Capacity Building of Agricultural Finance Institutions and Their Customers, by IFC

Banks perceive agricultural risks to be high and profits to be low, and lack technical expertise in agriculture and specific crops. Therefore, a fundamental bottleneck is the inability of financial institutions to adequately conceptualize, underwrite, mitigate, and manage agricultural risks. At the same time, agricultural SMEs lack basic business and financial management skills, and poor financial literacy rates and a limited understanding of traditional banking requirements pose a challenge to accessing formal finance.

Capacity building is necessary among all market participants to support the growth of agricultural finance in order to enhance the capabilities of staff in financial institutions to serve agricultural clients. Capacity building will also enhance the financial literacy and management skills of farmers, farmer organizations, and agricultural SMEs in order to make them better financial clients. Agricultural universities and colleges should add or improve curricula offerings specifically related to agricultural finance.

The capacity building of financial institutions is critical to their sustained expansion and strengthening in the agriculture sector. Such support helps participant institutions to access new markets and clients, broaden their product offerings, and learn the skills to integrate sustainable finance practices into their strategy and operations. For many international organizations, institutional capacity building has been a significant component of their SME finance assistance strategy, such as streamlining credit processing, standardizing product offerings, segmenting the SME market, training staff and management, and introducing management information systems. Development finance institutions (DFIs) can scale up their efforts to provide capacity building and advisory services to financial institutions specifically in the agricultural space and help them serve agricultural SMEs more efficiently, as they have already done in the broader SME space.

On the demand side, capacity building for farmers and agricultural SMEs is important in improving their access to formal finance. It can provide technical and business support services such as training, business development services, assistance in formalizing financial statements, and loan application preparation. Poor financial literacy rates, especially among small farmers, and a limited understanding of banking requirements pose a significant hurdle for agricultural SMEs wishing to access formal financial services. However, training of farmers and agricultural SMEs on financial literacy, record-keeping, and financial services in general can help to instill a greater trust of banks and improve understanding of the benefits of formal financial services. Bringing both groups closer together through capacity building on both sides of the equation is key to bridging the agricultural SME finance gap.

The above information is reproduced from the “Scaling Up Access to Finance for Agricultural SMEs – Policy Review and Recommendations” issued by IFC

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