Institutional Finance for Agricultural Development an ANALYTICAL SURVEY of CRITICAL ISSUES
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FOOD POLICY ~EVIEW 1 Institutional Finance for Agricultural Development AN ANALYTICAL SURVEY OF CRITICAL ISSUES BHUPAT M. DESAI JOHN W. MELLOR INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE IFPRI FOOD POLICY REVIEWS The FOOD POLICY REVIEW series provides a forum for scholarly reviews of the literature on key topics relevant to food and agricultural policy. These works are substantive syntheses of research on major food policy issues and may include original research to supplement the discussion. They provide considered judgments on policy options in liglit of current knowledge on issues that reflect the underlying processes that contdbute to the reduction of poverty, hunger, and malnutdtion in the world. All manuscripts submitted for publication in the FOOD POLICY RE VIEW series undergo extensive review under the auspices of IFPRI's Publications Review Committee. The review process includes presentation of the manuscript in a fOlmal seminar and selection by the Review Committee of at least four reviewers, two of whom are external to IFPRI and two, including one from the Committee, are internal. Reviewers are chosen for their expertise in the manuscript's subject matter and method ology. The author responds in writing to the reviewers' comments and resubmits the manuscript to the Review Committee after making neces sary revisions. The Review Committee then makes its recommendation on publication of the manuscdpt to the Director General ofIFPRL With the Director General's approval, the manuscript becomes part of the IFPRI FOOD POLICY REVIEW series. IFPRI BOARD OF TRUSTEES Gerry Helleiner James Charles Ingram Chairman, Canada Australia Sjadfuddin Baharsjah Dharma Kumar Indonesia India David E. Bell Harris Mutio Mule U.S.A. Kenya Abdoulaye Sawadogo Henri Carsalade COte d'Ivoire France Nicholas H. Stem Anna Ferro-Luzzi United Kingdom Italy M. Syeduzzaman Ibrahim Saad Allmed Hagrass Bangladesh Egypt Per Pinstrup-Andersen Yujiro Hayami Director General Japan Ex Officio, Denmark FOOD POLICY REVIEW 1 Institutional Finance for Agricultural Development An Analytical Survey of Critical Issues BHUPAT M. DESAI JOHN W. MELLOR INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE WASHINGTON, D.C. Copyright 1993 International Food Policy Research Institute. All rights reserved. Sections of this report may be reproduced without the express permission of but with acknowledgment to the International Food Policy Research Institute. Library of Congress Cataloging in-Publication Data Desai, B. M. (Bhupat Maganlal), 1938- Institutional finance for agricultural develop- ment : an analytical survey of critical issues / Bhupat M. Desai and John W. Mellor. p. cm. - (Literature review series: 1) Includes bibliographical references. ISBN 0-89629·500-1 1. Agricultural credit-Developing countries. 2. Agricultural credit corporations-Developing countries. 3. Rural credit-Developing countries. 4. Interest rates-Developing countries. I. Mellor. John Williams, 1925- . II. Title. III. Series. HG2051.D44D47 1993 93-34703 332.7'1'091724-dc20 CIP Contents Foreword ix Chapter One Summary 1 Chapter Two Introduction 5 Chapter Three The Historical Record aud Organizational Structure of Formal Rural Financial Institutions 12 Chapter Four Vertical Integration, Density of Coverage, and Multiproduct Structure of Formal Rural Financial Institutions 26 Chapter Five Transaction Costs, Profitability, Scale, and Effects on Development 39 Chapter Six Response of Rural Loan Demand to Interest Rate and Nonprice Determinants 81 Chapter Seven Response of Supply of Rural Deposits to Interest Rate aud Nonprice VaJiables 95 Chapter Eight Response of Supply of Rural Saving to Interest Rate and Nonprice Determinants 104 Chapter Nine Flow of Funds of the Institutional Rural Financial System 115 Chapter Ten Conclusions and Implications 121 Appendix 1 Methodology 130 Appendix 2 Reasons for Delinquency in Repayment of Agricultural Loaus in Selected Countries 133 References 137 iii Tables 1. Number of rural financial institutions (RFls) in develop ing and developed countries selected for the study, mid- 1970s 20 2. Share of different types of organization of rural financial institutions in the total number, mid-1970s 22 3. Vertical integration, density, and coverage of formal ru ral financial institutions (RFls) in selected developing and developed countries 28 4. Share of small farmers receiving institutional loans and land in selected developing countries, mid-1970s 32 5. Proportion of rural financial institutions (RFIs) and country RFI systems that are unifunctional, semi-multifunc- tional, and multifunctional, by region and income group 36 6. Unit transaction costs of selected institutional lenders, by region and country, mid-1970s 43 7. Costs and viability of the Grameen Bank, Bangladesh, 1984c86 46 8. Estimated parameters of double-log cost functions for the Grameen Bank, Bangladesh 46 9. Transaction costs of br~nches of the Grameen Bank, Bangladesh, 1984-85 47 10. Estimated parameters of the log-log-inverse transaction cost function for