Case study

Financing Term Investments in Agriculture: A Review of International Experiences

How to lend to farmers?
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This paper discusses the main findings of a research conducted by Food and Agriculture Organization (FAO) on term finance for agriculture. It summarizes the main lessons from a number of case studies of providers of term loans, leasing and equity finance for small and medium scale farm related investments.

The paper presents case studies from Bolivia, Ghana, India, Indonesia, Madagascar, the Philippines, South Africa and Thailand and describes how a variety of rural financial institutions (RFI) have tackled the provision of term finance for agriculture.

Some of the constraints that the paper identifies for the supply of term finance are:

  • Credit risk,
  • Portfolio risk,
  • Risk related to asset liability management,
  • Transaction cost.

The main lessons that it mentions are:

  • Importance of gradual approach,
  • Selection of suitable regions,
  • Offering of a range of products,
  • Selection of clients for term loans and leasing,
  • Requirement of collaterals for term loans,
  • Selection of viable term investments,
  • Appraisal of term loans,
  • Structuring of loan repayments,
  • Setting of interest rates.

The role of donors and some possible areas of support in developing appropriate products and procedures are:

  • Carrying out a thorough analysis of the potential demand for term finance;
  • Developing and pilot testing of suitable financial products and technologies;
  • Training of loan officers and staff of credit committees in proper appraisal of loan applications;
  • Introducing or upgrading the use of management information system;
  • Assisting the establishment of partnerships with non-financial institutions.