Improving Agricultural Microfinance through Risk Mitigation

23 February, 2015

The following paper by NpM member Cordaid (November 2014) presents 4 categories of risk mitigating measures that MFIs can apply to enhance opportunities for agricultural lending. See more info below.

Before publication, the paper has been discussed during the latest working group meeting of the NpM Rural Finance Working Group.

What is the NpM Rural Finance Working Group

Members of the NpM Rural Finance Working Group convene two or three times a year to discuss possible common projects in the field of financial services for the rural and agricultural sector in developing countries. One of the major outcomes is the research conducted on opportunities for risk management through linking financial institutions and producer organisations in Ethiopia, Uganda, Rwanda and Mali. The research has been carried out with Joost de la Rive Box (lead consultant/team leader), AgriProFocus, NpM member Terrafina Microfinance (coordinator of the working group) and the Wageningen University, and is funded by the Food & Business Knowledge Platform. The report is in the final phase of editing and will soon be published on this website!

In the last working group meeting, we discussed the paper published by NpM member Cordaid which identifies four risk mitigating measures that Microfinance Institutions (MFIs) can apply vis-à-vis the inherently risky nature of agricultural lending.

Cordaid paper: Improving Agricultural Microfinance through Risk Mitigation

Agricultural lending is considered very risky by financial institutions due to matters such as weather
conditions, price fluctuations, diseases, etc., making it difficult for farmers to repay their loans. Yet, the
expected growth of the global population from 7 billion to 9 billion people by 2050, will boost the demand for
food and hence the need for increased agricultural productivity. This will in turn require appropriate financial
services, thereby probably making the agricultural sector worth the investment, provided that risk
management is properly applied.

So what can MFIs and other financial institutions do to decrease risks? The following paper elaborated by
Cordaid (November 2014) presents four categories of risk mitigating measures that MFIs can apply:

  • 1) Preparation: in order to minimize risks before developing of a new agricultural financial product;
  • 2) Product: risk alleviation with regard to the product and its development;
  • 3) Operations: risk mitigating measures similar to the MFIs' internal operations;
  • 4) Collaboration and linking: mitigation of risks through cooperation with other actors in the sector.

To read the full article on risk mitigation measures for agricultural lending, click here.

Members of the NpM Rural Finance Working Group are: Cordaid, FMO, ICCO, Hivos, Oxfam Novib,
Rabobank Foundation and Terrafina Microfinance (coordinator).

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