EBKUST Lecture Notes Template

Name Of Lecturer: Sheka R. Bangura

Course Title: AGRICULTURAL FINANCE

Course Goal: To understand the critical issues related to agricultural

finance
Class & Semester: B.ED IN AGRIC EDUCATION and B.ED IN
Lecture Notes CDS.AGRIC Year 2- (SECOND SEMESTER)
Course Status: Compulsory
Course Code: AGED 263 Credit
Hours: 2
Email: ramadanbangura09@gmail.com Phone: 077224367
Date & Time: 6th June, 2020 12:19 Pm
Topic: Meaning and Importance of Agricultural Finance

WEEK ENDING: 15th -19th June, 2020

LECTURE NO. 01
Learning Objective: Upon completion of this course, students will be able
• To understand the meaning, sources and importance of Agricultural finance
• Analyze the importance of farmers economic independence and sources of finance

Questions: Notes: What is agricultural finance?

• Agricultural Finance – Financing of agriculture-related activities, from
• What is Agriculture production to market. Not all agricultural finance is rural, and not all
Finance? rural finance is agricultural. Yet financial service providers offering
rural, micro- or agricultural finance often have overlapping objectives
• What are the and opportunities.
issues about Farm • Agricultural finance is a subset of rural finance dedicated to
Financial financing agricultural related activities such as input supply,
Management? production, distribution, wholesale, processing and marketing

• What are the

• Some authors for example, may define agricultural finance as the
Financial
study of the financing and liquidity services credit provides to farm
Intermediaries
borrowers.
serving
• Others may define agricultural finance as the study of those financial
Agriculture?
intermediaries who provide loan funds to agriculture, and the
financial markets in which these intermediaries obtain their funds.
• What are the types
• In fact, several agricultural economists identified a number of studies
of Agricultural
focusing on such additional topics as rural banking, insurance,
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Loans income distribution, farm financial management, and taxation.

• Finally, the study of agricultural finance can be broaden even further
• What are to account for all economic and financial interfaces between
Agricultural agriculture and the rest of the macroeconomics, including the effects
Subsidies? that changes in national economic policies have upon the economic
performance of agriculture and the financial position of farm operator
families.

Farm Financial Management

• The purposes of financial management are traditionally defined to
include the investment decision, financing decision, and the dividend
decision. Together, these decisions largely determine the rate at
which the farm business grows over time. Because most farm
business is sole proprietorships, financial management in agriculture
encompasses the proprietor withdrawal decision (i.e. the withdrawal
of funds to finance personal consumption and nonfarm investments)
instead of the dividend decision.
• The investment, financing, and proprietor withdrawal decisions are
not made independently. For example, the decision to invest in a
new piece of farm equipment cannot be made independently of the
financing or withdrawal decisions. Furthermore, the financing
decision is directly influenced by the farm operator’s decision to
withdraw part of his current net farm income to finance personal
consumption and nonfarm investment.
• Operative investment, financing, and withdrawal decision making
requires a comprehensive farm financial accounting system. For
example, an accounting system is needed to help identify the level
and timing of financing needed to facilitate the farm operator’s
current production and marketing plans. Such an accounting system
should also provide information pertaining to the farm operator’s
present financial position and the efficiency and profitability of his
current operations.

Financial Accounting System

• A perfect and inclusive set of financial statements is essential to
sound financial management. Such an accounting system should at
a minimum include a balance sheet, an income statement, a
statement of change in owner equity, and a cash flow statement.
These statements can provide an informational input to the
production, marketing, investment, and financing decisions that must
 EBKUST Lecture Notes Template

be made annually by the farm operator. For example, the

information contained in these statements can be used to evaluate
the annual performance of the farm operator’s business.
• This could be done by comparing the profitability and efficiency
ratios computed for his business in the current year with similar
ratios he has achieved in previous periods or with other farm
businesses having similar types of operations.

