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Production Credit from Input Suppliers, Processors, and Buyers

The majority of farmer credit needs are provided by input suppliers, product buyers and processor, which fall outside of the formal financial sector and, therefore, government and donor regulation and support. These financial transactions are often vital to farmers for accessing inputs and bridging periods of low income prior to harvests. The arrangements are usually made on the basis that by first securing access to the farmers’ produce, processors or buyers will then provide inputs on credit (usually in kind), and also guarantee a market of sale for the farmers’ produce. Technical advice is often offered as well to ensure that the necessary quality standards are met in production. Once the farmer hands over his or her produce, the credit and interest is repaid.

However, in the absence of formal financial system regulation, farmers are very vulnerable, as they often have limited market access and information, weak bargaining power, and often powerless business relations with credit providers. This Agriculture Investment Note from the World Bank highlights the largely unexploited potential of supporting these arrangements by improving the:

  • development of producer associations that enable small and marginal farmers to engage better with agribusinesses;
  • brokering contractual linkages between farmers and private businesses;and
  • developing linkages with specialized financial institutions to improve the efficiency and transparency of credit.

It also demonstrates how successful producer credit schemes can be possible, even where traditional contract enforcement systems are weak, and provide win-win outcomes for both farmers and private credit providers. Case study examples are drawn from the Cotton Company in Zimbabwe, FAIDA in Tanzania and Critecnia in Peru.

The Note reminds governments and donors that while they clearly have a role to play in this form of credit, there is need for caution, for example to avoid introducing market distortions and disrupting existing informal financial services.

  • Author Goodland, A.; Pearce, D. (CGAP).
  • Organisation
  • Year of Publication2004
  • Region
  • LanguageEnglish
  • Number of pages5 pp.
  • EditionAgricultural Investment Sourcebook

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