by Godwin Ehigiamusoe
A major challenge and criticism of microfinance today, at least in Africa, is its inability to meet the financial needs of farmers.
This concern is understandable. Despite the prominence given to tourism in Kenya and petroleum in Nigeria, farming remains the main occupation of most people across the continent. In villages and hamlets, men and women are engaged in the oldest occupation. We are frequently told that agriculture still ranks the biggest employer of labour and contributor to gross domestic product of most African economies. Properly supported, the sector has capacity to do more.The neglect of agriculture by commercial banks is well known. In the 1970s, in an effort to prompt funding for the rural economy, commercial banks were required to open specified number of branches in rural communities. The rural banking programmes recorded limited success for familiar reasons. Rural branches were considered not viable. As for the same reason the poor were excluded from institutional credit, farmers were considered as bad credit risk and therefore not bankable.
Current trends in microfinance practice reveal the same neglect of agriculture. The proportion of the loan portfolios of microfinance institutions to farmers is insignificant. From Uganda through Cote d’Ivoire to Nigeria, microfinance institutions and banks pay little attention to agricultural financing.
This is ironic as the rise of microfinance was prompted by the desire to meet financial needs of those excluded from formal financial institutions. Added is the fact that early microfinance interventions were targeted at farmers.
The reasons for this development are familiar.
First is the perception of agricultural financing by conventional lenders as a risky business. Statistics are sometimes presented to validate this position. Usually fingers are pointed at the propensity of male farmers to apply their loan facility to acquire more wives than acquire farming inputs. Floods, drought and bush fire are usual suspects. Despite their commitment to address poverty, microfinance institutions have not been immune to this negative perception of rural financing.
Another explanation for the scanty attention to farming is ascribed to the nature of microfinance products and operational procedures. For instance, the loan duration of most loan products is short, usually less than eight months. Also, loan sizes are usually small, which are only sufficient for petty trading.
These reasons appear plausible. However, in reality they have no valid basis for exclusion of farmers from financial services. The facts are that poor repayment performances by farmers are due to other factors than acquisition of women.
Inappropriate operational procedures and poor understanding of the needs of farmers are culprits. For instance, farmers who received loans far into or after farming season would most probably misapply the facility. Loan amount misapplication is a sure prescription for repayment default.
There is no rule which compels microfinance institutions to make small and short- term loans. From experience the real reason for the neglect of agriculture is the rising commercialisation of microfinance. Microfinance left the rural economy in early 1990s when premium was being place on sustainability and profit at the expense of impact. Operational strategies and habits were being borrowed from commercial banks. Priority is being given to short- term loans and deposit mobilization; practices that are not responsive to agricultural lending.
This trend must be reversed to make microfinance relevant to our economic environment. It should be noted that rural or agricultural financing does not necessarily compromise profit making. It only requires innovation in product design and service delivery procedures. Applying the same lending and savings mobilization approaches of conventional banking to rural financing is a sure prescription for disaster.
Lending should take into consideration peculiar features of farming and farming calendar in deciding on facility sizes, disbursement and repayment schedules. For instance, why should loan amount to be used to meet expenses over a farming period of ten months be disbursed at once? This certainly makes for misapplication of funds. Success has been recorded by staggered or instalmental loan disbursement, which makes funds available only when required. Making profit with impact on the people in microfinance requires some measure of imaginative interventions.
Business Day