Financial Intermediaries Serving Agriculture

• The financial intermediaries serving agriculture provide an important
service by channeling funds from savers to borrowers in the
amounts necessary to finance production expenses and capital
expenditures. The funds used by these financial intermediaries
come from variety of sources. These funds are then made available
to agriculture under a variety of terms.
• It is important for students studying Agricultural Finance to study the
regulatory environment that each of the financial intermediaries
serving agriculture must operate in, where these lenders obtain their
funds, and the terms of the loans they make
• These institutions are divided into four groups for discussion
purposes:
➢ commercial banks,
➢ Farm Credit System,
➢ government lenders,
➢ and other financial intermediaries.
• The changing relative importance of these institutions over time is
examined as is the joint participation between several of these
institutions sometimes employed to meet the loan demands of larger
farm operators. Finally, the performance of these financial
intermediaries will be evaluated in terms of the efficiency and equity
of their lending activities.
• Accordingly, in order to increase access by rural populations to
agricultural credit and other financial services, while at the same
time ensuring the profitability and viability of the financial institutions,
strategies capable of alleviating the risks specific to financing
agricultural activities have to be identified
• For an effective financial services for agriculture, the following must
be taken into consideration.
❖ It is necessary to adapt financial services, as well as credit
methodologies, to the agricultural systems of each region if
 EBKUST Lecture Notes Template

we are to respond adequately to borrowers’ needs and

facilitate loan management;
❖ The offer of agricultural financial services must, to the
extent possible, be made part of an overall approach that
fosters the development of the entire value chain;
❖ Risk-management and risk-sharing mechanisms must be
put in place to secure agricultural loan portfolios against
systemic risks
❖ An essential element of accessibility to financial services by
rural populations is the employment of proximity services
provided by existing financial institutions or by the
emergence of new structures or new distribution networks.
• Agricultural credit products adapted to the prevailing market
conditions can help farmers obtain a higher price. For example,
storage loan (or warehouse receipt financing or warrant age)
enables farmers to stagger their sales and thus obtain a higher
average price than what they would have obtained by selling all of
their production at harvest time, when prices are generally at their
lowest.
• Furthermore, it will be advantageous for financial institutions to
establish partnerships with credible marketing organizations that
enable the farmers to obtain better purchase terms for their inputs or
for the sale of their goods. In addition, this type of association can
enable lenders to facilitate the distribution of credit and the
repayment of loans granted to farmers. It is important to point out
that such partnerships do not replace the due diligence the
institution must display in granting and tracking loans.

Loans/Credits
• Agricultural loans are sourced by a farmer to fund seasonal
agricultural operations or related activities like animal farming, pisci-
culture or purchase of land or agricultural tools. Seasonal
agricultural operations include routine activities like preparing and
ploughing land for sowing, weeding, and transplantation where
necessary, buying inputs such as fertilizers, seeds, insecticides etc.
and engaging labour for cultivating and harvesting the crops.
 EBKUST Lecture Notes Template

Types of Agricultural Loans

• The main types of products that meet the different needs of

entrepreneurs in the rural environment are operating loans
(seasonal credit), marketing loans (for example, warehouse receipt
financing or storage loan) and investment loans. Each of these types
of credit seeks to meet a specific need of the enterprise. The types
included:

➢ Operating Loans
➢ Marketing Loans
➢ Investment Loans
Operating Loans
• For most developing countries, whose GDP strongly relies on
agricultural production, operating credit is the basic tool to improve
agricultural productivity. This emerges simply from the fact that the
poor level of productivity that tends to persist is attributable to a
rather generalized use of rudimentary production techniques,
starting with the choice and quality of the seed and other basic
inputs such as fertilizers and pesticides. Thus, the marginal yield of
an investment in this type of inputs is generally high enough to make
it worthwhile for the farmer to take out an operating loan.
• In addition, for most microfinance institutions in developing
countries, financing operating expenses that produce a crop or
livestock in less than 12 months generally does not pose any
problems for matching the funds, which primarily consists of demand
deposits or short-term savings.
Marketing Loans
• Marketing is still a fragile link in various agricultural value chains.
Two factors greatly weaken marketing actions in developing
countries: the poor level of organization of the markets and the lack
of adequate infrastructures. Some credit products can contribute to
improve the marketing systems and then become significant
productive loans whose impact on improving the living conditions of
farmers is sizeable. This is the case of storage loan that offers an
alternative to the producer for the distribution of his production.
• Without storage loan, he has to sell his crop at harvest time—the
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time of the year when prices are generally the lowest because of the
abundant supply. With an appropriate loan, he can defer part of the
sales and obtain a higher average price, which contributes to raise
his welfare.
Investment Loans
• Similar to other types of credit, an investment loan should enable the
borrower to achieve a sufficient marginal yield on his investment to
at least meet his credit obligations. If it is generally easy to satisfy
this condition for an operating loan, or even for a storage loan, this is
not the case for an investment loan, which involves higher sums
repaid over a longer term. Indeed, the profitability peculiar to basic
agricultural activities is often weak and uncertain, so that the
investments may appear too great to justify financing them with
credit. In addition, most microfinance institutions providing financial
services in rural areas often suffer from a lack of long-term capital
capable of supporting this type of loan

