Financial Needs and Tools for Agricultural Development and Transformation Pertinent to Low- Income and Low-Middle-Income Countries
Investment and financing of small farmers are central issues for agricultural development and food security. This chapter explores the financial needs that arise in the course of agricultural transformation in low- and middle-income countries, and then reviews the financial tools that have been utilized in a variety of settings in the agricultural sectors of such countries. The effort will be to identify situations and settings where some types of financial institutions are more likely to be successful than others.
The agricultural transformation seems to be an inevitable stylized fact of development, characterized largely by major changes in agricultural land and especially labor productivity. It is the transition to a state of
A. Sarris (h)
© The Author(s) 2017
G. Mergos, M. Papanastassiou (eds.), Food Security and Sustainability, DOI 10.1007/978-3-319-40790-6_6
higher agricultural productivity, and the ensuing higher level of aggregate income, that creates the need for finance. The appropriate provision of both amounts as well as forms of finance can facilitate or delay the necessary transformation.
Rural smallholders are the predominant agents of agricultural production in most low-income countries, and are also the sector where the largest incidence of poverty and food insecurity is located. Rural smallholders have similar requirements of financial services as urban-based agents, albeit the types of specific products needed are different given the agricultural product cycle. These include savings, loans, insurance, production and consumption risk management tools, payment systems, and so on. Many rural residents and agricultural producers are constrained in their economic behavior by the absence of many of these tools, and are consequently greatly hampered in improving their livelihoods, thus affecting the overall growth and welfare of the countries where they reside.
There exists a multitude of formal organizations that deliver financial services to rural residents, including commercial and publicly owned banks and insurance companies, savings and loan cooperatives, microfinance banks, specialty financial institutions, such as leasing companies, and housing and consumer finance companies. However, many of these institutions have not expanded much into agricultural finance. This is because of the dispersion of agricultural households that renders the provision of services expensive, the covariate risks, usually linked to weather, that affect large numbers of rural households simultaneously, the lack of knowledge about the particulars of agriculture, and the low education on the part of rural service recipients. In their absence, a variety of informal financial institutions have tried to fill the gap. These include rotating savings and credit associations, local credit unions, financial nongovernmental organizations (NGOs), businesses financing their agricultural customers, local private moneylenders, friends and relatives, self-help groups, and many others. Nevertheless, a large number of rural smallholders in many low-income countries are underprovided in financial services, and face high costs for the financial services available.
This chapter commences by discussing the patterns of agricultural transformation and its relation to overall growth in different parts of the world. The next section reviews the way in which agriculture grows. Section “Financial Flows into Agricultural Development” describes the financial flows and financing gaps in agriculture. Subsequently the chapter discusses various models of rural finance, as well as the wide perceived gap between the needs and possible remedies in rural finance. Recent innovations in rural finance are explored. Finally, the concluding section describes the lessons learned from the reviewed literature.