Finance for Agriculture

Abstract

Finance for funding agricultural activities can be fixed through three typical sources, namely formal, informal, and semi-formal channels. However, the small-scale farmers either by omission or commission tend to rely solely on informal sources of finance, for instance, personal savings, for funding agricultural activities. There is therefore the need to inform farmers on the array of sources of finance that are available for them for use boosting their farm investment and enterprise expansion. The objectives of the chapter include highlighting three important functions of an enterprise, defining the meaning of agricultural finance, describing sources of investment fund for agriculture, and discussing the rural finance institution-building programme. The methodology adopted is that of systematic and analytical review of relevant literature. Following from the review of relevant literature, this chapter argues that the reported reluctance of banks to lend to agriculture is dictated by the profit-making motives of the banks against the characteristic risky nature of agricultural enterprises. A way around the reluctance is government backed and efficiently targeted credit schemes. The chapter further argues that farmers should form cooperative societies and source loans from such cooperative societies at single digit interest rates. With respect to the cooperative societies, government should constantly and consciously discharge its responsibilities as they relate to supervision, monitoring, and evaluation of the activities of registered cooperative societies. The chapter observes that the formal sources of agricultural finance are capable of mobilizing a large sum of money; however, in the process of financial intermediation, a relatively small fraction of the whole gets to agriculture. On their part, the informal sources tend to mobilize funds for agriculture at high and therefore unsustainable interest rates to farmers. Incentives and subsidies are therefore required for financing agriculture. It is specifically recommended that African governments should strive to commit themselves to the Comprehensive Africa Agriculture Development Programme's call for the allocation of at least 10% of the national budget for agriculture to achieve a target of 6% annual agricultural growth.