Agricultural Finance

• Finance is narrowly interpreted as capital in monetary form, referring to funds lent or borrowed for capital purposes through financial markets or institutions.
• As a branch of agricultural economics, finance focuses on financial resources related to individual farm/firm units.
• Microfinance provides financial services to poor and low-income people in both urban and rural areas, covering the lower end of rural and agricultural finance.
• Rural finance involves providing financial services to a heterogeneous rural farm and non-farm population across all income levels.
• Rural finance includes formal, informal, and semiformal institutional arrangements that offer financial services like loans, savings, deposits, insurance, and remittances to rural individuals, households, and enterprises on a sustainable basis, and covers financing for agribusiness and agro-processing.
• Agribusiness finance narrows the scope to financing agribusiness-related activities along the value chain, including input supply, production, distribution, wholesale, processing, and marketing.
• Fundamental economic and management principles help efficiently manage capital.
• The course focuses on finance in agriculture broadly, including rural finance, farm finance, agribusiness, and agricultural finance, to effectively fund agribusiness activities for optimal output.
• Farm finance at the farm level is an important input due to capital-intensive agricultural technologies.
• Farmers need capital to enhance the productivity of farm resources.
• In agriculture, capital includes tools, machinery, seeds, fertilizers, chemicals, and livestock.
• It also includes land improvements made by farmers through labor.
• Agribusinesses need substantial capital for farm supplies, processing, and marketing, in addition to farm capital.
• Agribusiness finance is the economic study of financing agribusiness activities to increase profit.
• The financial system mobilizes and allocates resources for agribusiness investment projects for economic development.
• A poorly functioning financial system hinders private investment, entrepreneurship, and economic growth.
• Financial systems reduce market frictions influencing resource allocation.
• Costs of information, contracts, and transactions drive the emergence of specific financial contracts, markets, and intermediaries.
• Essential functions to growth include producing information for investments and allocating capital.
• Essential functions to growth include monitoring investments and exerting corporate governance.
• Essential functions to growth include facilitating trading, diversification, and risk management.
• Essential functions to growth include mobilizing and pooling of savings.
• Essential functions to growth include easing the exchange of goods and services.
• Rural financial services in agrarian economies are essential for agribusiness and overall economic development.
• Agribusiness finance is required to spur economic growth.
• Agribusiness finance is required to promote inclusion of all rural population in economic development.
• Agribusiness finance is required to reduce vulnerability to economic, physical, and other shocks.

Spurring Economic Growth

• Access to financial services is necessary to achieve economic growth in rural areas.
• Growth in agribusiness, and other rural economic activities, is enhanced through reliable financing and sustainable financial intermediation.
• Modern technologies have increased production.
• Technological and structural agricultural changes have heightened the business risks for farm/firms.
• Increased credit use and narrower profit margins have increased financial risk in farming.
• The importance of finance in agribusiness has increased with technology and production changes.
• Sustaining agro-based industries requires an increased supply of raw materials and a stable flow of credit to enhance overall economic growth.
• Fixed capital is locked in agriculture in land and buildings.
• It takes time to receive revenue from farms, requiring farmers to continue finance.
• Small farmers are in a poverty cycle consisting of: low returns, low savings and low investment
• Credit needs to be injected into the sector to break cycle.

Promoting Inclusion

• Many developing economies, including Uganda, have poor rural populations without access to financial services.
• Wealthy people, farms or rural enterprises typically have access to financial services.
• Microfinance has shown that aiding the poor and wealthier populations can be successful.
• Access to financial services provides them with some of the resources they need to pursue economic opportunities as well as manage their household finances.
• Policy should aim to develop a market-based financial system for rural finance, with targeted programs for disadvantaged groups like women, smallholders, and the non-formal sector due to market failures.
• Fixed-cost subsidies and self-selected targeting is a better alternative to subsidizing interest rates is not the way to help marginal borrowers.
• Commercial banks should consider non-mortgage lending practices.
• Lending for downstream agricultural activities like agro-processing needs to be considered.
• Strengthening property rights, title, and default enforcement will improve rural financing,.
• Motivating weaker farming communities to participate in development, provide financial assistance to acquire assets.

Reduction of Vulnerability to Shocks

• Farmers are subjected to disasters like floods, drought, and famine.
• Vulnerability to income swings exist due to illness, death, and seasonal problems.
• Being able to save, even small amounts, during good times and be able to safely keep until needed is essential.
• Financial products are important to poor rural populations, specifically, remittances from migrant workers.
• Existing field-based evidence supports the importance of rural finance for economic development.
• Most households need access in urban and rural areas to financial services.
• Access to finance is needed for improving rural infrastructure.
• Rural and agribusiness financing in developing countries are generally weak.
• Unique rural factors challenge supply/demand for finance, which can be economic, political, legal, institutional, or weather-related.

Economic Challenges

• Rural finance faces challenges from the country's economic reality.
• High transaction costs for borrowers and lenders exist.
• Limited economic opportunities for local populations also exist.
• High risks exists due to the variability of incomes, exogenous economic shocks and limited tools to manage risk.
• High agribusiness concentration increases client and institutions which increases risk.
• Inadequate or unusable collateral and unclear property rights contributes to economical challenges.
• Undeveloped or inadequate infrastructure is also a challenge.
• Land may be too small to be sustainable for optimal use.
• Individuals may depend on a single crop for income.

Political, Legal and Institutional Challenges

• Political, legal, and institutional challenges exist in agribusiness finance.
• The main political challenge is a weak institutional capacity including poor governance, operating systems, low staff and management skill.
• The risk of intervention and debt forgiveness which lowers payment morale exists.
• Unfavorable policy, legal, and regulatory frameworks make it a challenge.
• Undeveloped legal systems and inadequate contract enforcement mechanisms contribute to political challenges.
• Lack of information about borrowers; and lack of market information and/or market access make for challenges.

Cultural and Geographical Challenges

• Common rural finance problems exist.
• Population density and demand are lower than typical.
• Rural populations associate poverty reduction efforts with charity viewed from NGO's, not microfinance institutions.
• Accessibility to market may prove a challenge getting acceptance to credit terms.

Weather Challenges

• Developing countries that rely on rain-fed agriculture are greatly impacted weather related challenges.
• Rainfall patterns vary by area which may have one growing season or others.
• Susceptibility to natural disasters which can cause severe devastation to livelihoods.
• Seasonality also potentially affects both the client and institution.