Santiago, Chile, 16 y 17 de mayo del 2002


La visión actual del financiamiento agrícola

Emanuele María Carluccio
Confederación Internacional de Crédito Agrícola (CICA)




Your Excellencies,
Mr. President,
Dear Members of Alide
Ladies and Gentlemen,

It is a pleasure for me to be able to participate at your conference today.

Vigorous and sustained agricultural growth is of vital importance for low as for high income countries and governments are rightly concerned with the level and pace of agricultural development. This concern is related to considerations of combating poverty, the need for disposing of sufficient food supplies and the key role which the agricultural sector may play in the overall economic development of a country. After decades of steady growth in world agricultural production and productivity during which global supply of food has kept pace with food demand based on population growth, today seems to be a critical moment for world agricolture due to some reasons: recent increases in food demand arising from population growth and per capita income growth have begun to overtake the world food supply and are affecting current food stocks and prices. Technologically induced increases in the agricultural  production are not equally distributed around the world. An appropriate policy framework and an essential economic infrastructure to support viable investments and to finance agricultural technology are missing in several regions of the world.  Trade and price policies oriented towards improving the terms of trade for agriculture and internationalisation of world markets are creating a better, but also more competitive, economic environment for agricultural investments and for production growth. All these points relates to policy questions. Every policy and agricultural policy in particular, can be successful in the long run only under the condition that it meets the demands of the society and calls of the times. Above all, an agricultural policy, must be sustainable in all the connotations of sustainability: social, ecological, economic and financial.  Let's consider the European Union as an example. The Common Agricultural Policy (CAP) is comprised of a set of rules and mechanisms, which regulate the production, trade and processing of agricultural products in the European Union (EU), with attention being focused increasingly on rural development. Among the European Union's policies, the CAP is regarded as one of the most important policy areas. Not only because of its share of the EU budget (almost 50%, decreasing over the years), the vast number of people and the extent of the territory directly affected, but also because of its symbolic significance, and the extent of sovereignty transferred from the national to the European level. The significance of the CAP, nowadays, is also portrayed by the fact that it is directly related to the Single Market and the EMU, two key areas in achieving the European  integration. The objectives of the CAP, as set out in Article 33 of the EC Treaty, are: to increase agricultural productivity by promoting technical progress and by ensuring the rational development of agricultural production and the optimum utilisation of the factors of production, in particular labour; to ensure a fair standard of living for the agricultural community, in particular by increasing  the individual earnings of persons engaged in agriculture; to stabilise markets; to assure the availability of supplies; to ensure that supplies reach consumers at reasonable prices. When the EU was founded, hunger was still a widespread phenomenon. After the war, Europe was dependent on food aid, and the foremost aim of european policy makers was therefore to ensure adequate food supply. Quite naturally therefore, the primary goal of the CAP was to enhance production and make Europe self-sufficient. To achieve that, financial aid was used to boost production and high prices guaranteed sufficient income for farmers. The success of these measures soon became apparent: in the 1973 the EU countries were self-sufficient in all major agricultural products. With that policy,  price support for agricultural goods was significant, no matter what the market demanded. This made European agricultural products relatively expensive, and in order to compete on the world market, export subsidies were introduced. However, EU agricultural policy became a victim of its own success: overproduction and exploding costs were the consequences. Farmers were producing more and more regardless of how much the market could absorb. As for the domestic market, our support system meant that producers did not need to react to market signals, and increasing milk lakes and mountains of beef and cereals were the consequence. Not really a sustainable situation. Reform was necessary, but made difficult by the existence of vested, often contradictory interests. Infact was not until 1992 that the first substantial reforms were introduced, to be completed, in 1999, with Agenda 2000. With our reforms in 1992 and 1999, EU has shifted the focus of its policy. Before the reform, EU  has spent 91% of its budget for market support. Today, it is only 28%. The direct payments which compensate farmers for the price loss represent 63% of EU agricultural expenditure today. As a consequence of this shift, European products have become more competitive, both domestically and internationally. Globalisation of world trade, consumer-led quality requirements, EU enlargement: these are the new realities and challenges facing European agriculture today. The changes will affect not only agricultural markets, but also local economies in rural areas. The future of the agricultural sector is closely linked to a balanced development of rural areas, which account for 80% of European territory. The Community dimension in  this relationship is therefore clear; agricultural and rural policy have an important role