What would it take to foster a measurable increase in the availability of agriculture finance to small and medium farmers? Panayotis N. Varangis from the International Finance Corporation explored some answers to this question when he spoke at IFMR on “Innovations in Agriculture Finance and Weather Index Insurance”. We bring you some of the thoughts he shared on making agriculture finance more accessible to small and medium farmers.
Agriculture finance, especially to small and medium farmers, is riddled with risks and challenges. Some of the broad categories of risk include –
- Climate change risk – exposure to variations in weather patterns
- Production/yield risks due to natural hazards
- Market and price risk
- Collateral limitation in the form of weaker and riskier security
- Government interventions weakening local rural credit culture
Many programs take the safe way out and end up lending to large farmers. A more robust way to lend to small and medium farmers is to explore existing delivery channels that focus on small and medium farmers and promote products that mitigate these risks. This is an appropriate time for the lending institutions to take a step back and re- visit the lending strategy.
While it is not necessary to abandon the traditional method of lending, it makes good sense to adopt an integrated approach of judiciously combining the old and the new methods of lending.
It is also important to learn from the existing projects to identify success factors, replicate and scale up. Many a time all it takes is designing a sub-component in an existing project than having to start something totally new. Existing channels that connect the small farmers should be identified to build financial capabilities. Lending institutions can leverage these existing linkages in the agriculture supply chain by connecting with participants such as input suppliers, commodity procurement agencies, and farmer groups.
Agri-lending is a challenging task and identifying risks and devising mitigants requires a lot of work with ears close to the ground. There has to be collaborative participation in the system and existing linkages have to be leveraged to the fullest possible extent. A comprehensive solution can be worked out only by bringing together different stakeholders and participants.
How to expand and reach scale?
- Map opportunities – Identify opportunities in the commodity supply chain/breadbaskets and design projects around them.
- Implement projects – Identify key components of success from existing projects, scale up and replicate, map further opportunities for the sector/region
- Capacity building and knowledge sharing – Integrate small farmers into the financial system, including working with producer organizations and leverage farmer capacity building in productivity & standards (e.g. finance investments for new technologies)
- Leverage and replicate – Complement existing initiatives, apply lessons learned/best practices from projects and consider providing incentives (e.g. financing and/or risk sharing at initial stages to demonstrate sustainable new financing approaches/products)
Some important levers for Financial Institutions to increase agriculture lending are
- Loan product design
- Tools to identify and manage risks
- Delivery channels to reach small farmers
- Financial literacy – awareness and training
A recently held regional forum on agriculture finance in Zambia had participants from local banks, producer organizations, input suppliers, NGOs, international organizations, donors, and consulting firms. The participants were asked to point out one change each that, according to them, would bring about effective agri-lending. The 5 winning ideas that emerged were –
- Develop a system of private sector mechanized service providers in rural areas: lead farmer/entrepreneur leases equipment to provide services to surrounding small farmers
- Invest in irrigation systems—community-based , owned and managed
- Develop a franchise model of community based storage facilities, provide real time market information, potential input demand aggregation
- Create private sector led agri-lending training centers for bank staff and farmers
- System of profiling of producer groups on their governance, financial management and performance—profiles that can be used by banks for lending to them
Like these ideas or have an idea to take agriculture finance to small farmers? Voice your thoughts, we want to hear it.