Breakout Session 7: Improving small farm access to modern inputs and financial services

Chair’s remarks and key points:  Mohamed Beavogui, IFAD

• Despite harsh criticism, financial institutions serving smallholders (namely, agricultural development banks) form an existing network capable of providing financial services. Let us focus instead on what they have gotten right, what can be replicated. Innovative partnerships have had success and there is potential for farmer cooperatives and other ‘own’ institutions.

• Persistently low input adoption rates cause lower productivity levels. Recognizing that input demand depends on accessibility and affordability, AGRA proposes a rural market structure based on 1) Agro-dealer networks who overcome disincentives of private investment in importing (no one firm invests since all firms will reap the benefits), and provide business management training and technical advisory to farmers.  And 2) subsidies, voucher schemes, and in particular a loan-guarantee scheme that improves availability of credit from commercial banks, thus affordability.

• Lenders need better and more thorough training in risk and portfolio management; understanding the heterogeneity of rural borrowers and the lending products will increase the amount of credit extended. On the farmers’ side, innovative financial and insurance products will improve their ability to mitigate risk.

• Perceptions of high risk in agriculture not only cause less working capital to be available to farmers, but less capital for the medium-to-long term investments necessary for intensification. There is a role for “venture capitalism” in this sense, and could it be filled by agricultural development banks?

• There is a distinct need for knowledge sharing at the institutional-level of models that may work; i.e. insurance-indexing, risk management, seed and technology fairs, contract farming, etc. Ultimately, the institutional environment will determine commercial or subsistence orientation.

• Training for farmers is crucial for navigating and using the financial and technological options (improved seeds and fertilizer) available to them.

• The private sector has incentive to engage with smallholders, but only to a certain point along the continuum of commercialization. There is a need to build strategies to supply input and credit to farmers who remain closer to the subsistence end.

Synthesis of discussion

By dually addressing supply and demand, AGRA’s model provides an example of viable private sector activity. In terms of inputs to production, low farmer uptake rates have been due to barriers of high prices, limited knowledge and extension, poorly functioning markets, etc. Agro-dealer networks are succeeding in making inputs accessible and affordable to farmers. On the other hand, access to credit has been limited by a perceived risk of lending to agriculture that is much higher than the actual risk. Although it was noted that AGRA’s guarantee schemes do not address the risks themselves, it improves risk tolerance and thus willingness for financial institutions to lend to agriculture. The topic of credit was examined more exhaustively in the discussion that followed.

After years of privatization and dismantling of government institutions in developing countries, it is generally agreed that the private sector has not succeeded in achieving the coverage that public institutions once had. Statal or agricultural development banks and input supply programs, including subsidies, are currently being rolled back in alongside the private sector, requiring the scope of each to be redefined. In this new and changing framework, how far can the private sector go with provision of assets? A contribution from an input supplier representative explained plainly that the private sector can only go so far as profitability is achievable, now or within a 5-year time span. New strategies are therefore needed for dealing with those farmers who remain outside of the private sector’s scope. The solution first requires clarity over the motivation for schemes such as AGRA’s; whether the priority is to reach “hard to reach” populations, or to lower the costs of transacting for all.

Regardless of the amount of household assets, it is the presence or absence of supporting institutions that will determine a farm’s commercial or subsistence orientation. Furthermore, even if the institutions exist, the opportunities may not. An example from India describes financial institutions that are not willing to engage in lending to farmers and farmers who exhibit uneven demand for financial products such as index-based weather insurance. There is a certain amount of institutional ‘failure’ in that inefficiencies, transaction costs, etc., are leading to prohibitively high interest rates. The costs of borrowing are deterring farmers from seeking credit for both working capital and long-term investment. Projects are sitting idle.

The paper argued that statal and agricultural development banks are inefficient to the point of being ineffectual, but the discussion affirmed that these institutions are here to stay. The reality is that development banks serving smallholders form a network capable of mobilizing financial services broadly and quickly, as evidenced most recently during the global financial crisis, and they do so despite their inefficiencies. The message from the discussion was clear; build capacity of these institutions based on what has worked, learn from institutions that have consistently lent greater than 10% of their portfolio to agriculture, and address weaknesses and inefficiencies. Another recommendation is better training in risk management, to both manage loan portfolios and to appropriately measure risk in agriculture. The risk perceptions of lending to agriculture are pervasive constraints to the availability of credit.

A criticism of microfinance institutions and “SACCOs” is that loan sizes are too small, resulting in high transaction costs. This translates into prohibitively high interest rates and begs the question, is there scope for AGRA-type guarantee schemes within these institutions? A likely scenario for the provision of rural and agricultural financial services is one where all three models of banks (public, private, informal) are needed together.

In addition to working capital and liquidity borrowing, the issue of medium-to-long term capital was also raised. Of concern is the reality that it is not being made available to agriculture sectors in developing countries because intensification necessarily involves investment to improve productive capacity. Since higher volatilities are part of the current landscape, why not see agricultural development banks act as venture capitalists?

Finally, there was a strong call for knowledge sharing, research and innovation, and product development.  Heterogeneity of rural populations notwithstanding, the information needs to transcend regions. For instance, a contribution about Latin America and the Caribbean described very little innovation with regards to financial services. Comments about the regional characteristics of supply chains in Africa brought up an interesting distinction. Anglo-African countries tend to organize value chains along product commodity lines, i.e. roots vegetables or fisheries. This is as opposed to Franco-African countries, among which Western-African countries are distinguished from Central-African as better organized.

Governments have an important role in value chain development, including getting institutions right, enabling well-functioning input supply and credit markets, building capacity for navigating complex financial systems, and effectively engaging in partnerships that will open the door for more private sector involvement in agriculture.