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Microfinance and securing credit for family farms
This is the second theme synthesis paper from the international workshop held in Dakar in January 2002. It considers the issue of how, due to the lack of proper instruments to secure credit for rural areas, financial institutions (FI) have no incentive to expand their agricultural credit portfolio. Apart from considering the tools and instruments that can be used to reduce the exposure of a financial institution to risk, the paper also examines the borrowers’ perspective. For family farms the real issue is securing income.
So the paper first reviews the factors that lead to credit insecurity, including factors that depend on the environment of the FI and its clientele, and those that depend on the choices made by the FI. Faced with a generally unfavourable environment, FI have a tendency to limit the share of agriculture in their credit portfolios and they concentrate their operations in areas where secure commodity chains enable them to limit their exposure to risk. In terms of the risk management policies of FIs, the paper goes on to appraise the various instruments that can be used such as mortgage of property, guarantors, pledges, agricultural warrants (pledges on stored crops or crops still in the field), delegated payment, security deposits, and various guarantee fund mechanisms.
Finally the paper reviews the question of protecting farmers’ incomes. One of the main causes of default on loans lies in family accidents, illness and death. Thus health and life insurance can provide valuable protection. To manage other types of risk – weather related or economic – most family farms devise diversification strategies and involve social networks. From this perspective, agricultural services reform, particularly improving technical and economic advisory services, may contribute to securing the incomes of family farms and thus to avoiding default. The difficulties of providing adequate cover for natural disasters and market risks are touched on briefly.