Facilitating Smallholder Farmers’ Market Access
In the OIC Member Countries
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of membership in a farmer association. Balances include strong savings incentives and
bonuses for high savings balances over longer periods.
Equipment finance. This option typically consists of loans to farmers to purchase
equipment directly from the equipment vendor.
Leasing. A lease is a contractual arrangement between two parties whereby a party that
owns an asset (the “lessor”) lets another party (the “lessee”) use the asset for a
predetermined time in exchange for periodic payments. Leasing focuses on the lessee’s
ability to generate cash flow from business operations to service the lease payment, rather
than on the balance sheet or on past credit history. Examples from OIC member countries
such as Pakistan and Uganda show that leasing can successfully finance the acquisition of
productive assets. The leasing entities that focus on the agricultural sector are often linked
to manufacturers or distributors of agricultural equipment in one way or another. Lease
financing only partially overcomes the typical constraints to credit financing, as leasing
firms in developing countries often take additional collateral from rural clients and
require down payments.
Warehouse receipt financing. Warehouse receipt finance is a form of secured lending to
owners of non-perishable commodities, which are stored in a warehouse and have been
assigned to a bank through warehouse receipts. Warehouse receipts give the bank the
security of the goods until they have been sold and the proceeds collected. Given the
limited collateral available to support farmers’ financing needs, such post-harvest
commodities and warehouse receipts represent a liquid form of collateral against which
banks can lend. When a well-functioning warehouse receipt system is in place, farmers
have a choice in deciding whether to sell immediately after harvest (when prices are often
lowest) or to store in a licensed warehouse and to apply for a short-term credit (thus
enabling farmers to sell at a later date, when prices may be higher).
The conditions for a warehouse receipt system in which smallholder farmers can
participate are many. They include: a legal environment that ensures easy enforceability of
the security, and makes warehouse receipts a title document; reliable and high-quality
warehouses that are publicly available; a system for licensing, inspecting, and monitoring
warehouses; a performance bond and/or indemnity fund; banks that trust and use the
system; agricultural market prices that reflect carrying costs; supportive public
authorities; and well-trained market participants. Even with these conditions in place,
warehouse receipt systems have some risks, including the risk of fraud or collusion; credit
and counterparty risk; storage risk and misappropriation by warehouse operators; price
risks, given the volatility in agricultural commodity prices and government price
intervention; marketing or buyer risks; and legal risks concerning perfection of security,
registration of prior claims, and enforceability.
Value chain financing for farmers. Value chain financing (VCF) and financing through
interlinked agents is increasingly recognized as an important source of agricultural
finance. Linking credit delivery to other products and services along the supply chain
through trade finance can reduce the adverse impact of asymmetric information; decrease
the high transaction costs of both creditors and borrowers; and ensure better and more