Agricultural Finance Revisited: Why?
This paper is the first in a series of publications produced under the title 'Agricultural Finance Revisited', through a joint initiative between the Food and Agriculture Organization of the United Nations (FAO) and the German Technical Cooperation (GTZ).
In the context of declining flow of credit to the agricultural sector in many developing countries, the paper, drawing on the experiences of FAO and GTZ, brings forth issues involved in the changing status of agricultural finance in developing countries. While an evolving broader view of rural finance has replaced the traditional directed agricultural credit approach for the better, the following factors hinder the outreach of agricultural finance:
- Lack of favorable macroeconomic environment;
- Unfavorable terms of trade for agriculture as indicated by the profitability of investments made;
- Dispersed location of farm-households and inherent heterogeneity of the farming population;
- Limited availability of non-financial services such as information, training and extension;
- Lack of access to formal insurance services. However, this shortcoming is overcome to an extent because of the availability of non-traditional and innovative risk mitigating mechanisms for farmers.
Finally, the paper identifies the need for an adequate policy framework for agricultural finance. It also summarizes a set of operational hypotheses concerning a redefined and reduced role of the state in supporting the provision of efficient and sustainable rural financial services.
