Buyer and Supplier Credit to Farmers: Do Donors have a Role to Play?

This paper analyzes how donors can help address product and financial market failures that limit the access of the agriculture-dependent poor to the financial services that they need. It examines how donor intervention in product and financial markets risks distorting those markets. It highlights the need for donor support to reduce these risks by helping to improve the enabling environment for rural financial service provision.

The paper states that donors can support the extension of buyer and supplier credit to poor farmers and those living in remote areas by promoting embedded services in product-markets, brokers and intermediaries, and the development of market-oriented associations of small farmers. A central dilemma for donors is how to avoid distorting markets with their interventions. Guidelines to reduce or avoid market distortion in donor support include:

• Focus on farmers that are poorly integrated into product-markets, but which could be viable market participants if underlying constraints or market failures are removed;
• Use subsidies to build provider capacity, not to subsidize the cost of services or loans to farmers;
• Reduce and end subsidies over time;
• Make support available through transparent selection criteria.