Managing credit risk in rural financial institutions: what seems to work
Mark Wenner | Sergio Navajas | Carolina Trivelli | Alvaro Tarazona
Rural areas are largely unbanked due in part to perceptions of high credit risk. Agriculture remains the main livelihood activity for many but it is inherently more risky than other sectors due to vulnerability to climatic shocks and commodity price volatility. Accordingly, many financial institutions do not see an attractive risk-return ratio and shy away from rural areas in general and from agricultural lending in particular. This article examines how a sample of rural financial institutions in Latin America views credit risk, how they manage it, and how well they fare in the process as measured by key financial performance indicators. It concludes that there are a set of common principles that can be applied in credit evaluation processes to select low-risk borrowers and that through portfolio diversification strategies and the establishment of portfolio exposure limits to agriculture, acquired risk can be managed and coped with at the institutional level. Unfortunately, risk transfer instruments are little used and generally unavailable. Much can be done to improve the situation. None- theless, nearly all institutions in the survey saw market opportunities, and the most successful institutions were growing fast and generating profits.Llsterri, J., Rojas, A., Mañueco, P., López, V. and García Tabuenca, A. (2006) Sistemas de Garantía de Crédito en América Latina. Orientaciones Operativas, Sustainable Development Department Best Practice, No. MSM 135, Inter- American Development Bank, Washington DC, http://www.iadb.org/sds/doc/int10D.PDF http://www.iadb.org/sds/doc/int10D.PDF
Navajas, S. and Tejerina, L. (2006) Microfinance in Latin América and the Caribbean: How Large is the Market?, Sustainable Development Department Best Practice, No. MSM 134, Inter-American Development Bank, Washington DC.
Trivelli, C. and Tarazona, A. (2007) Análisis de la Encuesta sobre Manejo de Riesgo Crediticio y Estudios de Casos de Cuatro Instituciones Financieras Rurales en Perú y Guatemala, Instituto de Estudios Peruanos (IEP), Lima (mimeo).
USDA (United States Department for Agriculture) (1997) Credit in Rural America, Agricultural Economics Report No. (AER749), Rural Economy Division, Economic Research Service, USDA, Washington DC, http://www.ers.usda.gov/publications/aer749/ http://www.ers.usda.gov/publications/aer749/
Wenner, M. D. (2005) Agricultural Insurance Revisited: New Developments and Perspectives in Latin America and the Caribbean, Sustainable Development Department Best Practice, No. RUR-05-02, Inter-American Development Bank, Washington DC.
Wenner, M. D., Navajas, S., Trivelli, C. and Tarazona, A. (2007) Managing Credit Risk in Rural Financial Institutions in Latin America, Sustainable Development Department Best Practice, No. MSM 139, Inter-American Development Bank, Washington DC.
World Bank (2006) Dimensions of Urban Poverty in the Europe and Central Asia Region, World Bank Policy Research Working Paper, No. 3998, World Bank, Washington DC.
Llsterri, J., Rojas, A., Mañueco, P., López, V. and García Tabuenca, A. (2006) Sistemas de Garantía de Crédito en América Latina. Orientaciones Operativas, Sustainable Development Department Best Practice, No. MSM 135, Inter- American Development Bank, Washington DC, http://www.iadb.org/sds/doc/int10D.PDF http://www.iadb.org/sds/doc/int10D.PDF
Navajas, S. and Tejerina, L. (2006) Microfinance in Latin América and the Caribbean: How Large is the Market?, Sustainable Development Department Best Practice, No. MSM 134, Inter-American Development Bank, Washington DC.
Trivelli, C. and Tarazona, A. (2007) Análisis de la Encuesta sobre Manejo de Riesgo Crediticio y Estudios de Casos de Cuatro Instituciones Financieras Rurales en Perú y Guatemala, Instituto de Estudios Peruanos (IEP), Lima (mimeo).
USDA (United States Department for Agriculture) (1997) Credit in Rural America, Agricultural Economics Report No. (AER749), Rural Economy Division, Economic Research Service, USDA, Washington DC, http://www.ers.usda.gov/publications/aer749/ http://www.ers.usda.gov/publications/aer749/
Wenner, M. D. (2005) Agricultural Insurance Revisited: New Developments and Perspectives in Latin America and the Caribbean, Sustainable Development Department Best Practice, No. RUR-05-02, Inter-American Development Bank, Washington DC.
