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The provision of medium term credit is an important aspect of IFAD-financed projects in West Africa. On-farm investments on credit look essential for the project to reach its incremental production objectives rapidly: In Segou (103 ML), medium term loans were needed to finance animal traction, to raise farm productivity; in Niger (SRS 009/023 NG), medium term loans were used to finance motor pumps. Sizable volumes of medium-term credits are often disbursed quickly at the beginning of a project, but repayment rates of less than 50% are common. There are two notable exceptions: (i) credit financing for motor pumps in the Komadougou Valley, Niger, where loans were well-suited to the needs of beneficiaries and the activities financed were profitable; and (ii) financing animal traction in the Borgou project in Benin (210 BE), where cotton provides cash income, credit repayment is deducted directly at the point of cotton sales, and farmers and the Caisses Locales de Crédit Agricole Mutuel (CLCAM) already successfully provided medium-term credit before the IFAD intervention. The consequences of failure can be serious: Repossession of motor pumps in the Niger Valley; farmer over-indebtedness and exclusion from credit in Segou; and household decapitalization, to reimburse unprofitable loans at any cost. Medium-term credit is much riskier than short-term credit, both for the borrowers (risk of indebtedness) and for the lenders (large volumes of credit and risk of default).
The decentralized financial systems which have been gradually emerging in West Africa over the past ten years have started with the provision of short-term credit. After several successful years (at least three), some have begun to provide medium-term credit. In the Rural Credit Project in Guinea, medium-term credit is provided by local credit schemes after three years of successful operations. In Borgou, Benin, CLCAMs have started providing medium-term credit after short-term credit proved successful. Experience shows that when medium-term facilities are available [Fédération des Caisses dEpargne et de Crédit Agricole (FECECAM) in Benin, rural credit in Guinea], there is little demand for credit outside profitable cropping zones (for cotton, in particular). The demand for medium-term credit is actually quite limited, which directly contradicts the beliefs of developers and the supposed "needs" of farmers.
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To minimize risk for both borrowers and lenders, medium-term credit facilities
should be introduced gradually, after short-term credit operations are
working well. This ensures that beneficiaries consider credit as something
that must be paid back eventually. The "agricultural policy statement"
in Guinea includes the following recommendation: "Projects should
not offer medium-term credit until they are satisfied with the success
of short-term credit operations."
- Where large investments require rapid financing, methods other than medium-term credit could be considered:
- Lease/hire schemes have the advantage that they may be terminated abruptly with minimal risk to both parties. If the beneficiary does not honour his/her commitment for repayment, the equipment can simply be recuperated. Similarly, the beneficiary can return the equipment if it is found unsuitable.
- Outright grants, through new institutions should be promoted in those poor areas where monetary revenues are low and where proposed investments may not generate stable and immediate cash income. The Local Investment Fund in Mali provides interesting experience with regard to financing village land development works.
Select any of the following related project profiles for background information: 056 GU, 101 BE, 103 ML, 187 CG, 198 GH, SRS-011 BF, SRS-012 GU.
