Credit a question of confidence
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CTA. 1987. Credit a question of confidence. Spore 11. CTA, Wageningen, The Netherlands.
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Because it is used to pay for the necessary seeds, fertilizer and equipment, money ranks as the most important input for agricultural modernization. And no maffer how you look at it, money often means credit and credit means confidence - mutual...
Because it is used to pay for the necessary seeds, fertilizer and equipment, money ranks as the most important input for agricultural modernization. And no matter how you look at it, money often means credit and credit means confidence - mutual confidence between the lender and the borrower. Farmers must invest ,and to finance such investments they need access to credit - without which modern agriculture simply could not exist The traditional farming systems that used to dominate agriculture in ACP countries -and which still exist in many areas - demanded no investments other than time toil and sweat. Today, however, national food security requires increased productivity and if the motors of such growth are technical, scientific and human, the fuel is financial. Unfortunately, the financing programmes that have been launched over the last two decades have only rarely had major impacts and have more often failed to produce the positive effects that were counted on. It is, after all, a risky business to loan money to hundreds of small farmers who can offer little collateral, are subject to unpredictable weather conditions, and sometimes do not even manage to feed themselves The situation of many countries in Africa is particularly revealing of the problems now being faced by the implementation of farm credit programmes. Before independence, the first attempts at farm credit were savings societies which were more or less successful in loaning money to individuals. There were two reasons for this relative success: firstly, these societies were financed by a form of taxation that was almost universal and paid at the same time as income tax; secondly only low-risk clients with sufficient collateral or revenues were accepted. This, of course, meant that the poor - who needed credit the most -were denied it. After World War 11 these societies were modernized and became Rural Credit and Savings Societies and then Rural Development Credit and Savings Societies. Many retained the right to collect fees, to which were added other resources generated by new activities such as the constitution of seed funds. They thus began to get involved in small traditional activities in rural areas. At the same time, another financing system was developed by those traders who were involved in buying and exporting local cash crops, often through advancing credit at extremely high rates of interest. But these revenues tended to be used primarily to cover current deficits rather than to repay outstanding loans. When the savings societies disappeared after independence they were replaced by commercial credit organizations. These tended to invest only in export crops, but did help to promote the organization and development of the cooperative sector with which they worked. But even when this credit system worked (and it still works for certain crops in some countries), it was because the crops that it financed were commercialized and thus provided some guarantee for the lender. It is a different story, however, when farm credit systems try to modernize and increase local food crop production. Attempts to develop such credit systems in many Third World countries have generally failed and many financial institutions have lost money and confidence. The first obstacle is the lack of guarantees. In fact, few small farmers are able to provide any collateral and their land, usually held under traditional titles, cannot be sold. Furthermore' their crops (generally annuals) and their few heads of livestock, generally do not have any commercial value worth pursuing. A hut, a couple of tools, a bicycle and a radio are also of little interest to bankers. This problem could partly be overcome by the formation of associations or cooperatives which provide mutual support, a practice that was started in Europe towards the end of the 19th century. This solidarity guarantee does not increase the financial resources per capita but the peer pressure that is thus exerted does improve the discipline and attitude of those involved. In both sub-Saharan Africa and the Caribbean this idea has long been adopted and it has recently appeared on the Tonga Islands where is it facilitating access to credit by small farmers who previously had no such source. In anglophone Africa, notably Nigeria, this solidarity approach led to the development of 'farm councils' which have since acquired sufficient status to serve as intermediaries with agricultural extension services. Despite such organizations, many small farmers are still at a disadvantage because even access to cooperative credit is often restricted to the lamer farmers. Another option that has yet to be widely developed, but which is being proposed for expanding farm credit, is the establishment of local stocks of cereals and seeds. These would not only improve the security of seed supply and reduce the financial and nutritional problems of the 'hungry season' between harvests, but would also lessen dependence on those entrepreneurs who tend to take advantage of the situation. This approach also facilitates the establishment of a credit system to the extent to which the cereal or seed stocks can serve as collateral. One of the reasons why lenders hesitate to loan against future harvests is that there is little guarantee that crops will be able to withstand the pests, droughts, cyclones and other natural calamities that beset farmers in the Third World. When a catastrophe does arrive, small farmers find themselves unable to repay their debts which may have accumulated over several years. These include medium-term loans to buy equipment as well as short-term loans that are supposed to be repaid each year. There are several ways of dealing with this situation. First of all, the risks should be spread over several crops, thus avoiding the all too prevalent practice of 'putting all one's eggs in the same basket'. Investments should also be balanced between production inputs (fertilizer, tools, etc.) and outputs that directly generate revenues. Finally, to safeguard the security of the credit system itself, the loans must be diversified in order to balance risky agricultural investments with ones in more stable sectors such as housing and small industry. Another way of dealing with such risks is to establish special 'catastrophe funds', which already exist in some countries. They are usually too small, however, because they normally draw only on the low levels of savings held locally or the occasional profits of another sector. It is thus no wonder that poor farmers figure prominently among