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Agricultural Credit 2015

Assessing the use of interest rate subsidies

Interest rate subsidies were dropped with the shift in the rural finance paradigm in the 1980s. However, new approaches have not led to satisfactory solutions to address financing needs for agriculture, as rural financial markets remain insufficiently developed, and their exit interest rates are often too high for farmers to finance structuring investments. The present study specifically assesses the effectiveness of providing end beneficiaries with credit at interest rates that are below market rates, as a way to foster the development of agricultural credit supply. The analysis relies on a historical review of practices in three large agricultural countries that have used interest rate subsidies as a central element of their agricultural policies: France, the USA, and Brazil.

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Based on these three case studies, a literature review, and an overview of how donors’ positions on the matter have evolved (World Bank, KfW, IFAD, USAID), this study seeks to determine whether subsidized loans to agriculture have contributed to modernizing small farms, increasing yields, and creating sustainable access to credit. An analysis of pro and con arguments is followed by recommendations, mainly relating to the conditions under which subsidized interest rates can have positive effects on the development of small-scale agriculture and on its sustainable access to financial services.

The three case studies highlight different strategies implemented by public authorities.

France: The French case study is particularly interesting, for two main reasons. French agriculture developed strongly over the 20th century, closing technical gaps, and thus making France the second-largest agricultural commodity’s exporter at the end of the century, despite its relatively small size compared with other agricultural countries. This was achieved thanks to strong state support, with interest rate subsidies as a major component. One of the specificities for France lies in the fact that, until 1990, subsidized loans were exclusively extended through “Crédit Agricole.”

This cooperative bank developed over the past century, and it was strongly supported by the state, which controlled its apex. However, interest rate subsidies appeared to be very expensive and difficult to control, in terms of costs borne by the state and controls to ensure proper allocation of subsidies in accordance with state policy. The system was criticized in particular because it led to public funds being allocated to large agricultural enterprises. Despite these limitations, interest rate subsidies were a major policy instrument throughout the modernization phase of French agriculture. Two aspects appeared key to achieving this result: 1) good linkage with complementary measures (training and technical support for farmers, targeted subsidies, sector stabilization funds, public research); and 2) long-lasting credit programs.