Agricultural Financing and Its Challenges

Increasing Demand for Agricultural Commodities

In East Asia and the Pacific, the agricultural sector contributes in average 10% to 18% of the GDP, and 40% to 50% of the employment. In the last 10 years, economic development has reduced poverty significantly, with an important increase of the middle class. Growing population and the emergence of a larger middle class are driving demand for more and higher quality food. Asia middle class will grow from 535 million in 2009 to 3,2 billion by 2030. The demand for higher quality commodities such as dairy, meat, fruits and vegetables, will grow significantly, but constrains on arable land, water resources and current yields could make it a challenge to meet this rising demand.

Challenges Faced by Stakeholders in The Agricultural Sector

Challenges to meet future food demand are considerable, because the limits of the biosphere today are much more pressing, compared to the resources available during the green revolution. The production of more and better-quality food with a lower impact on the environment, will require the use of new agricultural technologies, new varieties of crop and animal stock. Better transportation and storage of food will be critical to reduce food losses and waste, which today accounts for 35% of total food produced.

Banks and Financial institutions will have a pivotal role in financing the modernization of the agricultural sector. Nonetheless banks today have a very small exposure to the agricultural sector (less than 5% of their portfolio). Limited presence in rural areas, lack of understanding of the business opportunities and risks in agriculture, as well as the small size and fragmentation of farmers has prevented banks to provide adequate support and funding to the sector. Governments policies like subsidized lending programs, have reduced the profitability to finance the sector, lowering further the interest of banks to engage with the sector.

Financing the Agricultural Sector Through Strategic Collaboration

IFC and other institutions are developing new technologies to help banks finance the agricultural sector. The development of scoring models and digital applications, combined with big data analysis is reducing the costs of financing the sector significantly. Building strategic alliances among banks, technology providers and agribusinesses is helping reduce lending costs and mitigate credit risks. Working with multiple players to finance the agricultural sector has increased the credit supply significantly. IFC is collaborating today with agribusinesses, e-commerce platforms and peer to peer Fintech companies to offer comprehensive financial service to the sector.

Modernizing the agricultural sector will require a proactive engagement among technology providers, farmers, crop processors, logistics companies and banks. Meeting among those players will facilitate the design of technology solutions adequate for each context and banks participation will enable the design of loan products to finance innovation.

Government Support Is Key in Modernizing the Agricultural Sector

Governments should promote the use of new technologies and have adequate policies for the different segments (small, medium and large agricultural producers). Effort on transferring knowledge and best practices, with subsidized loans are powerful tools to improve small farmers productivity. However medium and large farmers need access to technology and markets. Here, governments could simplify regulations facilitating access to new markets and lower tariff to import new technologies. Subsidize loans would be counterproductive for these segments, crowding out potential banks interested in financing those innovations.

The Future of Agriculture

The modernization of the agricultural sector is a prerequisite to meet future food demand. Aging population in rural areas and excessive fragmentation of farms (70% of farmers have < 1 ha) are preventing the modernization of the sector. Working with value chain players to finance the modernization of its suppliers is one way. The consolidation of farms to sizes that enables cost effective production and the investment in new technologies, are requisites to achieve a modern agricultural sector, government policies should promote the consolidation of medium to large farms (5 ha to 100 ha). Displaced farmers should be offered job opportunities in other more productive activities. Farm tourism and eco-tourism in rural areas could become important sources of employment in rural areas.

Author:

Hans Dellien
Agrifinance Specialist for EAP at IFC
www.linkedin.com/in/hansdellien