Governments typically play the role of ensuring that financial institutions carefully track deposits, charge the interest on loans that they state beforehand, and maintain reserves so that they continue to be solvent. We conclude with some simple recommendations to improve the climate for AVCF.Ĭredit markets, not just agricultural credit markets, tend to be regulated by governments. Here, we describe the level and method of government involvement in credit markets in the three countries, examining how this involvement may affect the quantity and quality of smallholder credit. In the IFS4Ag project, we have studied the necessary conditions for AVCF to work and how government policy and action in three countries- Indonesia, Myanmar, and Viet Nam-affects the potential of AVCF to help alleviate credit and liquidity constraints among farmers, thus limiting their potential. The enterprise can more effectively monitor and screen farmers while providing the individualized loans that banks find too costly to make, and the bank retains the ability to make a formal loan to an enterprise under standard terms and conditions. The relationship between the enterprise and farmers acts as a substitute for more formal collateral provided by the farmers. a processor), which then buys crops from individual farmers. a bank) to lend to a single enterprise (e.g. A standard AVCF scheme allows a formal lender (e.g. As such, incorporating digital technologies into existing models of whole-of-value chain agricultural finance, or agricultural value chain finance (AVCF), is a potentially attractive approach to increase smallholder farmer returns, financial viability, and resilience and improve livelihoods.ĪVCF blends relational contracting with more formal contracting observed in modern value chains. Yet new technology will neither fully eliminate barriers to increased production nor improve resilience against shocks if farmers lack markets for additional output or if financial providers lack sufficient information to assess potential clients, supervise loans, and address risks.
A combination of new technologies, markets, and government priorities in several Southeast Asian countries suggest that new opportunities are emerging to overcome these long-standing challenges to expanding agricultural finance. One such constraint is access to formal finance smallholders and other agricultural value chain participants frequently cannot access credit necessary to invest in new crops or technologies and deal with risks and shocks and/or savings products necessary to safely carry wealth from harvest to planting. Several constraints limit the ability of smallholder farmers in low and middle income countries (LMICs) to reach their production potential.
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