To solve food security puzzle, give farmers cheap loans

Among many other challenges facing our farmers, lack of access to credit on reasonable terms and often lack of information regarding sources of credit are major bottlenecks. This has led farmers to obtain loans from local money lenders on high-interest rates. This could be one of the major hindrances to agricultural development. Credit allows farmers to increase production, improve quality of what is produced, access improved agricultural technologies and revise operations to make them more profitable.

Rational Credit Principles

While at it, applying the following principles wisely can lead to success and profitability for an agribusiness and farmers: Use credit for productive purposes that increase income, limit borrowing on unfamiliar enterprises, use credit where it will generate the highest return within reasonable risk limits, know your own business situation, keep debt in line with income and repayment capacity, shop for loans and select a dependable lender, and be honest and fair in credit dealing

Types of Loans

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A loan is basically a contract between borrower and lender. Loans usually fall into three borrowing time frames: short-term, intermediate and long term. Short-term loans are distinctive in that their terms are normally one year or less. The main use of a short-term loan is to finance operating inputs. Banks, individuals, merchants and farm credit services are among the suppliers of short-term loans. In business applications, short-term or operating credit assists in purchasing items such as fuel, fertiliser, chemicals, seeds and in meeting maintenance expenses. Short-term credit may be the most important type for the survival of an agribusiness because it finances the everyday operations of the firm which generate the cash flow in the business.

Intermediate-term loans vary in length from one to 10 years. They finance assets that may be depreciable over their expected lives. Farm machinery and equipment, breeding livestock, irrigation systems, and any modernisation of farm facilities are examples of these assets. Commercial banks and farm credit institutions are suppliers of intermediate-term loans. A lender may require collateral when considering whether to grant a loan.

Long term loans are those that extend over 10 years. Purchases of land, buildings and housing create the need for this type of credit. Typically, the credit instrument used in long-term financing is a mortgage. Businesses and individuals both use mortgages for long-term financing needs. Long term credit is especially important when starting an agribusiness.

Areas to improve in agricultural financing

The past few years have proven that neither commercial banks nor the emerging microfinance industry alone can meet the key financial needs that arise along agricultural value chains. Many farmers are left unserved. On the other side, the growth and deepening of agriculture finance markets is constrained by a variety of factors which include inadequate or ineffective policies, high transaction costs to reach remote rural populations, covariance of production, market and price risks, absence of adequate instruments to manage risks and lack of expertise of financial institutions in managing agricultural loan portfolios. The development of agriculture requires financial services that can support larger agriculture investments and agriculture-related infrastructure that require long-term funding given that currently, transportation and logistics costs are too high. Greater inclusion of youth and women in the sector and advancements in technology too is vital - both in terms of mechanising the agricultural processes and leveraging mobile phones and electronic payment platforms to enhance access and reduce transaction costs.

[The writer is a researcher - PHD in Finance Candidate, JKUAT, C.E.O of Splendid Mushroom Enterprise.]

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