Four strategies for overcoming barriers to agricultural financing
This highlight by the Microfinance Gateway discusses the engagement of formal financial service providers (FSPs) in the agriculture sector. Less than 2% of the demand for global financing by smallholder farmers is met by financial institutions. This is due to a number of risks that are specific to agriculture, which are difficult to mitigate and insure against. In addition, the lack of coordination within value chains, and the bulky, seasonal and long-term financing requirements for food products pose serious challenges. Adding to these challenges is the general lack of capacity within financial institutions to properly assess returns on investment in agricultural activities. However, the growing global demand for food is providing more opportunities for investments. In recent years, an increasing number of financial institutions have pioneered innovative experiences related to the delivery of a wide range of agricultural financial products and other investment vehicles, which tend to be more inclusive of poorer rural families that depend on agriculture. Drawing from the common traits of such experiences, four key strategies for addressing bottlenecks and overcoming barriers emerge: 1) Improve financial institutions’ understanding of the agricultural markets and their capacity to assess business opportunities. 2) Diversify and adapt products and services for different actors of the value chain. 3) Establish strategic partnerships with non-financial service providers, for transferring non-financial costs to specialized entities. 4) Identify alternatives to guarantees based on physical collateral.