Commercializing State-Owned Retail Banks
In many countries, state-owned retail banks (SORBs) are the only financial institutions in rural areas, and they have a wealth of assets in terms of branch infrastructure and institutional knowledge that—under the right circumstances, strategies and leadership—can be leveraged and oriented toward sustainable and inclusive financial services for microentrepreneurs and small farmers.
SORBs come in many forms, including agricultural development banks, state-owned commercial banks, and postal banking facilities. They also come in various financial conditions. Although many have become sinkholes for government and donor bailouts, others are merely moribund, uninterested in doing more than taking customer deposits and buying government debt. Only a few SORBs have realized the microfinance potential inherent in their vast retail networks, their brand identities, and their integration with the larger financial sector.
Given this background and the current state of SORBs around the globe, there are four key reasons that SORBs are important for USAID’s and other donors’ development finance agendas:
- Some restructured SORBs have worked. Incentives to leverage their advantages in micro and rural finance have produced dramatic results. There is a clear need to document the rationale for—and prerequisites to—successful SORB reform.
- Preserving the access of lower-income firms, farmers, and consumers to financial services, particularly in rural areas, requires that SORBs be addressed.
- There is increasing interest in diverse strategies for restructuring SORBs and refocusing their activities on sustainable micro and rural finance.
- Expanding market-oriented rural and microfinance services in regions where SORBs have a presence requires a better understanding of the effect these institutions have on client behavior and competitive performance.
KNOWLEDGE AND PRACTICE
USAID’s Microenterprise Development office (MD) has funded research to better understand 1) the number and statuses of SORBs currently operating in developing countries, and 2) the critical success factors of specific instances where SORB reform led to increased financial access for poor, rural communities.
A comprehensive census of SORBs gathered information on 234 institutions in 68 countries throughout the developing world. Analyzing that information, researchers isolated four key operational strategies: closure, continued government involvement, creation of new SORBs, and privatization.
A case study of the Banco Agrario del Peru was conducted to examine the effect of allowing a struggling state-owned bank to close. It determined that, although government officials assumed the private sector would fill the gap left by the bank’s closing, that gap persisted for five years until another government-sponsored bank was founded. Five other case studies—focusing on the Land Bank of the Philippines, Banque du Caire in Egypt, Amhara Credit and Savings Institute in Ethiopia, Banco do Nordeste in Brazil, and Mongolia’s Khan Bank—examined successful instances of reform followed by rapid growth of microfinance services offered by SORBs.
An additional report will present the highlights of the existing USAID-funded research as well as the agendas of other donors, and will provide a foundation for an online discussion through a microLINKS Speaker’s Corner event.