to play in the cohesion of EU territorial, economic and social policy. This is why the Agenda 2000 reforms follow the development seen in recent years: alongside the market measures and the elements of a competitive European agriculture, the varied needs of the rural world must also be recognised, together with the  expectations of today’s society and environmental requirements. Still much progress has to made: especially from the financial perspective. Still in the EU the rural financial market is not efficient. For several reasons the agricultural sector continues to be undeserved by financial system. Before considering the rural finance importance and the related  role of CICA  let me enlarge the point of view. The proliferation of a number of regional trade agreements has enhanced the potential of the agricultural sector in specific countries to access regional and world markets. Together with the new opportunity for internationalisation is the challenge to come up with an adequate response to reap the potential benefits of international markets and to survive in an increasingly competitive market environment. Clearly, freer trade and exposure to world markets increases price risks for farmers, especially in countries that are price takers in international markets. Positive changes in the terms of trade for agriculture as a result of more favourable exchange rates, less punitive import and export taxes, lifting of price controls, etc. are now beginning to create in many countries an improved market environment, that may support profitable farm operations and investments in technology. Freer world markets present, however, both opportunities and challenges: opportunities to access these markets and challenges of fierce competition and risks inherent in free markets. The importance of a market-oriented and stable macroeconomic environment and an appropriate legal framework for  a country’s primary production sector as well as its financial sector is increasingly acknowledged by government. In the past, policy makers have undermined financial market development in pursuit of short-term and elusive economic goals through, inter alia, directed agricultural credit programmes. Inefficiencies in the financial sector, if not corrected in time, however, may seriously affect the development of the “real” sectors as well. Effective financial intermediation is closely related to the profitability of proposed investments. If returns are low because of adverse macroeconomic and sectoral conditions, then it will be impossible to develop strong financial markets and thus to support a sustainable rural development. Paradoxically, when market conditions for agriculture to expand and to contribute significantly to overall economic development are increasingly evident, and at the precise moment when local financial institutions are gradually maturing and improving their ability to more adequately service the rural population, loanable funds for agriculture, in manycountries, have declined precipitously. For example, the World Bank volume of agricultural lending in the 1990s is only one third of the level of ten years earlier. There is little evidence that  private commercial banks are compensating for the reduction in international agency funding. The provision of subsidised and easily accessible credit constituted a central theme of the agricultural development strategies in the past years (in EU as in the rest of the world). It was argued that enhanced access to credit would accelerate technological change, stimulate national agricultural production through increased farm output and improve rural income distribution. Many agricultural development banks were created for political purposes and were not meant to operate as viable financial institutions. As they were established to channel subsidised donor and government funds to farmers, they lacked the market discipline and incentives of commercial banks. The provision of credit depended upon political decisions and interests. Worldwide, it's been recognized the importance of  the switch from directed credit to financial market development. The International Monetary Fund and the World Bank have played key roles in prodding this conversion as part of the economic reforms under structural adjustment programmes, that aim at creating economies that are less planned and more market driven. Understandably, these conversions usually encounter strong resistance. Since the benefits (subsidies) from these programmes are usually concentrated and the costs (taxes) diffused, it is much easier to mobilise defenders of the benefits than to organise those who bear the costs of these programmes.  Where the new approach was followed .the new policies have led to a shift away from the administration of directed credit programmes that rely on continuous government subsidies. Although the financial systems development approach is now being increasingly accepted and adopted, the debate continues on the nature and the extent of required government interventions in the rural financial sector. The environment for rural financial intermediation has changed significantly in recent years with an enhancement of the role of markets and increased privatisation in countries. However, an immediate result of most of these reforms has been that fewer small farmers and other rural households qualify for credit or that those who do qualify will have to pay more for loans. At the same time, in view of the high proportion of the population engaged in agriculture in developing countries and the strategic importance of (in particular) basic food production, policy makers are highly sensitive to public interventions in favour of the farmer population. It is vital, however, that financial institutions are not “misused” to fulfil social equity purposes and that public interventions in this direction, while fully justified, are obtained through alternative mechanisms. 

