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Wednesday, 30 May 2007

A new Government bank for farmers?

Media reports suggests the Government plans to re-open the Cooperative Bank for farmers. According to Agriculture Minister Ben Kapita, the move will enable small scale farmers have access to resources to improve their agricultural activities”.

We have been discussing for a while on this blog some key potential farming reforms. One of those key areas is access to credit for small scale farmers. However, I put to the government that in takingthis measure forward we should try and learn from past failures by improving in two particular areas.

First, the bank should run as independent from Government to avoid the corruption that pervades most Government centred ventures. Related to this is that the bank must be self financed to ensure that tax payer liability is kept to a minimum. This naturally means the bank would provide credit at positive but sufficiently lower rates to enable farmers to invest and still be able to pay back – this could be accompanied with a potential break of five years to allow small farmers to make progress with new farm start-ups.

Secondly, improvements in access to credit must come with broader reform in access to land and greater provision of agricultural focused education. Farmers need access to land to ensure that it is properly used. As we have discussed many times of this blog, a lot of our land remains dormant. On education, it does appear that there’s a strong mismatch between investment in agricultural centred education and the emphasis to make agriculture the cornerstone of our economic growth. It’s about time we considered establishing dedicated agricultural centres of learning in each province. If the agriculture sector is going to continue growing, farmers need easier access to land and the necessary “know-how” to employ the latest and most effective farming methods.


  1. I have no doubt that independent financial institutions are important to national development and empowerment. As far as lending to cooperative and individuals is concerned Zambia has had experiments with this sort of thing the government is proposing between 1970s and 1990s and guess what it worked for a while and died a natural were not being repaid, people stealing money, lack of political will to enforce things and inevitably a headless chicken always end up on the plate..i am not suggesting you schedule an interview with a chicken ask about what happened to RDC (rural development corporation) and Lima bank

    Before 1985, the Zambia through RDC ,SODA,CDA,FAO used to give small loans to small scale farmers and fishermen in rural areas however, meddling made it impossible for bank sponsors to see its viability and without donor support RDC met a natural end. RDC was then reincarnated as Lima bank and between 1985-1990 the 'bank' functioned for a while and guess what by 1992 it applied full brakes as if it never existed.. it met the same fate as a turkey on the Christmas eve...only this time it was political oven with a lot of meddling forks.

    My opinion is that the idea of bring sustainability to rural agricultural programs through financial assistance to cooperatives and small scale farmers is a good idea but it has to be operated on a sound business model. Free enterprise does not mean open blindness and stupidity.

  2. Jay,
    I wouldn't be too hasty, the chicken likely has a unique perspective on rural development previously unrepresented on the subject. Besides I cannot resist the image of Cho's patient questioning . . .

    Your central point is well stated and important, and will probably have to be constantly repeated throughout the establishment and operational management of the bank in order for it to be successful.

    I think that the relatively recent emergence of microfinance as both a successful fiscal model and resource provider to smallholders throughout the developing world bodes well for yet another attempt at government contribution to farm credit. One approach could be along the lines of the Reserve Bank of India's NABARD division, which provides initial capital and infrastructure to a network of rural financial institutions, rather than as direct lender to farmers.

    Such a decentralization could serve to insulate the apex bank from widespread effects of poor management by individuals, as well as incentivize smaller financial institutions to more carefully marshal limited capital and intervene with borrowers to ensure productive use and timely repayment.

    Whatever structure is ultimately chosen, it is certain that the total capital available will be too small for the nation's farmers to simply view this as 'free money'. It will have to be used and reused in cyclic fashion for any lasting agricultural improvement to be realised.

  3. Jay,

    Before 1985, the Zambia through RDC ,SODA,CDA,FAO used to give small loans to small scale farmers and fishermen in rural areas however, meddling made it impossible for bank sponsors to see its viability and without donor support RDC met a natural end.

    I have heard that before, that it isn't lack of flexibility that is the bane of state enterprises, but political interference - appointing of political operatives as a favour, appointing family members of... etc.

    If there was a legally binding hiring mechanism, there could be objective standards for hiring employees in state enterprises.

    But there is no market reason why government entrprises couldn't be profitable.


    I think that the relatively recent emergence of microfinance as both a successful fiscal model and resource provider to smallholders throughout the developing world bodes well for yet another attempt at government contribution to farm credit.

