Managing Credit Risk in Rural Financial Institutions in Latin America
By Sergio Navajas, Alvaro Tarazona Soria, Carolina Trivelli, Mark D. Wenner (05/07, MSM-139, En) See also Microenterprise
Adequately managing credit risk in financial institutions is critical for their survival and growth. In the case of rural lending in general and agricultural lending in particular, the issue of credit risk is of even of greater concern because of the higher levels of perceived risks resulting from some of the characteristics of rural dwellers and the conditions that they find themselves in. More extremely poor people tend to live in rural than in urban areas. In addition, fewer people are able to access basic infrastructure services and these tend to be of lesser quality or to be less reliable than in urban areas. Rural residents tend to be less educated, more often than not they have insecure land tenure, and they live farther apart than urban populations. Most importantly, agriculture, the mainstay of most rural economies, tends to be subject to price volatility, weather shocks, and trade restrictions. As a result, financial institutions that are active in rural areas are likely to face an elevated level of credit risk and need to manage it well. The lack of good risk mitigation techniques and high transaction costs can discourage formal financial institutions from entering and serving rural areas.
The purpose of this report is to review common credit risk management techniques used in a sample of Latin American financial institutions with agricultural portfolios, identify the factors that contribute to successful credit risk management as measured by several key financial performance indicators in order to assist donors, governments, and owners of financial institutions to promote and adopt the most efficient and robust techniques. The ultimate aim is to make financial markets more inclusive and sounder.
The report also examines the results of a survey of forty-two rural financial institutions in Latin America and provides a detailed analysis of four intermediaries, two in Peru and two in Guatemala. It ends with a set of recommendations on how to improve credit risk management capabilities.
We are confident that owners and managers of financial institutions with agricultural portfolios, donor agencies, national governments, and other stakeholders will find this report informative and helpful for making decisions and strengthening institutions.
Last updated: 06/06/07