Wenner, M. D., Navajas, S., Trivelli, C. and Tarazona, A. (2007) Managing Credit Risk in Rural Financial Institutions in Latin America, Sustainable Development Department Best Practice, No. MSM 139, Inter-American Development Bank, Washington DC.
World Bank (2006) Dimensions of Urban Poverty in the Europe and Central Asia Region, World Bank Policy Research Working Paper, No. 3998, World Bank, Washington DC.
Llsterri, J., Rojas, A., Mañueco, P., López, V. and García Tabuenca, A. (2006) Sistemas de Garantía de Crédito en América Latina. Orientaciones Operativas, Sustainable Development Department Best Practice, No. MSM 135, Inter- American Development Bank, Washington DC, http://www.iadb.org/sds/doc/int10D.PDF http://www.iadb.org/sds/doc/int10D.PDF
Navajas, S. and Tejerina, L. (2006) Microfinance in Latin América and the Caribbean: How Large is the Market?, Sustainable Development Department Best Practice, No. MSM 134, Inter-American Development Bank, Washington DC.
Trivelli, C. and Tarazona, A. (2007) Análisis de la Encuesta sobre Manejo de Riesgo Crediticio y Estudios de Casos de Cuatro Instituciones Financieras Rurales en Perú y Guatemala, Instituto de Estudios Peruanos (IEP), Lima (mimeo).
USDA (United States Department for Agriculture) (1997) Credit in Rural America, Agricultural Economics Report No. (AER749), Rural Economy Division, Economic Research Service, USDA, Washington DC, http://www.ers.usda.gov/publications/aer749/ http://www.ers.usda.gov/publications/aer749/
Wenner, M. D. (2005) Agricultural Insurance Revisited: New Developments and Perspectives in Latin America and the Caribbean, Sustainable Development Department Best Practice, No. RUR-05-02, Inter-American Development Bank, Washington DC.
Wenner, M. D., Navajas, S., Trivelli, C. and Tarazona, A. (2007) Managing Credit Risk in Rural Financial Institutions in Latin America, Sustainable Development Department Best Practice, No. MSM 139, Inter-American Development Bank, Washington DC.
World Bank (2006) Dimensions of Urban Poverty in the Europe and Central Asia Region, World Bank Policy Research Working Paper, No. 3998, World Bank, Washington DC.
Llsterri, J., Rojas, A., Mañueco, P., López, V. and García Tabuenca, A. (2006) Sistemas de Garantía de Crédito en América Latina. Orientaciones Operativas, Sustainable Development Department Best Practice, No. MSM 135, Inter- American Development Bank, Washington DC, http://www.iadb.org/sds/doc/int10D.PDF http://www.iadb.org/sds/doc/int10D.PDF
Navajas, S. and Tejerina, L. (2006) Microfinance in Latin América and the Caribbean: How Large is the Market?, Sustainable Development Department Best Practice, No. MSM 134, Inter-American Development Bank, Washington DC.
Trivelli, C. and Tarazona, A. (2007) Análisis de la Encuesta sobre Manejo de Riesgo Crediticio y Estudios de Casos de Cuatro Instituciones Financieras Rurales en Perú y Guatemala, Instituto de Estudios Peruanos (IEP), Lima (mimeo).
USDA (United States Department for Agriculture) (1997) Credit in Rural America, Agricultural Economics Report No. (AER749), Rural Economy Division, Economic Research Service, USDA, Washington DC, http://www.ers.usda.gov/publications/aer749/ http://www.ers.usda.gov/publications/aer749/
Wenner, M. D. (2005) Agricultural Insurance Revisited: New Developments and Perspectives in Latin America and the Caribbean, Sustainable Development Department Best Practice, No. RUR-05-02, Inter-American Development Bank, Washington DC.
Wenner, M. D., Navajas, S., Trivelli, C. and Tarazona, A. (2007) Managing Credit Risk in Rural Financial Institutions in Latin America, Sustainable Development Department Best Practice, No. MSM 139, Inter-American Development Bank, Washington DC.
World Bank (2006) Dimensions of Urban Poverty in the Europe and Central Asia Region, World Bank Policy Research Working Paper, No. 3998, World Bank, Washington DC.
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