Financing for Agriculture: How to boost opportunities in developing countries

This policy brief examines the challenges and instruments of agricultural financing in developing countries, emphasizing the need for a coherent strategy involving governments, financial institutions, and private actors to mitigate risks and boost production, infrastructure, and research.

• Agricultural financing in developing countries is severely limited due to high transaction costs in rural areas and inherent risks. Financial institutions are often reluctant to lend because of production risks like natural hazards, the inability of farmers to provide sufficient collateral, and price volatility. In Africa, less than 1 per cent of commercial lending is allocated to the agriculture sector.
• Agricultural finance needs are categorized into four primary groups: farmers and small entrepreneurs who need funds for inputs and production; actors along the value chain requiring instruments to strengthen interlinked transactions; rural infrastructure such as irrigation and transport; and Research and Development (R&D) for knowledge generation.
• A variety of direct financing instruments exist, ranging from informal community savings (such as tontines in Senegal and susu groups in Ghana) and micro-finance to formal traditional finance, leasing, and factoring. Specialized tools like weather-based insurance and credit guarantee schemes are used to improve access to finance by mitigating objective risks or covering default shares.
• Value-chain finance focuses on business transactions between participants rather than direct lending to individuals. This includes internal finance (e.g., trade credits and input-supplier credits) and external finance (e.g., receivables financing and factoring). Technology, such as the DrumNet system in Kenya, has enhanced these networks by linking farmers to agro-processors and input suppliers.
• Rural infrastructure is globally underfinanced and requires diverse funding models. While traditionally public-funded, governments now use public-private partnerships (PPPs) involving debt, equity, and risk mitigation. Small-scale infrastructure is sometimes developed by value-chain actors or cooperatives, such as through the National Cooperative Development Corporation in India.
• Governments play multiple roles in agricultural finance: as direct providers of funds, as risk managers through subsidies or guarantee funds (e.g., FIRA in Mexico, CGTMSE in India, and the Agricultural Credit Guarantee Scheme Fund in Nigeria), and as regulators. Some governments, like India, impose mandatory lending targets for priority sectors, requiring banks to allocate 40 per cent of lending to such sectors.
• Effective agricultural finance requires a stable institutional environment, including strong land tenure systems and efficient legal enforcement. Overregulation can hinder innovation, whereas flexible regulations issued by the executive branch are often more adaptable. A holistic approach is recommended to integrate food security and poverty reduction into financial regulations.

APA

Ruete, M. (2015). Financing for Agriculture: How to boost opportunities in developing countries. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/financing-agriculture-boost-opportunities-devloping-countries.pdf

Chicago

Ruete, Marina. Financing for Agriculture: How to boost opportunities in developing countries. International Institute for Sustainable Development, 2015. https://www.iisd.org/system/files/publications/financing-agriculture-boost-opportunities-devloping-countries.pdf.

Wikipedia

{{cite report |last1=Ruete |first1=Marina |title=Financing for Agriculture: How to boost opportunities in developing countries |publisher=International Institute for Sustainable Development |date=September 2015 |url=https://www.iisd.org/system/files/publications/financing-agriculture-boost-opportunities-devloping-countries.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{ruete2015financing, author = {Ruete, Marina}, title = {{Financing for Agriculture: How to boost opportunities in developing countries}}, institution = {International Institute for Sustainable Development}, year = {2015}, month = sep, url = {https://www.iisd.org/system/files/publications/financing-agriculture-boost-opportunities-devloping-countries.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }