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Financing for Agriculture

How to boost opportunities in developing countries

Access to finance is critical for the growth of the agriculture sector. The shift from subsistence to commercial agricultural production requires funds. However, in developing countries, where agriculture is a source of livelihood for 86 percent of rural people (International Finance Corporation [IFC], 2013), financing for investments in agriculture is scarce, even for large investors. In Africa, less than 1 percent of commercial lending is destined for the agriculture sector (IFC, 2013). Financial institutions are reluctant to accept the risks prevalent in the agricultural sector, such as droughts, floods, pests, and diseases, or the transaction costs of covering large geographical distances.

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Challenges of Agricultural Financing

Similar to other sectors, those who invest in agriculture, particularly local farmers, but also foreign-owned plantations, processing factories, storage facilities, or fertilizer companies, may need funds from third parties to carry out their businesses. However, in the current global financial system, a number of factors frustrate the development of solid financial services in rural areas in most developing countries. First, transaction costs in rural areas are higher than in urban areas due to a more dispersed population with weak infrastructure (International Fund for Agricultural Development [IFAD], 2009a).

Second, and more importantly, the risk factors inherent in agriculture often inhibit financial institutions from lending. These include production risks linked to natural hazards (such as droughts, floods, and pests), farmer’s weak ability to provide collateral (either because the farmer lacks title to land to offer as a loan guarantee or the value of the land may be too low) and the volatility of prices (IFAD, 2009a).