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Rural and Agricultural Finance: Emerging Practices from Peruvian Financial Institutions

This short paper begins by highlighting the issues surrounding the availability of rural and agricultural financial services, through the formal financial system, in Peru. It notes that the formal financial system in Peru provides very limited rural and agricultural finance (RAF) services and most financial institutions focus uniquely on serving urban clients. If financial institutions lend to agriculture at all, it is primarily to large agro-processors or input suppliers, rather than to farmers directly. Only 3.2% of all formal loans are for agriculture, for a total amount of US$388.8 million. Even microfinance providers, which are more inclined to serve the needs of the rural poor, focus on the urban areas of Peru. Given the Peruvian microfinance industry’s 20% growth last year, microfinance providers are likely to continue to focus on unserved urban markets, which are easier to serve than rural markets.

Nevertheless, the paper serves to stress that several financial institutions in Peru are making efforts to serve poor clients with a variety of RAF product and process innovations that reduce transaction costs and manage risks. This microNOTE captures some of the emerging products and processes of four Peruvian financial institutions. While not all of these innovations are specific to Peru, the paper argues that their positive results suggest that they may be applicable in other countries.

The paper first discusses RAF product innovations, looking at:

  • Adapting disbursal and repayment to agricultural cash flows
  • Allowing agricultural income to be considered in microlending
  • Offering longer-term loans for fixed asset-lending
  • Using technology to lower transaction costs of serving rural areas

It then examines RAF policy and process innovations:

  • Diversifying loan portfolio – not just rural and not just agricultural
  • Hiring loan officers experienced in rural and agricultural markets
  • Linking technical assistance providers to RAF clients
  • Linking RAF through processors within dynamic value chains

The paper concludes by providing four main donor recommendations:

  1. Do not be discouraged by previous RAF failures, as RAF can be profitable if well managed
  2. Support the expansion of RAF, because there remains significant unmet demand for RAF in Peru, as in other countries
  3. Disseminate lessons about Peruvian product and process adaptations
  4. Discourage negative interventions in RAF
  • Resource type
  • Author Campion, A
  • Organisation
  • Year of Publication2007
  • Region
  • LanguageEnglish
  • Number of pages5 pp.
  • EditionmicroNOTE
  • Keywords

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