Smallholders need reasonable loans to start the journey towards profitability
Toward Global Scale
Emerging non-profit microcredit institutions, which leverage donor funds to offset loan servicing expenses, can open the world of finance to smallholder farmers.
The hard reality of subsistence farming is that farmers don’t have the ability to try new things without some form of assistance. These farmers simply lack the funds to invest in anything, even a miracle technology guaranteed to earn double the amount invested in it. They need small loans, with reasonable rates, on terms that allow for single payback (rather than monthly or quarterly installment payments) at the end of a growing season.
Emerging non-profit microcredit institutions, which leverage donor funds to offset loan servicing expenses, hold the key to opening up the world of finance to smallholder farmers.
People who live in rural areas pose additional costs and risks for financial institutions willing to make credit available. The low population density means reaching these populations requires more travel time, while the lack of infrastructure (e.g., roads, telephone service, electricity) increases informational and transactional costs. A generally low-level of education means that explaining terms and conditions of the loan make take additional time and effort. Then there’s the risks of providing credit to a business that contains inherent risks from variable weather, crop diseases, pests, and price fluctuations. Finally, rural farmers often lack any significant usable collateral.
Emerging non-profit microcredit institutions, which leverage donor funds to offset loan servicing expenses, hold the key to opening up the world of finance to smallholder farmers. Enabling low-income people to access finance without collateral at interest rates less than ten-percent per annum provides them the ability to invest in equipment and quality inputs to grow their farm businesses.
It’s important to remember, however, that:
- Microcredit as a stand-alone service cannot pull people out of poverty.
- Microcredit can, if market opportunities exist, allow the poor to invest in viable businesses and increase their incomes, and to smooth income flows.
- Microcredit can also release the poor from resorting to borrowing from predatory lenders or being caught in cycles of debt from non-viable agricultural activities.
- Microcredit may not be appropriate for the destitute (very poor) and may in fact cause them to become more indebted.
