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Why credit is so important.

     Small farmers need credit to purchase inputs for their farming activities.

That is the most obvious reason for credit but it goes further than that as the easiest forms of credit for small farmers comes from merchants.

They will provide the inputs on credit and purchase the outputs rapidly for cash.

These are apparently simple and low cost transactions for farmers but in fact the hidden costs can be considerable.

Cash purchasers are free to seek better discounts on purchases than those who seek to delay their payments until after harvest or when the lambs are sold.

Selling directly after harvest because of financial need can lead to a low sale price.

    While merchants are usually seen as the problem farmers can suffer the same effects from their cooperatives.

Merchants are also good at providing small amounts of credit for purchases.

A separate small loan from a bank can be expensive to establish even if the interest rate is lower.

An integrated approach 

    In this chapter I will describe an integrated approach where instead of seeing credit as a separate issue I have tried to incorporate it into the farming system.

By this I mean that credit is part of the decision making process of selecting a farming system.

For example a cereal - grain legume farming system requires a high level of inputs and may produce high returns but if credit is not available a rotation such as the Zaghouan 4 might be a better option.

Reducing credit needs

    Low cost farming systems will have less need for credit.

Of course high cost systems if they also produce high returns can be profitable but if credit is not available or costly a system with low costs might be a better option for a small farmer.

    Cereal -  grain legume

Two crops are being grown.

Credit needed for seed, fertiliser etc.

Share farming can be used if credit is lacking but overall credit can be a limiting factor for this rotation.

    Cereal - vetch.  

Again two crops. Inputs need to be paid for and sufficient funds to hold hay for later sale as a quick sale will be at a low price in most seasons.

Share farming can reduce credit needs.

    Cereal - medic.

Once established credit needs for medic phase very low.

Cereals can be share farmed.

    Zaghouan 4

More medic in rotation.

Credit needs are even lower.

Cereals can be share farmed.

Credit needed for:

Property purchase.

    Farms are usually purchased with long term loans of 15 to 20 years that are secured with mortgages over the land.

The mortgages are secured on the title.

If the borrower defaults the lender can foreclose by taking court action and the property is normally sold.

There are means of expanding the effective area of land without purchase.

Farmers can rent land for short periods, lease it for longer periods or undertake share farming or agistment.


    Machinery is financed on a much shorter term that relates to the efficient working life of the machine.

This is usually 5  years.

Good machinery will last longer than 5 years but the value has dropped considerably and lenders feel their security is at risk if the outstanding loan is greater than the second hand value.

Machinery can be purchased through bank loans that are for a fixed term or though overdrafts.

If these loans are from a bank they will normally be secured with a mortgage over the farm.

Alternatively the farmer can use hire purchase or leasing where the loan is secured on the machinery itself.

Farmers can reduce their machinery credit needs by purchasing second hand machinery, by joining a farm machinery group or by using contractors.


    Livestock are traditionally difficult to finance through the traditional financial institutions.

They find them too risky.

Finance is usually available from merchants and dealers but can be expensive.

The best option is for farmers to increase their flocks through the retention of female lambs.

This is dependent on improved lambing percentages as currently surpluses are small and the increase is slow.

Alternatively farmers can cut their surplus pasture for hay or sell the pasture on agistment.

Working capital

    Credit is needed for purchases of seed, fertiliser and herbicides for crops as well as the fees charged by contractors or fuel and oil if the farmer has his own tractor.

For livestock hay and grain and medicines may need to be purchased.

If farmers lack working capital they are forced to sell at times when prices are low.

This applies particularly to hay and livestock. 

Share farming can be used to reduce working capital needs.

Drought reserves.

    Access to credit is an important part of drought survival.

Farmers need credit to feed their basic breeding flock and to establish crops after the drought.

Access to drought credit will depend on the level of equity the farmer has in his land.

If he has already obtained credit on the property and machinery to a high level drought credit will prove difficult to obtain.

The lack of security is one reason but doubts about the farmer's ability to repay the additional loan in also important.



    Families are a common source of credit for small farmers.

The advantage is that the borrowers' and lenders' margins accrue to the family. If the family members place their funds in a savings bank and then other family members borrow the money from the bank there is a margin that goes to the bank.

By lending directly the lender can receive a higher rate and the borrower pay a lower rate.

Even if family funds are available the major disadvantage is risk.

