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Challenges and good practices in agricultural financing

In 2017, SEDPI conducted a series of training on “Innovations and Trends on Financial Inclusion” held in Baguio, Cebu, and Davao. It aims to provide capacity building training to microfinance institutions in improving delivery of pro-poor financial services towards financial inclusion of microenterprises.

Industrial Guarantee Loan Fund (IGLF) supported the conduct of the training. IGLF is a government-owned credit program (through the National Economic and Development Authority) administered by the Development Bank of the Philippines (DBP) under the supervision of a Governing Board composed of NEDA, BSP, DTI, DOF, and UP-ISSI. It used to be the longest running lending facility in the country assisting MSMEs with their credit needs.

Through a workshop, the participants were asked to (1) provide a profile of farmers, fisherfolks and producers who are the main actors in agriculture; (2) identify challenges of firms working with producers and producer organizations; (3) identify challenges microfinance institutions face in agricultural financing; and (4) describe good practices in agricultural financing. These served as a jumping point to deepening the discussions on the methods and processes to innovate agricultural financing activities in their respective organizations.

Profile of respondents

A total of 157 participants from 56 microfinance institutions all over the country. Most are top management (32%) or middle managers (62%) of their respective microfinance institutions and holds a college degree (74%). More than half are male (58%) and married (71%). Most of the participants finished college (74%).

Profile of Farmers or Fisher Folks

The first question focused on the profile of farmers or fisherfolk The responses of the participants varied, with answers ranging from their economic status and income levels to their social situation, behavior, and educational levels.

The participants agreed that most of the farmers and fisherfolk have low educational levels. Some even highlighted that the highest educational attainment that the farmers reached is at the high school level. Because of this, the farmers, according to the participants, lack the business know-how to transform their farming activities into a business venture.

The participants also mentioned that a typical Filipino farmer or fisherfolk depends on farming and fishing as their primary source of income and that they use traditional tools and methods, thereby affecting their productivity. Because of the low productivity from not modernizing their tools and methods, most of the farmers are living below the poverty line.

Pressured to sustain their daily living, the farmers would depend on many loans, through formal or informal means. Hence, farmers and fisherfolk are often unaware of sound personal finance practices.

The participants also described their social situation, stating that the farmers are often tenants, tilling farmlands of other people despite government efforts in agrarian reform, particularly on land ownership.

Lastly, the participants shared that society tends to look down on farmers because of their perceived characteristics, like having too many children without being able to provide for themselves and their family and having many vices.

Challenges of Firms Working with Producers or Producer Organizations

The second question tackled the challenges of private firms working with farmer-producers and producer organizations. This provided an overview of the existing problems that private firms face in dealing with farmers, thereby affecting the economic status of the farmers.

The participants agreed that quality remains the biggest challenge that private firms face. The quality of produce that farmers and producer organizations provide is not only inconsistent but most of the time not at par with the specifications of the private firms.

More than quality, the participants also noted that farmers and producer organizations have problems fulfilling the volume requirements of private firms. Because of this hindrance, private firms often question if partnering with farmers and producer organizations is sustainable because they are often susceptible to various externalities, such as fluctuating prices, lack of storage and processing facilities and infrastructure, and natural and manmade hazards.

Furthermore, the participants also intimated that the attitude of the farmers, particularly their commitment in keeping with the agreements to the private firm, is another factor that affects the relationship of the farmers with private firms.

Challenges of MFIs in Agricultural Finance

The third question discussed the challenges of MFIs in agricultural financing. The question identified the problems that MFIs face when extending credit to agricultural activities, based on their experience.

The participants agreed that extending credit to farmers is often a high-risk high return scenario.  The MFIs carry all risks of agricultural credit, especially when natural and manmade hazards affect the productivity of the farmers, such as typhoons, drought, pests, and diseases, or armed conflict. As such, even if the MFIs incorporate this in their product design by incorporating crop insurance in their loan products, there is only one crop insurance provider and the MFIs feel that their options are limited to manage their risks.

In addition, there are outside factors that affect the repayment of farmers. The participants cited the lack of infrastructure (farm to market roads, irrigation facilities), lack of market linkages, and even overproduction or surplus also affect how the farmers would repay their loan.

In addition, designing products for farmers after considering all these factors proves to be difficult for MFIs because they usually follow the gestation period of the crops the farmers produce. Some participants mentioned that long gestation periods of crops also affect the ability of the MFIs to revolve the funds and plow back to their operations.

Lastly, because of these issues in repayment, there are occasional instances of fraudulent activities being conducted.

Good Practices in Agricultural Finance

The final question asked about the good practices the MFIs do on agricultural financing. Once again, the responses were based on their experiences.

The participants agreed that requiring farmers to submit a farm and budget plan helped them in approving loan applications for farmers. To support the plan, the MFIs also apply proper credit and background investigations, ensuring that the information written in the plan is verified and would be implemented accordingly.

Loan disbursements were based on the plan, coinciding with the major activities that need funding thereby reducing the financial strain to the farmers.

The loan products, the participants agreed, were coupled with crop insurance from the Philippine Crop Insurance Corporation. In absence of crop insurance, some MFIs set up a loan guarantee fund, where the loan and not the crop is guaranteed.

Loan monitoring is also crucial, according to the participants, as it is the responsibility of the MFI to look after the farmers and their progress in accordance with the farm plan.

Another good practice is the provision of non-financial services, such as providing technical training to farmers, looking for opportunities to link farmers to the market, and equipping the farmers with skills and knowledge on financial literacy.



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