A Linear Programming Analysis of the Regulatory Response of Rural Banks in the Philippines

The Philippine government through the Central Bank has tried to influence the rural banks' allocation of funds in favor of small farmer loans through changes in regulatory policy. A linear programming model was developed to evaluate changes in the small farm loan portfolio resulting from selected regulatory changes. Results indicate that neither seed funds to support supervised credit programs nor preferential interest rates on rediscount funds for agricultural loans increase the flow of credit to small farmers. Such policies discourage banks from mobilizing local deposits and increase their dependence on Central Bank rediscount funds. A comprehensive rural financial market reform that eliminates negative real rates of interest and promotes the financial independence of rural banks is needed to increase the flow of credit to small farmers