Posted June 1997
NoteAccess to natural resources, land and water has always been a premise in development strategies for the rural poor. One of the main bottlenecks when dealing with land access for this population group is credit for land. While there are some succesful experiences in rural credit for the poor (e.g. the Grameen Bank in Bangladesh), it is more difficult to find succesful experiences when dealing with credit for land purchase.With the idea of identifying and analysing successful experiences with land credit - thus providing new insights for FAO's work in this area - the FAO Land Tenure service asked Mr. Javier Molina, who has been working on the subject for several years in Latin America, to prepare a paper analysing the successful experiences reported by NGOs, government agencies and multilateral institutions. This article is based upon his findings. Mr. Molina worked on the topic of informal rural credit for his PhD dissertation for the University of Wisconsin, has published an article on Agrarian Reform in Nicaragua and El Salvador in a UNICAMP-FAO publication in 1996, and is presently in charge of the CARE Program dealing with land titling in El Salvador.
Adriana Herrera |
To assess the ability of the rural poor to participate and benefit from land markets, numerous studies have looked at the factors that in one way or another shape/determine the farmers' capacity to access land through the market (Dorner and Saliba 1981; Binswanger 1987; Carter and Mesbah 1990; Shearer, Lastarria and Mesbah, 1990; Carter and Segarra 1996). Likewise, governments and NGOs have implemented land funding programs on a pilot basis in order to develop a successful non-conflictive model by which the rural poor can buy land from willing sellers in the market.
In this article, relevant literature on rural markets as well as experiences of land funding programs are reviewed in order to identify the main factors/features that may account for a sustainable credit program for the rural poor. The cases analyzed here refer to experiences in Latin America, therefore, the scope of the study focuses on this region.
This article comprises four sections: a) a review of relevant literature on the economics of rural land markets and its implications for the rural poor regarding access to land; b) an analysis of the experiences of some land credit programs which include both governments' and NGO-run projects; c) a suggested strategy and methodology to design an sustainable land credit program for the rural poor. In the final section, some concluding remarks are presented.
In perfect market environments, it is argued, markets alone may not be well suited to ensure access to land by the rural poor (Binswanger 1987). The reason for this is that, in perfect market situations, the value of the land reflects the present value of agricultural profits, capitalized at the opportunity cost of capital. If the poor borrow money to purchase an unit of land at the market price, they will have to use the entire increase in their annual income from that land to pay for the interest charged on the loan. Therefore, they will need extra income in order to pay the principal and for consumption expenditure, or to reduce their consumption level otherwise. Thus, because the poor generally have neither enough equity nor consumption credit, they cannot afford to purchase land at the equilibrium land market price.
In most developing countries, however, rural land markets appear to be imperfect (Feder 1985; Carter and Sager 1996; Kevane 1996). Now, in imperfect markets (that is, with differential access to labor and capital markets), differences in agricultural activity (i.e. type of crop) and productivity among different-sized producers may account for the greater capability that the large farmers have vs. small farmers, to generate and accumulate a surplus over consumption needs. As a result, in active land markets large farmers enjoy a systemic capacity to outbid smaller farmers for available land (Dorner and Saliba 1981, Carter 1994, Larson 1995).
In addition, there are two other factors which are considered to further shape the ability of the rural poor to buy land in the market. The first one refers to transaction costs, which according to some scholars (Carter and Zegarra, 1996) may be decomposed into two types of biases against the poor: a) high fixed transactions costs that raise the net cost of land purchases for resource-poor farmers who want to make small transactions; b) high "inter-class" transaction costs which discourage between resource-poor and wealthy agents. The other factor is related to insecure property rights which block the farmers' incentives to invest in and pay for the land.
Another strand in the agricultural economics literature looks at the various forms of capital available to farmers in order to analyze their income strategies and subsequently, to their ability to participate in land markets. In a comprehensive review of relevant studies on the subject, Melmed-Sanjak (1997) suggest that rural households are stratified according to resource endowments (or asset typology) which entails different behavioral strategies. Such a typology is based on the notion that farmers differ according to access to land holdings and financial capital as well as to reliance on off-farm income for survival. This typology includes proletarian, semi-proletarian, peasant, capitalist family farms and capitalist farms (the latter three strata also differ with regard to the type of labor employed in their farms). Each group is differently constrained by its relative need for and capacity to participate in size-sensitive rural factor markets.
