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Agricultural Finance 2011

Trends, Issues, and Challenges

Agriculture is and will remain, a major global building block in achieving the Millennium Development Goals. Recent statistics show that by 2050 at least a 70% increase in agricultural production will be required to feed the world, while climate change, soil degradation, and urbanization will reduce cultivable land areas.

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Rural and agricultural finance is among the most challenging fields of banking, which have notoriously been lagging behind in the overall development of financial systems. Earlier attempts during the 1960s and 1970s based on subsidized and directed agricultural credit did not achieve the desired results sustainably. Then, during the 1980s and 1990s, the attention of the governments and donors shifted away from agricultural credit toward overall financial systems development and microcredit. Financial liberalization and the closure of agricultural development banks led to a contraction of rural and agricultural finance in many parts of the developing world, which has not yet been fully reversed by new entrants.

Although there has been significant progress in the overall financial system’s development since then, large segments of the rural population remain without access to essential financial services, such as loans for productive and consumptive purposes, deposit facilities, payment services, and insurance. Even the ‘microfinance revolution has had limited impact in rural areas and has largely bypassed the agricultural sector. Moreover, existing rural financial services are often of low quality and do not respond adequately to the demand of diverse rural markets.

Given the importance of the rural economy and the agricultural sector for economic growth and poverty reduction, rural and agricultural finance are now being widely acknowledged as the main frontiers of financial systems development. Moreover, the recent food price crisis forcefully evidenced the consequences of decades of underinvestment in agriculture and rural infrastructure. Given that about 70% of the poor in the developing world still live in rural areas, rural and agricultural development is essential for achieving the Millennium Development Goals. Finance has an important role to play as it helps rural households and enterprises in making productive investments, smoothing consumption, managing risks, and coping with shocks.