Public sector banks

Networks of state banks or recently privatized state banks with extensive rural branch networks offer a mechanism for introducing low cost financial services at scale, as these are frequently the only multiservice financial institutions that have extensive networks in rural branches. State-owned banks that may have extensive rural networks of branches or outlets include agricultural development banks, regional development banks, savings banks, and postal banks.

The shortcomings of state banks are well known, however, as is their vulnerability to political influence, associated with a tendency toward subsidized and/or directed credit. However, there are an increasing number of examples of financial services being offered successfully to rural populations through state banks, taking advantage of existing branches, assets, established customer base, existing transfer and remittance services, operating systems, and banking licenses to lower initial and subsequent costs.

Where both the state bank management and government owners (if any) are committed to allowing sufficient space for good practice financial services to be introduced, technical assistance to improve management and training can help these institutions fill the gap in financial services for farmers and their households.

Library Resources

resource title type year resource
Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand Case Study 2010

view page
This resource appears in: Public sector banks

BAAC has come to be internationally recognised as one of the few specialised, government-owned rural finance institutions which has been successful in carrying out its mandate without government subsidies. Its loan outreach to Thailand's rural poor and its savings mobilisation performance are impressive. This case study reviews the macroeconomic and financial sector context of the bank and undertakes a substantial institutional analysis.

Exploiting the comparative advantage of its branch network and the already close links it had developed with its client population through lending programmes, BAAC developed its deposit base remarkably quickly, providing both standard and tailor-made savings instruments to its clients. BAAC has demonstrated to other Thai institutions that lending in rural areas can be a profitable activity, thus encouraging an increase in lending by other banks.

The author suggests that the focus of BAAC's management on the "bottom"line and a corporate culture that recognises and rewards cost effectiveness and efficiency are principal elements in accounting for BAAC's relative success as a financial institution despite its character as a state-owned bank.

Author Fitchett, D.
Publisher GTZ - CGAP Working Group on Savings Mobilisation
Number of Pages 37 pp.
Primary Language English (en)
Region / Country Global
Keywords Agricultural Bank, Development Banks, Agricultural Credit
Related Resources
Bank for Agriculture and Agricultural Cooperatives (BAAC), Thailand Case Study 2010

view page
This resource appears in: Public sector banks

BAAC has come to be internationally recognised as one of the few specialised, government-owned rural finance institutions which has been successful in carrying out its mandate without government subsidies. Its loan outreach to Thailand's rural poor and its savings mobilisation performance are impressive. This case study reviews the macroeconomic and financial sector context of the bank and undertakes a substantial institutional analysis.

Exploiting the comparative advantage of its branch network and the already close links it had developed with its client population through lending programmes, BAAC developed its deposit base remarkably quickly, providing both standard and tailor-made savings instruments to its clients. BAAC has demonstrated to other Thai institutions that lending in rural areas can be a profitable activity, thus encouraging an increase in lending by other banks.

The author suggests that the focus of BAAC's management on the "bottom"line and a corporate culture that recognises and rewards cost effectiveness and efficiency are principal elements in accounting for BAAC's relative success as a financial institution despite its character as a state-owned bank.

Author Fitchett, D.
Publisher GTZ - CGAP Working Group on Savings Mobilisation
Number of Pages 37 pp.
Primary Language English (en)
Region / Country Global, Asia, Eastern Asia
Thailand
Keywords Agricultural Bank, Development Banks, Agricultural Credit
Related Resources
Access to Finance – What Does it Mean and How Do Savings Banks Foster Access Paper 2006

view page
This resource appears in: Public sector banks

The purpose of this study is to give an overview of the importance of access to finance for all and to record the main obstacles to access in different parts of the world. It also attempts to create a coherent framework for analysing the available data on access and to link this through to indicators of wider economic development. Having surveyed the nature and dimensions of access (or lack of it), the study goes on to review public and banking sector initiatives to improve access to finance and then looks at the critical role of the savings bank movement – socially committed retail banks, like savings banks, postal savings banks and community banks – in the provision of financial services to all strata of the population in urban and more remote areas. Finally, a policy agenda is developed for both the financial institutions that must deliver access and the public sector that must create the right environment for doing so.