Reforms will continue in the current context of economic deregulation and market development. A principal aim of financial sector reform is to ensure that market-based and a varied supply of financial services (financial widening) are available to an increasing number of both commercial farmers and farm households, agriprocessors, traders and other rural non-farm entrepreneurs (financial deepening). To achieve these objectives will require a good understanding of rural economics, the existence of an appropriate policy and legal framework for rural finance and access to financial as well as to nonfinancial support services.  

Why rural finance is special? Most small farmers and other rural entrepreneurs, due to their dispersed location and the general poor rural infrastructure, experience great difficulty in accessing urban-based banks. Rural client dispersion and small loan volumes lead to high financial transaction costs both for banks and borrowers, and increase the perception of high risks which banks usually associate with small rural clients. In addition, current bank practices and procedures may discourage rural clients from using formal financial services and, in many cases, rural people are even unaware of the availability of financial services or of the conditions under which these are available. Moreover, small farmers have to make many visits to banks at office hours which may not be convenient to them, while banks lack essential information on the credit history of potential clients, the viability of on-farm investments, the self-financing capacity of farmers and their repayment capability. Transaction costs in rural areas are high compared to urban areas, due to problems of collateral provision, low and irregular income flows and the small amounts involved in the transactions. Due to these factors the costs of reaching the rural poor and small scale farmers are high for financial institutions, which charge high interest rates when compared to market rates in the formal banking sector. The overall costs of formal borrowing therefore, in many cases, may result in borrowing from the informal sector becoming more attractive to smallscale farmers. The challenge still remains to design and expand the provision of loan products to better service the farming community and to lower transaction costs to improve the terms and conditions of lending for agriculture. This will demand improved management of existing rural financial intermediaries, and innovations or ‘new methods’ in financial intermediation for the agricultural sector. 

Banks may decide to open rural branches, but the demand for bank services needs to be large enough to warrant setting up such a rural branch network. Efforts to expand the range of financial services by including savings mobilisation and current accounts may lead to economies of scale and thus to higher efficiency. Simplification of loan procedures may minimize the costs for individual borrowers, while group lending based on joint and several liability of group members are other means of reducing costs. In all cases, the availability of decentralised financial intermediation services is a precondition for effective on-farm lending.  Individual farmers have different investment needs, and may apply for seasonal and/or investment loans to meet specific financing requirements. 

Diversification of farm enterprises and offfarm income contribute to smoothing out farm household expenditure requirements and income flows. Indeed, the cashflow  at farm household level is greatly influenced by the heterogeneity of production, trading and consumption and social security transactions within the household. Timely availability of farm inputs such as seed and fertilizer, in accordance with cultivation practices, is essential in farming, and requires flexible financing mechanisms. In particular, non-permanent working capital requirements may be ideally met by a bank overdraft or a special credit line for working capital, which has the potential to reduce transaction costs for both the client and the bank. However, it requires that the banker knows his client well and has sufficient confidence in the farmer’s management capabilities. In particular, in the case of investment loans, banks require good investment loan appraisal studies and timely and accurate farm records. Banks should also be in a position to supervise the execution of the investment/financial plan.  

Training of farmers and bank staff in preparing and evaluating farm plans as well as in loan followup constitutes an important technical assistance function that may be provided by donors and/or governments, without violating the principles of free markets, by respecting the autonomous decision power of financial intermediaries in providing loans for viable on-farm investments. Encouragement of savings and building up the financial reserves of farmers will strengthen their selffinancing capacity. Complementary bank credit may be useful in particular to finance increased working capital and new capital investments, while leasing financial arrangements may be attractive for the acquisition of farm machinery and similar investments. The major factors that affect banker and farmer behaviour in onfarm lending operations are the expected profitability of and the risks related to onfarm investments. Risks can be of different natures and include those associated with the impact of unfavourable weather on production, diseases, economic risks due to uncertain markets and prices, productivity and management risks related to the adoption of new technologies, and credit risks as they depend on the utilization of financial resources and the repayment behaviour of farmer clients. The relative importance of these different risks will vary by region and by type of farmer. For example, marketing risks are greater for monocrop cultures in developing countries, which depend on volatile world markets. Eastern European transition economies which go through a major restructuring from a centrally planned to a market economy, need, in particular, training and technical assistance in business management in order to reduce both market and credit risks. These risks will also decrease as the level of education of farmers and the availability of information on markets, prices and loan repayment behaviour increase. In some cases, especially for relatively high technology farming that involves significant investments, agricultural insurance may be useful as a risk management tool. But it should be used only for specific crop/livestock enterprises and for clearly defined risks. Risks are also related to the duration of loans, since the uncertainty of farm incomes and the probability of losses increases over longer time horizons. Thus, given the average short maturity of loanable resources in deposit-taking financial institutions, and considering the time horizon of agricultural seasonal and investment loans, commercial bankers are normally reluctant to engage themselves in agricultural lending. To protect themselves, banks should carefully match the maturity of their loans with that of their loanable resources and apply measures to protect their loan portfolio from potential risk losses. Additional risk protection measures that present added costs to borrowers include insurance coverage against insurable risks such as specified adverse weather events leading to crop damage or insurance against fire (buildings and crops) and theft (movable assets). Government or donorfinanced loan guarantee schemes, in general, have not led to significantly increased bank lending (additionality) and they should be carefully designed in order to secure appropriate risk management and sharing as well as a cost effective administration. On the other hand, mutual guarantee associations have proven their usefulness. Banks also control their financial exposure by limiting their loans to only a portion of the total investment costs and by requiring that the borrower engages sufficient equity capital as well as by a careful diversification of their loan portfolio in terms of lending purposes, market segments and loan maturities. It is worth underlining that successful financial institutions operating in rural areas, especially densely populated rural areas, do not concentrate their portfolio in agriculture to the exclusion of  non-farm activities. This is because portfolio diversification is a key to sustainability and successful risk management. 