    I like the concept of microcredit a lot. I like the idea of grants even better, however, I think all levels of financing should be available.

    Thanks for the NABARD link. I intend to look deeper into India's 'green revolution', although I think we can do better than they have, considering the level of poverty they still have.

    Also, I think that the government could incentivize farmers to grow on bigger pieces of land. Go from working 2-3 hectares to 100 hectares, and the government will buy you a tractor, or partially finance it.

    As long as government money is tied to increasing production (bigger harvests, in this case), the inflationary effect would be minimal, and would in fact be deflationary in the long run.

    In fact, effective government stimulation of agriculture or other economic sectors, should be first and foremost viewed as deflationary.

  4. Interesting discussion - some very important points being made:

    1. Jay's point on the need for "sound business model" - emphasises the need for Government to be clear on just how this venture would be financed - and whether it would deliver good value for money. What are the benchmarks? How will success be measured? Over what horizon? Legitimate questions indeed. I'll add another one - shouldn't there be a Green Paper atleast on this? -such things require wider consultation not just men in gray suits - but whose going to demand it? Whatever happened to Green papers by the way?

    2. Yakima’s point that ”decentralization could serve to insulate the apex bank from widespread effects of poor management by individuals, as well as incentivize smaller financial institutions to more carefully marshal limited capital and intervene with borrowers to ensure productive use and timely repayment”- I agree a decentralised framework probably works better and matches the needs of the people. Yunus has taught us it does not require much capital to make a difference to the poor. The advantages of micro finance schemes as you say is the “self policing” element. Again we assume that Government will want to explore the advantages of various lending mechanisms e.g. decentralisation versus centralisation – the pros and cons. By the way, I am not totally against centralised financial provision – I always point to the Student Loan system that has worked successful in the UK as a way of funding university education. Government gives a loan to students, and they pay back once they get a job at a very low rate. A similar framework can work for our farmers – or do we see serious drawbacks with that?

    3. MrK’s is right to point out that “there is no market reason why government enterprises couldn't be profitable”. But is the question that there are certain types of investments where Government tends to do well and some where it doesn’t? In that sense I would qualify MrK’s point by saying, where Government’s rationale for intervention is sufficiently strong (like in this case with a “market failure” of credit access) and it can be proved that it can make a difference depending on how it intervenes (Jay and Yakima’s points), there is no reason why Government enterprises can’t be profitable or self sustaining – but I caution that an enterprise that generates good value for money from society’s point of view does not necessary mean its financial viable – conversely we can get a project that is profitable but does nothing to moves society to a better social outcome. But those caveats are important indeed – as is Mrk’s central point about ensuring processes that avoids political interference.

  5. "By the way, I am not totally against centralised financial provision – I always point to the Student Loan system that has worked successful in the UK as a way of funding university education. Government gives a loan to students, and they pay back once they get a job at a very low rate. A similar framework can work for our farmers – or do we see serious drawbacks with that? " -Cho

    I agree that by and large student loan systems have provided a good solution to the difficulties in bridging the gap between the clear societal benefit of extending educational opportunities to a broad spectrum of students faced with the large up front capital investment required. It is important to note however that such programs are not issuing open-ended loans for use entirely at the discretion of the student, but rather in conjunction with the school as third party. For students making choices within the entire range of schools in the country, a central system makes sense. A NABARD-style adaptation would assume that students needed service in only one locality (like farmers) and so would issue financial support to the schools who would then in turn issue loans to only their own students.

    While a centralized framework for loans directly to individual farmers is not necessarily troublesome, there are a few aspects which seem to indicate a decentralised approach could deliver better service. Most of them seem to hinge around the geographically fixed nature of agricultural investment.

    The first of these has to do with political patronage and the institutionalised temptations for certain types of corruption. Where political representation is allocated by geographic partitions, re-election is often predicated on capture of disproportionately large amounts of certain types of government expenditure for one's own district. Cabinet Ministry structures as well as legislative committee structures tend to concentrate control over particular sectors of government spending into the hands of officials beholden to specific geographic districts. The temptations to reward one's own constituents or punish those of one's rivals are then likely to manifest in the implementation of policy within the sector where one wields power. A decentralised approach would tend to transfer patronage delivery more equitably to local authorities and institutions, although similar temptations may still apply to service delivery within the local district. It is to be hoped that central authorities will then view their opportunity to provide service in oversight and anti-corruption regulation of local delivery.

