2. Literature Review and Theoretical Background
2.1. Agriculture finance
2.1.1. Agricultural credit
Several interventions are needed in the form of financial
institutions and instruments at the value chains (VCs) level to improve
financing in the agricultural sector. This interest has been renewed following
the economic crisis and the increase in food prices in 2008 and 2011 (Arias,
2019). In most developing countries, the level of financing and public
expenditure on agriculture remains very low. This reflects the low percentage
of the share of agricultural credit of total credit (Piñeiro, 2019).
Moreover, according to the agriculture orientation index (AOI) for credit,
agriculture financing is still also low and is just 0.4 in developing
countries, while in developed countries it is 1.95 (Arias, 2019).
According to Adams (1994), rural producers need access to
financing at the right time and this needs to be stable and reliable for more
than a few cropping seasons. This is designed to improve the production and
marketing process as well as to have access to input, new technologies and
limited resources (Zander R. , 1994). While rural credit is a powerful
instrument for poverty alleviation (Ololade & Olagunju, 2013), supporting
the agricultural sector is always complicated for FIs because access to
information is very expensive and difficult. Moreover, the soft skills in
lending to small-scale farmers are not well developed (Zander R. , 2016).
Many studies on the agricultural credit in developing
economies have shown that agricultural lending is necessary to improve
productivity in the agricultural sector (Sriram, 2007; Das, Senapati, &
John, 2009). Other studies have found that without external financing,
small-scale farmers cannot even continue their business, and this is proved in
the history and debts of people working in agriculture (Gowhar, Ganie, &
Padder, 2013). Agricultural credit is therefore a necessary element in meeting
the need for investment and bridging thegap between the farmer's income and the
expenditure in the field (Khan, Shafi, & Shah, 2011). Additionally,
Agriculture credit plays a key role in the modernization of agriculture by
removing financial constraints and accelerating the adoption of new
technologies (World Bank, 1975).
In this context, Singh et al. (2001) announced that most farm
households face a lack of funds on their side. To meet their credit
requirements, both formal and non-formal financing is available in a developing
economy. Pradhan (2013) suggests that farmers' need for credit increased
spontaneously after the Green Revolution. This was the period when
institutional sources of credit were considered major players. This was the
time when subsistence crops were replaced by cash crops. These credit sources
were classified in the following figure into
three groups by Yadav and Sharma (2015) following their
intensive literature review on agricultural credit.
Agriculture credit
Non-
institutional
sources
Semi-
institutional
Sources
Institutional Sources
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Figure 1: Sources of agriculture credit
Source: Yadav & Sharma (2015)
Figure 1 shows the main sources of credit that are available
to rural producers. Credit from institutional sources includes credit from the
creation of institutional framework with banks and institutions including
specific organizations established for agricultural development, commercial
banks, cooperative banks, and regional rural institutions. Non-institutional
sources cover credit from the unorganized sector such as friends, relatives,
landlords, entrepreneurs who are not part of the institutional set-up (Ijioma
& Osondu, 2015). Halfway between the institutional and non-institutional
agencies is the semi-formal configuration of microfinance and the provision of
a range of financial and non-financial services to members based on joint
responsibility (Yadav & Sharma, 2015).
Regarding the components of agricultural credits, Yadav &
Sharma (2015) highlight direct credit, which includes short-term loans,
medium-term loans, and long-term loans for agriculture and connected activities
with direct responsibility for repayment. According to Gowhar et al. (2013),
short and medium-term loans are provided by cooperatives, commercial banks, and
regional rural banks for agriculture and allied activities. Whereas, long-term
loans for agriculture are provided by rural development banks and primary
cooperatives. Short-term agriculture credit enables farmers to buy inputs such
as fertilizers, seeds, power, irrigation and the cost of the hired labor
(Osuntogun, 1980; Adebayo & G, 2008). Short-term credit is practically for
6 months. However, long-term credit is oriented toward large investments such
as irrigation pumps, tractors, and agricultural machinery (Anwarul &
Prerna, 2015). While indirect credit allows the farmer to benefit from
subsidized inputs and warehouse facilities. In this case, farmers are under
indirect repayment responsibility through fertilizers dealers and
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input suppliers. Figure 2 summarizes the components covered
under the scope of institutional credit.
Direct Credit
Indirect Credit
Subsidized Inputs
Warehouse facility
Setting up
agribusiness centres
t
Credi
Agricul
ture
Short term loans
Medium term loans
long term loans
Figure 2: Components of direct and indirect agriculture
credit Source: Yadav & Sharma (2015)
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