If things go badly due to drought or other disasters the effects are amplified in the family.

In such circumstances the family would normally provide emergence support but this may not be possible or can be weakened if family funds are already committed to the farming enterprise.

Banks often demand that other family assets are used as guarantees for loans.

That is a brother's house in the town or one belonging to parents is included in the group of assets under mortgage.

This is even worse.

It concentrates the risk within the family while providing no benefits in the form of cheaper credit or better rates on savings.

Unfortunately is often the only means of obtaining a loan from a bank if the farmer has a low level of equity.

Commercial Banks

    The commercial banks lend money for property purchase.

The loans are secured with a mortgage over the property.

The banks will not lend 100% of the value.

Even with 80% of the value they will often insist that other assets are included as guarantees.

The purchaser is often forced to put his funds into the purchase of the property to increase his equity.

This leads to chronic shortages of credit for farming operations or borrowing from other sources at much higher rates.

Community banks

     Commercial banks split their revenue four ways.

The first call is the payment of interest on funds deposited with the bank and loans taken out by the bank.

The staff and other costs are also a high priority.

Any surplus, after tax, over operating costs and interest is then split two ways.

Part is used to expand the business and part is paid to the shareholders who provided the capital.

Community banks (there are a number of legal frameworks such as cooperatives or trusts) are owned by their account holders and do not pay dividends to shareholders.

They have additional funds to use within the banking operations.

These may be used to extend banking to parts of the community (such as small farmers) who commercial banks find expensive to service.

It may be used to provide cheaper loans or better interest or deposits or a combination of both.

Community banks can be be an excellent source of credit but their growth is slow because they are heavily dependent on retained surpluses for growth.

Finance companies.

    These are fringe banking institutions (often owned by banks) that specialise in providing credit for farm machinery, cars. trucks etc. 

The cost of finance is usually higher than that paid for a loan from a bank but this depends on the size of the loan.

For small loans from banks the establishment costs may be more than the saving in interest.

Bank loans may be difficult if the farmer already has a mortgage.

Hire purchase and machinery leasing is also very convenient. It is just a question of "sign here" at the machinery dealer. 

There is no need to negotiate with the bank.

Hire purchase finance is very easy with new machinery but may be more difficult with second hand machines.

Machinery groups.

    Farmers in effect hire farm machinery from these groups.

Farmers provide a personal loan guarantee to the group but this usually has little effect on their credit worth.

They are an excellent means of financing machinery for small farmers.

Credit unions

    Countries such as Bangladesh have developed and effective credit union structure for small farmers.

Credit unions work on different principles from traditional banking.

They require members to establish a regular pattern of saving.

On the basis of their ability to save - that is repay the loan - they a granted a loan without the type of security demanded by banks.

Supplier, dealer or merchant.

    Suppliers, dealers and merchants will supply credit to farmers.

This is convenient as small amounts are provided without paperwork, guarantees or mortgages of any kind.

Usually the merchant provides the funds on the basis of personal knowledge.

While the provision of credit through suppliers is readily available it can be expensive.

Merchants will charge on overdue accounts and the interest rate (which is almost never stated) is high.

The use of merchant credit is expensive in other ways.

The farmer has no freedom to negotiate a cheaper price or if he has credit from a purchaser he may receive a low price.

Purchasing groups.

    Purchasing groups collect the orders of a number of small farmers together and with this increased buying strength negotiate discounts on inputs.

Part of the package may be the provision of credit but this will be more favourable when negotiated by a group.


    Traditionally banks established imposing branches in the main squares of important towns.

These branches were expensive to build and had numerous staff.

They required a considerable catchment area of customers to justify their costs.

They were not convenient for small farmers in remote areas.

    Credit cards.

    In developed countries there has been a huge expansion of consumer credit, credit cards, cash machines and more recently Internet banking.

These systems have mechanised many banking operations and transferred others to the merchants (who also pay for the privilege of doing some of the work normally carried out by the bank).

Some of these ideas could be applied to small farmers in the WANA region.

It is unlikely that small farmers will be able to justify a computer and direct link to their bank but they could do so through an agent (either private or farmer association).

    Local agent

    This is the model used in countries such as Bangladesh for their credit union.

They provide an excellent service to small farmers.

While it is costly it is much less costly than the traditional banking service.

A combination of internet, credit card and local agent could be a good model for countries such as Tunisia that have a growing generation of computer trained young people.