Despite the disproportionate concentration of poverty in rural areas around the globe, microfinance- the provision of financial services to poor and low-income people has tended to gravitate away from rural borrowers.  As the industry matures, however, practitioners are increasingly turning to the vast and largely underserved rural frontier, and to the thorny challenges of financing small-scale agriculture. Delivering small-scale loans and savings mechanisms can be particularly challenging in areas of low population density, where the distance between clients is great, transportation networks are often poor, and low-income levels tend to translate into impracticably small financial transactions. Given that most rural citizens depend at least in part on agriculture for their livelihood, these conditions make the prospect of operating a self-sustaining, rural microfinance institution even more daunting. Agricultural finance is notoriously risky.

Many farmers need credit to purchase seeds and other inputs, as well as to harvest, process, market, and transport their crops. While borrowing on the basis of anticipated crop production might seem logical where collateral assets are few, such loans expose the lender to production and price risk. Natural disasters, a decline in market prices, unexpectedly low yields, the lack of a buyer, or loss due to poor storage conditions are just some of the factors that can result in lower-than-expected revenues. Such a fall in revenues can often lead to high default rates on agricultural loans. Yet new approaches are increasingly being developed to fill this gap in a sustainable and efficient manner.

The identification of agricultural microfinance as a significant remaining challenge to financial sectors that serve the majority of the poor spurred CGAP to undertake an analysis of current practices. With financial support from the International Fund for Agricultural Development (IFAD), CGAP in 2002 began desk research, consultant site visits, and stakeholder consultations to identify promising agricultural lending operations. An initial list of 80 candidates was slowly whittled down to a handful of representative examples. While many on the long list proved to be fundamentally unsustainable or lacked the potential to achieve scale, about 30 were sufficiently promising to merit further research.

Learning Objectives

1) Highlight the challenges of Agricultural microfinance 2) What are factors contributing to results in lower-than-expected revenues? 3) Why do farmers need credit?