Agri-banks in Malawi
Well, the meaning of the term an agri-bank is rather illogical but the common one identifies an agricultural bank as a commercial bank whose ratio of agricultural loans (real estate and production loans) to total loans is greater than the unweighted mean for all commercial banks.
Agri-banks were established with donor funds and technical assistance to finance progress in high-yielding agriculture and to generate excess revenues to be invested in the emerging industrial sector. The other reason was to alleviate poverty through smallholder credit. However, most agri-banks turned out to be a flop. Instead of producing income to be profitably reinvested, they disbursed funds that were not repaid and generated losses that were a drain on public resources.
Even though most agri-banks proved to be a failure in the past decades, they have continued to be major providers of rural and microfinance services in most countries through their branch network. Their outreach varies widely, but in many countries, they are major providers of rural financial services, sometimes they are the only ones.
Depending on the political economy of a country, ownership may be private, cooperative, public or mixed.
Agri-bank reform deserves priority in the fight against poverty. As such, government and donors should cooperate in generating the required political will. In the absence of the political will, donors should stop undermining rural finance by using agri-banks as credit channels.
Where agri-banks have been closed, their market share has usually not been taken over by other institutions. This demonstrates the need for agri-banks. There are now some examples of successful agri-bank reform in Asia. They indicate that reform may well be feasible and their financial performance and outreach can be greatly increased.
The performance of many agri-banks in existing countries is considered to be inefficient because of many reasons. Firstly, given the spatial dispersion of production and the comparatively high incidence of location-specific factors and exogenous shocks on yields, it is very difficult to determine the extent to which negative outcomes reflect less than optimum levels of effort by the agent or simply conditions beyond his control. Monitoring of borrowers is thus very costly. Lenders feel threatened by their less comprehensive knowledge of the riskiness of the borrower’s activities and by the ability of the latter to modify the level of risk in opportunistic attempts to profit (gamble) that may hurt the lender.
Borrower domination is also a setback. The operations of state-owned agricultural development banks were characterised by borrower domination. All practices and procedures were designed with the interest of borrowers in mind, not for the sake of depositors or the institution’s viability. Thus, the rapid disbursement of funds was favoured. Target clientele were chosen independently of repayment capacity and without reasonable guarantee of loan recovery. Credit was subsidised; as such, borrowers were incurring losses.
The agricultural sector in most developing countries such as Malawi is heavily repressed through taxes on both food and non-food export commodities, for which these countries possessed comparative advantages, and indirectly, through overvalued exchange rates and the protection of manufacturing. These policies dampened loan demand, lessened the creditworthiness of potential farm borrowers, weakened their ability to repay loans, and reduced rural capacity to save, making the task of agricultural development banks even harder.
Unsuccessful macroeconomic policies (inflation, overvaluation of the domestic currency, crowding out) also discouraged financial intermediation, while repressive financial regulation constrained the behavior of financial intermediaries with interest rate controls, confiscatory reserve requirements, extensive loan targeting, and restrictions to entry into financial markets that reduced the efficiency of intermediation. Burdened by their more intrinsic shortcomings, state-owned agricultural development banks were only artificially sustained in this environment but when deregulation took away the artificial life-jacket, they sank.
Implementation of agri-banks in Malawi will be viable because Malawi’s economy depends on agriculture. Almost 80 percent of the farmers are smallholder farmers who do not have the financial muscles to purchase necessary inputs. As such, agri-banks will act like an answer to this common problem of finances.