those who contribute to the failure of farm credit systems. In all too many cases, the gains in productivity made possible by loans simply help them to feed their families, not to reimburse their debts. Many credit programmes have brought modernization and improved food crop proauction to rural areas without generating an economic surplus, because any profits have been absorbed locally in the form of a better diet. Rural credit has thus had a positive social effect but a negative financial effect with, at times, disastrous results for the credit organization involved. Extension programmes As it turns out, rural credit does not always even result in increased proauction. If farmers take out loans to buy equipment that they do not know how to operate correctly, they stand little chance of paying back their loan and may even see their production drop. For many observers, the counter-productivity of new technologies made available by farm credit is a major cause of the debts that have been accumulating in rural areas nf AC:P countries There are, however, many cases where farm credit programmes have been accompanied with extension programmes usually in cooperation with regional development authorities. An example is that of the people who resettled the Volta valley in Burkina Faso after the eradication of river blindness. Over a three year period these new farmers benefited from an intensive technical training programme combined with a farm credit system. At the end of this period they were not only making money, thanks to the benefits of efficient techniques and appropriate credit, but were actually loaning money to the training officials who were having difficulty making their own ends meet! The extreme variety of local conditions and the diversity of technical skills of farmers, however, does not always enable extension and credit programmes to work so well together. Nevertheless, it is in this direction of better integration between credit and development programmes that many government officials are now turning. The message that credit organizations have for such officials is clear: 'make sure that our borrowers stay solvent by ensuring that the investments they make with our money result in real economic progress'. In this way, farm credit is no longer treated as an isolated factor but becomes part of an integrated rural development programme which involves not only the provision of new inputs but also technical training, management, cooperatives, cereal stocks, improved water and energy supplies, and even literacy programmes. Farm credit is thus taking on a new dimension, that of overall development policy. For if bankers and developers have their role to play, the same is true for government officials who also share a large part of the responsibility for the success or failure of farm credit programmes. In particular, they must assume part of the responsibility for the practices, good and bad, that have been allowed to develop in this field. In fact, the traditional behaviour of some borrowers has often threatened the establishment of new credit operations. In the past, farmers - and government officials -have not always respected the distinction between loans and grants. Having long been backed up by public funds managed by development banks, applications for farm credit were almost automatically approved and involved little or no personal risk. In fact, these loans were regarded as grants and under such circumstances it became customary not to repay them. The results however, was that lenders lost confidence in their borrowers. Improving confidence In an attempt to make such farmers more responsible for their loans, they are now being asked to invest some of their own savings so that the credit agencies finance no more than half of the cost of any one project. But such commitments also require that the farmers have confidence in the government or credit agency. Who can guarantee them that a sacrifice of their meagre savings will, in fact, turn out to be beneficial for them? That requires an excellent understanding of the local situation which can only be the result of long years of close work within the community between the farmers and credit agencies. The banks, some credit agencies and even the government are often considered to be too anonymous and too far removed from the community to play this role. Farmers sometimes even prefer to deal with the local usury lender - the devil they know - rather than the credit official who is a stranger to them. That explains the existence of the many types of 'informal' loans described by economists that, for the farmers, are anything but informal. In some African countries, for example, there are many non-commercials traditional savings associations (called 'tontines') that consist of a dozen or so people who periodically contribute money, the total of which is made available on a rotating basis to one of them. These associations are a very effective means of generating local savings. A study in Senegal, Cote d'lvoire, Cameroon, Gabon and the Congo showed that the participation rate of such associations reaches 28.6% compared to 13.2% for the credit agencies. It is probably safe to assume that this difference is even greater in the rural parts of these countries. In Rwanda, the organization of numerous savings and loans associations led to the development of credit unions. They have brought together impressive sums of money reaching 10 billion Fcfa in 1986 and are now an active force in farm credit. In Cote d'lvoire, the rural savings and loans offices are spread throughout the country in order to serve the small farmers who are too far away from urban centres to benefit from the credit services offered by standard banks. These traditional savings associations and the first official organizations that evolved from them are no doubt among the most effective. The idea of having credit services available in the community has worked elsewhere: the slogan of one of the largest banks in the world, the French Credit Agricole, is 'le bon sens pres de chez vous' (good advice in your own backyard). Whether in France or Zaire, however, it is not enough for farmers to be good managers, technicians and weather forecasters in order to repay their loans. They also depend on the vagaries of the market, including the whims of consumers and the strategies of all the middlemen in between, who can often make or break the situation. On top of everything else, government decisions on prices, quotas and other factors affecting food production can negate years of hard work and investments with the stroke of a pen. That too is a question of confidence. BlBLIOGRAPHY Roch, J., 1986. 'La mise en place de la Caisse Nationale du Credit Agricole du Senegal' IN: L'exercice du developpement. ORSTOM, Paris. 355 pp. ISBN 2-7099-0799-2 Beaudoux, E. and M. Nieuwkerk, 1985. Groupements paysans d'Afrique - Dossier pour l'action. L'Harmattan, Paris, 243 pp. ISBN 2-85802-547-6
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