The study concludes with the following viewpoints:

  • Access is an important issue but it has to be understood differently from the related issue of exclusion, as the solutions are different.
  • The savings bank movement has an instinctive sympathy for improving access and this study shows how important the movement is to sustaining what access there already is.
  • At newly identified levels of supply, savings banks account for three quarters of the 1.4 billion accessible accounts provided across developing and transition economies.
  • Moreover an economy is very unlikely to be approaching full access unless it has a strong savings bank movement or other proximity banking presence.
  • Regulators need to recognise that the governments they serve may have more at stake in improving access than commercially run banks. Regulation should be fine-tuned accordingly.
  • As always the performance of banking systems cannot be understood in isolation from the systems of political economy within which they operate. Governments are likely to do more to improve access by improving the foundations of civil society than by trying to mandate access and interfere with product design.
Author Peachy, S and Roe, A
Publisher World Savings Bank Institute
Number of Pages 71 pp.
Primary Language English (en)
Region / Country Global
Keywords Savings, Financial Savings, Development
Related Resources
The Role of Postal Networks in Expanding Access to Financial Services Paper 2006

view page
This resource appears in: Public sector banks

This Discussion Paper builds on the findings and conclusions of a study commissioned by the Global Information and Communication Technologies (GICT) Department of the World Bank and carried out by ING Bank in March 2004. The study comprised a review of about 60 developing countries in five regional landscapes. It provided a further in depth analysis of seven of those countries (Egypt, Kazakhstan, Namibia, Romania, Sri Lanka, Uganda, Vietnam) chosen for their most valuable features in terms of successful business model or reform failure, and the lessons that can be drawn from them. This paper provides a unique insight into the worldwide provision of postal financial services. It identifies the strengths, weaknesses, opportunities, and threats faced by the postal sector—from a financial sector perspective and from a communication sector angle. It also documents elements of best practice. Lastly, it offers a variety of strategic options covering several dimensions (policy, legal, regulatory, institutional, technology, capacity building, and corporate strategies). A limited number of country case studies are included in the discussion paper to present a concise story. The full descriptions of the five regional landscapes and the seven country studies can be found separately in Volume II.

The postal branch network with some 500,000 branches in the developing world, and twice the number of branches of commercial banks, has the potential to be a powerful distribution platform, especially in rural and remote areas. However building and maintaining a network of this dimension is costly and has rarely proven to be profitable. Therefore, the challenge for the owner of a postal branch network is to maximize the use of the network by increasing the number of services and products that are distributed through it. In many countries, financial services have been distributed through the post office but not always in an efficient way. In recent years policy-makers have questioned whether post offices can distribute financial services in a sustainable way. Yet some success stories (such as the Brazil's Correios-Bradesco strategic partnerships, or Morocco's Poste Maroc model of partnering with multiple financial institutions), show that the postal network can be an effective tool to leverage increased access to finance in rural areas and to the poor.

This paper attempts to determine the key success factors needed to achieve successful reform at a country level. There is no solution that is one-size-fits-all. Therefore a checklist of prerequisites is suggested to help policymakers and stakeholders have an objective debate based on facts and figures, and to look clearly into all options and solutions. This debate should lead to each country reaching a national consensus and a long-term vision on the way forward. Only with these in place will the implementation of policy measures have a chance to be successful, as is emphasized in the UN Blue Book on building Inclusive Financial Sectors for Development.

Based on the underlying regional and country reports, it is clear that the postal branch network can be leveraged to promote access to finance and that the divide between success and failure depends on the strength of a clear policy and a strong commitment from the government to deliver the proposed solutions.

