Microcredit and Agriculture: How to Make it Work

This paper was commissioned by the  Microcredit Summit Campaign in 2006. The paper discusses the challenges to and the factors affecting the success of institutions providing financial services for agricultural activities. The paper is divided into the following sections:

The first section overviews recent research on rural economic development and agricultural finance, revealing that:

• Weak market linkages, high costs, and the lack of extension support services make the provision of agricultural credit inherently risky;
• However, donors and governments are beginning to attend to the financial services needs of the rural poor;
• The new rural finance paradigm highlights the need for a commercial market-based approach, suitable infrastructure and an enabling policy environment.

The second section focuses on the rural finance sub-sector of agricultural credit. This section:

• Explores the challenges that micro- and rural finance institutions face, including:
  • High transaction costs;
  • Lower population density and dispersed demand;
  • High risks;
  • Undeveloped infrastructure and legal systems, etc.
• Presents "what is working". This includes:
  • Following the 'best practices' of urban microfinance;
  • Flexibility in terms and conditions, etc.
• Sets out the lessons learned. These include:
  • Adapting current microfinance technology would benefit rural clients;
  • Flexible disbursement and repayment schedules are important for rural outreach;
  • Economies of scale are important in reducing costs.

Within each section, the paper presents references to publications as well as practical examples; mostly from the experiences of the Mennonite Economic Development Associates (MEDA).