Costs and risk specific to agricultural lending
Costs and risk specific to agricultural lending

Summary/Abstract: The question of how to best develop an effective rural financial system in developing countries has been much debated over the past decades. During this period, developing countries are facing rather drastic changes of the agricultural sector, accompanied with decline in agricultural credit supply for borrowers. Lack of access to formal credit and to full financial intermediation services impedes agricultural development. In addition, most banks have neither the rural branches nor the agricultural lending expertise to serve small farmer clients. As a result, many rural people still rely heavily on unformal financial arrangements. These sources may be beneficial in some respects but cannot be a substitute for effective banking services.Issues of high risks and costs are the main attributes of the rural finance markets within the developing countries. Within the framework of rural financial markets, this paper concentrates on the specific issues of lending to agricultural producers. Namely, agricultural lenders face distinct challenges that are related to the specific nature of farm production and are associated with the granting of rural and agricultural credit. The problems of high risks and costs are specific issues for agricultural finance and they are elaborated in this paper. Major attention is given to an assessment of the specific cost and risk barriers that formal lenders face in agricultural lending. In the conclusion remarks, particular attention is given to those aspects that facilitate a better cost and risk management in agricultural lending.

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