BRIEF

Agriculture Finance & Agriculture Insurance

February 2, 2018


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.
  • Demand for food will increase by 70% by 2050; at least $80 billion annual investments will be needed to meet this demand.

Overview:

There is an ever increasing need to invest in agriculture due to a drastic rise in global population and changing dietary preferences of the growing middle class in emerging markets towards higher value agricultural products. In addition, climate risks increase the need for investments to make agriculture more resilient to such risks. Estimates suggest that demand for food will increase by 70% by 2050 and at least $80 billion annual investments will be needed to meet this demand, most of which needs to come from the private sector. Financial sector institutions in developing countries lend a disproportionately lower share of their loan portfolios to agriculture compared to agriculture sector’s share of GDP.

On the other side, the growth and deepening of agriculture finance markets is constrained by a variety of factors which include: i) inadequate or ineffective policies, ii) high transaction costs to reach remote rural populations, iii) covariance of production, market, and price risks, and iv) absence of adequate instruments to manage risks, v) low levels of demand due to fragmentation and incipient development of value chains, and vi) lack of expertise of financial institutions in managing agricultural loan portfolios. The development of agriculture requires financial services that can support: larger agriculture investments and agriculture-related infrastructure that require long-term funding (given that currently transportation and logistics costs are too high, especially for landlocked countries), a greater inclusion of youth and women in the sector, and advancements in technology (both in terms of mechanizing the agricultural processes and leveraging mobile phones and electronic payment platforms to enhance access and reduce transaction costs). An important challenge is to address systemic risks through insurance and other risk management mechanisms and lower operating costs in dealing with smallholder farmers.

Agriculture finance and agricultural insurance are strategically important for eradicating extreme poverty and boosting shared prosperity. Globally, there are an estimated 500 million smallholder farming households – representing 2.5 billion people – relying, to varying degrees, on agricultural production for their livelihoods. The benefits of our work include the following: growing income of farmers and agricultural SMEs through commercialization and access to better technologies, increasing resilience through climate smart production, risk diversification and access to financial tools, and smoothing the transition of non-commercial farmers out of agriculture and facilitating the consolidation of farms, assets and production (financing structural change).

What We Do:

We focus on developing and implementing agriculture finance strategies and instruments to crowd-in private sector, enhancing access to suitable financial services to farmers – particularly smallholders – and agricultural Small and Medium Enterprises (SMEs) as a way to increase agricultural productivity and income, and facilitating the consolidation/ integration of production and marketing entities in agriculture to achieve economies of scale and stronger presence in markets.

We primarily work on agriculture finance, agriculture insurance and its linkages with agriculture finance. Our key areas of work are described below –

  • Policy and Regulatory Interventions – Agriculture Finance: We conduct diagnostic studies on the state of agricultural finance within client countries and produce concrete action plans to reform public policies and regulations in order to create an enabling environment to mobilize agricultural finance. Some examples of policy and legal/regulatory intervention areas include lending quotas, interest rate caps, bank branch expansion regulations, prudential regulations impacting agricultural lending, warehouse receipt financing frameworks, and alternative dispute mechanisms for contract farming.
  • Policy (and Insurance Product Development) Advisory – Agriculture Insurance: We advise governments on policies for agriculture insurance (e.g. financial incentives, premium subsidies, and the overall role of government to promote agriculture insurance) and on development of effective insurance products. Additionally, we also collaborate with the Global Index Insurance Facility (GIIF)  and the Disaster Risk Finance and Insurance Program (DRFIP) on certain projects and activities.
  • Strengthening of Relevant Institutions: We provide technical assistance to reform and build capacity of public financial institutions, to establish commodity exchanges, and to build capacity of MFIs and other institutions. We operate a special program focused on financial cooperatives, given the importance of these entities as providers of financial services to smallholder farmers, rural MSMEs and households. This program aims to strengthen their performance as well as to enhance applicable regulations and oversight arrangements to better integrate them into their country’s financial system. Furthermore, we design and implement in projects risk-sharing mechanisms through various instruments, such as partial risk guarantees.
  • Developing Innovative Products: We assist in the design and develop a wide range of instruments, either as a technical assistance or part of lending projects: value chain finance, inventory finance (examples include warehouse receipts, CMA, and SMA), partial credit guarantee schemes for agriculture-sector loans, matching grants, crop insurance, price hedging instruments, and gender finance. We also work on developing mobile banking & payment platforms to enhance access to finance and reduce transaction costs within the eco-system. An important focus of our work in this area has been to develop solutions to reduce the riskiness of agriculture by addressing systemic risks (e.g. production and weather risks through insurance, and price hedging instruments) and also focus on ways to reduce operating costs in reaching to smallholder farmers and SME agribusinesses (for instance, the role of digital finance technologies).
  • Knowledge Management and Community of Practice: Informed by our in-house research and knowledge production, we carry out activities both at the internal level (including community of practices and training programs) and at the external level (global and regional dissemination events, South-South exchange and capacity building for policy reforms, among others). We organized two Community of Practice: one on agriculture finance and insurance and another one specific to financial cooperatives.
  • Global Engagements: Since 2011, we have served as a technical advisor to the G20 Global Partnership for Financial Inclusion (GPFI) SME Finance Sub-Group on issues related to agricultural finance and insurance. Also, we haves formed a partnership with Rabobank on financial cooperatives that aims to contribute to the global knowledge on these institutions and their promotion building on concrete experiences.

Last Updated: Feb 02, 2018






Experts

Panos Varangis

Global Lead for Agricultural Finance and Agricultural Insurance

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