development Banks: Latin American experiencesLatin American experiences

December 2007

A summary of the research results can be download (in English) at:

www.bancosdesarrollo.org