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Agricultural microfinance : proposed terms of reference
BACKGROUND
The Foundation for World Agriculture and Rural Life seeks to contribute to the competitivity of agriculture and related industries in developing countries and especially in the least developed countries (LDCs) by drawing upon the know-how of its founding members. One component of this programme, agricultural financing, is the subject of this working group.
Access to credit in the rural economy is difficult for a number of operators in the primary sector, and particularly for small producers, despite the fact that credit is an essential tool.
Credit is one of a set of rural financial services that include also savings and insurance. Rural micro-finance, involving modest sums and services, is one important means of access to financial services, while also accomplishing social goals.
The number of individuals living in poverty who have access to micro-credit is estimated at only 100 million, mostly urban and peri-urban dwellers, whereas the poor who could make good use of micro-credit access are thought to be about one billion.
THE CONTEXT
Micro-finance generally takes the form of micro-credit, as first attempted at a national scale in Bangladesh in 1976 where it played a decisive role in its development. Since then, this form of financing has spread to many other countries in both the North and the South. A tool for those who have no access to conventional banking systems, micro-credit has proven to be a powerful weapon against poverty, inequalities, and precarity. Nonetheless it is not yet widely used in farming, because agricultural and related activities are dispersed geographically and poorly organised professionally.
Micro-finance, which is sometimes lumped together with the economics of solidarity, has provoked numerous debates and much controversy and difference of opinion. The United Nations nonetheless declared 2005 to be the "International Micro-Credit Year", and this form of financing is included in the Millenium Development Goal (MDG) of reducing extreme poverty by 50% by the year 2015.
While on one hand financial exclusion is not just a consequence but truly one of the causes of poverty, since it obstructs potential revenue-generating activities, it is nonetheless true that financial-service provision, an important factor in development, is by no means a cure-all.
GOALS
Access to financing is identified by FARM and its founders as one of the priorities of the Foundation. This includes micro-credit – short term loans of small amounts intended for farmers and primary product transformers to finance their professional activities, provide for the education and health of their family or for access to essential goods and services – but also more generally access to agricultural financing in all its forms.
The goal is to produce innovative propositions for the conception, improvement and expansion of agricultural financing in the developing world. This involves disseminating the results of successful projects, identifying projects worthy of support, propose methods for starting new projects, professionalising the structures that exist already, and defining the role of FARM and other donors in these projects.
IDENTIFYING THE MAIN ISSUES
- What are the financial instruments needed by agricultural activity ? Seasonal credit, farm equipment, risk coverage ? Which ones are proven to work ? What remains to be invented ?
- What is the outlook for micro-credit growth ? How does a producer become more professional and gain access to conventional banking systems ?
- How can rural credit projects be launched or re-launched in developing countries and what form should they take ? Micro-credit, agricultural financing, cooperatives ? What are the conditions that make for lasting structures ?
- How can agricultural credit systems manage public external funding ? For what activities and with what guarantees ? What returns should be expected on loaned funds ? What sort of guarantees and controls should be associated with grants ? How is risk addressed ?
- What are the priority projects for FARM participation and by what criteria should projects be selected ? What forms should priority projects take ?
- What studies should FARM undertake in order to formalise and disseminate its methods and to integrate credit with funding in a systematic approach to supporting agricultural and related activity ?
METHODOLOGY
Preparing this working group will take the form of an inventory of the current situation to be undertaken by Crédit Agricole, FERT, and others.
This inventory will take stock of current practices.
Credit systems are accessible through :
- rural Banks ;
- commercial banks located mostly in urban areas ;
- projects with a credit component which is generally limited to the life of the project.
This effort will involve cataloguing all those operations that work as well as those that encounter difficulties, and enumerating the various types of failure. The constraints faced by rural micro-credit will be analysed. The various methods of functioning will be examined in detail (their statutes, organisation, partnering, agent qualification, management, cost, interest rates, profitability, scale, the solvency of borrowers, and the like).
This diagnosis should generate key questions which will in turn lead to :
- identifying potential partners ;
- defining a work programme.
Finally this study will result in :
- lessons learned from current micro-finance experience by comparing results and by identifying sociocultural factors that add to or detract from a project’s chance of success ;
- a series of actions and recommendations aimed at a more effective accompaniment of agricultural credit institutions, including ensuring their financial and legal sustainability while helping them adopt effective governance procedures for continued growth and advancement ;
- some clear ideas about the means by which micro-insurance can be incorporated into rural credit systems ;
- uses for new technologies of information and communication.