branches of the Grameen Bank, Bang- ladesh 47 11. Unit and marginal transaction costs and viability of the Sonali Bank, Bangladesh, 1976-80 49 12. Estimated parameters of the double-log transaction cost function for the Sonali Bank, Bangladesh 50 13. Unit and marginal transaction costs and viability of 10 rural branches of the Sonali Bank, Bangladesh 50 14. Estimated parameters of the log-log-inverse transaction cost function for branches of the Sonali Bank, Bangla- desh 51 iv 15. Unit transaction costs, unit interest costs, and unit net margin of the regional rural banks and commercial banks, India, 1978 and 1980 52 16. Deposit growth rates of nationalized commercial banks in India dudng 1980-85, according to branch groups 55 17. Estimated parameters of the log-log-inverse transaction cost function for rural branches of the nationalized com~ mercial banks, India 55 18. Size and growth of rural deposits and rural loans in the rural institutional finance system, India, 1961/62- 1985/86 58 19. Pattern of agricultural loans of the rural institutional finance system, India, 1961/62-1981/82 60 20. Pattern of loans advanced by the cooperatives for the Agricultural Production Subsystem (APS), India, 1961/62-1981/82 61 21. Unit profit and unit transaction costs of RFls, India, 1961/62-1981/82 63 22. Scale parameters and implied economies or disecono mies in transaction costs of RFIs, India, 1961/62- 1981/82 64 23. Vadous costs, gross margin, and net margin of the Dill ing Branch of the Agricultural Bank of Sudan, Sudan, 1975-77 65 24. Estimated parameters of the double~log transaction cost function for the Dilling branch of the Agricultural Bank of Sudan, Sudan 66 25. Various costs, gross margin, and net margin of the Wad Medani branch of the Agricultural Bank of Sudan, Su- dan, 1975-77 67 26. Estimated parameters of the double-log transaction cost function for the Wad Medani branch of the Agricultural Bank of Sudan, Sudan 67 27. Various costs and viability of the Bank for Agriculture and Agdcultural Cooperatives, Thailand, 1976 68 28. Estimated parameters of the log~log inverse transaction cost function fm the Bank for Agriculture and Agricul- tural Cooperatives, Thailand 70 29. Aggregate costs, aggregate revenue, and net margin of all agdcultural cooperatives. Thailand. 1973-78 71 v 30. Estimated parameters of the cubic aggregate cost func- tion for all agricultural cooperatives, Thailand 72 31. Aggregate costs, revenue, and net margin of a sample of agricultural credit cooperatives, Thailand, 1972 74 32. Estimated parameters of the double-log aggregate cost func- tion for agricultural credit cooperatives, Thailand, 1972 74 33. Transaction and financial costs and net margin of the National Agricultural Cooperative Federation, Republic of Korea, 1967 and 1970 77 34. Structure of assets and liabilities of the National Agricul tural Cooperative Federation, Republic of Korea, 1967 and 1970 77 35. Transaction and financiaI costs and net margin of the county/ city cooperatives, Republic of Korea, 1967 and 1970 78 36. Structure of assets and liabilities of the county/city coop- eratives, Republic of Korea, 1967 and 1970 79 37. Data on viability of primary cooperatives, by crop area, Republic of Korea, 1970 80 38. Estimated multivariate models of demand for rural credit in India, a low-income country 82 39. Estimated multivariate models of demand for rural credit in three middle-income countdes 83 40. Estimated multivariate models of demand for rural credit in the United States, a high-income country 85 41. Evidence on interest elasticity of demand for rural loans in selected developing and developed countries 88 42. Evidence on interest elasticity of demand for rural loans by farm size or income group in selected developing cQuntIies 93 43. Impact of raising the interest rate on farm-level loans and on scale economies in transaction costs of rural financial institutions (RFIs) in low-income countries 94 44. Estimated multivariate models of supply of rural deposits in Kenya, 1970-82, and India, 1951-63 97 45. Estimated multivariate models of supply of rural deposits in two studies of Asian low-income countries 98 46. Relative importance of interest- and noninterest-rate-re lated determinants of supply of rural financial savings, Taiwan, 1960-70, and United States, 1948-70 99 vi 47. Relative importance of interest- and noninterest-rate-re- lated determinants of supply of rural financial savings in a study of the United States 100 48. Evidence on elasticity of supply of rural financial savings to the real interest rate in selected developing and devel- oped countries 102 49. Pattern of total rural savings and assets in the Philippines and Japan 105 50. Estimated multivariate models of supply of rural saving in two studies of India 107 51. Estimated multivariate models of supply of rural saving in selected studies of Asian cQunuies 108 52. Estimated multivatiate models of supply of rural saving in the Republic of Korea 109 53. Estimated multivariate models of supply of rural saving in selected developing and developed countries 110 54. Positive and negative effects of the rate of return on total saving in selected studies of various countries 113 55.