Agricultural Policies

Paper

Buyer and Supplier Credit to Farmers: Do Donors have a Role to Play?

Paper prepared for the conference “Paving the Way Forward for Rural Finance”, June 2-4, Washington (2003)

Traders, processors, input suppliers, and exporters are the primary source alongside moneylenders) of credit to poor agriculture-dependent households. These buyers and suppliers provide credit to farmers as part of input supply and product purchase transactions. They overcome key constraints to lending to farmers—for example, high operating costs, lack of client information, and risk associated with agricultural activities—by linking credit to the provision of other services, such as input supply (fertilizer, seeds etc) and technical advice. In many cases, they also tie credit to subsequent sale of produce. Even in those rural areas where financial markets are shallow and poorly developed, product-market credit may be widespread. Yet the range of financial products provided in product-markets by buyers and suppliers is narrow. It primarily consists of seasonal credit and short-term advances. Smaller or more remote farmers may have limited market options, may be dependent on a few traders with less favourable credit terms, or may not have access to product-market credit at all. Increased trader activity can lead to credit being provided on better terms. If financial service providers also enter the picture, then the range of financial services available to agriculture-dependent households will also be increased. For small farmers to be good credit risks, they need the technical services, inputs, and sales agreements that form part of the relationships of product market credit, however. If credit is offered by financial institutions rather than through the product-market, then those financial service providers will need to be sure their farmer clients still have access to those non-financial inputs and services. There is a case for donors to help address product and financial market failures that limit the access of the agriculture-dependent poor to the financial services that they need. Yet any donor intervention in product and financial markets risks distorting or damaging those markets. A complementary, and critical, area for donor support is improving the enabling environment for rural financial service provision.

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