This post reports on an insured loan in Ghana that increased the likelihood that women would apply for credit to invest in greater productivity. It also increased the likelihood of getting approved.
Learning from Agricultural Lending Here at Home through Interagency Dialogue
While Feed the Future’s partners wrestle with the challenges of facilitating agricultural finance for smallholders abroad, there’s much to be learned from what the U.S. government has accomplished at home. This February, as part of Agrilinks’ Finance for Food Security month, USAID's Bureau for Food Security (BFS) invited several experts from the U.S. Department of Agriculture (USDA) to share their experiences lending to farmers through the Farm Service Agency (FSA) loan program.
Through a lively interagency dialogue with USDA’s Dana Richey, Bill Cobb, John Tamashiro and Chris Hartley organized by BFS’ Markets, Partnerships and Innovation office, we learned about FSA’s model and lessons learned in agricultural finance and reflected on what might be applicable in the development context. A few key takeaways:
We face similar issues at home as abroad in agricultural development. We’ve all heard the rallying cry in development: “How do we attract youth to farming?” This is also a concern domestically, as the average age of a farmer has risen eight years in the last 30 years to 58. FSA has a loan program that serves children as young as 10 with loans of up to $5,000 for small-scale ag enterprises like livestock or dairy. Youth sign promissory notes and put up their business assets as collateral, helping them to build a precocious credit history and learn about entrepreneurship. Programs are often done in conjunction with FHA or 4H programs, so they have supervision.
Agricultural lending requires significant training to do it right, but the investment can pay off with low default rates. The FSA’s network of 1,100 loan officers go through an extensive two-year training program before they have lending authority, which helps ensure they are not only making sound deals but also able to counsel borrowers, roughly 60 percent of which are beginning farmers in FSA’s Direct Loan portfolio. FSA provides “supervised credit,” which means they work closely with borrowers at every stage, including assessing business plans to ensure that the loans make good business sense. That, among other factors, like its farmer-friendly terms, has contributed to FSA’s low default rates — 5 percent for direct loans and 1 percent for guaranteed.
It’s important to find the right niche for government to intercede where the private sector can’t or won’t. Commercial banks hold the lion’s share of the country’s agricultural lending; USDA is really the lender of first opportunity. FSA loans are strictly for borrowers who can’t access commercial credit, to the extent they may require prospective borrowers to show proof of a credit denial as part of the application process. They offer both direct and guaranteed loans, guaranteeing up to 95 percent to drastically reduce the risk of lending for commercial banks. They also intercede with emergency farm loans in cases of a nationally declared disaster and offer microloans (loans of up to $50,000 maximum) to encourage beginning and underserved farmers to get in the game.
A small subsidy can have a big impact. With current interest rates ranging from 3.25 percent to 3.75 percent and subsidy rates under 5 percent, the programs are pretty efficient considering the extensive support they provide and the types of farmers they serve.
Crop insurance is critical for managing the risk of agriculture. FSA requires borrowers to take out crop insurance when FSA is actually financing the crop with loan funds if such insurance is available. USDA underwrites crop insurance policies for 551 types of crops and livestock in the United States, and 89 percent of principal cropland area is covered by federal crop insurance. Insurance premiums are subsidized, but the programs provide an important safety net for farmers and, in turn, our food supply.
Flexibly structuring deals to accommodate the nature of the farming business is key to success. FSA pegs repayment schedules to harvest and sales time and will structure repayment from certain businesses such as dairy or poultry to recoup payment directly from sales. FSA loan officers also have the ability to restructure loan terms when disaster strikes or other issues occur on the farm.
We all know context matters; every country has a unique fingerprint when it comes to agricultural development, from the physical environment to the policy environment. What works in the Midwestern Corn Belt may fail in the maize-growing communities of sub-Saharan Africa. Yet knowledge exchanges such as this can only help inspire us to think differently about the challenges we face in the development context and eventually adapt and apply what’s been learned from other models. Feed the Future’s collaborative ethos can help foster greater dialogue between government agencies toward our common goals of food security both at home and abroad.