De Janvry, Sadoulet and Davis (1995) also propose a typology of rural household based on access to land in order to analyze farmers income strategies. They conclude that microeconomic features such as whether a farmer is a net seller or a net buyer of a farm commodity, shape his/her income generating capacity, and consequently, his/her ability to access rural factor markets.
In short, it can be said that asset typologies define rural classes according to asset availability. Therefore, income strategies are farm-size groups specific and so are their opportunities to participate in rural factor markets. An implication of these typologies is that policy interventions aimed at facilitating the access to rural markets by poor farmers, need to consider the various microeconomic foundations of the targeted groups.
To summarize, factors concerning market imperfections, assets endowment, transaction costs, and insecure property rights are considered major constraints which limit the poor farmers' capacity to acquire land through the market. While policies aimed at clearing transaction costs and distortions from the land markets, and removing tenure security constraints (which weigh heavy on the rural) would appear to open the way to land market-oriented land distribution, both conceptual considerations and empirical evidence suggest that the economics of the land market and land valuation by the rural poor are much more complex than this scenario presumes. Thus, in many cases simply clearing away imperfections and obstacles in the land market will not be sufficient to secure/enhance the access to land by the rural poor.
Moreover, in most developing countries, the rural poor face risk from many sources (the production process, the market, the environment, among others) that threaten their normal income and consumption streams. (In 1996 study, Zimmerman and Carter demonstrate the relevance of the risk coping capacity of farmers - i.e. the risk factor - to understand poverty, accumulation and poverty policy in developing countries.) In the absence of insurance, the rural poor cannot freely borrow against their expected future income. Therefore, the opportunity for poor farmers to take advantage of land markets under existing market environments seems very limited, unless they have access to capital markets in the first place, and additionally, access to production support systems (i.e. productive infrastructure, market information, and the like). The next section analyzes the experience of various land credit programs in order to identify the factors that may account for a sustainable credit program for the rural poor.
The experiences of these programs are illustrative and provide guidance for the design and successful implementation of a sustainable land credit project for the rural poor. Regarding the government land bank and land fund referred to above, a review on their performance shows that the following lessons may be drawn from their experience: a) a land funding program should have a good degree of autonomy to ensure that it will reach the needy regardless their political affiliation; b) it should provide for full titles, legally registered since the beginning to avoid property right problems that may possibly arise in the subsequent stages of the program; and c) institution building is critical for the effective functioning of a land funding agency.
The FEPP in Ecuador and FUNDACEN in Guatemala also provide valuable insights on land credit programs which are relevant to the subject in question. Both programs provide for more than just the land and mortgage. That is, they provide the resources and assistance needed to work on the land: the beneficiaries receive production credit, technical assistance, and guidance on product marketing.
In FEPP's experience, non-farm income has been fundamental for the repayment of loans. As it can be seen in the following figures, agriculture provides for only one third of the farmers' income and therefore, for repayment: agricultural production 34%, remittances (migration) 21%, livestock sales 23%, off-farm wage labor 17%, and small informal loans 4% (Vallejo, Navarro, Villaverde, 1996).
Regarding land prices, in the FEPP's case the provision of institutional assistance and a flexible time frame to negotiate land purchases helped farmers to obtain and pay lower land prices. In many cases, farmers did not have the experience nor the knowledge of land legislation to negotiate the purchase, so that sellers tried to take advantage of them.
When default occurs, in the absence of penalties or consequences credit users tend to develop a "clientelistic" attitude towards the program and try to get away with not repaying their loans. Clear lending policies and a credible mechanism for collection helped reduce the default rates in the programs in question.
The need for a strong local organization to promote beneficiaries participation has been highlighted by the experience of FUNDACEN in Guatemala. In this case, the lack of such a local organization has resulted in a heavy reliance on FUNDACEN for the administration of the farms. For instance, product marketing and the farms' finances are handled by FUNDACEN's staff with little beneficiary participation
Such a legal organization needs to have some kind of legal identity. In this respect, a major step for the local organization to achieve independence from FUNDACEN is to obtain legal identity, that is, legal recognition from the state to operate as a community organization. Such legal identity is needed for: a) to seek outside assistance for improvement of the community, and b) to conduct business transactions independently from FUNDACEN.