Author Global Information and Communication Technologies Department, The World Bank
Publisher The World Bank
Number of Pages 30 pp.
Primary Language English (en)
Region / Country Global
Keywords Postal Networks, Financial Services, Rural Outreach
Related Resources
Teaching Elephants to Tango: Working with Post Banks to Realise Their Full Potential Paper 2006

view page
This resource appears in: Public sector banks

The paper begins by pointing to conclusions drawn in a CGAP study - CGAP’s paper, “Financial Institutions With A “Double Bottom Line”: Implications for the Future of Microfinance” (CGAP, 2004) notes that “that there are over 750 million accounts in various classes of financial institutions that are generally aimed at markets below the level of commercial banks, and that some substantial fraction of these institutions’ clients are probably poor or near poor”. These institutions are referred to throughout this important paper as “Alternative Financial Institutions” (AFIs).

This paper follows up by setting out two questions:

  1. Do the AFIs really serve the poor?
  2. Is the quality of service offered by the AFIs adequate to make a significant contribution to developmental goals?

Building on Micorsave’s experience of several years working with the Kenya Post Savings Office Bank (KPOSB) and Tanzania Postal Bank (TPB), this paper looks at the potential of post banks for serving large numbers of low-income people and the opportunities and challenges for those who seek to realise this potential.

After profiling both banks the paper conducts its analysis through a PEST and SWOT methodology. PEST analysis is used to discuss the broader environment in which they operate, based on: Political, Economic, Social/Legal and Technological factors. SWOT analysis is used to analyse the individual institutions based on their: Strengths, Weaknesses, Opportunities and Threats.

The final part of the paper looks at the lessons learned from working with both post banks. It suggests that there are a number of key lessons for those seeking to assist them in realising their potential. Firstly, it is important to secure the buy in of key members of the management team that will act as champions for the changes being made. Thereafter it is important to develop and communicate a coherent strategy for the change process using participation with customers and staff from as widespread over the organisation as possible. The lessons also note the need to undertake successful market research to inform product development and marketing; product costing exercises that lead to pricing revisions or economies; and process mapping that leads to substantive changes in operational procedures – all of which can lead to significant bottom-line benefits. Furthermore, the paper also suggests that massive re-training and re-deployment may also be necessary at times.

Author Wright, G.A.N, Koigi, N and Kihwele, A
Publisher MicroSave
Number of Pages 23 pp.
Primary Language English (en)
Region / Country Global
Keywords Postal Bank, Savings, Outreach
Related Resources
Agricultural Development Banks: Ignore them, Close them or Reform them? Document 2005

view page
This resource appears in: Public sector banks

Agricultural development banks (AgDBs) have been identified as being among the main culprits undermining rural finance and development. Historically, they did so on behalf of their government. Donors provided funding and technical assistance. For extended periods of time, neither their performance nor their impact were properly monitored. When donors finally did evaluate their support to AgDBs and other development finance institutions, many virtually eliminated their assistance. In recent years, there has been a tendency to ignore AgDBs in programs of rural and microfinance systems development.

In this Editor's Note Hans Dieter Seibel challenges us to either close or reform AgDBs but not to ignore them. He looks at the positives and negatives or AgDBs and outlines a planning framework for reforming them.

Reforming Agricultural Development Banks Paper 2005

view page
This resource appears in: Public sector banks

This paper suggests that until around 2000, from which time a new interest developed, agricultural development banks had became the forgotten half of rural finance. It notes, for example, that agricultural development banks had disappeared from the agenda of international conventions and workshops, as attention shifted from agricultural credit to rural finance. Instead two new topics came up: financial systems development and microfinance.

It then poses a concluding question: What should happen to the remaining agricultural banks: ignore them, close them or reform them? It suggests firstly, that ignoring them may be the worst strategy, simply throwing good money after bad. Secondly, a number of arguments are made against the idea of closing the remaining agricultural development banks. These are broadly:

Moral reason: If donor experts were responsible for the flaws in the design of the banks, as was frequently the case, they should now, enlightened by 40 years of development banking experience, not discard them without due diligence.

