Commercial Financing of Seasonal Input Use by Smallholders in Liberalized Agricultural Marketing Systems

Innovations in the provision of seasonal credit

This paper reviews recent experiences in providing seasonal credit. It argues that economic liberalization leaves many questions unanswered, especially given the reluctance of commercial banks to provide this service and the weak private trading sectors in many countries.

The paper examines the supply of seasonal inputs on credit by traders in multi-buyer output markets, where no group liability mechanism is in operation and legal enforcement of contracts is not feasible. These traders develop mechanisms for loan disbursement and recovery so as to expand their share of the relevant output or input market.

Further, the paper presents the following lessons for development of credit provision:

  • Informal institutional innovation in the private sector;
  • Balance in competition and cooperation in interlocked markets;
  • Incentives creation for loan repayment;
  • Promotion of efficient systems;
  • Influence in traders' incentives: the impact of investment in processing;
  • Challenges in strategic default by setting new rules suited to liberalized credit markets;
  • The role of the state to encourage commercial service provision.

Finally, the paper states that the state (assisted by donors), should help improve the efficiency of liberalized market systems to increase trader competition by:

  • Reducing entry-barriers;
  • Encouraging strong, liberalized financial sectors;
  • Reducing the cost of information;
  • Investing in physical infrastructure, especially in rural roads and telecommunications;
  • Encouraging private investment in more than just agricultural processing.

About this Publication

By Dorward, A., Kydd, J., Lyon, F., Poole, N., Poulton, C., Smith, L. & Stockbridge, M.