    The second area has to do with tailoring loan requirements and repayment schedules to the needs of farmers within a geographically localised context. For example, some regions may need to pay particular attention to irrigation development in order for farmers to make successful use of credit, while others may need greater emphasis on transport or mechanisation or seasonal labour. Local credit institutions would presumably be able to provide more personalised attention to the requirements of farmers within a region, within a certain watershed, and within a particular sector of agricultural production. By contrast student loan programs do not require particular attention to elements such as a given student's chosen field of study, and "one size fits all" types of regulation are unlikely to adversely affect a significant proportion of borrowers.

    The third area which comes to mind has to do with Jay's concern over the collapse of the entire loan system due to unviable policies in enforcement and business models. By decentralising the bulk of these functions to semi-autonomous local institutions under an umbrella framework, failures of policy or planning in any one institution is less likely to threaten the viability of the program as a whole. The risk of innovative or outmoded policy experiments is mitigated by the operation of a variety of delivery and enforcement mechanisms chosen by local institutions. In essence, the umbrella organisation can treat local credit institutions in much the same way they in turn treat their individual borrowers, with sufficient return from successful participants to cover the losses incurred from those which underperform or default on their obligations.

    For these reasons I think that the NABARD approach is one which merits scrutiny as a model for Zambia for rural development financing. While data indicates that some localised programs and institutions have failed to meet delivery and/or repayment requirements, the umbrella organisation itself has been able to show steadily increasing account balances sufficient to both maintain successful programs and steadily introduce additional ones. Compartmentalization of failures within the system even appears to serve as a positive, by providing cautionary examples for avoiding and addressing previously unidentified risks and pitfalls.

  6. Yakima,

    Your points with regards to a decentralised NABARD system appear valid.

    A number of points I would like to explore further by way of developing this fascinating of topics.

    1. The NABARD system gives up front capital to the rural institutions themselves, and not directly to people. This system to work it has to avoid the failures that bedeviled the Credit Guarantee Scheme operation in Zambia (1987 - 93). Under the CGS set up by the BOZ in 1987, money was being given to financial institutions against losses incurred for credit exposures to small enterprises. The fund was intended to become self supporting the long term, unfortunately it didn't work out that way - "moral hazard" was in full swing, as the institutions knew guarantees where in place, they acted in bad faith. So we need to ensure that it is only "start up capital" as you say.

    2. The other point is that since money is not going directly to farmers, measures have to pe put in place to ensure that these institutions lend to farmers and money isn't diverted to other borrowers. Or would we like some flexibility? Because ideally the more they lend the lower the rates might be in the long term.

    3. This brings to another point, I am concerned about not just access to credit but the cost of credit. Whilst a centralised system has many disadvantages that you have noted, we have to allow a degree of flexibity in terms of mergers between rural institutions. There are clearly economies scale of scope that could be attained from mergers and so forth especially on a provincial level in terms of cheaper credit. I guess my point is that the definition of "local" could be more flexible :) What limits would you place on that?

    4. The issue of cost of credit is particularly a serious one because on the one hand you want the local institutions to freely determine the lending rates to farmers, and your role is limited to capital and start up infrastructure grants (or loans) to the local institutions, but you also want to ensure that they charge appropriate rates to farmers. To illustrate - the average annual rate of interest in Zambia was at 48% in 2005, with inflation at 20% that year. Its not unusal to find micro finance institutions in Zambia charging rates of about 50% – 60% - so if and when Government adopted the NABARD style they would need to ensure that the loans are sufficiently low - how they do this whilst ensuring the market is effectively unconstrained from political pressures to capture funds (e.g. power local political farmers, wanting to borrow always for free!) is unclear. We should not forget that 35% of bank credit to private firms in 2005 went to agriculture, fishing and forestry. So whilst access is not amazing, farmers do retain a larger share of access to credit that there’s mainly because land acts as collateral. This is why I have advocated for greater access to land. But in this context, clearly the issue is also the cost of credit.

    5. The other issue is just how the NABARD style approach could work in practice. In other words, who would run these rural institutions? Would this system be open to anyone or could they use existing institutions (bearing in mind that we have poor banking coverage 1 branch per 70,000 people in Zambia)? I am very much in favour of grouping services together. So the people who sell implements to farmers could also administer these rural lending institutions. If services are bundled together they will benefit from positive spillovers of joint consumption. This approach underlines the recent “Zyonse” product which was developed by the National Resources Institute for small order farmers. The package consists of insurance, primarily covering weather insurance; production credit and the ability to colletarize produce to improve crop marketing; and easy access to commodity finance.

