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close this book Agricultural extension
close this folder Providing agricultural support services
close this folder Direct services
View the document Testing recommendations
View the document Administering credit
View the document Selecting and producing seed
View the document Providing farm inputs
View the document Surveying agricultural land
View the document Providing storage
View the document Marketing agricultural products

Administering credit

OVERVIEW

Farmers can exercise certain options only when they have the financial resources to do so. Accumulating these resources (sometimes called 'capital') is a necessary first step toward innovation and change. Farmers can accumulate resources by saving surplus income or borrowing resources from other sources. To the small-scale farmer saving presents a major problem because even the diligent application of customary farm practices does not often yield much surplus beyond home needs. One of the major catalysts of potential farmer innovation in developing countries is therefore the provision of credit.

There are many kinds of credit: informal sharing of a shovel and family communal labor, village-level borrowing at the money lender's, bank loans or inputs-credit schemes. Beyond the village level, credit is both a powerful tool and a potential cause of dependence. While credit is a way of life for American farmers, it is only as a last resort or an initial catalyst event that it is considered in this manual. Cooperative ventures and capital-sharing are better ways to help small scale-farmers gain access to the resources for change. (See TOOL Forms of Credit for Small Scale Farmers).

Farmers themselves have various motives for using credit:

CONSUMER CREDIT

• Survival - when a crop failure or family ilness causes the normal balance of home needs and harvest to go out of balance.

• Family and Social Obligations - when a wedding, funeral or other family obligation requires money or resources not at hand.

• Consumption - when something the farm family wants is beyond normal means.

• Investment in the Home or Cottage Industry - when the farm family wants to buy a labor-saving device (corn grinder), set up a cottage industry (sewing machine and cloth) or repair/expand a house.

 

AGRICULTURAL CREDIT

• Survival of Farm Enterprise - (e.g. securing seed or using a cultivator) securing resources necessary to keep the farm going.

• Paying for Seasonal Labor - extra labor beyond the family may be needed to plant, weed or harvest when there is no surplus to provide wages.

• Acquiring Inputs - purchasing new tools, fertilizer or equipment to carry out a new package of practices.

• Increasing Efficiency - sometimes farmers wish to substitute animal or machine power for human power for land preparation, for example, but need to borrow to employ it before realizing profits.

• Marketing - while waiting for a good price for their produce farmers may need to borrow to survive.

• Expanding the Scale of Farm Business - to acquire additional land, to finance farm improvements (clearing land, building storage facilities, constructing irrigation works, etc), to increase herd size.

It is important for the extension worker and small-scale farmers to understand why and how credit is extended to farmers. Credit being a form a dependence on resources beyond farmers' control, it should be carefully and cautiously used. When the motivation of the lend is different than the farmer's motivation, there is much less opportunity for informality, for leeway with regard to the repayment of a loan, and generally for sympathy for the farmer's precarious position. It is of prime importance that the extension worker and farmer seeking credit be aware of the motives of lenders.

Locally, credit can be extended as a social obligation or an aspect of friendship or family responsibility. However, credit is most often proferred in order to earn interest on the loan. This is the basis of commercial lending in and out of the village. Beyond earning interest, credit is loaned to facilitate sales, to assure the delivery of farm products or as a public service through development projects. These motives are important to consider in seeking credit with farmers.

In order to determine whether it is worthwhile to incur the risks of using credit, it is useful to calculate the costs and terms versus the profitability (the cost/benefit) of credit. The cost of credit is not fixed and has to be determined by lender and borrower in informal cases like communal labor. There may also be customary or unwritten rules as to what such credit costs/terms will be. The cost of commercial credit on the other hand is always the amount of the loan, plus agreed-upon interest, plus any expenses incurred by the borrower in securing the credit.

Most of the cost of a commercial loan is interest. Interest is calculated a variety of ways, each resulting in a different amount of credit and a different cost (see ILLUSTRATIONS). A common form of interest for small-scale farmers is the advance sale of crops, in which the lender is promised crops at current prices even though the price will be higher at harvest time. The difference in price constitutes a loss to the farmer which is a form of interest, or credit cost.

Credit "terms" are all the conditions, including credit costs, that are part of an agreement between lender and borrower. (These are listed in the TOOLS section.) The usefulness of credit is a measure of the costs and terms versus the returns or results of credit use. Cost/benefit is calculated in monetary terms for most commercial credit, although timeliness, social appropriateness and other considerations also must be weighed. Most especially, the Peace Corps extension worker must help a farmer weigh the value of credit against the danger of dependency on factors beyond the farmers' control. This must always be part of the calculation of credit cost/benefit.

