Module 8 - Investments in Rural Finance for Agriculture

Providers encompass all types of financial services (credit, savings, money transfers, leasing, and insurance)¹  for agricultural activities, which are defined broadly to include primarily production but also processing, distribution, and marketing. This module gives particular emphasis to groups that presently have only limited access to financial services, such as poor, agriculturally dependent households in less-favored (low productivity, more remote) rural areas.

Rationale for Investment

Constraints to agricultural development are many. Access to financial services is only one response to these constraints, but improvements in the provision of—and access to—financing for agriculture can meet a range of needs, and it can be critical to the success of agricultural development programs. Indeed, many investments in agriculture depend on access to appropriate financial services. At the production level, financing for agriculture can enable farmers to introduce irrigation or other technologies; finance input and marketing costs; cofinance extension and information services; bridge the preharvest income gap; prevent sales of produce immediately following harvest at low prices; smooth seasonal income flows through deposit facilities, access to remittances, and existence of bank overdraft lines; or insure against price or yield fluctuations. If agribusinesses cannot access financial services, their capacity to finance and supply farmers, and to buy and process farm produce, is restricted.

Past Investment Experiences

Since the 1950s, the donor community has made large-scale investments in recognition of the importance of supporting financing for agriculture. Widespread development of sound and sustainable financial systems for agriculture has yet to occur, however, and the challenges described above remain. Attention frequently has been drawn to the apparent failure of past approaches, and in particular to the directed credit programs of the 1960s to the mid-1980s. Although these programs lent short-term impetus to agricultural production, they have been criticized as costly, unsustainable, and creating a misperception of free credit, thus jeopardizing future efforts to create sustainable financial institutions. Since the 1980s, attention has switched to the development of sustainable financial institutions providing services to poor clients. This change in emphasis has entailed greater donor support to the establishment of an appropriate policy, regulatory, and legal environment for financial institutions, as well as support for the development of innovative approaches to reach poorer clients.

During the 1990s, the number of World Bank operations with rural and microfinance components rose steadily, with average annual lending of US$630 million (World Bank 2003). Yet the relative share of agriculture in total Bank operations with rural and microfinance components declined from 65 percent during fiscal years 1992 to 1994 to only 27 percent in 2001.