loan defaults, etc. Historically, both public and private sector banks expected – and often received – bailouts from the government to re-capitalize, often at politically expedient moments.

The process of financial liberalization has led to rapid growth in the volume of financial services transacted in the domestic economy, and to consolidation of the number of institutions in the market. The reduction in the supply of subsidized agricultural credit from the second tier-lending window of the Central Bank has reduced the flow of agricultural credit. Commercial interest rates are high – about 25-30% per annum (before the current financial crisis) - which reduces the demand for agricultural credit (Schiff, 2001). Scarce agricultural credit makes the coffee and cocoa sectors less competitive compared to other countries with less expensive credit and better functioning banking systems. Because tree crops, like coffee and cocoa, have a long gestation period, they are especially sensitive to interest rates and credit access (Schiff, 2001).

Financial services for the agricultural sector in the Dominican Republic have historically been limited. Following financial sector reforms and Hurricane Georges, commercial banks have been withdrawing from the provision of agricultural credit. The main reasons given on the part of the private bankers for this are the excessive risks that accompany financing to the agricultural sector. The principal sources of risk perceived by the private banking institutions are: price risks, lack of appropriate loan guarantees (e.g., land titles), weather shocks, weak administration on the part of the farmers themselves, as well as the distortions in pricing generated by the marketing and financing functions of the GoDR (Poyo, 2003). In addition, rapid growth in construction, telecommunications, commerce, tourism and services over the past decade has provided the banking system with an attractive alternative to financing agricultural production (Schiff, 2001).<sup>7</sup> Most private banking institutions do not offer financial services directly to smallholder producers (Schiff, 2001), but smallholders access credit though other sources. These producers depend on informal financial markets and exporters. The latter have access to credit from the domestic (and sometimes international) banking system. Historically, coffee and cocoa exporters and intermediaries have been a source of pre-harvest financing for producers. Thus, official data on lending to coffee and cocoa producers are under-reported, since these are “informal” financing arrangements.<sup>8</sup>

**<u>Table I.6 Loan Portfolio of Principal Financial Institutions, 2000 (values in RD$)</u>**

|Type of Institution|Total Loan<br>Portfolio|Agriculture Loan<br>Portfolio|% Share<br>Agriculture|
|---|---|---|---|
|Commercial Banks|78,228|3,469|4.4%|
|Development Banks (DEFINPRO)|5,329|442|8.3%|
|BancoAgricola|2,440|2,494|100.0%|
|Savings andLoan Associations|18,280|--|--|
|Other|2,493|--|--|
|Total|104,330|6,405|6.2%|

Source: World Bank (2002), based on Gomez (2002).

7 Rapid economic growth has created a growing middle class and opened greater opportunities for expansion in consumer and small enterprise credit. The deepening of the consumer credit markets and small enterprise lending enables the banking system to rapidly expand its loan portfolios while shrinking participation of the agricultural sector in loan portfolios. The banking system has moved towards shortterm commercial lending (Poyo, 2003).

8 Schiff (2001, p.63) notes: “Processor (mills) or exporters may lend to farmers since they exercise control over their output ... the lack of access to formal credit leads to interlinkages between the production and credit markets. The same is true for coffee, cocoa and tobacco where financing comes from exporters. Thus taxpayer money is used to subsidize credit, which reaches the larger farmers, mills and exporters, but does not reach the most needy.” 15