Sources of Funds in Agricultural Lending
Rural financial markets in developing countries consist of various intermediaries: agricultural development banks, commercial banks, rural unit banks, co-operatives, NGOs, informal financial institutions and individual moneylenders. Regardless of whether these actors are formal or informal, large-scale or only one-man businesses, they have one feature in common: they can not operate without financial inputs. Financial intermediation is their main purpose, which refers to capturing funds to transform into loans. Both sides of the financial intermediation process have their particular rules. Just as financial institutions can fail due to a bad loan portfolio, they can also fail due to a bad management of their sources of funds. In particular, financial institutions involved in agricultural lending are exposed to high risks due to the problem of mismatched conditions of funds and loans. That is why liability management has become an essential part of a financial institution's activities in the last three decades. (In addition to the overall problem of managing liabilities effectively, access to formerly relevant sources of funds decreased in the last decade.)
However, there is still a necessity to create awareness of this task in the area of agricultural finance. Each fund available for agricultural lending is associated with some essential features. These pose advantages and disadvantages from the financial institution's point of view. It is not possible to access funds without being influenced by their particular ingredients. Some features attached to funds are negligible, some are positive but others can be highly dangerous for financial institutions depending on the situation, the type of institution using them and its special aims. Every financial institution has to analyse the specific impacts of each fund on its aims, viability and autonomy to determine the most appropriate mix of funding sources. Resource mobilization for agricultural lending faces a lot of challenges due to the specific nature of agricultural credit demand. Lenders have less turnover of their loan portfolio because of the particular term-structure (seasonal and long-term) of credit for agriculture. This has a direct impact on the composition of funds needed to meet the specific requirements of agricultural producers.
It is therefore essential for financial institutions to develop appropriate strategies in order to find a sound and suitable composition of funds for agricultural lending. Corresponding proposals and recommendations are listed in the document indicated below. They are consistent with the overall aim of providing the necessary resources for agricultural investments of farmer households, especially small-scale farmers in developing countries and focus mainly on formal and semi-formal financial institutions. Only these actors are faced with a big variety of funds for on-lending.
To read more about this issue, please consult the document "Sources of funds for Agricultural Lending" here.
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