Many investments in agricultural production and related activities are capital intensive or characterised by long gestation periods. Invested funds amortise only over longer time horizons. Financing these investments may require access to term finance products, such as mediumand long-term loans, leasing or equity. The potential demand for term finance includes farmers and rural small and microenterprises that have ‘graduated’ out of rural microfinance programmes, as well as many of the better clients of former agricultural banks, or even farmers that have never had access to term finance.
For rural financial institutions (RFIs), the provision of term finance is probably the most complex field of finance, since the general constraints on rural lending related to risks and transaction costs are exacerbated by the increased uncertainties associated with longer time horizons. The absence of term finance limits the ability of entrepreneurial farmers, with growth potential, to undertake investments that enhance the scale or productivity of farming operations or exploit new market opportunities. From a macroeconomic perspective, the absence of suitable rural term finance products has economic costs in terms of slower growth and lower competitiveness of the agricultural sector, reducing its contribution to rural development and poverty reduction.
This volume focuses on the ways in which RFIs can provide term finance successfully by adjusting financing products and technologies to the specific cash flow and risk profiles of rural clients and farm investments. It draws on empirical research on rural term finance providers in various parts of the world. Some cross-cutting issues are also discussed, related to the economic, legal, institutional and policy environments that determine the supply and effective demand for term finance. These include improving the legal and institutional environment for secured lending, reducing asset liability mismatches, and managing systemic yield and price risks. Key areas are highlighted for government and donor support to financial institutions, clients, policy reforms and other complementary measures.
This publication is a continuation of the series Agricultural Finance Revisited, produced under a joint FAO/GTZ Initiative. With its particular focus on financing long-term investments, it complements numbers 3 and 4 of the series.