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

This paper has been written primarily to provide advice to donor organisations about whether they should consider channelling funds to private traders for on-lending to farmers as a means of improving financial services in rural areas. Donor funding to market actors and to intermediaries does risk distorting competition and incentives. The author concludes that patient and longer-term support to improving the operating environment for financial service provision in areas dependent on agriculture, can avoid such distortion and have more systematic and far-reaching impacts. A more positive enabling environment would enable the extension of financial services to poorer and more marginal farmers through both product-market and financial market providers.

Another important conclusion within the paper is the scope for encouraging the development of market-oriented associations of small farmers. By forming associations or cooperatives, small farmers can improve their market position. If, together, they improve the scale and quality of their production, they may be able to access better market channels and associated credit arrangements, and they can also present a more attractive credit risk. Donors could help farmers to organise themselves and they could also broker links between farmers and suppliers or buyers. They might consider temporary financial guarantees or provide extension and technical support services.

Financial service providers generally offer more transparent credit than do most buyers and suppliers. They can also offer loans to a larger number of clients as a result of having more appropriate systems and procedures and can offer a more diverse range of financial services. Yet in order to overcome the risk, operating cost, and informational constraints that have limited their involvement in agricultural lending to-date, financial service providers may need to establish linkages with suppliers and buyers; either directly or through intermediaries. Processors or suppliers that are able to set-up finance companies that offer credit to farmers may have an advantage over financial institutions as a result.

The paper is illustrated with examples drawn from a wide variety of countries, e.g. Costa Rica, Mozambique, Zambia, Zimbabwe, Kenya, Peru, Haiti and Malawi.

  • Resource type
  • Author Pearce, D.
  • Year of Publication2003
  • Region
  • LanguageEnglish
  • Number of pages18 pp.

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