Agricultural & Rural Finance

Rural finance comprises the full range of financial services - loans, savings, insurance, and payment and money transfer services - needed, offered, or used in rural areas by household and enterprises. The term encompasses agricultural finance.

Agricultural finance refers to financial services ranging from short-, medium- and long-term loans, to leasing, to crop and livestock insurance, covering the entire agricultural value chain - input supply, production and distribution, wholesaling, processing and marketing.

Rural and agricultural financial services are provided by formal and informal financial institutions as well as through financial arrangements within the agricultural value chain.

While the majority of Africa's population lives in rural areas and depends on agricultural production, the supply of financial services to the sector is inadequate, with, on average, a mere 5 percent of domestic resources being allocated to the agricultural sector.

Reasons for the lack of access to finance in rural areas and in the agricultural value chains are numerous. They can be found in the slow and uneven entry of formal financial institutions into rural areas, which leads to rural clients often remaining beyond the reach of financial outlets, to the reluctance of financial institutions to provide financial services to agricultural and rural activities, whose risk profile is frequently not fully understood and which are often informal in nature.

Factors such as poor infrastructure and widely dispersed populations in rural areas raise transaction and information costs, thus further hindering the spread of financial services. In addition, title and property rights can be difficult to verify in rural areas, posing problems in the use of collateral. Subsidized lending programs for rural recipients have also contributed to obstructing the development of a sustainable rural banking sector in Africa.

Farmers and agricultural companies typically face seasonal income and long maturation periods and are exposed to considerable risks. Seasonality requires specifically tailored financial services and conditions, such as longer repayment and grace periods, less frequent repayments, or leasing products. Agricultural risks to be considered include price fluctuations for inputs and products or crop failure due to pests and diseases, temperature or variable rainfall.

Despite these difficulties, formal rural and agricultural finance has been making advances in the continent, with innovative financial services and improved risk management on both the client and institution sides. The most promising approaches include flexible credit schemes, value-chain finance, insurance products, promotion of financial literacy and the use of new technologies.

Sources

http://www.mfw4a.org/agricultural-rural-finance/agricultural-rural-finance.html