Risk-Based Differentiation Between Agricultural and Rural Finance

Agricultural finance refers to financial services used throughout the agricultural sector for farming and farm-related activities including input supply, processing, wholesale trade, and marketing. Whereas agricultural finance refers to all kinds of services (including deposit services, money transfers, etc.) for such businesses, discussion in development finance traditionally focuses on agricultural credit, predominantly on credit for primary agricultural production.[1]

Since SF typically targets at credit risks, this article is focusing on agricultural credit, too.[2] But we include the above mentioned agro-related value chain activities under the headline of agricultural credit. Both farming activities and non-farm activities in the agricultural value chain have two relevant features in common and which are reflected in SF and risk-management approaches:

x Both farming and related economic activities in the value chain[3] are often characterised by seasonalities, and

x They are often exposed to the same specific agricultural risks.[4]

In contrast, the concept of rural finance is not defined referring to a business sector, but instead to a geographical definition. It refers to financial services in rural areas that result in a somehow broader category than agricultural finance as it includes financial services to rural businesses that are not directly linked to farming including production and service activities like restaurants, retail shops or manufacturers, as well as financial services to rural households. These customers are not necessarily directly or only indirectly linked to seasonalities and specific risks of agriculture. On the other hand, rural finance does not include urban-based processing facilities or other agri-businesses which are subject to agricultural risk. Thus, from a risk-perspective, the concept of rural finance is fuzzy. However, serving both non-farm and farm clients in rural areas is a way for financial institutions to diversify credit risks and increase scale.[5]

  • [1] See for instance Meyer (2013), about the historical development of agricultural finance (”the old paradigm“).
  • [2] Agricultural credit to farmers is normally provided in cash. But in some structures (involving non-financial intermediaries – see below in the article) in-kind loans are provided for seed, fertilizer, and other farm production inputs.
  • [3] See below.
  • [4] As an example: When detrimental weather conditions reduce the quality and/or quantity of the tomato harvest, not only the tomato farmer is hit in his or her sales income. Also the local factory, which is canning tomatoes, is likely to suffer in terms of sales and income since its input is scarcer and possibly more expensive than usual.
  • [5] See for instance Meyer (2010) or Christen and Pearce (2005).
 
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