A conventional bank practice that protects the lender against possible borrower default is the requirement of loan collateral such as real estate or chattel mortgage. Banks use loan collateral in order to screen potential clients (as a substitute for lack of customer information) and to enforce and foreclose loan contracts in the event of loan default. In the absence of conventional types of collateral such as land, livestock and machinery, other forms of often supplementary collateral are sometimes accepted by banks, such as third party guarantees, warehouse receipts and blocked savings. Without secure loan collateral, it is expected that there will be a contraction in the supply of bank credit and this will result in reduced access of small farmer and rural clients to finance. In the informal credit market, where intimate client knowledge and, often, interlinked trade/credit arrangements exist, nontradable assets or collateral substitutes, such as reputation and credit worthiness, are much more prominent. Group lending based on group control and joint and several liability of group members, and group savings are suitable forms of collateral substitutes. It may be effective if groups are homogenous in their composition, interests and objectives and when problems of moral hazard can be avoided. However, in many countries, groups of farmers do not easily meet these criteria. In addition, also due to the long duration of agricultural loans and high costs of group training, individual lending in agricultural finance, in general, is much more widespread and might be more appropriate than group lending. Moreover, successful experience with group lending is chiefly for non-agricultural purposes. Emerging successful microfinance institutions have built up their loan portfolio following a modern “credit technology”. Modern credit technologies targeted at a resource poor clientele assign greater importance to keeping risks in check (e.g. by maintaining loan amounts small and of short duration) and to well designed repayment incentives. One of the most powerful incentives to loan repayment is the prospect of access to subsequent loans. Thus, the typical loan disbursed by these institutions is for a short term (4  12 months), and loan amounts start small and grow slowly in accordance to a client’s repayment performance. With regard to agricultural finance, such modern “credit technology” may be suitable to livestock farming, where the cashflow generated is more continuous. However, this is not the case with crop production as the extent to which new credit technology may be utilised is inversely dependant upon the importance of crop sales on family income. From numerous CICA reports and meeting documents it is evident that agricultural credit expansion is hampered by farmers’ lack of knowledge about the availability and conditions of credit, and by the shortage of well trained bank staff, who have experience in dealing with small farmers and rural people. Training therefore should focus both on bank staff and farmers clients. Banks’ field staff should have appropriate education and training in business and farm management, agriculture and banking. In their work they should interact closely with agricultural extension agents and organisations, who provide essential non-financial support services to small farmers and rural people. Such liaison should involve sensitising  farmers about the availability and conditions of bank credit and assist farmers in preparing proper farm and business plans and submitting loan applications. Extension agents and similar technical staff, however, should not be involved in loan approval and loan recovery, which remains the exclusive task of banks. Banks should accept staff training as an investment, forming part of overall man-power development. This needs to be reflected when recruiting staff, bearing in mind that poor recruitment practices may result in poor recruits which cannot be easily rectified by training. Measures should also be taken to provide adequate incentives to bank staff who work in rural areas. Salary levels and fringe benefits, compensation for overtime work, appointment and career perspectives need to be in line with similar employment in the urban sector in order to promote agricultural lending. Bank staff performance-based incentives should focus in particular on loan recovery and savings mobilisation. The main objective of farmer training should be to increase the benefits of borrowing for production purposes and should be oriented at improving the business skills of individual farmers. Topics to be included are farm planning and farm management, risk management, book keeping and cost accounting, savings and liquidity management, the role and use of credit, the costs of credit (interest and related financial charges), collateral requirements, loan repayment obligations, legal measures against loan defaulting, etc. Such training can be prepared by banks and delivered to the farmers in conjunction with or by agricultural extension staff. Agricultural bank staff and private sector business may provide essential training support to initiating groups, when the requirements of training are greatest and when additional costs are the least affordable. Non-financial services such as information, training and extension can be provided by the state, by the private sector or by a combination of these.  

The problem is finding the right combination and identifying how to institutionalise these arrangements. Many drawbacks in the provision of support services in developing countries can be traced to their high costs, to inefficiency and to non-involvement or non-commitment of the final beneficiaries, when they are provided directly by the public sector. The private sector strengths are in identifying the immediate needs of different clientele, in organizing the supply of services to meet the demand, and in managing effectively the financial transactions involved. However, there is still an important role for the public sector in providing a proper policy and legal environment within which private sector business activities can take place. Focusing on developing countries: in view of these unique features and in the light of significant rural financial market imperfections, governments in developing countries still have an important role to play. This role includes the following functions: