Financial Sector Development in Africa: Opportunities ... - World Bank

Financing Agriculture: Selected Approaches for the Engagement of Commercial Finance 87
support to struggling SACCOs and “rescue” failures by implementing
changes to the management and governance structure.
Other rural financial services providers include MFIs and rural banks,
which can face similar challenges in some markets.
Limitations of rural financial services providers. Even rural financial
services providers tend to minimize agricultural lending and focus on the
local salaried and merchant populations of the village or regional center.
Although this may have some indirect benefit for agricultural producers
in terms of establishing a deeper pool of local liquidity to facilitate trade,
it is not comparable to the explicit and direct financing of specific productive
agricultural activity.
Two major reasons that rural financial service providers minimize agricultural
lending are discussed here: they perceive the risk to be high and
they lack institutional capacity (internal skills, processes, technologies,
and business culture).
When asked, managers of rural financial services providers point to the
risks of agricultural lending and cite previous examples of poor repayment
by farmers. However, this may change in time. Some credit unions
in Kenya and rural banks in Ghana are showing promising signs of
increased agricultural finance. It is clear that this model can work in the
right circumstances, as exemplified by the relatively larger amounts of
finance leveraged for production by cooperative banking systems in markets
such as Latin America and South and East Asia. However, it should
be noted that in the right circumstances over-politicization almost always
is aligned to value chains that are much more “structured” and organized
around a larger private sector agribusiness. The commercial environment
in many of these markets is also much more developed, which gives lenders
a greater degree of stability and comfort. This shows that the quality
of the businesses to be financed is one key to improved access to agricultural
finance.
The majority of the rural financial services providers have low institutional
and human capacity and are small and isolated (though some have
grown to have a more significant regional presence). SACCOs are often
part of an apex structure, which offers some short-term liquidity support.
Nevertheless, their balance sheets are usually independent and very limited.
As a consequence of both balance sheet restrictions and their origins
as “savings first” institutions, they are very conservative in their lending
approach. Nor are they overly keen to access sources of wholesale finance
even on generous long-term terms, which they perceive as a potential