BRIEF

Agriculture Finance

November 23, 2015


Key Messages
  • Agriculture finance empowers poor farmers to increase their wealth and food production to be able to feed 9 billion people by 2050.
  • Our work in agriculture finance helps clients provide market-based safety nets, and fund long-term investments to support sustainable economic growth.

Context:

The need for investing in agriculture is increasing due to a rising global population and changing dietary preferences of the growing middle class in emerging markets toward higher value foods (e.g. dairy, meats, fish, fruits, vegetables, etc.).

According to estimates, demand for food will increase by 70% by 2050, and at least $80 billion annually in investments will be needed to meet this demand, most of which is expected to come from the private sector. 

Banking sectors in developing countries lend a much smaller share of their loan portfolios to agriculture compared to agriculture’s share of GDP. This limits investment in agriculture by both farmers and agro-enterprises. It also demonstrates that the barrier to lending isn’t due to a lack of liquidity in the banking sectors, but rather a lack of willingness to expand lending to agriculture.  

Even when available, much of the agriculture funding tends to be informal and short-term, precluding longer-term investments. This informal funding only partially covers the financial needs of farmers and small agribusinesses, and usually at a high cost.

The challenges financial institutions face when offering financial products to agriculture are threefold:

  • The transaction costs of reaching remote rural populations
  • Higher perceptions of non-repayment due to sector-specific risks, such as production, price and market risks
  • Financial institutions’  lack of knowledge in how to manage transaction costs, agriculture-specific risks and how to market financial services to an agricultural clients

Also, government policies often prove to be ineffective and could in fact create impediments to offering financial services to the agricultural sector.  Policies like concessional lending practices, interest rate caps, and loan forgiveness programs create disincentives for private sector lending while creating problems for government lending to agriculture. 

Agricultural finance needs to focus on the following four areas:

  • Segment the smallholder farmers and identify their financial needs.  Smallholder farmers are heterogeneous and have different needs.  It is important to identify various smallholder sub-segments and assess their needs and constraints before designing solutions and products.  Also, smallholder farmers don't just need credit for agricultural activities but they also need credit for other household needs/activities, savings, payment systems and insurance.
  • Find ways to de-risk agricultural finance by addressing both idiosyncratic (or individual) risks as well as important systemic risks.  Individual risks are often linked to credit risk assessment, and information and systems to help.  Information can assist financial institutions in credit risk assessment by promoting credit bureaus and linkages with value chain companies, etc.  Finding a good collateral, for example, moveable collateral, and not just rely on titled land, could also help.  On the systemic risk, agricultural insurance, catastrophic risk programs, price hedging through commodity exchanges or value chains, can also provide some solutions. 
  • Identify appropriate institutions and delivery channels that would reduce the costs of serve agricultural clients.  A variety of institutions can provide agricultural finance, depending on the types of clients they serve.  MFIs and cooperatives can serve sub-segments of small holder farmers through their local presence and expertise.  Commercial banks can also provide solutions through value chains and for better organized groups of smallholders.  New technologies and advancements in mobile banking solutions as well as increasing integration of farmers into better organized value chains can promote solutions and delivery channels that reduce the cost of serving disperse populations in rural areas.
  • Address issues in the enabling environment and specific government policies that limit the flow of financial services to small holders.  Government policies can restrict lending but also can crowd in private sector. 

Future needs in agriculture finance include:

Longer-term agricultural financing is needed for longer-term investments such as better storage facilities, food/commodity processing facilities and equipment/mechanization. (Most of the current longer-term financing goes to trade and working capital.)

Financing agriculture-related infrastructure, such as rural roads, port facilities, loading terminals, etc., is needed in most of the poorest countries.  Currently, transportation costs are often too high, particularly for landlocked areas where moving food in and out becomes almost impossible because of poor logistics and high costs. 

Climate change poses the biggest risk for agriculture and food security.  We need to invest in agriculture (such as irrigation, drought-resistant technologies, controlling floods, etc.) to be able to adapt to climate change. We also need to use insurance and other mechanisms to mitigate the effects when climate events cause losses in agricultural production and assets. Investments in climate adaptation and development of insurance and other capital market products to compensate for losses are underdeveloped in emerging markets and need to be further developed.

