Today we shall be looking at some of the main Challenges for Agricultural Financing and How to solve them. Those in the agricultural sector know very well about the existence of challenges for agricultural financing. For years on end, there have been talks about how financial service providers should be involved in this industry. We are well aware of the fact that farmers and many agricultural SMEs are not usually very welcome in banks and microfinance institutions that offer financial services. it is actually known that not more than 2% of the entire demand for global financing that smallholder farmers have, is met by the financial service providers.
We also know very well why this is actually an existent issue. Research has shown that there are quite a number of significant risks that are quite specific to the agricultural sector, including:
- Natural disasters
- The volatility of crop prices
- Pests and diseases
- The lack of proper coordination within the value chains
- The heavy long-term financing needs
All of the above challenges make it quite hard for financial institutions to build the confidence to lend money to the farmers. Not forgetting that it can be quite hard to assess the Return on Investment for the small farms.
International financial institutions that are trying to make their way into the untapped rural areas to finance the farmers also meet some unique challenges. The main challenges that have been reported so far include forex losses, loan defaults, the removal of subsidies of various inputs even after that was a factor that motivated them to step into the untapped market, as well as significant production-related losses arising from unprecedented events, leading to the very rapid deterioration of the bank’s credit portfolio.
To that regard, the only question we can ask ourselves is whether financial institutions should even care about the agricultural sector at all. Are there any outstanding strategies that could be relied upon to see to it that efforts to tap into the rural areas are feasible? The answer is yes! We are currently facing such a huge demand for food in the present-day world, which is something that creates more investment opportunities. The demand for food is actually expected to grow more rapidly as:
- The global population grows
- Life expectancy increases
- The urbanization rates grow
- The capability to change diets arising from an increase in income becomes higher
Global agricultural production has also been increasing gradually to meet market demands. All of this information works to support the idea that financial service providers should actually have a look at what is going on in the agricultural sector and actually be actively involved.
Strategies for combating the challenges for agricultural financing
The experts in this industry have managed to come up with strategies that they perceive as the best for tackling the challenges that FSPs in the agricultural sector experience. These include:
The improvement of the FSPs understanding of the nature of agricultural markets, as well as increasing their capacity to assess potential business opportunities
This calls for a dynamic shift towards the utilization of a value chain approach that usually considers all sets of factors, along with the processes distributed across the entire value chain at the time of making all financial decisions. This is an approach that is bound to create an opportunity for financial institutions to acquire knowledge from various stakeholders, including:
- Input providers
- Informal service providers – those who have an informational advantage that comes from direct engagement with various facets of the value chain.
FSPs can also look into how quantitative data can help them form market intelligence to support agricultural finance. This can lead to significant savings before they can even move out to do qualitative analysis for their financial product design.
The diversification and adaptation of products and services for various players in the value chain
Financial institutions need to learn how to identify all additional client needs, as well as their capacities and opportunities so that they can be in a position to offer additional services. This process also calls for the development of partnerships with the key local actors, in a bid to establish more efficient and cheaper ways to deliver extra services. Any additional financial service that is offered in the rural areas has the potential of increasing the returns for the FSPs and significantly growing the profitability of the rural portfolio.
The establishment of strategic partnerships with select non-financial service providers, in order to transfer the non-financial costs to the entities that are responsible for them
Non-financial costs are essentially related to all the technical assistance that is needed to strengthen the organization and coordination of activities between the stakeholders in the value chain. This includes:
- Capacity building for the smallholder farmers
- SMEs in various areas ( marketing, financial management, as well as governance).
Such partnerships are bound to open the door to win-win collaborations, in which financial institutions get to offer the needed agricultural finance, as the public sector takes care of all the other complementary development objectives.
The public sector can actually facilitate the creation of an enabling environment for the establishment of agricultural investments, as well as the identification of new market opportunities that private investors can take up.
The identification of alternatives to loan guarantees that are based on tangible collateral
Financial institutions tend to reject most business proposals presented by farmers regardless of the potential returns, due to the farmers’ lack of collateral. Trying to integrate farmers into the financial system will call for FSPs to be innovative not only in the creation of financial products but also in the establishment of effective processes. One of the ways to minimize risk as experts have established is to find out all processes and indicators that have little weight on the guarantees and to actually focus on performance indicators. The new processes that are based on alternatives to the traditional collateral-based lending can also play a significant role in the reduction of the time that goes into the approval and disbarment of farmers’ loans.
Broaden Your Knowledge About How Investing in Agriculture-How To Do It In This Decade ( Survive The Food Crises and Profit)
That will be all for this article about some of the main challenges for agricultural financing and how to solve them. I hope you found it educative and that it will now inform your decisions if you are in the field of precision farming. If you are a sucker for research-backed investments, then do have a look at my recommended agriculture 4 part series also, just to ensure that you get all the investment factors in the agricultural sector for this decade right.
I wish you well,
Eric, Bitcoin Investor, and Team Member of Gold Retired!