Agricultural Finance for Smallholder Farmers E-Book

Daniela Röttger

• Herausgeber: ibidem
• Kategorie: Fachliteratur
• Serie: University Meets Microfinance
• Sprache: Englisch

Seitenzahl: 282

Veröffentlichungsjahr: 2015

Beschreibung

Even though traditional microfinance has successfully paved the way for offering financial services to low-income populations without traditional collateral, many microfinance institutions (MFIs) are still reluctant to move into rural areas and agricultural finance, due to the perceived high risks and costs. Daniela Röttger`s research demonstrates how MFIs can mitigate risks and costs of lending to smallholder farmers by using a combination of proven traditional microfinance mechanisms while adapting specific loan features and lending mechanisms to the particularities of smallholder agriculture. She systematically compares traditional microfinance risk management mechanisms with agricultural microfinance approaches and identifies successful strategies. For this purpose, eight MFIs providing agricultural finance to smallholder farmers in four countries in East and West Africa (Uganda, Kenya, Benin, Cameroon) were interviewed and their loan features and agricultural lending mechanism were analyzed. The study shows that MFIs can successfully serve smallholder farmers in rural areas. However, the extent of adaptations is reason enough not to commit to such an endeavor lightly. A strong commitment combined with sound in-house knowledge of agricultural value chains and the flexibility to adapt loan terms and lending procedures to the particularities of agriculture are needed to successfully develop and sustain agricultural microfinance.

Leseprobe

ibidemPress, Stuttgart

Table of Contents

List of Abbreviations

1 Introduction

1.1 The relevance of agricultural finance for increasing smallholder farmers' productivity

1.2 Purpose and outline of the paper

1.3 Methodology

2 Terminology and historical background of agricultural finance for smallholder farmers

2.1 Terminology

2.1.1 Microfinance, rural finance, and agricultural finance

2.1.2 Smallholder farmers: definition and financial needs

2.2 The history of agricultural finance for smallholder farmers: a change of underlying principles

2.2.1 Old paradigm: subsidized agricultural credit

2.2.2 Emergence of a new paradigm

2.2.3 Linking the new paradigm and agricultural finance for smallholder farmers

3 Risks and costs of agricultural lending for smallholder farmers

3.1 (Credit) risks specific to agricultural lending forsmallholder farmers

3.2 Costs specific to agricultural lending for smallholder farmers

4 Traditional microfinance risk and cost management approaches: do they work for smallholder farmers?

4.1 Loan product design for risk mitigation in traditional microfinance

4.2 Loan assessment and monitoring for risk mitigation in traditional microfinance

4.3 Reducing transaction costs in traditional microfinance

5 Interim conclusion

6 Overview of interviewed MFIs and their agricultural lending strategies

6.1 Indicators and agricultural loan products of interviewed MFIs

6.2 Commercial banks

6.3 Microfinance companies

6.4 Membership-based financial institutions

7 Risk mitigation through adapted loan products and lending procedures

7.1 Loan features of agricultural production loans

7.1.2 Discussion of interest rates

7.2 Risk management through adapted lending procedures

8 Further strategies to reduce risks and transaction costs in agricultural lending to smallholder farmers

8.1 Qualified staff with agricultural backgrounds

8.2 Value chain finance

8.3 Cooperation with external actors

8.4 Cost-effective outreach to smallholder farmers

9 Conclusion

Bibliography

Annex

Foreword

It is a great privilege and honor to write this foreword for this outstandingvolumeby Daniela Röttger, who won the 2013 University Meets Microfinance (UMM) award.

Since its creation in 2008, the Grameen Crédit Agricole Microfinance Foundationhasthe objective to support MFIs in rural areas and agriculture finance, with a strong focus on Sub-Sahara Africa. Established as a uniquealliance between the Bangladeshi Grameen Trust and the French bank Crédit Agricole SA, the Foundation has the mission tocontribute to the fight against poverty by supporting microfinance institutions (MFIs) and Social Business enterprises.