Theoretically inspired reason: As cheap credit together with a credit bias create dependency on public resources and invite interference by the government and politicians, savings mobilization as the main source of funds and the deregulation of interest rates on deposits and loans might eliminate the material basis for government interference.

Pragmatic reason: Even if the quality of their service is low, their outreach can be vast, in some countries in the millions and even tens of millions; and there is no immediate alternative available, most certainly not in the form of credit NGOs.

An unsolved problem: After closing agricultural development banks in several countries, especially in Latin America, the gap has never been closed by new financial institutions, such as the promising microfinance institutions.

Historical reason: Not all agricultural development banks have failed.

The paper suggests that since around 2000, there has been a new interest in the reform issue: cautious and gradual, but continual.

The structure of this paper is as follows. The introductory chapter gives an overview of the background and the crucial issues. This is followed by a confidence building section (with the evidence presented only in chapter 5). After briefly listing the flaws and ills of the old world of agricultural credit, the new consensus on rural finance is outlined, which overlaps with that on microfinance, and the major lessons taught by international experience is listed in a condensed format. The final issues dealt with here is whether agricultural finance is really as risky and unprofitable as it is usually depicted, particularly by those who stay away from it.

Chapter 3 presents some puzzling insights into agricultural finance from both a supply-side and a demand-side perspective, pre-empting some of the evidence given in chapter 6. There is the usually reported lack of funds in banks and lack of finance among the potential investors (such as farmers, microentrepreneurs, commodity processors and traders) in some cases; but also the abundance of funds and shortage of investment opportunities in others.

Chapter 4, sets the scene for the subsequent presentation of data, coming back to the basic issue of the introduction: ignoring, closing or reforming agricultural banks. Chapter 5 presents the statistical facts as given in the AgriBank-Stat inventory of agricultural banks, amply illustrated by presentations of pre-reform, reforming and reformed agricultural banks in Chapter 6.

The final chapter presents the new recent initiatives at agricultural bank reform, the role played by the agricultural bank associations, and a planning framework for policy and decision makers.

Author Seibel, HD, Giehler, T and Karduck, S
Publisher GTZ
Number of Pages 69 pp.
Primary Language English (en)
Region / Country Global
Keywords Development, Financial Sector Reform
Related Resources
Financial Services through State Banks Document 2004

view page
This resource appears in: Public sector banks

State banks, particularly recently privatised state banks with large rural branch networks, have the potential to offer low-cost access to a range of financial services on a wide scale. This Agricultural Investment Note from the World Bank explores ways in which these institutions can best be taken advantage of, in terms of their infrastructure, systems and services, to provide improved access to a range of viable, demand-driven and low-cost financial services to rural populations reliant on agriculture. State-owned banks that may have extensive networks of rural branches include agricultural development banks, regional development banks, savings banks and postal banks.

The Note does not advocate a return to unqualified support for state banks or putting lines of credit through state banks. It proposes three main options for engaging with these types of banks and gives recommendations on how the options can best be pursued. They are:

  1. A management-led turnaround of the bank – which is the most ambitious and costly proposal. It assumes the complete reform of the bank, such as took place in the Agricultural Bank of Mongolia (AgBank) and the National Microfinance Bank (NMB) of Tanzania. The turnaround in these banks was achieved by contracting a consulting firm to provide temporary foreign senior management, intensive technical assistance, systems and infrastructure improvement, together with new product development and marketing aimed at diversifying the financial services and improving branch viability.
  2. The creation of a specialized, autonomous micro or rural finance unit within a state bank structure, that utilizes state bank branches and systems but is insulated from political interference and can be given the freedom to operate on the lines of internationally accepted good practice. Cited examples are Banco do Nordeste in Brazil and Bank Rakyat in Indonesia.
  3. The creation of linkages with other financial providers to improve access to a better range of financial services for agriculturally dependent populations. An agreement with a postal savings bank, for example, may allow a financial institution to provide money transfer services to their customers and NGOs that are not allowed to offer deposit services could negotiate access to savings schemes through a state bank.