Agricultural Subsidies
• An agricultural subsidy (also called an agricultural incentive) is a
government incentive paid to agribusinesses, agricultural
organizations and farms to supplement their income, manage the
supply of agricultural commodities, and influence the cost and
supply of such commodities. Examples of such commodities include:
wheat, feed grains (grain used as fodder, such as maize or corn,
sorghum, barley and oats), cotton, milk, rice, peanuts, sugar,
tobacco, oilseeds such as soybeans and meat products such as
beef, pork, and lamb and mutton.
• Agricultural subsidies are given in several forms. Fertilizer subsidies
come through the system of retention prices provided to the fertilizer
producers (fertilizer factories).
• These prices are calculated on the basis of economic costs to the
factories, based on their investments, running costs, and a margin of
profit (say 12%), and the government then decides on the
subsidized prices at which the fertilizers are sold to the farmers.
Imported fertilizers are also provided to the farmers at subsidized
prices.

Summary:
• Agricultural finance has to do with financing i of agriculture-related activities, from production to
market. Not all agricultural finance is rural, and not all rural finance is agricultural. Yet financial
 EBKUST Lecture Notes Template

service providers offering rural, micro- or agricultural finance often have overlapping objectives
and opportunities

• Agricultural finance is a subset of rural finance dedicated to financing agricultural related

activities such as input supply, production, distribution, wholesale, processing and marketing

• The purposes of financial management are traditionally defined to include the investment
decision, financing decision, and the dividend decision. Together, these decisions largely
determine the rate at which the farm business grows over time

• A perfect and inclusive set of financial statements is essential to sound financial management.
Such an accounting system should at a minimum include a balance sheet, an income statement,
a statement of change in owner equity, and a cash flow statement. These statements can
provide an informational input to the production, marketing, investment, and financing decisions
that must be made annually by the farm operator

• The financial intermediaries serving agriculture provide an important service by channeling funds
from savers to borrowers in the amounts necessary to finance production expenses and capital
expenditures..

• These institutions are divided into four groups for discussion purposes:
➢ commercial banks,
➢ Farm Credit System,
➢ government lenders,
➢ and other financial intermediaries
• Agricultural Loans are credit facilities extended to farmers, agribusinesses and other agricultural
institutions for the development of agricultural activities.
• The main types of agricultural loans include:
➢ Marketing Loans
➢ Operating Loans
➢ Investment Loans
• An agricultural subsidy (also called an agricultural incentive) is a government incentive paid to
agribusinesses, agricultural organizations and farms to supplement their income, manage the
supply of agricultural commodities, and influence the cost and supply of such commodities

Assignment:
 EBKUST Lecture Notes Template

• Not all agricultural finance is rural, and not all rural finance is agricultural. Discuss?

Further Reading: For further reading please explore the following :

• WWW. Worldbank.org
• WWW.ifc.org
• WWW.ada-microfinance.org
• WWW.ruralfinanceinvestment.org
• Ag4impact.org

References:

A DID Position Paper on credit gives a general presentation of the principles and approaches in credit
prioritized by DID. This Position Paper on agricultural credit seeks to develop the specificities of the
sector. 2 The agricultural sector generally employs more than 60% of the active population in
developing countries. This proportion rises to as much as 80 to 90% in some countries such as Burkina
Faso, Burundi, Malawi, Mali, Niger and Rwanda. Source: World Statistics:
http://www.statistiquesmondiales.com/population_active_par_secteur.htm 3 The share of GDP
attributable to the agricultural sector in developing countries is between 35 and 50% and even exceeds
the 50% threshold for some countries such as Liberia, Guinea Bissau and Chad. Source:
http://www.statistiques-mondiales.com 4 “World Agriculture: Towards 2015/2030,” United Nations Food
and Agriculture Organization (FAO).