After 6 years, the Foundation is proudto have a partnership with 45 MFIs in 20countries, more than half of them in Africa. Together these MFIs serve more than 2,3 million clients, of which 83% live in rural areas. Nevertheless,the proportion of their portfolio dedicated to agricultural finance is less than 30%. Taking into account our effort to find MFIs that finance agricultural activities, this figure is disappointingly low. And it clearly illustrates that many MFIs are still reluctant to finance agricultural activities due to the perceived high costs and risks, even though microfinance has, in general, successfully paved the way for offering financial services to low-income populations.In that context one question remainsopen: how to encourage MFIs toengagemore in financing agricultural activities for small farmers. The research from Daniela Röttger clearly provides some concrete answers by providing a comprehensive analysis of the issue.

Especially inSub-Sahara Africa,a continent wheresmall farmsaccount for 80% of the agricultural economy and where 70% of the poor work in agriculture,the challengeoffinancing smallholder farmers remains crucial. The research of Daniela can be very useful for all stakeholders interested to engage more in that field as it provides insights into how MFIs can successfully manage the risks of financing agricultural activities of smallholder farmers through adapted loan features and lending procedures.

The research thereby systematically links theory with practice. It offers a comprehensive overview of risk and costs of agricultural microfinance and theoretically analyses the extent to which traditional microfinance risk management approaches are able to mitigate these agricultural risks. But more importantly, it offers practical insights into the experiences of MFIs that already offer finance for agricultural activities by interviewing eight MFIsin four countries in East and West Africa (Uganda, Kenya, Benin, Cameroon). By identifying their loan features and lending mechanism specific to agricultural lending, the empirical research provides concrete examples of the microfinance mechanism that work in agricultural lending and the ones that need to be adapted and thereby underpins the theoretical analysis.

The main contributionof this researchis, however,the comprehensive and systematic comparison of the microfinance approaches to manage risks versus the agricultural microfinance approaches, with a summary of the "successful" approaches to manage risk in agricultural microfinance.Allmain issues have been clearly identified and analyzed, such asthe need to adapt loan features to agricultural production cycles(interest rate, duration, repayment schedule), to have qualified staff with sound agricultural knowledge, toperceiveand analyze farmers as a partof an agricultural value chain andto introduce innovation like agri-microinsurance and new technology to mitigate costs and reduce risks.

Even though adeeper analysis of the portfolio quality of thestudied MFIs, which is a key element for all investors, is missing in the research,the analysis succeedsin demonstrating that MFIsare able toprovide relevant services to small farmers and finance their agricultural activities, if there is a strong commitment at the highest level of the institution and the willingness to adaptthe methodologies, to innovate andto take well-balanced risk.TheGrameen Crédit Agricole Microfinance Foundationcan fully share this conclusion based on its own field experience with its partners. However,financing agricultural activities for small farmers is not thesole responsibilityof MFIs. It will only be successful with a strong commitment from all stakeholders,especially regulators and funders, whichalsoneed toadapt their methodology, approach, services and products. Only then have MFIsthe best chancesto succeed with their agricultural lending efforts.

This thesis is a concrete example ofhow very good practical, field based research can help practitioners  and the sector in general to better understand some of their key challenges and to open new opportunities for development and innovation. The work of University Meets Microfinanceinsupporting such master students in their field research and providing them with the opportunityto disseminate their work is unique and extremely relevant.

Iam convinced that the readers willshare mypleasure ofreadingthis work to better understand how microfinance institutions can contribute to sustain a successful agricultural microfinance business for the benefit of small farmers.

