Agriculture Finance 1/28/16, 10:38 AM

Working for a World Free of Poverty

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Agriculture Finance
November 23, 2015

Agriculture (/en/topic/agriculture)
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Key Messages
Agriculture finance empowers poor farmers to increase their wealth and food PUBLICATIONS
production to be able to feed 9 billion people by 2050.
Innovative Agricultural SME Finance Models
(http://documents.worldbank.org/curated/en/201
Our work in agriculture finance helps clients provide market-based safety nets, 2/11/24160709/innovative-agricultural-sme-
and fund long-term investments to support sustainable economic growth. finance-models)
Scaling Up Access to Finance for Agricultural
SMEs: Policy Review and Recommendations
(http://documents.worldbank.org/curated/en/201
1/10/16528471/scaling-up-access-finance-
Context: agricultural-smes-policy-review-
recommendations)
The need for investing in agriculture is increasing due to a rising global population
Access to Finance for Smallholder Farmers:
and changing dietary preferences of the growing middle class in emerging markets Learning From the Experiences of Microfinance
toward higher value foods (e.g. dairy, meats, fish, fruits, vegetables, etc.). Institutions in Latin America
(http://documents.worldbank.org/curated/en/201
According to estimates, demand for food will increase by 70% by 2050, and at least 4/01/24161046/access-finance-smallholder-
farmers-learning-experiences-microfinance-
$80 billion annually in investments will be needed to meet this demand, most of
institutions-latin-america-acceso-las-finanzas-
which is expected to come from the private sector. para-pequenos-productores-agropecuarios-
lecciones-de-las-experiencias-de-instituciones-
Banking sectors in developing countries lend a much smaller share of their loan microfinancieras-en-america-latina)
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 EXPERTS

rather a lack of willingness to expand lending to agriculture. (/en/about/people/panos-

varangis)
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

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Agriculture Finance 1/28/16, 10:38 AM

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

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Agriculture Finance 1/28/16, 10:38 AM

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.

Strategy: What 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

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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
(http://www.indexinsuranceforum.org/) (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. Through GIIF and its Disaster Risk
Financing and Insurance Program (http://www.worldbank.org/en/programs/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.

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