1. Introduction 1.1. Background Agriculture and agricultural finance have been the subjects of constant and often value-laden political debate. Faced with multiple and sometimes contradictory challenges of achieving national food security and supporting rural populations while providing food at accessible prices to urban dwellers, governments have always intervened in the agricultural markets, including in finance. In the post-colonial 1960s and 1970s, governments tried to ensure access to agricultural financing through administratively set interest rates and compulsory lending quotas on banks. In addition, and nearly universally, governments created development banks specifically mandated to finance agriculture. International development partners, such as the World Bank, AFD, EIB, AfDB, ADB, KfW, and IFAD, provided credit lines to national central banks or ministries of finance, which in turn refinanced local banks at concessionary interest rates where the state absorbed the exchange rate risk. In parallel to interventions in agricultural finance, governments strongly intervened in agricultural value chains through (state-)monopolised marketing and price controls. Indeed, many countries took over or regulated entire value chains (e.g. cotton in Mali, sugar in Burundi) creating farmer cooperatives, input suppliers, agro-processors, and state-controlled marketing Boards. Farmers were often compelled to sell through the indicated channels, and had practically no influence on the prices and terms imposed on them. Export crops were often excessively and arbitrarily taxed (e.g. Guinea Bissau, Tanzania, Thailand). On the macroeconomic level, overvalued exchange rates created havoc such that Zambia went from being a large food exporter in the 1970s to a large food importer in the 1980s, because local farmers could no longer compete against imports. Toward the 1980s, the strains imposed by the state-led model of agricultural development and finance became increasingly visible. Directed lending programmes showed poor results as they were inefficiently managed, generally ineffective (failing to reach poor farmers), and unsustainable because of loan losses (Yaron et al., 1997). The agricultural development banks’ business model of financing only one sector (agriculture, and often only a few crops) contradicts the principles of risk management in banking (diversification), and the banks’ association with government
July 2012 / Creating Access to Agricultural Finance / Š AFD
[9 ]