Both FEPP's and FUNDACEN's experience shows that a comprehensive program to assist the rural poor can overcome the obstacles they face in the land market. It also shows, that this type of project is costly because of the diversity of services rendered (i.e. land credit, production credit, technical assistance, product marketing, and the like), whose overall costs are not paid for by the beneficiaries and whose outreach capacity is limited by funds availability. Thus, outside financial assistance is critical to the functioning of the program. But precisely, because both FEPP and FUNDACEN are comprehensive development programs, somehow they have been able to achieve their objectives.
A comparative analysis among government-sponsored and NGO-run programs provides valuable insights on the factors that may lead this type of programs either to failure or to success.
First of all, the provision of subsidies has been a common feature in both types of programs (governments' and NGOs'). Either by means of negative interest rates or through direct subsidies, there were net transfers of resources in various degrees at the expense of the programs' initial capital. As a result, the programs' capacity to self-perpetuate was diminished considerably.
Similarly, in both instances there has been an extreme reliance on donor funds as opposed to a more business sound, for profit oriented approach. Because of this, programs had serious difficulties to continue their operations once their start capital was dissipated.
The failure to address the issues of land title and registration simultaneously has also been a problem in both types of programs, though in varying degrees. Although there has been awareness about the need for the programs to provide for titles to the purchased land, some of them have failed to ensure that beneficiaries get full title. To some extent, this failure has created misunderstanding and mistrust among beneficiaries about the program in question.
Some critical differences between government programs vs. NGO-run projects
are summarized below:
| Government-sponsored Land Banks | NGO-run Land Credit Programs |
|---|---|
| Beneficiaries saw credit as a give away; did not feel compelled to repay loans. | Beneficiaries understood that they had to pay back the loan. |
| Regarding default, beneficiaries felt they could pressure the government to condone the agrarian debt. | Beneficiaries had little leverage on the institution. |
| Penalty on default was seldom enforced. | When needed, penalty on default was enforced. |
| Program continuity was affected by change of government. | Program continuity was seldom affected by change of staff. |
| Programs operated on a large scale, so follow-up on a individual basis was complex and required greater institutional capacity. | Programs operated on a small scale, thus follow up on a individual basis was more manageable. |
| Additional assistance programs (production credit, technical assistance) had difficulties reaching all beneficiaries due to the large number of them. | Additional assistance programs were able to reach most beneficiaries; thus, their capacity to service the debt was strengthened. |
| Programs neglected beneficiary organization at the community level as a means to control for the use of the program's funds. | Programs emphasized community organization as a means to ensure the right use of funds. |
The strategy proposed here calls for a differentiated approach. There is ample evidence that not all poor farmer groups can have access to land through the market in the same way. Thus, program's objectives and implementation strategy should be group-specific, according to the socioeconomic characteristics of each farmer group.
Van Zyl, Kirsten, and Binswanger (1995) propose a typology of classes of rural clients which helps identify target groups for a business sound credit program. According to this typology, two major groups within the rural poor can be identified for banking purposes for banking purposes: the bankable poor and the non-bankable poor. The former are often in the subsistence sector with small commercial sales. They have a very small level of savings and loan demands. Banking business with them has high transaction costs. For this reason, they are not served by commercial banks.
Nevertheless they have some saving capacity and access to some resources. Because of this, the bankable poor may engage in banking operations in a business-sound basis. Experience of the Grameen Bank (Bangladesh), the Bank Rakyat (Indonesia) and other similar programs (operating with short-term credit) show that banking services can be successfully organized for these groups. In fact, it is argued that credit interventions are likely to be more effective in areas with productive agricultural groups, who are slightly above the poverty line. In less favorable conditions, alternative projects, such as public works schemes or savings-driven, group-based financial services are likely to be more effective (Yaron, Benjamin, Piprek, 1997).
