Why Lending to Farmers is a Good Thing
Agriculture is a fundamental source of livelihood in many developing countries. Most of Deki’s entrepreneurs in Ghana, where we have just recently partnered up with new field partners St Joseph Cooperative Credit Union and BESSFA Rural Bank, are farmers. In Ghana, about 60% of the labour force is employed in agriculture, which makes up about 46% of the GDP. In Malawi also, agriculture makes up more than a third of GDP, while in South Sudan, up to 95% of the country’s population depends on farming, fishing or herding to meet their food and income needs.
Traditional banks are less keen to finance agriculture
It is more difficult for agricultural businesses to get bank loans because of the high risk commonly associated with farming. Farmer’s income is subject to the weather, so even when farmers take measures to protect their crops, such as water storage and growing environmentally appropriate crops, there is always a degree of unpredictability. What’s more, there is always the threat of drought, excessive rainfall or other natural disasters farmers cannot plan for that could devastate the business.
Due to the seasonal nature of farming activities loan repayment schedules are different from other businesses. Harvest is time of positive revenue whereas there is very little to no income at other times. Entrepreneurs may find it difficult to repay loans at certain times of the year, especially before the harvest. This is why we allow our agricultural entrepreneurs 6-9 months before they start repaying their loan.
Fields in GaruHigh transaction costs for traditional banks
Another reason why agricultural entrepreneurs find it hard to get credit from traditional financial institutions is the high transaction costs. Agricultural entrepreneurs live far from urban centres where financial institutions are located. This means the transaction costs microfinance institutions have to pay – such as additional time and high transportation costs to allow staff to reach remote farmers, makes serving farmers much more expensive than serving entrepreneurs in the cities and towns. The result of these high transaction costs is that few financial institutions offer finance to poor households and small enterprises based on small scale agricultural activities.
Microloan is vital for growth
At Deki, we recognise that farmers are the backbone of the economies in many developing countries, but their exclusion from the financial sector means they have very little opportunity to grow their farming activities. Farmers will continue to farm at a subsistence level unless they are provided with access to the training and finance they need to help move themselves out of poverty. We have partnered with BESSFA and St Joseph’s in order to specifically bring microfinance to these individuals, so if you are interested in helping this hardworking group of people, please consider giving an agricultural loan to one of our entrepreneurs today.