Focus on youth and women.  We need to make agriculture more attractive to young people and empower women so they can contribute more.  The average age of farmers around the world is rising as agriculture isn’t appealing to young people. Women in agriculture don’t have the same access to technology, finance and extension as men do, which results in lower yields and income. 

Advancements in technology could also lead lowering the cost of financial services to agricultural clients.  Solutions involving information and communication technologies (ICT) could provide a key in reducing the costs of frequent small transactions by disperse populations in rural areas.  The use of mobile phones, electronic payment platforms, mobile agents, etc. hold quite a promise and we are seeing an increase in such applications. 

StrategyWhat the World Bank Group Is Doing

The World Bank Group works on government policies and institutions to improve financial services for agriculture. We focus on two objectives:

  • Increase financial inclusion in the agricultural/rural sector by bringing more rural people into the formal financial system
  • Provide funding to increase investments in agriculture to raise productivity, improve quality of agricultural products, and lead to better postharvest practices, which ultimately will increase smallholders’ incomes and promote rural entrepreneurship for small agribusinesses. 

Instruments to support agricultural finance often involve:

  • Lines of credit through both public and private financial institutions
  • Appropriately structured partial credit guarantees
  • Agricultural insurance for crop losses
  • Development of leasing for agricultural equipment
  • Setting up financial infrastructure (credit bureaus and collateral registries attending also to clients in the rural areas)
  • Capacity building and technical assistance to both private and public banks/FIs
  • Support of agricultural cooperatives
  • Set up the right legal and regulatory environment to promote finance to the agricultural sector
  • Assist in the development of innovative financing schemes such as warehouse receipt finance and value chain finance
  • Assist in the development of commodity exchanges as a means in reducing market related risks

Since agricultural finance is a public-private partnership in most of the world, including in developed countries, our aim is to create an environment where the public sector crowds in the private sector to promote the delivery of financial services to agriculture. 

Partnerships

Within the World Bank Group, a Community of Practice (CoP) focusing on agricultural finance and insurance brings together staff from different parts of the institution, including from IFC, to share best practices and lessons learned, and devise new products, tools and approaches to help increase agricultural finance to small farmers and agribusiness SMEs.

The AgriFin initiative of GFADR, a multi-stakeholder program funded by the Bill & Melinda Gates Foundation, aims at providing technical assistance to financial institutions in developing countries to improve their capabilities in lending to the agricultural sector.  The program, since its inception in 2009, has provided capacity building to individual financial institutions, organized innovative group training events called the value chain financing “boot camp” that include several banks, and hosted annual gatherings to promote peer to peer learning.

CGAP has an initiative on small holder finance that focuses on identifying the demand for financial services by households in agricultural areas and also exploring innovative approaches in the use of information and communication technologies (ICT) to reach these households in a cost effective way.  Key outcomes of this initiative so far has been a) the designing of digital financial services for smallholder families in Zimbabwe, Senegal, Rwanda and Cambodia, and b) understanding demand of financial products and services through the Smallholder Dairies project in Mozambique, Tanzania and Pakistan. 

IFC works with private sector banks and agribusinesses through lines of credit, equity participation, risk sharing facilities, and targeted advisory services to promote the flow of credit to smallholder farmers and agribusinesses.  Key areas of IFC’s work include trade finance for commodities, warehouse finance for stored commodities, and financing improved technologies to increase productivity and improve resilience to shocks.

The World Bank Group has been a technical advisor to the G20 Global Partnership for Financial Inclusion SME Finance Sub-group on agricultural finance.  Since 2011, the Bank Group has produced policy documents and research on innovative ways to finance agriculture. More recently co-organized with GIZ a roundtable on agricultural finance during the recent G20 meetings in Antalya, Turkey, under the Turkish Presidency. 

The World Bank Group also manages the Global Index Insurance Facility (GIIF), funded by the European Union, ACP, and the Governments of Japan and the Netherlands, which aims to develop affordable agricultural insurance products that would protect investments in agriculture against mostly weather events. Overall, through GIIF and the Disaster Risk Financing and Insurance Program (DRFI), the World Bank Group has helped more than 35 million farmers in Africa, Asia and Latin America benefit from new or improved insurance products. 






Experts

Panos Varangis

Global Lead for Agricultural Finance and Agricultural Insurance



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