Overcoming Obstacles to Agricultural Microfinance: Looking at Broader Issues

Abstract

This paper presents a general picture of the difficulties in developing a sustainable lending service geared toward smallholder agriculture. Drawing on the experiences of the Philippines and other countries, it traces the rethinking of the agricultural credit policy following the collapse of subsidized agricultural credit programs, and the subsequent rise of microfinance, as pioneered by nongovernmental organizations. Acknowledging that the main challenge is not about the straightforward application of microfinance technologies to agriculture, the paper discusses how crafting an approach to sustainable agriculture microfinance is influenced by myriad of issues. The paper concludes that overcoming the barriers to agricultural microfinance goes beyond the simple provision of credit, extends outside agriculture, and shuns a "one size fits all" approach. To be able to deal with the complexity and risks in agriculture, rural lenders would have to innovate on their product design, lending technologies and risk management strategies; improve their information base; and strive to have access to market-based risk management products. Moreover, policymakers have to recognize and understand the peculiarities of the rural and agriculture sector, namely: information asymmetry, geographic dispersion, heterogeneity of the population, covariant risks, insecure property rights, and the absence of insurance markets and risk-reducing institutions.