Philippe Guichandut,Paris, November 5th 2014

Head of Development and Technical Assistance at the Grameen Crédit Agricole Microfinance Foundation

List ofAbbreviations

aBiTrust

Agricultural Business Initiative Trust

ACCI

Adaption to Climate Change and Insurance

ADAF

Appropriate Development for Africa Foundation

AFD

Agence Francaise de Développement

AFRACA

African Rural and Agricultural Credit Association

AGRA

Alliance for a Green Revolution

AIC

Association Interprofessionelle du Coton

AU

African Union

BMZ

Bundesministerium für wirtschaftliche Zusammenarbeit und Entwicklung (GermanFederal Ministry for Economic Cooperation and Development)

CB

Commercial Bank

CeCPA

Centre Communale pour la Promotion d'Agriculture

CeRPA

Centre Regionale pour la Promotion d'Agriculture

CGAP

Consultative Group to Assist the Poor

CLCAM

Caisses Locales de Crédit Agricole Mutual

CNCA

Caisse Nationale de Crédit Agricole

COMPACI

Competitive African Cotton Initiative

CRDB

Centenary Rural Development Bank

CSPR

Centrale deSécurisation de Paiement et de Recouvrement

DEG

Deutsche Investitions- und Entwicklungsgesellschaft (German Investment and Development Corporation)

DFID

Department for International Development

EIR

Effective Interest Rate

FAO

Food and Agriculture Organization

FECECAM

Faîtière des Caisses d'Epargne et de Crédit Agricole Mutuel

GDP

Gross Domestic Product

GDPRD

Global Donor Platform for Rural Development

GIGA

German Institute for Global and Area Studies

GIZ

Deutsche Gesellschaft für Internationale Zusammenarbeit (German Society for International Cooperation)

GLP

Gross Loan Portfolio

GTZ

Deutsche Gesellschaft für technische Zusammenarbeit (German Technical Cooperation)

HH

Household

HYV

High Yielding Varieties

IAASTD

International Assessment of Agricultural Knowledge, Science and Technology for Development

IBLF

International Business Leaders Forum

IFAD

International Fund for Agricultural Development

IFPRI

International Food Policy Research Institute

IIED

International Institute for Environment and Development

i

Interest rate

KfW

Kreditanstalt für Wiederaufbau (Bank for Reconstruction)

KDA

K-Rep Development Agency

LACE

Loan Application and Credit Evaluation

MBFI

Membership-basedFinancialInstitution

MC²

Mutuelles Communautaires de Croissance

MFC

Microfinance Company

MFI

Microfinance Institution

MFW4A

Making Finance Work for Africa

MoA

Ministry of Agriculture

NGO

Non-Governmental Organization

NPL

Non-performing Loan

OSS

Operational self-sufficiency

PAD

Projet d'Appui aux Etablissements de Microfinance de Développement

PAR

Portfolio at Risk

PTI

Pricing Transparency Index

RUCREF

Rural Credit Finance Company

SACCO

Savings and Credit Co-operative

SADC

Southern African Development Community

SDC

Swiss Agency for Development Cooperation

SSA

Sub-SaharanAfrica

UCA

Ugandan Coffee Farmer Alliance

UNEP

United Nations Environment Programme

UNIDO

United Nations Industrial Development Organization

URCLCAM

Unions Régionales des Caisses Locales deCrédit Agricole Mutuel

WOCCU

World Council of Credit Unions

All dollar amounts areUS dollarsunless otherwise indicated.

1Introduction

1.1The relevance of agricultural finance for increasing smallholder farmers'productivity

