Managing risks and designing products for agricultural microfinance : features of an emerging model

Globally, 1.2 billion people are extremely poor surviving on less than one dollar a day and three-quarters live in rural areas. Poverty is predominantly a rural phenomenon. Extremely poor people spend more than half of their income to obtain (or produce) staple foods, which account for more than two-thirds of their caloric intake. Most suffer from nutritional deficiencies, and many go hungry at certain times of the year. Rural poverty and hunger fell sharply between 1975 and 1990, but the rate of poverty reduction has since slowed. The paper analyzes the features of an emerging model on managing risks and designing products for agricultural microfinance. Agricultural finance has been one of the most prominent elements of the rural development strategies used by development agencies and national governments. The renewed international emphasis on poverty reduction has put rural populations, particularly agricultural households, back in the spotlight of development efforts. Yet, agriculture is widely considered more risky than industry or trade. Thus, it is not surprising that agricultural lending projects have had poor repayment performance. The paper offers a model, termed agricultural microfinance, for providing financial services to poor, rural farming households. This model combines the most relevant and promising features of traditional microfinance, traditional agricultural finance, and other approaches including leasing, area-based insurance, use of technology and existing infrastructure, and contracts with processors, traders, and agribusinesses into a hybrid defined by 10 main features. While the paper does not suggest that there is broad consensus on a potential model for agricultural microfinance, it does identify features that have worked well in various combinations, on the frontier of rural finance in agricultural regions, with many poor families. Hopefully, this paper will trigger a more comprehensive discussion of what features such a model should further include.