Emerging Models in Agricultural and Rural Finance

To talk about the new agricultural and rural finance, it is useful to provide some definitions and go back very quickly to the “old” agricultural finance and draw some lessons. In fact, the emerging models, both the modern rural finance model and the value chain financing model, have derived their basics from the lessons learned from the old models and incorporated best practices from microfinance, taking advantage of all the changes that took place in the environment while avoiding the major errors of the past.

Definitions and Lessons from the Old Agricultural Finance

Three definitions are important:

x What is called microfinance is the provision of financial services to poor households that are excluded from conventional banks. It could be delivered in urban or rural areas and the clients could be involved in all sorts of income generating activities;

x What is called agricultural finance is the delivery of financial services to farmers/farming enterprises for their agriculture production activities. The farmers/farming enterprises could be large, medium or small;

x What is called rural finance is financial services delivered in a rural area, where there is no concentration of inhabitants and dwellings and where the major incomes are related with farm or off-farm activities.

Hence, normally, these three categories of financial services may not concern the same people, the same activities or even the same place where they are performed. However, for many decades and still now, poverty was a rural phenomenon and in developing countries, 60 to 70 percent of the poor were rural, living mainly of subsistence agriculture production. Therefore, it has been thought that poverty alleviation could be obtained by providing massive access to financial services to poor rural households.

Failures in agricultural finance in the 1970s and 80s, where agriculture was a governmentally led/dominated sector, are mostly due to:[1]

x Directed agricultural loans;

x Often provided by or through agricultural extension workers or agriculture development projects' staff with little financial culture and for whom loans are inputs included in technical packages;

x Subsidized interest rates, lax attitudes in loan recovery;

x Political interference, leading to the perception from borrowers, that those loans need not be repaid.

Hence, it is important to note that many of the causes for the failure of programs following this old paradigm are not related to the profitability of agriculture but are rather due to other external factors. However, the low profitability of agricultural production during those days remained the major reason why banks were reluctant to lend and farmers to borrow.

  • [1] See IFAD: “IFAD Decision Tools for Rural Finance”, IFAD publication (2012) and Meyer (2013), in this volume.
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