Over thelast decade, theinternational development discussionrediscovered the importance ofsmallholder agricultural developmentfor poverty reduction and food security inSub-Saharan Africa (SSA).It became obvious that poverty cannot be reduced without addressing smallholder agricultural developmenton a continentwheresmallholder farms account for 80% ofthe agricultural economy, 70% of the poor work in agriculture and yet"astaggering one out of three is undernourished"(Haggblade et al.2010, 3; IAASTD 2009b, 6)[1].Moreover, agriculture plays a key role in the overall economies of most SSA countries in terms ofstandard economic indicators with itscontribution tothegross domestic product(GDP),foreign exchange earnings, andnumber of people employed (Dorward et al. 2009, 5ff.).Here, agriculturenot only accountsforabout 25–30%of the combinedGDPand forover half of total export earningsbut also for 65%of SSA's full-time employment(IAASTD 2009a, 2; Yumkella et al.2011, 17).Increasingsmallholderfarmers'agricultural productivitycan,therefore,bea powerful tool for spearheading broad-based income gains for both farmersas well asnon-farmers. Higher production generates more income among smallholders[2]and their increased purchasing power can promote a diversification of the local economies by creating jobs in commerce, small business,andhandcraft (Wolz 2005, ii). Consequently,Birner/Resnick (2010, 1442ff.)state that there has been no example of mass poverty reduction in modern historythat was not based on increasedproductivity onsmall family farms.Smallholder agriculture is, however,not onlyof interest todonors and their poverty reduction strategies. Multinational buyersof agricultural productsalsostarted to recognize the importance of smallholder agriculture. Faced with an increasing global demand for agricultural commodities and growing consumer preferences for sustainable products, leading buyershaveincreased theirshareof agricultural productssourcedfrom smallholderfarmers (Carroll et al. 2012, 5).

Even though many agricultural specialists seeasignificantpotential to increase the productivity of smallholder agriculturein SSA (Haggbladeet al.2010, 5; Brüntrup 2011, Klerk et al.2011, 3),multiple constraintsexist.Currentlysmallholder agricultureinmostSSAcountriesis characterized by low yields and lowproductqualityand lags far behindin terms of productivitycompared to other world regions.The constraints to a more profitable agriculture are manifold and often beyond the control of the farmers. Among them are anegative influence of the worldwide agricultural policies;low public sector expenditure on agriculture;poor rural infrastructure (roadsand communication);uncertainlegal environment(e.g. modernand traditional rules on land);very thin or deficient markets for(financial)services andagriculturalinputs(quality seeds and agrochemicals)and outputs(marketing of agricultural products);as well as inadequate extension services, water management,andresearch and development support.These challenges often reinforce each other andlead to a generallyhostile business environment, makingprofitable smallholderagriculturaldifficult. Smallholder farmershave tostruggle to accessbasic services required forprofitable production (adequate supply of high-quality inputs, extension services, and reliable markets to sell their products). Furthermore, many farmers lack the managerial and/or technical skills as well as the internal capital resources to produceregularsurpluses for the market.These illustrations clearly demonstrate that agricultural development and increased agricultural productivityrequirea joint effort by different stakeholders and different strategies and approaches. (Dorwardet al.2009, 7ff.; Haggblade et al. 2010, 6ff.)

Providing access to capital and other financial products is one important part in the overall strategy toenhance the productivity of smallholders andimprovetheirlivelihood. Even though"loans cannot substitute for appropriate technology, input supplies, and access to remunerative markets"(Meyer 2011,6),borrowed fundscanassistfarmerswithaccess to markets toinvest innew farming technologies,high-quality inputs(e.g.quality seeds, fertilizers, agrochemicals)ormechanizationand equipment(e.g.oxen, plough, sprayer).Adequate access toborrowed capital and other financial servicescan thus enablefarmers toproduce more for the market,improve their food security,and raise their agricultural returns(Klerk et al.2011, 3).In addition, other financial services like insurance products and saving possibilitiescan lower the risk of external shocks,smoothencyclical cash flowsof farmersand helpthemto managetheir farm as a viable business.

Whilemicrofinance institutions (MFIs)were successful in developing techniques to provide financial services to low-income clients without traditional collateral, ruralareas and smallholder farmers in particularare still underserved by the microfinance industry(Morvant-Roux 2009, 189).MFIs are reluctant to move into rural areas due to the perceived high risks and costs associated with lending to agricultural clients.

