Reforming agricultural development banks (AgDBs)

For a hundred years or more, until the middle of the 20 century, a small number agricultural banks existed outside of Europe. For three decades, roughly from the1950s to the 1970s, agricultural development banks (AgDBs) were considered a panacea. At first, they were to finance progress in high-yielding agriculture and generate thereby excess revenues to be invested in the emerging industrial sector. Next, poverty alleviation through smallholder credit was added to their mandate. Donors were eager to support them with soft loans for credit lines, repayable over 40 years, and with technical assistance. Donor experts assisted in preparing and implementing the key components of the development banking concept: government ownership, the enactment of special AgDB laws and exemption from central bank supervision, budgetary allocations and external credit lines as sources of funds, subsidized interest rates, targeted credit, and, in a later phase, a poverty focus frequently combined with group lending. However, most AgDBs turned out to be a flop. Instead of producing income to be profitably reinvested, they disbursed funds that were not repaid, generated losses that were a drain on public resources, and, last but not least, missed their target group and their purpose. In their downfall, they frequently pulled with them large numbers of cooperatives which they had used as credit channels. One of the chief reasons for their failure was cogently summarized in a book title: Undermining Rural Development with Cheap Credit (Adams et al., 1984).