Good Morning Ladies and Gentlemen,
It is my pleasure and privilege to welcome you to this roundtable discussion on behalf of the Food and Agriculture Organization of the United Nations. FAO and APRACA have collaborated for over 25 years now and we are pleased also on this occasion to work together on this joint activity.
During it’s last meeting in October 2002, the Executive Committee of APRACA recommended the establishment of a committee to carry out a feasibility study for a regional rural and microfinance bank. The overall objective of the regional bank would be to stimulate economic activities among the poor in Asia and thus alleviate poverty in the region. The regional bank would support the achievement of the first of the Millennium Development Goals of the United Nations for halving extreme poverty and hunger by 2015. Consequently, the study recommended by the APRACA Executive Committee received the full support of FAO.
Indeed, the commercialization of small farm production is a critical rural development issue throughout Asia. Small farmers face unprecedented opportunities and risks as a result of market liberalization, privatisation of agricultural services, and globalization of trade. Many substantive areas addressed by FAO – such as sustainable agricultural practices including organic farming or fish marketing – are of considerable interest to private sector companies. FAO is therefore facilitating dialogue as a honest broker between the public and private sectors, and amongst the private partners themselves or private investors such as banks. The organization also promotes agricultural policies that attract private investments while, at the same time, addressing hunger and food insecurity issues.
The regional bank’s immediate major objective would be to provide financial services to rural financial institutions (RFI) and microfinance institutions (MFI) that have retail operations. The proposed bank would thus play the role of a second-tier financial institution. Its services would include loans for on-lending to individuals and micro and small enterprises. The possibility of equity investments could be considered. The bank would also accept deposits from RFIs and MFIs that have temporary surplus funds.
The question may be raised as to why such a regional bank is needed when similar second-tier institutions already exist, or can be formed, at a national level. The answer is that past experiences with national level, second tier institutions are rather mixed. Experience has shown that when there are a large number of micro and rural financial institutions that can form the customer base for a second tier institution, then a national level institution can be successful. The Palli Karma Sahayak Foundation (PKSF) in Bangladesh is an often quoted example of such a successful second-tier institution.
But in smaller countries, or in countries where there is no large number of rural and microfinance retailing institutions, or where the creditworthiness of such organizations is doubtful, the situation differs. In such an environment there is insufficient scope for a wholesale bank to spread its risks over a sufficiently large number of borrower institutions. In such cases a regional level second tier institution may play a useful role. I would recommend, however, that the target group of potential client institutions be surveyed to ascertain the demand for the services of the new bank.
Ladies and gentlemen,
I have reviewed the list of discussion points that was distributed in preparation for this meeting. I understand that your consultations over the next three days will focus on the ownership structure of the proposed bank, on operational issues and on the most appropriate location to register the bank.
As for the ownership structure, it may be useful to study existing and similar organizations such as regional development banks, for instance the Asian Development Bank, as well as to look into more private forms of ownership. There are many nternational non-governmental organizations and other not-for-profit organizations active in rural and microfinance that may be interested in becoming shareholders of the regional bank. Thus the involvement of commercial investors, possibly other banks, should also be explored. Ownership participation by commercial banks would be conducive to creating a linkage between the commercial banking sector and the rural and microfinance sector. An improved integration of the two markets could facilitate the flow of resources from the commercial into the rural and microfinance sector. It would be another linkage model, but this time at a higher level than the linkage projects that APRACA has conducted in the past. In my view, the proposed bank provides a good opportunity for partnership between public and private as well as between commercial and not-for-profit organizations.
Two challenging operational issues are the management of borrower risks and the management of foreign exchange risks. Effective customer screening mechanisms are needed to appraise loan applications from various institutions. In this context, I should like to emphasize that there are rating agencies specialized in the rating of micro and rural financial institutions. Examples are Micro-Credit Ratings International Limited (M-CRIL) from India, MicroRate from the USA and Planet Rating from France.
In at least two regions of the world donor-supported rating funds encourage RFIs and MFIs to get a rating which, in turn, helps them to borrow from commercial or non-commercial sources. The Inter-American Development Bank (IADB) and the Consultative Group for Assistance to the Poor (CGAP) established a rating fund that subsidizes part of the cost for RFIs and MFIs that want to be rated. In Africa, the International Network of Alternative Financial Institutions (INAFI) has established a similar fund for its member institutions in the region. With a rating from one of the rating agencies, RFI and MFIs will become more quantifiable risks thereby reducing the workload of the proposed regional bank and facilitating the loan appraisal process.
A perhaps even more challenging issue will be the management of foreign exchange risks. National level second-tier lending institutions normally shoulder the foreign exchange risk for their borrowers if the loan funds are denominated in a foreign currency. This is a very important function that most RFIs and MFIs will not want to undertake on their own. Therefore, the proposed regional bank will have to undertake this responsibility. It will involve the use of financial instruments such as future contracts and currency swaps. These are specialized tools and there would be an economy of scale in having such tasks centralized at the second tier level.
Ladies and gentlemen,
Allow me to conclude on a policy note. Your deliberations over the next few days ultimately touch upon the daily conditions of live for countless small farmers in the Asia region, and aim to enhance small farmer livelihoods, in particular through higher incomes and competitiveness of small farmers, including vulnerable groups and farmers living in fragile ‘at risk’ ecosystems. FAO counts on your vision and expertise to establish improved enabling conditions for small farmer development and enhance farmers’ managerial and entrepreneurial skills. These will allow farmers to make sound decisions with respect to enterprise management and resource allocation. As a result, farmers will respond more rapidly and effectively to new market opportunities and minimize risks associated with commercialization and globalization.
Finally, I do not wish to further delay you from commencing your challenging task ahead. I wish you fruitful deliberations and a pleasant stay in Bangkok.