It can thus be concluded that:

"financial services will probably not, on their own, bring about greaterinvestmentin productivity or income from agriculture or any other rural enterprise. However, if such improvements are insufficient on their own to ensure progress, they are clearly a sine qua non for such gains.Yet, of the many pre-conditions for agriculture and rural development, the provision of financial services remain among the most poorly understood."(Klerk et al.2011, 4;emphasisadded)

1.2Purposeand outline of thepaper

This paper will shed more light on the provisionofagricultural finance tosmallholderfarmersinSSA.It willtherebybeguided by the following research question:

Howcanmicrofinance institutions adapt their traditional loan features and lending procedurestomitigate credit risk and manage transaction costs whenproviding agricultural finance for smallholder farmers?

This research question definesthe scope of this paper:the focus is on MFIs'(internal)procedures to mitigate credit risks and transactions costs for agriculture.The research question implies that traditional microfinance risk management techniques (e.g. their loan features and lending procedures), if applied as is,are not well suited for agricultural investments of smallholder farmers and thus need tobe adapted to the particulars of agricultural smallholder lending.

While there is abundant literature on general credit risk management for MFIs, very little research has been done on the specific management of agriculture-related credit risks.[3]Researchonrural finance and/or smallholder(agriculture)finance is often limited toexplanationsof whythese financial servicesare non-existent in rural areas,that is, itis limited to descriptions ofthe respective risks and costs of agriculturalmicro-lending.Additionally, while a number of one-off case studiesexist(e.g. presentations at conferences), which use the example of a single MFI offering finance for smallholder farmers to show that it is possible to do so, the information provided by such cases are limited in nature, making a comparison between case studies impractical.

The presentpaper isan attempt to focus specifically on the management of agriculture-related risksand costsin microfinance.After a brief outline of thespecific risks and costsofagricultural lending asfoundinexistingliterature(Chapter 3),Chapter 4 willexaminetraditional microfinance(credit)riskand costmanagement approacheswith regard totheirappropriatenessfor smallholderagriculture.Based on this analysis, Chapters6–8 will provide empirical insights into the topic. Eight MFIs providing agricultural finance to smallholder farmers in East and WestAfrica were interviewed from June to September 2011 and asked abouttheir loan products forsmallholders as well as theirlending techniques to mitigatetherisks and costs of lending to this target group. After presenting their diverseinstitutional backgrounds and specific business strategies and approaches to agricultural finance for smallholders in Chapter 6,this paper will focus onthe loan products and lending proceduresin Chapters 7 and 8.The analysis will concentrate onwhich of the traditional microfinance approachesMFIsare using within their lending activities for smallholdersand which ones they adapted,changed,or addedtobeable to mitigate the additional risks and costs associated with agricultural finance for smallholders as depicted in Chapter 3.

Besides drawing on the conducted interviews, the paperalso refersto two other importantstudiesdealing with the aspect of agricultural microfinance for smallholder farmers. The firstis entitled"BetterPracticesinAgricultural Lending"andwas published in 1999 by Klein et al.Drawing on case studies of three MFIs in Thailand, Peru,and El Salvador,it analyses howmicrofinance techniques inurban areas could provide models for agricultural production lending.A more recent studyentitled"Managing Risk and Designing Products for Agricultural Microfinance: Features of an Emerging Model"was conducted byChristen/Pearce (2005).Theystudieda total of30 MFIsworldwidethat successfully lendto smallholder farmers.They thendevelop10features and suggestedthat a combination of a substantial number of these features contributes to a well-performing agricultural portfolio.The features range from recommendations for lending techniques (e.g.Feature 2: Combinecharacter-based lending techniques with technical criteria in selecting borrowers, setting loanterms,and enforcing repayments) over suggestions to offeringspecific products (e.g.Feature 3: Offer savings mechanism) to general proposals (e.g.Feature 10: To succeed, agricultural microfinance must be insulated from political interference).Athird studyon this topic entitled,"Assessing and Managing Credit-risk in Agricultural Lending"was conducted by the World Bank.Itanalyses17 financial institutions in nine countries.[4]Unfortunately,the study has notyet been publishedand the rather general conclusionsthat have been presented atconferences are not far reaching.[5]While the third studyunfortunately cannot be taken into account, the other two studies are drawnupon for the present paper and usedto support or confront the finding of this paperas applicable. While the first study does not include MFIs from SSA, the second one does, but as MFIs were not named and only some were disclosed within short case studies, the exact number of African MFIs within the sample is not known.