    Couple of latest documents worth reading on this:

    The regulation of microfinance in Zambia (Chiumya, 2006)

    Access to financial products in Zambia (2007)

  7. Cho,
    Very good questions and points! Both documents are extemely useful, and really help to describe the playing field any new government bank for agriculture would be on.

    I have been delving into the guts of NABARD to try and see where it applies as a useful model or not, within the scope and purpose of the Co-operative Bank. One key difference is that NABARD covers the full spectrum of rural development programs and related financial instruments. Like the scale of India's rural population, it is a huge umbrella (for example they work with over 440 MFIs), but I think it is analagous given the depth of Zambia's rural development needs.

    On your specific points:

    1&2. NABARD credit functions are primarily in refinancing of local institutions for loans issued under approved projects in targeted populations and/or market sectors. A wide range of agencies are eligible for refinancing, including Commercial Banks, State Co-operative Banks, District Central Co-operative Banks, Primary Agricultural Credit Societies, State Co-operative Agriculture and Rural Development Banks, Primary Co-operative Agriculture and Rural Development Banks, Regional Rural Banks, State Governments, and NGO's. Agencies provide primary investment credit to finance individual development projects, and are reimbursed by low interest NABARD loans for 50% to 100% of the cost, and, "are required to repay the refinance as per the repayment schedule fixed for ultimate borrowers in such a manner that repayments that are likely to come from ultimate borrowers will be first utilised by the banks to liquidate NABARD refinance."

    "Some of the major purposes covered under Investment credit are farm mechanisation, minor irrigation, plantation/ horticulture, animal husbandry, storage/market yards, fisheries, post harvest management, food/agro processing, non farm sector including rural industries, microfinance, purchase of land (for small/marginal Farmers, share croppers etc.), rural housing and disbursements under poverty alleviation programmes. Hi-tech projects and agri-export zones are identified as thrust areas and NABARD helps in techno-financial appraisal of such projects besides providing refinance."
    This table provides an overview of investment credit refinancing:

    Since only certain types of project loans are eligible for refinancing, agencies must accurately serve target populations in order to qualify. Agencies can still engage in other credit functions which do not meet the criteria, so their flexibility to maximize loan volumes is preserved.

    3&4. The cost of credit can be contained through the process of determining eligibility. For example NABARD refinancing loans carry interest only a few points over inflation, so the rates paid by the ultimate borrower to agencies can be restricted to a reasonable amount above that. To use your example of 20% inflation, the refinancing rate would be 22% or 23%, and the rate charged to the ultimate borrower around 30%. If current inflation (as reported by zamstats) holds steady around 12%, then borrower rates could be closer to 20%.

    5. By enabling refinancing for eligible projects through a wide variety of agencies the NABARD approach can be flexible, utilising existing credit delivery infrastructure where available and stimulating capital flows to underserved markets which improve the viability of new agencies. Bundling investment credit with delivery of other services sounds like a good idea, and could even be considered as a factor in eligibility of projects and/or agencies.

    Some big questions for a new Bank for Agriculture and Rural Development (BARD) include which types of project should be eligible? Should it cover a wide range of development right from the start or begin with a few core project types and grow over time? What sort of built-in mechanism for expanding eligibility should there be, if any?

    Some useful NABARD links:

  8. Thanks Yakima,

    I'll follow up the links.
    It does sound like there's flexibility within the NABARD model - although more thought is probably needed given that it will be focused on one particular sector.

    I have added a new blog referencing the recent World Bank paper on access to finance. Has couple of areas, where it jumps too quickly to conclusions but well worth a read.

  9. when you talk about gov. funds,am meant to believe this is tax payers money in the many tax payers do we have and what is our breakeven point,"in terms of funding and projects".

    how much is the land worth the farmer will put up as collatteral?
    how much profit is he making from this venture? unless we are providing charitable services,then we might aswell be going backwards!!!

    make every business profitable so that they can be able to pay back loans.

    make lenders accountable in form of equality in issuing loans or to deserving applicants.audit them.

    just a thought,do you build beautiful hotels & airports to attract tourists or you start by investing in emergency services?
    what is number in choice of destination? why are we in europe.


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