Rural and Agricultural Finance: Glossary

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Agricultural Finance – Financing of agriculture-related activities, from production to market. Not all agricultural finance is rural, and not all rural finance is agricultural. Yet financial service providers offering rural, micro- or agricultural finance often have overlapping objectives and opportunities.

Agricultural Subsidy – A governmental subsidy paid to farmers and agribusinesses to stabilize food prices, ensure plentiful food production, guarantee farmers' basic incomes, and strengthen the overall agricultural sector of the national economy. Proponents of agriculture subsidies claim the country's food supply is too critical to the nation's well-being to be governed by uncontrolled market forces. They also contend that to keep a steady food supply, farmers' incomes must be somewhat stable or many farms would go out of business during difficult economic times. Critics argue that subsidies are exceedingly expensive and do not achieve the desired market stability.

Contract Farming – An agreement between farmers and processing and/or marketing firms for the production and supply of agricultural products at a specified time in the future, frequently at predetermined prices. Repayment of the input credit is deducted when the farmer sells the produce.  

Covariant Risk – Covariant risk arises when many farms/households in one area are adversely affected by a single phenomenon such as a natural disaster, epidemic, unexpected change in world prices, macroeconomic crisis or civil conflict. This is distinct from individual risks, which randomly affect individual households.

Index-based Insurance –  A special form of insurance that can be used to compensate for losses related to extremes in weather that often plague agricultural enterprises and increase the level of risk involved in agricultural endeavors. Unlike traditional insurance, which is most useful in compensating for losses from idiosyncratic events, such as house fires or car wrecks, index-based insurance works best where there is correlated risk, i.e., risk of an event that causes consistent damage or losses across a geographical area or sector, such as drought, flooding or price volatility. More recently, some insurers are also piloting innovative index-based livestock insurance products.

Lease –  Contract for use of an asset for a set term in exchange for fixed regular payments between two parties. Leasing is a method of financing the acquisition or use of a fixed asset, predicated on the concept that the value of the asset is in its business use rather than through ownership.

Rural Finance –  Provision of financial services to a heterogeneous rural farm and non-farm population at all income levels. It includes a variety of formal, informal and semiformal institutional arrangements and diverse types of products and services including loans, deposits, insurance and remittances. Rural finance includes both agricultural finance and rural microfinance and is a sub-sector of the larger financial sector.

Secured Lending –  Pledging of an asset as collateral by a borrower to a lender until a loan is paid back. If the borrower defaults, then the lender has the right to seize the collateral and sell it to pay off the loan.

Trade Credit – Short-term or seasonal loans between buyers and sellers of inputs or products. It is typically provided in commodity value chains. Relationships between buyers and sellers are often more temporary and more price-driven than outgrower schemes.

Value Chain –  Series of transactions necessary to bring a product from inputs to the final market, involving a process of adding value at every stage.

Value Chain Finance –  Credit or other financial services flowing through actors along value chains. Value chain finance can improve the overall effectiveness and efficiency of the value chain by identifying relationships among players along the value chain, mitigating constraints, and exploring how formal financial institutions can participate to provide services. If designed well, value chain finance interventions can increase the competitiveness of a range of agricultural and agribusiness enterprises, including small producers.

Warehouse Receipt Financing (inventory credit) –  The use of securely stored goods as loan collateral.  A document is issued by a warehouse listing the goods or commodities deposited in the warehouse. The depositor can then use that receipt as a pledge to secure a loan from a bank or other lender. The lender places a lien on the commodity, so that it cannot be sold without the proceeds first being used to repay the outstanding loan.

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