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Overcoming Obstacles to Agricultural Microfinance: Looking at Broader Issues Gilberto M. Llanto Philippine Institute for Development Studies July 18, 2008

Objectives of the paper „

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An overview of some of the main obstacles to agricultural microfinance Some key issues to consider in crafting a strategy to overcome perceived obstacles.

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Can we do agricultural microfinance? „

The rise of microfinance in the last twenty years has unlocked the puzzle of how to profitably lend to the poor and micro-enterprises in densely populated urban areas in East Asia and Southeast Asia.

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What policy, regulatory or institutional issues could inform agricultural microfinance for providing sustainable finance services to smallholder agriculture? Do we have enough understanding of the risks and the particular situation of agriculture to enable us to suggest with confidence agricultural microfinance? Llanto: Overcoming Obstacles to Agricultural Microfinance

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Clarification „

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Agricultural microfinance is not agricultural credit as commonly understood (subsidized, government/donor driven, targeted to particular borrowers) Smallholder agriculture continues to rely on informal sources and self-finance Llanto: Overcoming Obstacles to Agricultural Microfinance

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Agricultural microfinance is not the straight forward application of microfinance lending techniques to smallholder agriculture.

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Some credit cooperatives/unions and village banks, have successful agricultural lending. However, it is of limited scale.

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Agricultural microfinance requires an understanding of the information, incentives and contract enforcement in a different type of setting: geographical dispersion, covariant risks, heterogeneity of the population and others. Llanto: Overcoming Obstacles to Agricultural Microfinance

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Some key issues „ „ „ „ „

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Scarcity of collateral Risks, risks and more risks The challenge of liquidity management Absence of risk-reducing institution Missing opportunities in the agriculture supply chain Regulation and supervision issues Llanto: Overcoming Obstacles to Agricultural Microfinance

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Concluding remarks „

The strategies and solutions to overcome barriers to agricultural microfinance go beyond simple provision of credit and more than agriculture.

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Innovate on product design and risk management strategies, Improve the information base and Use market-based risk management products, e.g., price risk management instruments, weather-based index insurance contracts and similar products Llanto: Overcoming Obstacles to Agricultural Microfinance

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The policy and regulatory environment must allow experimentations and innovations but ensure the stability of the rural financial system. There is promise in further developing risk-based supervision in view of the discussion of risks facing agriculture microfinance. Llanto: Overcoming Obstacles to Agricultural Microfinance

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Thank You!

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