Module 8 - Microfinance Institutions Moving into Rural Finance for Agriculture

Microfinance institutions (MFIs) have tended to avoid less densely populated or diversified rural areas and the financing of seasonal or longer-term crop and livestock activities. A few innovative MFIs, however, recently have led the way in adapting their operations and products to expand into agricultural lending. They have done so by tailoring procedures and products to seasonal agricultural needs, applying risk management techniques, and adopting new technologies. Successful MFIs have important strengths, such as financial sustainability, excellent portfolio quality, financial products that fit diverse client needs, and a clear commitment and orientation to the poor. Prudent risk management techniques can increase the outreach of MFIs to less affluent, more remote rural areas and more diversified farmers.

Rural financial services have benefited significantly from treating the rural household as a unit with diverse activities and sources of income and financing, instead of maintaining a narrow focus on agricultural credit. Even so, financing for agriculture still tends to fall outside the scope of the mainstream microfinance industry. Where rural microfinance providers do exist, they are mostly limited to diversified rural economies and to clients with a number of income sources. Rural areas that are not densely populated, or that are dependent on a few principal crop and livestock activities, tend to be avoided by MFIs, because of higher transaction costs, price and yield risks, seasonality, and collateral limitations in the agricultural sector. Conventional microcredit relies heavily on short-term loans with frequent, regular repayments, a model that does not fit well with seasonal crop production or livestock production (except for poultry).

Involvement of Microfinance Institutions

Public investments can help microfinance providers meet the challenges of financing for agriculture by making adaptations to conventional financial products and delivery mechanisms, including the following:

Matching disbursement and repayment to agricultural production cycles. Flexibility in loan disbursement and repayment is needed, with finance made available when farmers need it and repayments matching income from produce sales. A rural MFI in Bolivia, PRODEM, redesigned its lending products by using market research to understand the financial service demands of agricultural clients (box 8.8).