Using a Subsector Development Methodology to Improve the Effectiveness of Agricultural Lending

This paper looks into reasons why agricultural credit seems to lack viable solutions that assure consistent benefits to the MFI and the small producer. It makes recommendations for MFIs to improve their lending to agriculture.

MFIs need to find ways to mitigate risks for successful agricultural lending. Risk can be mitigated by keeping the agricultural portfolio sufficiently diversified among a group of products, and lending to successful agriculture.

Lending for agricultural practices that respond to market demand is one of the best ways for rural MFIs to mitigate risk, and help small farmers integrate their production in an increasingly globalized world economy. It recommends that rural MFIs should:

• Play a proactive role in keeping abreast of changes in the commodity markets, limiting the amount of financing they put into products with volatile futures;
• Help finance successful agricultural practices that improve yields and quality, and mitigate risks;
• Examine how their clients can benefit from MFI financing of other links in the productive chain.