Matching supply by MFIs and the needs of family agriculture
This is the first synthesis paper from the Dakar International Workshop in January 2002. It addresses the key issues: “What is the current nature of supply and demand for the financing of family farms, and how can microfinance services be best adapted to the financing requirements of family farms?” The paper starts by examining the diversity of types of family agriculture and what methods can be used to understand their financing needs, e.g. income and family budget analysis or accumulation paths. Path analysis makes it possible to set in context the credit from MFIs in relation to other sources of credit and financing in general. For example one study in Burkina Faso emphasizes the importance of emigration income in the accumulation process.
The paper continues by summarizing the results of studies that examined the financial requirements of farms and the strategies they used to meet those financing needs. The importance of self financing is clear and the authors suggest that MFIs could provide more support for these strategies by promoting savings services and responding to solvent demand for credit. They note that the fungibility of financial services and the multi-activities of farmers suggest the need for services that are not necessarily specific to agriculture. The financing of agricultural activities should, therefore, be closely interwoven with the other components of the family budget (non-agricultural economic occupations, social transfer, savings in kind).
The second part of the paper reviews the financing for agriculture that is available from the main categories of MFI. It is generally assumed that MFIs primarily finance activities which generate regular, comparatively reliable income with rapid capital rotation that reduces risks and allows high rates of profitability. However, studies conducted within the framework of the CIRAD-CERISE research project show that certain institutions have innovated and that the supply of services for agriculture is not totally absent but it is limited and depends on the origins of the organization or network. The role of Farmers’ Organizations and changes in sector financing are discussed.
The third section examines the constraints that limit the supply of financial services for agriculture and, in particular, medium term credit. With regard to the latter, the authors note that as for all credit, the central problem is the evaluation of the quality of the borrower, the profitability of the investment and the risk. However, if the investment is profitable, the risk can be better mastered than with short-term credit because fixed assets can serve as collateral and it is easier to award partial moratoriums in a bad year. The failures observed for certain medium-term loans are often the result of insufficient investment profitability, technology that is poorly mastered by the borrower, a non-functioning maintenance and spare parts service, inefficient, non-existent or insufficiently available veterinary services, bad adjustment of the loans to the production calendar or to the social characteristics of the environment.
In the final sections the paper suggests answers for the financing of agriculture. They emphasise that loan and savings products often enable households to finance agriculture without being directly targeted at that activity. Pre-approved credit lines enable farmers to respond more quickly to unplanned events such as pest invasions or climate changes. Hire purchase and leasing may facilitate medium term borrowing. MFIs also need to ensure they have a diversified loan portfolio to reduce risk.
This paper is well illustrated with examples that are separated from the main text by boxes. It is a challenging read but makes a valuable contribution to this vital aspect of rural finance. Some of the issues raised are covered in more detail in the other synthesis papers.