In contrast, the non-bankable poor include very poor farmers on marginal land who have very little investments opportunities or resources to draw upon. They need assistance on a partial or matching grant basis, which may be made to groups for group projects. In this way, capital formation can be induced. In cases like these, the donor or the state does not expect repayment although members can repay their group (for a revolving fund) in cash or in kind.
Building on this approach, the strategy to address the funding problem of the rural poor suggested here, deals primarily with small farmers who have some economic capacity. It would not try to provide for all needs; rather, it would cover one specific need, a fundamental one, which is access to land. Because they have experience and some assets, they are presumably able to respond dramatically to credit purchase. Thus the targeted groups include poor small farmers who had successful experience already, and who consequently would probably survive the usual failures and still be productive and able to make payments, thus making the program itself sustainable.
Moreover, this is not a proposal of an integrated rural development program. Programs that try to provide (in addition to land credit) technical assistance, production credit, inputs supplies, product marketing and so on, are extremely expensive. Instead, this proposal would provide for one specific need, that is, access to land, in a way that is non-conflictive and by which small farmers may buy land from willing sellers in the land market.
The design of such a sustainable credit program needs to consider the following factors:
1. Land prices should be reasonable in relation to the income that can be earned by farming the purchased land.
2. The program should consider the system of "differential quotas" for repayment, that means that credit users can tailor their repayment schedule according to their cash flows. They could choose twice-a-year or quarterly payments for instance. They also could choose which payments will be interest alone and which will be interest combined with capital.
3. Clear and sound lending policies should be set forth so that credit users will know all the rules regulating the program, particularly the consequences of default. These policies should include: types of loans, interest rates, repayment schedule, grace period, and penalties in case of default. The following factors are critical to design those policies (Strasma, 1992, 1994; Yaron, Benjamin and Piprek, 1997):
4. Beneficiary organizations should be encouraged to participate in program design and implementation. As showed by the experiences reviewed, a successful credit program needs to be participatory in order to foster program control and implementation by the beneficiaries, and to guarantee that the intended beneficiaries are reached.
5. The establishment of a sound information system on land prices and land markets is necessary for the effective functioning of a land credit program. Similarly, an information system for management purposes is needed for decision making as well as for audits and external evaluators; this also contributes to the transparency of operations and therefore, to accountability.
Moreover, an information system is crucial to provide information on the financial performance of the overall institution. This is relevant to keep track on repayment performance of individual clients or groups. In cases of non-repayment, this system will enable the program to investigate the problem and either reschedule the loan or enforce punitive measures. Borrowers "profiles" may be created to improve future loan selection and screening.
In addition, the program should establish a close coordination with other institutions operating with the same target groups, in order to focus efforts and avoid overlapping. This coordination could prove to be critical to enhance the beneficiaries' repayment capacity, since it would allow to channel into beneficiary groups additional assistance (i.e. production credit, technical assistance, product marketing among others) not provided for by the program.
Finally, institution building should be promoted in order to ensure that the program relies on competent staff and sound management policies and practices. To this end, staff policies that emphasize training, accountability and reward through monetary incentives and promotion are called for. The staff must have the necessary skills and incentives to ensure stability and continuos improvement in the program.
In order to be sustainable, the program must set financially sound policies so that capital will be protected. This requires a clear definition on the type of program to be established, in other words, is either a credit fund in which case repayment must be enforced, or a grant whose repayment is not expected.
In addition, to address the needs of the different farmer strata, such a program should be based on a differentiated approach to its target groups. This differentiated is called for, since it is clear that not all poor farmers can have access to land through the market in the same way. Thus, lending policies need to be tailored according to the specific characteristics of the intended clientele.
Moreover, the program needs to be participatory to enhance program control and implementation by beneficiaries. The success of the program relies not only on its ability to reach the intended population, but also on its capacity to strengthen beneficiary local organizations. Likewise, a land funding program in order to be successful needs to provide security of rights and tenure. The failure to address this issue may prove costly and fatal to the program's success.
As in any other policy intervention, the socioeconomic context in which the land funding program is to operate, has to be considered. For a long term project such as the one in question, program continuity is a necessary condition to ensure consistency in both policy and methodology. Finally, though the factors mentioned above by no means attempt to provide a recipe for a successful land funding program, they can certainly make a difference.
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