Managing Risks and Designing Products for Agricultural Microfinance: Features of an Emerging Model
This paper presents a model termed "Agricultural Microfinance" for providing services to poor, rural farming households. The model combines the most relevant features of traditional microfinance, traditional agricultural finance and other approaches into a hybrid defined by the following 10 main features:
- Repayments are not linked to loan use;
- Character-based lending techniques are combined with technical criteria in selecting borrowers, selecting loan terms, and enforcing repayment;
- Saving mechanisms are provided;
- Portfolio risk is diversified;
- Loan terms and conditions are adjusted to accommodate cyclical cash flows and bulky investments;
- Contractual arrangements are established to reduce price risk, enhance production quality and help guarantee repayment;
- Financial service delivery piggy-backs on existing institutional infrastructure;
- Membership-based organizations can facilitate rural access to financial services and be viable in remote areas;
- Area-based index insurance can protect against the risks of agricultural lending;
- Agricultural microfinance must be isolated from political interference.
The paper goes on to discuss each feature, outline the key elements, provide examples and discusses the research methodology.
It argues that successful agricultural microfinance programs need not incorporate all the features suggested by it. However, each feature has played a prominent role in the programs that have attained high repayment levels over a significant time span, and reached profitability. The paper concludes by listing the specific challenges faced by this new model.
