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Agricultural financing for smallholder farmers in development cooperation : Analyses and recommendations

One of the main reasons why smallholder farms in the Global South are unable to realise their actual high potential is the lack of financial resources to procure the agricultural inputs required for a significant increase in production, such as quality seed and fertiliser, as well as tools, labour and, if necessary, additional arable land.

If farmers are unable to raise the funds for investments in agriculture from their own resources, they can, in principle, take out a loan. However, due to the high risk of default in agricultural production and the lack of agricultural economic expertise among loan officers, financial service providers (FSPs) are generally not very interested in offering agricultural loans to smallholder farmers. In middle-income countries, such as Cambodia, the average loan amounts are already so high, at over US$ 5,000, that finance institutions are reluctant to process applications for US$ 500–1,000 loans for agriculture. International funds and development organisations are also partly responsible for this situation due to an oversupply of refinancing funds.

The barriers to accessing loans exist on both sides, especially in Africa. On the one hand, FSPs are reluctant to grant agricultural loans. On the other hand, it is difficult and expensive, especially in Africa, for many farmers, particularly those from remote villages, to visit FSPs, which are often located in the district capital, and understand their offers. This is even more the case for women than for men, as the former are less likely to have the property required as collateral and are also disadvantaged by socio-cultural traditions.

Decentralised FSP branches, mobile services, such as advisory buses (e.g. found in Zambia and Uzbekistan), which also travel to remote villages, and digital services can eliminate the need for expensive journeys, bridge distances and, thus, create access to FSPs. Development cooperation organisations are trying to build on these points and bring FSPs and potential borrowers together. On the one hand, this is done by developing financial products tailored to smallholder agriculture and sensitising and training FSP employees regarding the situation of smallholder farms. Here, the offer to invest savings is just as important as the granting of loans.

For potential borrowers, on the other hand, support takes the form of financial literacy courses and business and technical advice. The counselling includes the preparation of a good business plan and the handling of a loan, i.e. the access conditions, the productive use of the loan and the management of financial resources to ensure repayment. However, it often goes beyond this and includes, for example, agroecological cultivation methods that can reduce the risk of crop failure, as well as options and technical advice for non-agricultural income-generating measures. Climate risk insurance is also sometimes discussed, which was set up to help compensate for crop failures and, thus, repayment difficulties.

There are reports, particularly from Asian countries, that loans are granted too easily due to the high level of competition from FSPs, leading to widespread over-indebtedness. As a result, people can lose their land – and often their livelihood – when taking out loans. The FSPs like to demand land as collateral when taking out loans. An INEF study in Cambodia reports that land is being sold on a large scale in order to repay loan debts. By contrast, at least here, FSPs cannot directly retain the land of defaulting payers, as is the case elsewhere.

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