Subsidies as an Instrument in Agriculture Finance: A Review

This paper presents a literature review of the lessons learned in the use of subsidies and investments as instruments of agricultural development finance.

Providing sustainable financial services for agriculture in developing countries has proven difficult despite recent reforms and billions of dollars spent in subsidizing financial institution development. Success in providing credit to rural markets has usually been the result of careful institutional development.

The paper focuses mainly on agricultural credit for small farmers. It evaluates the following five major interventions involving subsidies used to kick-start private sector activity in support of financial services:

• Microinsurance and weather-index-based insurance;
• Credit guarantee funds;
• Warehouse receipts;
• Specialized agricultural development banks; and
• Agricultural investment funds. 

Conclusions include:

• There are no simple solutions to create sustainable agricultural credit systems;
• Past approaches of subsidies have not led to sustainable agricultural credit institutions;
• Careful development of products, policies, institutions and supportive infrastructure has led to greater success;
• New, more rigorous methods of research hold promise for deepening understanding of the influence of human behavior on credit market operations; and
• Learning from research and innovations will help international agencies to expand the frontier of agricultural credit in developing countries.