1.3Methodology

Thispaperand the necessary empirical research was developed and conducted with the support ofthe GermanDevelopment Finance Institution(DEG)andtheir Competitive African Cotton Initiative (COMPACI).COMPACI's goal isto enablesmallholder cotton farmers to earn higherincomesthrough their cotton production bysustainably raising their productivity,providingmarketaccessthrough the label Cotton made in Africa (CmiA), improving soil fertility andimprovingaccess to microfinanceamong others.[6]

From June to September 2011, qualitative,semi-structured interviews were conducted with different MFIs in four countries, namely Uganda, Kenya,Benin,and Cameroon. A range of MFIs withdifferent institutional backgroundswerechosen to ensurea broad picture of agriculturallending to smallholder farmers. The different institutions include:(1) membership-based financial institutions (MBFIs) (e.g. credit unions and savings and credit co-operatives) that offer a range of financial products solely to their members;(2)microfinance companies (MFCs) purely concentrating on micro-clients and the provision of microfinance services;and (3)commercial banks (CBs) offering microfinance and agricultural finance for smallholder farmers as part of their overall banking portfolio.The MFCsinterviewedwere allspin-offs of non-governmental organizations (NGOs) and now trying to reach financial sustainability as standalone institutions.Table 1 depicts the interviewed MFIs, their respective institutional background,as well as the countryin whichtheyoperate. A detailed presentation of the MFIs will be given in Chapter 6.

Table1:Overview of the interviewed MFIs

CB

MFC

MBFI

Kenya

(1)Equity Bank

(3)Faulu

(4)Juhudi KilimoLimited

Uganda

(2)Centenary Rural Development Bank (CRDB)

(5)Rural Credit Finance Company Limited (RUCREF)

(6)AgaruSavings and Credit Co-operative (SACCO)

Benin

(7)Caisses Locales de Crédit Agricole Mutual (CLCAM)Kuandé and Pehunco

Cameroon

(8)MC²/ADAF

Source: own table.

Employees whowere actively involved in agricultural lending for smallholder farmerswithin these institutions,either in the head office designing loan products for smallholder farmers and overseeing the agricultural business of the respective MFI (e.g. Agribusiness generalmanager) or"in the field"actively engaged with smallholdersin day-to-day business (e.g.agricultural loan officer), were chosen for the interviews.

In Benin and Cameroon,the focus of research was on specific programmessupporting the agricultural lending activities of either CLCAMs or MC²s,and therefore employees involved in the respective programmewere also interviewed. In Benin, the two interviewed CLCAMs in Kuandé and Pehunco set up a credit scheme for cotton smallholder farmers in collaboration with the COMPACI programme,and thusemployees of the COMPACIprogrammewere interviewed. MC²s in Cameroon are supported and controlled by an NGO called Appropriate Development for Africa Foundation (ADAF).[7]ADAF also supports MC²s to implement a government-fundedprogrammecalled Projet d'Appui aux Etablissements de Microfinance de Développement(PAD), which intends to increase agricultural lending activities of MC²s and was the focus of the conducted research for this paper. Interviews were,therefore,conducted with several staff members of ADAF.Additionally,expertsand consultantsworkingin the field of agricultural finance for smallholder farmers were interviewed in allfourcountries. An overview of interview partners is given inAnnex A.

