Sources of Funds for Agricultural Lending

This paper 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 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 with a qualitative analysis of sources of funds.

The paper identifies the reasons for the past support for directed credit, and presents the arguments for its failures. Also identifies the positive features of the new evolving financial markets and outlines additional changes needed to support the development of rural financial markets, if the agricultural sector is to have sufficient access to viable and durable financial services. It traces the experiences of FAO and GTZ with regard to agricultural finance and draws lessons from the experiences. it presents the difficult position of low-income food deficit countries, in particular in Africa. Also the challenges of agricultural technology development and the adoption of new technologies faced by farmers in several areas of the world in response to the dynamic changes in effective food demand. It looks at policies, structures, and procedures which need to be taken into account to ensure that the farming sectors, consisting of both farm enterprises and small farm households, have better access to effective financial services. The paper concludes that:

• The market environment of the agricultural sector in developing countries still requires special government attention but in a different manner than that given under the directed credit approach;
• There are appropriate combinations of funds for financial sustainability and independence while maintaining inputs for agricultural investments.

[Adapted from the author's abstract]