Agricultural Finance Revisited

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FAO/GTZ Initiative
"Agricultural Finance Revisited"

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The aim of the initiative

The background of the joint initiative "Agricultural Finance Revisited" of FAO and the German Agency for Technical Cooperation GTZ is the shrinking volume of agricultural credit resources in many developing countries since the beginning of the 1980s. Since policy-makers, practitioners, and scholars have become aware of the negative consequences of so-called directed or supervised credit programmes, they shifted their attention from credit to finance, the latter comprising both credit and savings, and from agricultural to rural, the latter encompassing both agricultural and non-agricultural activities. As a consequence, donors' assistance shifted from farm credit and state-owned agricultural development banks to microenterprise financing (microfinance) and the promotion of non-governmental finance institutions. Focusing more on financial services for off-farm production, both donor and government funds for agricultural lending experienced a sharp decline. This shift implies the danger of negligence of the specific financial demand and requirements of in particular small farmers.

After the collapse of many agricultural development banks the remaining or recently established financial institutions are very often not capable of closing the gap with a high degree of outreach and sustainability due to their business policies and institutional weaknesses. In the end, many small-scale farmers do not have access to financial services.

The FAO/GTZ joint initiative attempts to develop appropriate strategies and instruments to ensure an increased access to appropriate financial services in the areas of agricultural finance. The aim is to supply key decision makers in the political and institutional field in developing countries as well as donor and executing agencies with innovative concepts for the sustainable provision of agricultural sector and small farmer oriented financial services.

This joint exercise has been initiated in order to formulate a better policy and to elaborate a new approach to agricultural sector finance. Our priorities in the framework of this joint initiative are on achieving goals which the above outlined context requires:

1. to ensure that the demand of farmers, especially of small-scale farmers in developing countries, for agricultural credit can be satisfied under the new financial market approach.

2. to develop instruments for public (national and international) intervention to overcome existing constraints of agricultural finance (high financial transaction costs, specific risks, lack of loan collateral etc.) without violating basic principles of financial system development.

3. to contribute to the world food security strategies through the widening and deepening of efficient agricultural financial institutions and services.




Publications

FAO and GTZ will publish together a series of documents under the umbrella title "AFR". This series comprises the following six studies:

No.1:
Agricultural Finance Revisited: Why?

The publication reviews the experiences with agricultural credit programmes in the last decades and the shift from directed credit towards a new approach based on rural financial system development. It sets out the special market environment of the agricultural sector in developing countries and the unique features of agricultural finance. These particular conditions still require special government attention but in a different manner than given under the directed credit approach.

No.2: Agricultural and Rural Finance Deserve the Right Policies

This publication sets out to clarify the process of policy formulation for agricultural and rural finance, and emphasises the mechanisms involved. It is addressed to those responsible for formulating, managing and tending the rural financial system, namely, policy makers, donors and managers of rural financial institutions, financial experts/consultants and project designers. It highlights some of the key issues that should be addressed in the policy making process and provides a diagnostic methodology which can be used as an aid in the evaluation of the comprehensiveness of a given policy-making system at national level. Case study examples are presented throughout the document to highlight the importance of some key issues when formulating an agricultural finance policy.

No.3:
Better Practices for Agricultural Finance - Doing it Right

The objective of this study is to identify unique features of the agricultural sector and the rural economy that present challenges for expanding the frontier of formal finance, how these affect the provision of sustainable financial services and the key elements of a strategy for successful agricultural lending. Although no simple blueprint exists for successful rural financial institutions serving agriculture, some recent interesting experiences derived from case studies and the new microfinance developments suggest "better practices" that are presented as part of the strategy.

No.4:
Sources of Funds for Agricultural Lending

This document describes the various loanable funds which are used by financial institutions: government budget funds, donor funds, central bank credit lines, interbanking loans, savings, debt and money market instruments and equity. It gives an overview of the current liability composition of the relevant rural financial institutions world wide and recent trends and shifts. A main focus will be given to the qualitative analysis of the advantages and disadvantages of each source of funds from the financial institutions' point of view. Based on this analysis recommendations will be made regarding the most appropriate combination of funds in order to obtain financial sustainability and independence under the general goal of providing the necessary inputs for agricultural investments.

No.5:
Prudential Regulation and Supervision for Agricultural Finance

Generally, financial institutions are not allowed to offer deposit services unless they are regulated and supervised by a supervisory body. Small depositors, especially from rural areas are also not able to monitor the management of the financial institutions where they deposit their funds in. To them the safeguarding of their deposits will be prioritary. Agricultural lending, on the other side, poses specific risks on a rural financial institution that need to be closed watched by a regulatory institution. The publication on this topic deals with experiences made in this area and recommends specific regulatory and supervisory measures appropriate to agricultural finance.

No. 6:
Improving Farmer Bankability and Financial Management Skills

This publication defines bankability as the capability of farmers to repay their loan principal plus interest from the cash flow generated by the farm households. The term financial management skills describes the farmer's capability to manage his liquidity (cash-flow) and is an important part of farmer bankability. This document clarifies the importance of these aspects for the development of sustainable and efficient rural financial markets, identifies roles and participation of different actors in the improvement of farmer bankability and financial management skills. Promising approaches and specific training programmes will be presented.



The AFR-studies No. 1&2 will be available in Autumn 1998; AFR No. 3 in the last quarter of 1998 and No. 4, 5 & 6 in 1999. Results will be presented to the donor community, developing countries governments and during international meetings and consultations (SACRED in cooperation with the Regional Agricultural Credit Associations and their member institutions).

Request for copies and information regarding publications listed in the series to:



FAO
Marketing and Rural Finance Service
Agricultural Support Systems Division
Viale delle Terme di Caracalla
00100 Rome, Italy
FAX: +39 6 570 56850
Email contact: Anthony.Slangen@fao.org

Gesellschaft für Technische Zusammenarbeit GTZ
Section Financial Systems Development
Dag-Hammarskjöld-Weg 1-5
P.O. Box 51 80
65726 Eschborn, Germany
FAX: +49 6169 79 6150
Email contact: Natascha.Pogodda@gtz.de


for further information on GTZ see also: GTZ-Homepage


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