Improving Agricultural Market Performance:
Developing Agricultural Market Information Systems
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2.3.2 LIBERALISATION AND SUPPLY OF AGRICULTURAL FINANCE IN
DEVELOPING COUNTRIES Scaling down of governments’ inputs credit programmes in most developing countries tended
to compound the problem of limited access finance by players in the agricultural sector. For
instance, a study undertaken by NRI in 201 involving seven focal countries in Africa, showed
a significant mismatch between the contrib on of the sector to GDP and its share of the supply
of finance to the private sector. In general, the share of total formal credit allocated to agriculture
in Africa is under 5%, whereas the contribution of the sector to GDP ranges from about 15% to
over 47%(NRI, 2014). As observed by Dalberg (2012), the situation in Africamirrors what exists
in developing countries in general – their study revealed that formal lenders “have only scratched
the surface of total SHF finance demand”– because they supply less than 15% of the estimated
global demand of over US$ 200 billion. The main reasons cited in the NRI (op. cit.) study by the
formal lenders for the limited supply of finance to smallholder farmers include the following: Production risks: which arise from a variety of factors, such as problems with input
supplies (inadequate or late supply), weather risks (including droughts, floods etc), crop
diseases and pests which can reduce the volume and quality of output farmers.
 Postharvest management risks: including poor postharvest management practices
which compromise the quality of the product as well as storage in inefficient facilities
and improper packaging which lead to losses and affect the volume and value of farmers’
marketable surplus.
 Marketing risk: these relate to the inability of farmers (and also traders at different
levels in the chain) to sell at the right time; in the right quantities/volumes; and at
acceptable quality standard. Contracting may be a way of reducing this problem but is
often hampered by weak enforcement of contracts as the risk of non-performance by
farmers and other counterparties tends to be high.
 Price risk: arise from fluctuations in market prices during the marketing season,
implying uncertainty of the price at future delivery dates when contracts are being
negotiated. These risks are borne by producers/farmers, traders and buyers.
These risks tend not only to be high but are also covariant, implying that lenders can be exposed to
very high levels of default if they have a high concentration of their loan portfolio in agriculture. To
compound these problems, high levels of illiteracy among smallholder farmers, the informality of
rural exchange transactions and a poor record-keeping culture in rural communities accentuate
information asymmetry in the rural economy. As such not only is it difficult to maintain credible
track records on borrowers’ transactions (to aid screening), but contracting and its enforcement is
weakened.
3 The study was undertaken on behalf of the Alliance for a Green Revolution in Africa (AGRA) and the Rockefeller
Foundation in 2014.