The Note goes on to review the benefits of these ways of improving state bank operations and assesses a number of policy and implementation issues. The authors recommend that that donors should only consider working with state banks if there is sufficient long-term protection from government influence. They also suggest that it is important to proceed ambitiously but cautiously.

Country Case Study - Agricultural Bank of Mongolia Case Study 2003

view page
This resource appears in: Public sector banks

The Agricultural Bank of Mongolia (Ag Bank) is the main provider of financial services in the rural areas of Mongolia. It has the largest branch network in the country with 356 locations and provides deposit and loan products in each location. Although in receivership in 1999 and facing possible liquidation, this former state bank has been completely turned around and was privatized through international tender to a major Japanese company in March 2003. Turnaround efforts have resulted in the Bank disbursing more than 500,000 loans to date while maintaining an arrears rate consistently below 1 percent and becoming the second most profitable bank in Mongolia. This turnaround identified and mobilized the strengths of an existing institution to rapidly disseminate desperately needed financial services to the rural areas as well as protect access to the few existing financial services that many rural Mongolians already relied upon.

This paper describes the results and impact of the reform process, its loan and deposit strategies and the challenges faced during the reform. It concludes with a review of the lessons learned and recommendations for others involved in a similar process. One key lesson learned by Ag Bank was the importance of marketing: focused research, strong brand promotion, and products responsive to customer demand to provide an income stream to sustain the organization. Ag Bank's managers used a combination of local knowledge from their branch managers, formal market surveys, and experience from working in other developing countries.

Agricultural Development Banks: Close Them or Reform Them? Article 2000 English (en)

view page
This resource appears in: Public sector banks

Agricultural development banks were established to extend credit and other financial services to customers not considered creditworthy by commercial banks. Although frequently unprofitable, they can play an important role in the fight against rural poverty. This article discusses the question of whether agricultural banks should be closed or revamped.

The author notes that despite the difficulties that have beset agricultural development banks in most parts of the world, they have continued to provide important financial services through their branch networks. In regions where these banks have been closed, their market share has generally not been filled by other financial institutions.

The experiences of the Bank for Agriculture and Agricultural Cooperatives (BAAC) in Thailand and Bank Rakyat Indonesia (BRI) are examined and used to support the contention that reforming agricultural development banks is feasible but only if certain preconditions exist to facilitate their rehabilitation. In many cases, reform will mean financial and organisational restructuring, including staff retraining and cleaning up any portfolio of bad debts. Then the banks must concentrate on demand-driven financial products tailored to the needs of rural customers.

Document  -  English (en)

Restructuring of Agricultural Banks in the NENA Region Book Chapter 2000

view page
This resource appears in: Public sector banks

Agricultural banks have been in existence in the Near East and North Africa region for decades. Some of them have become so embedded in the local social and economic environment that the general public has become highly conscious of their existence and role. All walks of people, including ordinary citizens and politicians, believe that these banks are owned by the government and that their responsibility is purely a developmental one aimed at helping farmers to acquire funds for investment in their farms. To them, development banks are there to make cheap funds available for them to use when and in the amounts they want. They believe that these banks must not use commercial banking practices and market mechanism for pricing their services based on cost.

Against this background, exposure to rapid inflation and an inability to collect debts from borrowers led to some banks being closed down while others needed reviving from time to time to continue to operate, which often overtaxed government financial capabilities. NENARACA, as a regional association representing agricultural development banks, has, therefore, been at the forefront of efforts to introduce reform by providing training and other policy-oriented activities. This extract from the book “Some Features of Rural Finance in the Near East and North Africa Region” outlines the type of actions that are needed to restructure these banks, e.g.

  • Partial privatization of their capital
  • Acting as a financial intermediary for attracting savings
  • Conversion to universal rural development banks
  • Restructuring interest rates
  • Moving towards commercial banking services
  • Adopting innovations and banking technology

The chapter continues by examining how far along the road restructuring has gone in the Region with tables showing sources of funds, the annual profitability of some of the banks and annual interest rates compared to market rates.

Search Library Resources