Challenges of Agricultural Financing
Similar to other sectors, those who invest in agriculture, particularly local farmers, but also foreign-owned plantations, processing factories, storage facilities or fertilizer companies, may need funds from third parties to carry out their businesses. However, in the current global financial system, a number of factors frustrate the development of solid financial services in rural areas in most developing countries. First, transaction costs in rural areas are higher than in urban areas due to a more dispersed population with weak infrastructure (International Fund for Agricultural Development [IFAD], 2009a).
Second, and more importantly, the risk factors inherent in agriculture often inhibit financial institutions from lending. These include production risks linked to natural hazards (such as droughts, floods and pests), farmers ́ weak ability to provide collateral (either because the farmer lacks title to land to offer as a loan guarantee or the value of the land may be too low) and the volatility of prices (IFAD, 2009a).