MFIswere chosen based on theirdifferent institutional backgroundsas well as their accessibility, as it is not easy to get in touch with MFIs involved in agricultural finance of smallholder farmers based on literature review andInternetsearches,especiallywhen working fromGermany.[8]In the case ofCLCAMs and MC²s in Benin and Cameroonaccess was possible throughCOMPACI.AConference on the research topicin Kampala/Ugandain June 2011("ZippingFinance and Farming inAfrica—Harnessing the Continent's Potential") opened the possibility to contact most of the Ugandan and Kenyan MFIs interviewed for the purpose of this paper. Equity Bank Nairobi,Kenya was chosen as one of the few well-known MFIs involved in agricultural finance for smallholder farmers.Even though this approach was quite successful and anumberof different MFIs with diverseinstitutional backgrounds and experiences could be interviewed, itwas not possible to chooseMFIsaccording to their overall performance[e.g. portfolio at risk(PAR)or non-performing loans(NPLs)in agriculture]. Additionally,the sample setcannot claim to be representative as the number of MFIs is too small and MFIs were neither selectedrandomly nor on the basis of specificindicators.

Length andintensity varied among the 18interviews used for this paper. The researcher was based for a period of2weeks in Benin within the COMPACI project collaborating with CLCAMs and another2weeks in Cameroon at ADAF. This allowedspecific issues to be re-discussed with the interview partners as well as for more detailed information to be gathered. Also at Equity Bank and Agaru SACCO several interviews were conducted allowing for cross-checking information. At the other MFIs, only one interview was conducted. Each interview lasted 1.5–2 hours and was recorded.In addition to the interviewtranscriptions, additional information on the respective MFIs was collected and analysed,for example,financial statements, reports, articles,etc.Interviews were transcribedmostlyword forwordand sometimes asadetailed protocol based on the recorded interview.Fillerwords, breaks in conversation,and non-verbal communication werenot documented.The interviews wereconducted in French and English, neither ofwhich is thenative language of the researcher. For this reason,a single word that could not be understood is marked by"(x)"andseveralwords by"(xx)".

Interviews were analysed using the method of qualitative content analysis by Gläser/Laudel (2009). Different categories and sub-categories were established based on the theoretical researchas well as on the additional background knowledge gained during the interviews.Interviewsand additional literaturewerethenscreened and encoded with MAXQDA according to these categories. Sentences and text passages were extracted with their references allowing for traceability and allocated toa singlecategory.It should be notedthat this process is alreadypart of the interpretation, as the researcher decidedon the categories as well as on the allocation of text passages to specific categories (Gläser/Laudel 2009,199ff.).

The main limitations havealreadybeenmentioned. First, they are the lack of representativeness of institutions, and secondly thelimited numbersof interviews per MF, especiallyin EastAfrica. Cross-checking the information from one employee of an MFI with statements made by other employeesof the same institutionwould have increased the reliability of data. However, all MFIs were rather busy and had limited time and resources for several interviews.An attemptto set off this limitation as far as possiblewas made bycross-checking informationprovidedin annualreports, financial statements,andarticles on the respective MFIs.It is still possible that some information from the interviews were misunderstood, for which the author takes full responsibility.

2Terminologyandhistoricalbackgroundof agricultural finance for smallholder farmers

There is a growing body of literature dealing with aspects related torural(micro-)finance, agricultural(micro-)finance,and agricultural value chain finance. These aspectsareallrelated to agricultural finance for smallholder farmersand are sometimes even used as synonyms. However, there are major differences between these different termsand it is important not to confuse them.Section2.1,therefore,definesthese termsand thereby alsoestablishesthe scope of this paper.Additionally,the term smallholder farmer will be defined including the financial needs of this specific group of interest.Section 2.2thenprovides an overview of the major lessons learned from the experiences with subsidized creditprogrammes and agricultural development banks in the 1950s and 1960s and summarizes the main principles of today's financial system approach,whichsets the frame for the provision of agricultural finance for smallholder farmersat present.

2.1Terminology

2.1.1Microfinance, rural finance,and agricultural finance

Thediagram in Figure 1illustratestheterminology usedin this paper.Thestriped area representsthemaintopic: agricultural finance for smallholder farmers, which issituatedat the intersectionof microfinance,rural,and agricultural finance.

Figure1:Defining agricultural finance for smallholder farmers

Source: own figure based onPearce (2003, 1).

