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Between microfinance and big bank lending there is…. a Missing Middle

December 18, 2009
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Credit is the lifeblood of farming – you need cash to plant seeds, buy fertiliser and stay alive long long enough to reap and sell your harvest and pay off your loan. But you can’t always get it when you need it. A new Oxfam research paper identifies one of the main market failures resulting from the retreat of the state in agriculture: the dearth of finance for producer associations and other forms of SMEs (small- and medium-sized enterprises) in agriculture, for transactions in the size range £5,000 to £500,000. While microfinance has at last begun to add some poor rural households to its traditional urban customer base and formal financial institutions work for the big farmers and companies, this ‘missing middle’ is largely neglected.

SMEs need not apply....

SMEs need not apply....

The problems are on both the supply and demand sides. On the supply side big national lenders don’t delegate to rural branches and enable them to assess the risks and get credit flowing. One bright spot, weather insurance, is under jeopardy as climate change steadily increases risks. However, there is some good news: a range of philanthropic foundations and international financial institutions are offering partial credit guarantees to lenders, helping reduce their risks and boost the flow of credit.

On the demand side, only one third of smallholders are aggregated in some form of group enterprise, appropriate for larger transactions, while individual farmers are usually reluctant to take on such big debts. Women farmers suffer from educational discrimination, limited mobility, lack of land rights, and restrictive social norms. They are virtually excluded from agricultural credit and extension services, despite heading up one in five farms, and being capable achieving large productivity gains.

What to do? The report identifies some useful institutional development that can get credit markets working better, including:

Strengthening independent services recording legal ownership of items and their location

Improving the working markets for land in rural areas

Persuading financial institutions and their regulators to allow the collateralisation of debts owed to the enterprise, crops in various stages of processing, and personal property such as jewellery – important for women farmers.

Setting up credit information bureaux to improve the flow of information to potential lenders

Encourage ‘apex organizations’ of small lenders to pool risk and get access to emergency liquidity if things go pear-shaped

Reform national agricultural development banks (the report is even agnostic on the merits of privatisation – very daring for an NGO!)

It’s very different from the normal run of NGO research papers, written by finance professionals for their peers, but worth a skim even if you’re a financial illiterate like me.

2 comments

  1. I’d like tie this tied back into earlier posts about the importance of belief in heaven and hell. If lenders and borrowers had a shared belief system that put extra moral pressure on borrowers to repay , and therefore gave lenders extra security wouldn’t that result in lower interest rates and help development?. Perhaps the Vatican Bank should get into the microcredit business?

  2. I would add that ‘SME lending’ of this kind is an emergent asset class and will require significant levels of public investment to build capacity and assume early risk, as was the case with micro-finance, if it is to succeed. We wait upon successful models so that the bandwagon can get rolling!

    For non-financial persons, the paper is to be followed by a ‘briefing for business’ in the New Year!

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