Because most commercial credit is extended for profit, it is rarely extended to the small-scale farmer. What with the uncertainties of weather, pests and diseases, the limited money-making ability of the small-scale farm, and the inconvenience of administering credit to a far-flung clientele in rural areas, the small-scale farmer is often not considered a good "risk".

Other forms of institutional credit (through development projects or ag product distributors), where these exist, are more readily available to small-scale farmers, but do not allow freedom to use the loan for any purpose. The loan must go to producing a certain crop or buying certain inputs. Thus, it is not easy to help small-scale farmers gain access to credit.

The process of acquiring credit involves, first, surveying a farmers' needs and clarifying with her the specific need to borrow capital. Secondly, the farmer and extensionist must inventory local credit sources. Next, extensionist and farmer must calculate the costs of credit and estimate the returns to the credit to determine the cost/benefit of employing the credit opportunities identified. This would include clarifying the terms of credit. Then the farmer and extensionist must apply for the credit. Finally, the extensionist must help the farmer honor the terms of the loan and re-pay it when due. Refer to Chapter Five, ORGANIZING COOPERATIVE ACTIVITIES, to see how to bring farmers together to solicit credit. Use the TOOLS in Chapter Six, MANAGEMENT, to help organize and carry out this process of acquiring credit.

ILLUSTRATION

1. An example of the results of a credit inventory:

Source: Ag supply store.

Type: Credit on fertilizer and hybrid seed, at planting time, to be repaid at harvest.

Location: Capital city, 400 km away.

Terms: Only for farmers or organizations who buy 2 tons of fertilizer and $100 worth of seed.

2. An example of credit costs:

a. Simple credit cost

Total loan

$100

Credit costs (fixed fee)

$10

Farmer expenses (travel)

$ 5

TOTAL CREDIT COST

$15

b. Annual interest credit cost

Total loan $300

$300

loan

8

months

8%

annual interest

2%

fixed service charge

INTEREST ANNUAL RATE

x

TOTAL LOAN

x

% YEAR USED

=

INTEREST CHARGE

.08

x

$300

x

8 (.75) 12 (months)

=

$16

Total interest charge

$16

Fixed service charge

$ 6

Farmer expenses (travel)

$ 5

TOTAL CREDIT COST

$27

Tool

FORMS OF CREDIT FOR SMALL-SCALE FARMERS

LOCAL SOURCES

• Borrowing tools, seed or other inputs from a neighbor, friend or cousin

• Work companies (groups of laborers work on each other's fields or work in a field for reciprocal work late)

• Communal labor (village farmers provide labor to local leaders out or respect and in the knowledge that leaders are benefactors in times of hardship)

• Informal sharing of equipment labor or other inputs in the village

• Borrowing from local money-lenders, merchants or leaders to pay back in kind at harvest.

INSTITUTIONAL SOURCES

• Borrowing from local lenders commercially - to be paid back in cash plus interest.

• Cooperative lending institutions credit co-ops, farmers associations or co-ops, consumer co-ops, etc.

• Ag product processors, e.g. canneries who extend credit as advance payment to get ag products.

• Ag equipment suppliers, e.g. fertilizer suppliers or feed dealers to extend credit to stimulate sales.

• Commercial banks

• Government or development agency - sponsored credit programs.

Identifying these sources is another research task which may be done with reference to that chapter as a guide.

TOOL

Checklist for clarifying credit terms

Once sources are identified, terms become the major consideration in matching credit alternatives with alternative opportunities to employ additional capital in the farm enterprise. The following checklist can be used to determine the terms under which credit is being offered through the credit sources available to the subject group of farmers.

CREDIT TERMS

1. Credit costs

a. Credit charges.

b. Credit expenses.

2. Security.

a. Land.

b. Capital assets.

c. Savings account.

d. Conditional sale deed.

e. Sponsors.

f. Integrity of the borrower.

3. Duration of the loan.

a. Less than 6 months.

b. "Til harvest."

c. Six to 12 months.

d. One to five years.

e. "Until repayment."

f. Over five years.

4. Timeliness of loan.

a. Is the loan available at the time needed?

b. How flexible to change is the date of repayment?

5. In kind or cash?

a. Is the loan disbursed in kind (fertilizers, seed, etc.)

b. Is repayment required in kind?

c. How are values (prices) set on these goods?

6. Constraints on Credit Use: Is it stipulated that the funds be used only in a specified fashion?

7. Application procedures.

a. Application form.

b. Financial statement.

c. Personal interview.

d. Farm visit by field superisor.

8. Disbursement procedure.

a. Processing time required.

b. Form of disbursement.

9. Repayment procedure.

a. Lump sum payment.

b. Partial payment or partial amortization.

c. Periodic repayment of principal and interest.

d. Interest paid in advance.

10. Penalty for default.

a. Discount for loan paid on time.

b. Penalty charge for default.

11. Other terms.