Microfinancerefers to a broad array of financial products (savings, payment transfers, credit,and insurance) specifically designed to meet theneeds oflow-income households and small-scale businesses, both in urban and rural areas.This target group isnot served by traditionalCBsbecause they are not considered to be viable customers.(CGAP 2013; Pearce 2003, 1; Meyer 2011, 3)

Microfinance services can be provided bydifferent typesof institutions. Per definition, any institution or individual that provides financial services to low-income clients offers microfinance.This paper, however,only refers to formal and semi-formal MFIs with the term MFI.Formal MFIs are subject to banking regulations and supervision and provide finance tothe above-definedmicro-clients. These includepublic or privateCBs,some microfinance companies, andinsurance companies.Threeof the interviewed MFIs belong to this group:Equity Bank and CRDBare privateCBsthat also target micro-clients with part of their portfolio, whileFauluis a formerly NGO-based microfinancecompany that acquiredadeposit-taking licence and isthusregulated by thecentral bank, just as the rest of the formal MFIs.

Semi-formal MFIsare recognized financial institutions, butarenot subject to the same legislations as formal banks. In many countries,they arelicensedand supervised byanother governmentauthorityinstead.Examples include creditunions, which are oftensupervised by a bureau in charge of co-operatives,andmicrofinance companiesorNGOsthatsolely providecredit,sincethey are often legally registered entities that are subject to some form of supervision or reporting requirements.Registeredvillage banks, self-help groups,and savings clubsarealsooften considered as part of the semi-formal sector. (Ledgerwood 1999, 12ff.)Fiveof the interviewed MFIs belong to this group:CLCAMs, Agaru SACCO,and MC²saremembership-basedcredit unions,whereasJuhudi Kilimo and RUCREFare formerly NGO-based microfinance companiesthat solely provide credit.

Rural financedescribes all financial servicesprovided to a heterogeneous rural population of all income levels through all kindsoffinancial service providers (Nagarajan/Meyer2005, 1).Other than microfinance, which is defined through its target group, rural finance isdefined through its location. The termrural microfinancecan be used for the combination of the two, hencethe provision of microfinance services in rural areas(represented by the intersection of microfinance and rural finance in Figure 1).MFIsare often based in rural town centres. Therefore,rural microfinanceoften does not target farming households, butsmall entrepreneurial activities in rural towns. (FinMark Trust 2011; Beck et al. 2011, 92; Adesina 2010, 74)

Agriculturalfinanceis mostly referred toasfinancial servicesused by the agricultural sector for farming as well as farm-related activities along theentirevalue chain,for example,input supply, agricultural production, processing, wholesaling,and marketing.Besides working capital or asset loans forfarmers, traders,or processors, it can also include crop or livestock insurance orleasingagricultural equipment. (Meyer 2011, 3; MFW4A 2012; Brüntrup 2008, 4; Andrews/MEDA2006, 3)The respectivedefinition uses the activity for which finance is providedfor (e.g.agriculture) as defining feature.

A conference paper of the African Union (AU) and Making Finance Work for Africa (MFW4A)proposes a wider definition anddefinesagricultural finance as"finance related to agriculture-specific risk"(AU/MFW4A 2011, 12).[9]This has important consequenceswhen applying it toreality. A financial institutionthat usesthe first definition would offeran agricultural loan withspecific featuresthat fit the agricultural production cycle (e.g. offering repayment after harvest)only for farm-relatedactivities,for example,the purchase of inputs. A financial institution applying the latter definition, on the other hand, would also offer these loan products with adapted features for other loan needs of a primarily agricultural household,for example,the school loan of a smallholder farmer would fallunder agricultural finance and wouldthusbe offered at the same conditions as an input loan.Both definitions are important for this paper,asone interviewed MFI defines agricultural finance based on agriculture-specific risk, while all other interviewed MFIs use the other definition.

Independent of the above definition, agricultural financewillmostlybe locatedin rural areas. However,