Credit programs for small farmers : a project manager"s reference

between 1950 and 1985 encountered serious implementation problems and failed to meet their objectives. This report, the first in a series of reference guides for project managers, summarizes A.I.D."s experiences with small farmer credit and its current policy, and describes two new approaches to providing agricultural credit. The lessons learned to date revolve around four issues. (1) Certain pre-conditions must be met if a credit program is to succeed: favorable market conditions and government pricing policies; adequate postharvest support; sufficient land and labor resources among target farmers; and the existence of an appropriate, profitable agricultural technology. (2) Positive real interest rates should be charged; this is a fundamental lesson, but often requires long-term, sector-wide policy reform. (3) In the area of loan administration, A.I.D."s experience suggests certain steps (outlined herein) that can help project managers design an appropriate loan portfolio, identify possible alternatives to big banking institutions, minimize transaction costs, protect against inflation and bad debt, and address equity concerns. (4) Standard methods of evaluating credit programs are costly and inefficient; perhaps evaluation should focus less on changes in farm income and more on the development of self-sustaining rural financial institutions. Two experimental approaches to funding agricultural credit programs - rural savings and private equity investment - are currently underway. (1) Early results from a program in Honduras and the Dominican Republic suggest that local agricultural banks and credit unions can successfully mobilize deposits in conjunction with their lending, although they might require substantial technical assistance and training. (2) A USAID/Honduras project is testing the feasibility of establishing a private company to share investment risks with small livestock farmers. Appendices include excerpts from A.I.D. policy papers and annotated bibliographies (along with ordering instructions). This report, and others in the Project Manager"s Reference series, will be made available to A.I.D. Missions through the computerized information retrieval system, MICRODIS.