Agriculture Finance

There is an ever increasing need to invest in agriculture due to a drastic rise in global population and changing dietary preferences of the growing middle class in emerging markets towards higher value agricultural products. In addition, climate risks increase the need for investments to make agriculture more resilient to such risks. Estimates suggest that demand for food will increase by 70% by 2050 and at least $80 billion annual investments will be needed to meet this demand, most of which needs to come from the private sector. Financial sector institutions in developing countries lend a disproportionately lower share of their loan portfolios to agriculture compared to agriculture sector’s share of GDP.

On the other side, the growth and deepening of agriculture finance markets is constrained by a variety of factors which include: i) inadequate or ineffective policies, ii) high transaction costs to reach remote rural populations, iii) covariance of production, market, and price risks, and iv) absence of adequate instruments to manage risks, v) low levels of demand due to fragmentation and incipient development of value chains, and vi) lack of expertise of financial institutions in managing agricultural loan portfolios. The development of agriculture requires financial services that can support: larger agriculture investments and agriculture-related infrastructure that require long-term funding (given that currently transportation and logistics costs are too high, especially for landlocked countries), a greater inclusion of youth and women in the sector, and advancements in technology (both in terms of mechanizing the agricultural processes and leveraging mobile phones and electronic payment platforms to enhance access and reduce transaction costs). An important challenge is to address systemic risks through insurance and other risk management mechanisms and lower operating costs in dealing with smallholder farmers.

Agriculture finance and agricultural insurance are strategically important for eradicating extreme poverty and boosting shared prosperity. Globally, there are an estimated 500 million smallholder farming households – representing 2.5 billion people – relying, to varying degrees, on agricultural production for their livelihoods. The benefits of our work include the following: growing income of farmers and agricultural SMEs through commercialization and access to better technologies, increasing resilience through climate smart production, risk diversification and access to financial tools, and smoothing the transition of non-commercial farmers out of agriculture and facilitating the consolidation of farms, assets and production (financing structural change).

We assist in the design and develop a wide range of instruments, either as a technical assistance or part of lending projects: value chain finance, inventory finance (examples include warehouse receipts, CMA, and SMA), partial credit guarantee schemes for agriculture-sector loans, matching grants, crop insurance, price hedging instruments, and gender finance. We also work on developing mobile banking & payment platforms to enhance access to finance and reduce transaction costs within the eco-system. An important focus of our work in this area has been to develop solutions to reduce the riskiness of agriculture by addressing systemic risks (e.g. production and weather risks through insurance, and price hedging instruments) and also focus on ways to reduce operating costs in reaching to smallholder farmers and SME agribusinesses (for instance, the role of digital finance technologies).

Informed by our in-house research and knowledge production, we carry out activities both at the internal level (including community of practices and training programs) and at the external level (global and regional dissemination events, South-South exchange and capacity building for policy reforms, among others). We organized two Community of Practice: one on agriculture finance and insurance and another one specific to financial cooperatives.

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