Better Practices in Agricultural Lending
Lack of access to formal credit and to full financial
intermediation services impedes agricultural development and hampers the
efforts to alleviate poverty in rural regions. Rural financial markets,
offering the provision of both farm and non-farm rural lending services
as well as essential savings deposit facilities, have not yet fully
developed in most countries. However, new initiatives are being
undertaken to meet the demand. They include the reform of agricultural
development banks, enabling them to pursue a market approach in the
delivery of credit services to small and medium-sized rural clients. At
the same time, some microfinance institutions (MFIs) are attempting to
transfer their urban microcredit technologies to rural areas.
Two recent developments have influenced these
initiatives. The first one has been the adoption of a "financial
systems" development approach. This emphasizes the need for an
integrated approach to financial market development and the provision of
competitive and durable financial services in local financial markets. A
clear understanding of both client demand and existing informal
financial services providers is required.
The second development has been the emergence of specialized
microfinance institutions. Microenterprise credit programmes were
initiated to address the unemployment problems that are associated with
the vast rural-urban migration in developing countries. Initially, they
targeted the promotion of self-employment and income-generating
activities for the urban poor.
The evolution in microfinance, like the earlier one in
rural finance, has been affected by the principles of financial systems
development. Attention is on developing financial institutions that
target low-income clients while pursuing commercial viability. The best
known micro and rural finance institutions such as the Grameen Bank in
Bangladesh and the Bank Rakyat Indonesia reach hundreds of thousands to
millions of clients in urban and rural areas. In the course of time they
have succeeded in reducing their reliance on subsidies. Although today
only a few microfinance institutions have achieved full financial
independence, many more use innovative credit technologies and have
developed organizational structures that produce positive results. These
initiatives illustrate the potential to overcome the financial barriers
that commercial banks traditionally face when they try to lend to low
income clients.
Although new financial institutions have been
established that attend low-income clients, even in cases where services
are extended to rural clients, small agricultural producers are only
rarely attended. Lending practices that are able to address the
challenge of financing small farmer clients are therefore needed.
Drawing from the lessons that can be learned from microfinance and from
successful microcredit practices, better practices in agricultural
lending come up with practical cost reduction and risk management
strategies. These strategies are described in "Better Practices in
Agricultural Lending" here.
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