Imagine you are a young entrepreneur seeking to establish a successful farming enterprise. You have access to arable farm land, water, road networks and markets, but something is missing. You are fresh out of high school and have no credit, savings or money to start up your agribusiness! What do you do? Suffice to say, this is a real issue facing many small and medium start-up agribusinesses, and farmers engaged in subsistence farming.
While access to finance and financial services is readily available to large agribusinesses, it is one of the major challenges facing small and medium agribusinesses today. Access to credit can determine the development, competitiveness and sustainability of successful agribusinesses in African, Caribbean and Pacific (ACP) territories. In an effort to overcome the financial constraints faced by these stakeholders, public and private sector have engaged in dialogue, policy development, and loan product creation aimed at a more favourable business environment.
In Jamaica, the National People’s Cooperative Bank (NPCB) has served as the premiere financial service provider for agricultural development in rural Jamaica. It has provided financial services for the development of a now successful Irish Potato expansion programme and commodity value chain. However, key challenges hindered future agribusinesses from relaxed (crop-lien system) means of accessing financial services.
These challenges include, but are not limited to:
- Limited information on credit worthiness of agribusinesses
- High transaction costs
- High loan risks, despite crop-lien facilities, which allowed borrowers to repay loan and interest at the end of the crop cycle.
This resulted in more stringent measures being institutionalised as new farmers required collateral to access loans from the NPCB.
The case of the Credit Union, the Agro Park and the Farmers’ Association
A Credit Union (CU) in the rural parish of St. Thomas conducted research and developed a loan product, which would be accessible to all St. Thomas farmers, irrespective of the size of their agricultural activity. The parish is well known for its agricultural riches, so it was only fitting of the CU to embrace this opportunity. The CU introduced the product to one Agro Park in eastern St. Thomas and sought to introduce it to another Agro Park in western St. Thomas.
The Agro Park is an ideal concept for supporting value-chain financing to farmers operating within the same locale. These farmers have access to irrigation water, proper roads and drainage network, and most importantly, marketing contracts. Thus, a meeting was set up by the value chain manager and the CU to introduce the financial product to the local water users’ group (farming association).
One can only imagine how anxious these farmers became as the possibility existed for them to honour marketing contracts (for identified crops) by accessing credit to execute their business operations. Would this opportunity allow subsistence farmers to establish sustainable farming agribusinesses? Would farmers be able to standardise their operations and engage in minimal value addition? The answer was YES!!!
The meeting day
The farmers sat in the room of the water users, patiently awaiting the start of the presentation. The CU’s Micro-Loans manager in his presentation introduced the agricultural loan facility, and explained how farmers can benefit from access to finance. Then reality struck!!! We were all reminded of the high risks associated with lending and the willingness to lend only where the risks were deemed to be significantly lower. Then, a sigh of relief echoed across the room as the CU expressed their favourable view of the Agro Park environment. All parties were ready to do business!
The financial services provided by the CU were only accessible to credit union members. In addition to the membership, and in lieu of collateral, farmers were expected to pay the 10% equity and processing fees, purchase crop insurance, and present a marketing contract from a reputable buyer which entitled them to access loans using the revived crop lien system. The farmers were still concerned because, they did not have the funds readily available. Also, most farmers did not have collateral and for those with collateral, they were unwilling to use their assets to secure the loan.
To access the CU loans, most farmers used cultural means of accessing finance by using personal savings, borrowing from family and friends and selling their livestock (2 goats) to accumulate the ‘start-up’ funds. Most were reluctant to purchase the crop insurance, which was mandatory for accessing the loan.
As I was writing this blog, I was invited to a workshop on Agri-Finance, organised by the Inter-American Institute for Cooperation on Agriculture (IICA), and I can say that I feel very connected to this topic. Well, cherry on the cake, I will also be an on-site social reporter at the Caribbean-Pacific Agri-Food Forum. If I get to share my experiences at the event (which I intend to), I will support the need for on-going financial education for farmers to develop their financial management skills, as well as adopting more easily new technologies such as crop insurance. Additionally, the culture of agribusinesses must embrace the need for trust, credit-worthiness, and honouring of contracts to ensure longevity of access to credit. On the other hand, the cost of borrowing must become more competitive because financial institutions identify the need to establish agricultural programmes as a component of their social responsibility mandate.
The Caribbean-Pacific Agri-Food Forum is being organised by CTA and partners in St Michael, Barbados from 02-06 November 2015. As part of the forum, a workshop on “Access to Finance for Agribusiness” will be held from 03 and 04 November 2015. Follow this workshop with Hashtags #CPAF15 #WS6! See the full programme of the Forum.
Photo credit: Latoya Lewis
Blogpost by Latoya Lewis, Social Reporter for the Caribbean-Pacific Agri-Food Forum 2015.