INNOVATIONS IN RURAL AND AGRICULTURE FINANCE


Rural Banking in Africa: The Rabobank Approach GERARD VAN EMPEL


FOCUS 18 • BRIEF 4 • JULY 2010 M


any people in the vast rural areas of Africa lack access to financial services, and most commercial banks are not


interested in moving into these areas due to their low income levels, lack of scale economies, and poor infrastructure. Also, few banks actually understand the most common economic activity in rural areas: agriculture. Consequently, the absence of financial institutions in rural Africa has often enticed governments to step in, particularly with state-dominated banks focused on agriculture. Many of these initiatives have failed, however, because they were too bureaucratic, too policy oriented, too concentrated on risk to only one segment of the population, or too weak in customer focus. In addition, clients considered these government-sponsored institutions to be instruments that provided grants; hence, the banks suffered from poor loan-recovery rates. While microfinance institutions have made some inroads


into rural Africa with the financial backing of international nongovernmental organizations and other sponsors, their sustainability is questionable. They tend to lack banking licenses and therefore have a very limited product range, and they cannot afford modern technology-based distribution systems.


Key gaps in rural banking in Africa


One of the most prominent gaps in developing banking services for rural Africa is poor infrastructure—for example, bad roads, erratic electricity provision, and lack of communications systems—which impedes effective outreach to customers. The legal environment in these rural areas is also suspect.


Insecure property rights—especially land titles in rural areas—limit any bank’s collateral options; combined with poor contract- enforcement opportunities, this takes away a bank’s incentive to provide credit, especially for long-term loans. Proper land registration and enforceable mortgage systems are important issues for rural development.


The inefficiency of markets is also a barrier to developing


rural financial services. Agricultural value chains are often poorly organized, lacking in transparent pricing, and fragmented in primary production—all of which results in high transaction costs. In many cases, the banking environment is distorted by stakeholders— including donors, governments, and development banks—who do not always regard agriculture as an economic activity, but rather as a social problem. These stakeholders provide subsidized funding to farmers or cooperatives, which means private banks often lack a level playing field. Poor financial literacy rates, especially among small farmers, and a limited understanding of banking requirements also pose a problem.


Rabo Development


In an effort to serve the financial needs of emerging markets and developing countries, Rabo Development (RD) was created with a mission similar to that of its parent organization, Rabobank, which was created by farmers in the Netherlands more than one hundred


years ago. In order to achieve its mission of providing access to financial services to those in rural areas of developing countries, RD participates in financial institutions and provides management services and technical assistance. It has made investments in Tanzania, Zambia, Mozambique, Rwanda, Paraguay, Brazil, and China. RD also works with cooperative “enterprises” and financial institutions that want to increase their own access to financial services. While RD focuses on investments, Rabo International Advisory Services (RIAS) provides technical assistance. RIAS has a 20-year history in consultancy services mainly to financial institutions and cooperatives in emerging markets. Rabo Development has made investments in some existing


financial institutions with the objective to transform these organizations into leading banks with a rural orientation. Financial participation is limited to minority stakes (variation between 10 and 45 percent); the majority of shares are locally owned, thereby retaining the status of a local bank. This allows customers to better identify themselves with the institution and appeals to national pride. Financial investment demands a shared vision of the future


development of an institution, so stakeholders should agree on a mission and business plan, which are likely to entail servicing new customer segments, including rural clients (mainly farmers), and developing a broader product base. In order to assist implementation, Rabo Development not only provides capital but also management services, technical assistance, and representation on the board of directors. At present, Rabo Development has four investments in banks in Africa, which have a total of more than 3 million customers collectively. There is no standard recipe for exactly how capacity should be built because it very much depends on each individual institution’s stage of development and the country concerned. In any case, however, special attention should be given to getting the product distribution strategy of the institution right. To distinguish customer segments and develop their value propositions, it is pivotal to organize an efficient outreach, using both physical channels (such as branches) and virtual channels (such as ATMs, mobile banking, and Internet banking).


Lessons learned


These lessons have been learned by Rabo Development’s work in developing countries and emerging markets.


• Banks with a rural orientation still need a strong urban presence, as most banking assets are concentrated in urban areas. New distribution concepts, such as mobile banking and products, are also normally piloted in urban areas.


• Banks need to service all client segments with the appropriate mix of products (including microloans) in order to effectively use the branch network and establish a well-balanced portfolio, thereby reducing the concentration of risks.


• Financial institutions that want to practice rural finance need to be committed to this segment and need specialized knowledge-based departments, including agriculture and small


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