Rural and Agricultural Finance: FAQs
Rural and agricultural finance clients are a complex and overlapping blend of rural households, small farmers, agribusinesses, and off-farm enterprises. These can broadly be categorized as:
- Off farm microenterprises and rural households (non agricultural) - Households not directly related to agriculture, as well as non-agriculture related businesses
- Farm and agriculture-related enterprises – Input suppliers, farmers, producer groups, local traders and processors
- Agribusinesses (non-rural) – Agri-processors, distributors, and exporters located in urban and peri-urban areas
The financial service needs are broad and may include:
Working capital is more readily available to rural enterprises than long-term credit or other financial services. It meets seasonal needs for inputs, labor, and production services. When timed correctly, working capital allows use of seed varieties, fertilizer, labor and other inputs that may lead to increased income. Working capital has limitations in that it is short-term financing for immediate needs of an enterprise. Also, very short-term loans (for instance, three months) for agricultural inputs are often too brief to allow repayment from the sale of seasonal crops. Without access to the flexibility of investment capital or other long- term sources of capital, enterprises cannot easily expand or upgrade their business or overcome unforeseen events. Term funds finance capital improvements such as a new barn, storage facility, equipment or livestock expansion. Investments in these assets help businesses to grow and jump to the next level. Long-term credit is not readily available in rural areas, at least to smaller farms and enterprises. Agriculture enterprises and rural households need other financial services. Deposit services enable rural households to manage crises (such as a sudden illness or a flood), to invest when opportunity strikes, or to pay for large expected expenses, such as school fees, a wedding, or a new roof. Cash flow management, money transfers and risk mitigation tools such as insurance are critical to weathering unforeseen costs like a family emergency, a natural disaster or crop failure.
Sources of repayment for a typical client may include:
Formal collateral (as opposed to collateral substitutes such as group guarantees) offered by RAF clients takes varied forms, including:
There are many potential problems in using these types of collateral. In some countries, land may not constitute an effective guarantee, either due to lack of land titling or judicial or political reluctance to enforce legal contracts (e.g., claiming land in compensation of non-payment on a loan) that would drive poor farmers away from their means of livelihood. Banks cannot use a house as collateral if the house cannot be seized (primary residence laws). In some countries the lack of lien laws or movable property registries may prevent the use of equipment as collateral.
The main source of credit for many farmers and agribusinesses is other agribusinesses along the value chain including input suppliers, traders, and processors. Moreover, the clients’ own savings and credit from financial institutions continues to play a role in agricultural production.
Suppliers of rural and agricultural finance can be broadly categorized as: