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AKST: Generation, Access, Adaptation, Adoption and Effectiveness | 73

products are financed, created, processed, traded and consumed. Producer organizations are also an important part of the market infrastructure, given the small scale on which many agricultural products are produced and their consequent disadvantage in the marketplace in the absence of a means of pooling products and consolidating the marketing of those products.

 Microfinance is an essential aspect of sub-Saharan Africa’s agricultural market infrastructure. Much of Africa’s agricultural output is generated by small-scale producers and other microentrepreneurs. Microfinance—financial services whose scale matches the needs of micro- and small-scale producers is therefore the way agricultural producers are able to expand their production, buy fertilizer and other inputs, adopt new technologies, and smooth seasonal fluctuations in household expenses and enterprise income. Microfinance introduces flexibility into small-scale and microproducer investments and asset building. Newer financial services and products, such as crop or rain insurance, are also critical to reduce the risk associated with adopting new technology, innovating production and marketing methods. Credit terms tailored to agricultural production and marketing, such as loan repayment terms that track seasonal crop production, are critically important to enable agricultural producers to take advantage of economic opportunities.

 Agricultural microfinance includes not only the products and services financial institutions offer, but also credit and other value chain services. Those in the value chain respond to different drivers of credit supply and demand than do financial institutions. They can accept more risk, and they have more information about the risks and likely benefits associated with particular agricultural endeavors. They also extend credit differently, e.g., through advance purchases, grace periods for payments for inputs, and embedded services that carry no direct costs.

 Supply and demand of rural and agricultural credit is constrained by several factors (Chalmers et al., 2005):

  • Distance from the financial institution’s branch, low population density and sometimes difficult terrain increase the effort involved in reaching clients and push up transaction costs, which in turn decrease the financial institution’s margin and incentive to reach rural and agricultural clients; when transaction costs are transferred to clients, they suppress demand because of the high cost of borrowed funds.
  • Fluctuations in income for producers increases the risks associated with credit. Borrowers are less certain about their ability to repay than they would be if their income were more consistent, and lenders are less certain that they will be repaid in accordance with loan terms. Moreover, traditional and most prevalent credit products are not tailored to agricultural production cycles, so repayment often begins before harvest or during a low season, which can increase the risk that producers will default—a negative outcome for both borrowers and lenders.
  • Agricultural production can be risky due to factors such as variability in climate and weather conditions, quality of seed or stock, availability of seasonal labor. Marketing agricultural produce is likewise subject to exogenous factors. Because repayment depends on yield and
  
  • ability to dispose of yield at a profit, these uncertainty factors translate into high risk for both borrower and lender.
  • Information about borrowers’ creditworthiness is not reliably available in most developing countries, particularly in rural areas. This lack of information increases financial institutions’ risk when they lend to clients in these areas.
  • If collateral is required to obtain credit, many microand small-scale agricultural producers have little or no hope of meeting the collateral requirements.
  • Inhospitable policy, legal and regulatory frameworks often prevail in rural and agricultural areas of sub- Saharan Africa. For example, land titling may be nonexistent, or it may lend itself to bias, such as when women are responsible for cultivating land to which they are not legally entitled to hold title.
  • Low availability of savings services also inhibits agricultural production; lack of rural deposit services or mistrust of them among would-be savings clients, prevents agricultural producers from saving the capital needed to build their assets and increase their productivity (Charitonenko et al., 2005).
  • Where they are available, rural equipment-leasing schemes (Rozner, 2006) and other suppliers of credit, as well as remittance services, can address this market failure in formal rural credit, which in turn can aid farmers to adopt new technologies. In addition to credit, crop, weather and geographic-based insurance, which are emerging products in SSA microfinance, can help create safety nets for small-scale producers.

Nonfinancial and business services value chain links. Business service providers in some parts of SSA offer technological solutions that enhance agricultural producers’ competitiveness by reducing unit costs of production, improving product quality and adding value at various stages, including on-farm production, postharvest storage and treatment, agroprocessing, marketing and transport. Postharvest losses in Africa are high; substantial improvement in profitability could be gained by improving roads and markets, as well as encouraging private sector investment in research and development at the lower end of the production-to-market chain (Rozner, 2006).

Competitiveness in global markets is generally enhanced when agricultural commodity markets are segmented and product quality, branding, and marketing are tailored to that market segment. Coffee is one example. By changing their processing methods and extending technical assistance to their members, coffee cooperatives in Rwanda are able to sort and process beans in accordance with quality standards set by European and North American markets. They establish market links with roasters who will guarantee a premium price in return for quality-controlled, stable coffee supplies. In some cases, producers have realized additional value through national branding (e.g., Ethiopian Yirgacheffe, Kenya AA). This is an example of how farmers can benefit by applying agricultural knowledge of how to control commodity quality through production and processing to enhance competitiveness and returns in the market for that commodity.
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