Financing Commodity-Based Trade and Development: Innovative Agriculture Financing Mechanisms

In many developing countries and countries in transition, access to credit is severely constrained, as most banks are willing to lend only against certain fixed assets and at terms and conditions that are often unfavourable to operators in the commodity sector. This situation is a serious impediment to development, and, since most of the world’s poor are commodity producers, it hampers worldwide efforts to reduce poverty. Recently there has been a quiet revolution in agricultural lending, similar to what happened with micro-finance in the 1990s.

Most of the new methods are geared towards borrowers, farmers or farmers’ associations, processors or traders as parts of the commodity supply chain. Credits are based on the performance of the borrower in the chain, rather than just on the borrower’s credit risk. Consequently the risk for the financiers is much lower, so that agricultural lending can become a useful activity. This paper reviews innovative delivery models for agricultural finance, suggests ways forward to further develop such models, and discusses how to mainstream them, particularly by familiarizing more developing country banks with these new techniques. There is a significant opportunity to unlock the agricultural sector’s growth potential through improved agricultural finance. Therefore, the paper highlights the need for the international community to fund related projects.

Innovations outlined in this paper include warehouse receipt finance, collateral managers, structuring finance around farmers’ purchases and sales, establishing agri-service centres, agricultural credit cards, weather and commodity price risk management tools. The paper concludes with recommendations for policy-makers, international financing organisations and banks to encourage the development of more innovative agricultural financing schemes.

This paper was presented to an Expert Meeting on Financing Commodity Based Trade and Development in Geneva.

Related Resources