When contemplating entry into rural markets, commercial banks can choose from a number of models. The choice depends on the importance of a given rural market within each bank’s overall strategic plan, the available business opportunities, the resources it is willing to invest, and its appetite for risk. Some initiatives undertaken by commercial banks over the past decade are outlined below. Integrating Rural Finance and Financing for Agriculture into a Commercial Bank’s Mainstream Business This approach is usually chosen by a financial institution that has realized that its traditional mainstay business is becoming increasingly competitive and that it must focus on new markets to survive or to increase profitability. This strategic business reorientation can take place in farsighted institutions without donor support (box 8.24), although in other cases support from donors will be instrumental. Traditionally donors and governments have supported interested banks through special-purpose credit lines and technical assistance. In many instances, however, banks have continued to focus on the supported markets after a project ends only if the bank’s owners and top management are highly supportive and consider it to be in their own interest. The example in box 8.25 demonstrates how significant donor involvement and an innovative three-party approach resulted in increased lending for agricultural equipment. Establishing a Separate Unit within a Bank to Serve Nonpriority Markets Many commercial banks are quite interested in entering new markets, such as lending to agri-businesses and SMEs, while remaining focused on their core business. A good choice in this case can be to set up a separate unit as a profit center and allow it to develop a distinct culture and business model. The European Bank for Reconstruction and Development (EBRD) has used this model successfully to introduce small/medium sized enterprise (SME) lending to commercial banks in Kazakhstan (box 8.26). Another example is Kingdom Bank in Zimbabwe, which has established a separate microfinance division with the assistance of ACCION International. Box 8.24 Banco del Pichincha Banco del Pichincha has developed a strong rural finance program as part of its overall strategy to become Ecuador’s leading retail banking institution. In pursuit of this goal, Banco del Pichincha has established a network of over 220 branches serving even remote villages. In 2001, Pichincha was providing almost 20,000 small loans to peasants and rural dwellers with an arrears rate of only 5 percent. The bank’s relationship with farmers has grown through its engagement with agro-processing industries, to which the bank provides cash management services. One of these services is to deposit payments into the savings or checking accounts of the small-scale farmers who supply inputs to the industries. Through managing these accounts, the bank has learned about small-scale farmers’ income levels and cash flow. It has tailored specific loan products for these farmers, which has allowed better utilization of the bank’s costly rural infrastructure. Source: Buchanau et al. 2003 |
    
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