July 2015
Agricultural Credit:
Assessing the Use of Interest
Rate Subsidies
CONSULTANTS
COORDINATION
Christine WESTERCAMP
Miryam NOURI
André OERTEL
Aurélie CHEVRILLON and Mathilde GASPERI
chevrillona @ afd.fr
gasperim @ afd.fr
AFD Sustainable Development Department
A SAVOIR
29
Agricultural Credit: Assessing the Use of Interest Rate Subsidies / July 2015
Since the beginning of the 20th century, interest rate subsidies have been one
of the tools used all around the world for developing agriculture, especially
by major agricultural countries such as France, the United States, and Brazil.
However, a general consensus against their use now exists among donors,
despite the fact that all of these latter still use them more or less directly.
In each donor institution, there is debate between the “financial” faction,
who oppose such subsidies, and the “agronomist” faction, who cannot effectively organize agricultural development projects that rely solely on rural
financial markets, as the latter are insufficiently developed and usually offer
exit interest rates that are prohibitively high for financing investments in
infrastructure. The issue of interest rate subsidies is moreover stirring
up intense discussion within international bodies, in particular the OECD
Development Assistance Committee (DAC). This study takes a critical look at
the consensus against interest rate subsidies and examines the arguments
for and against them.
Agricultural Credit:
Assessing
the Use of Interest
Rate Subsidies
A SAVOIR
29
Christine WESTERCAMP
Miryam NOURI
André OERTEL
A SAVOIR
Agricultural Credit:
Assessing
the Use of Interest
Rate Subsidies
CONSULTANTS
Christine WESTERCAMP
Miryam NOURI
André OERTEL
COORDINATION
Aurélie CHEVRILLON
chevrillona @ afd.fr
and Mathilde GASPERI
gasperim @ afd.fr
AFD Sustainable Development Department
À Savoir
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Executive Summary
5
Contents
Introduction9
1. Historical analysis
11
1.1.France
1.1.1. Transition from a largely rural economy to a modern economy
1.1.2. Strong growth in interventions that include interest rate subsidies,
since their start in 1910
1.1.3. Impacts on the French agricultural and financial sectors
1.1.4. The essential role of interest rate subsidies in the major phase
of French agricultural modernization, in conjunction with other support
11
12
14
23
31
1.2. United States 1.2.1. Shift from a largely rural economy to a modern economy
1.2.2. Interventions that include interest rate subsidies,
essentially under the sponsorship of the FSA
1.2.3. Impacts on the agricultural sector and the financial sector
1.2.4. Conclusion: the subsidized loan system has acted as a security net,
but cost has been high
32
32
1.3. Brazil
1.3.1. Agriculture, a strategic sector for Brazilian growth
1.3.2. Success in adapting interest rate subsidy interventions to the size of farms
1.3.3. Impacts on the agricultural sector and on the Brazilian bank sector 1.3.4. Conclusion: little prospect of the private sector taking over
the subsidized loan supply
58
58
60
71
1.4. Summary and comparison of case studies
78
34
50
57
77
2. Review of donor policy on subsidized
credit interventions
85
2.1. History, strategy, and forms of donor intervention
85
2.2. Donor positions on subsidized credit lines
95
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Sommaire
A SAVOIR
3. Analysis of arguments for and against
the use of subsidization
101
3.1.Introduction
101
3.2. Presentation of the pros and cons
102
3.3. Arguments for and against subsidization as a tool of intervention
104
3.4. Arguments for and against subsidization within the specific framework
of agricultural financing
112
4. Recommendations
121
4.1. Recommendations regarding the intervention context
122
4.2. Recommendations concerning how to implement the subsidization tool
4.2.1. A healthy subsidization system that is regularly evaluated and audited
4.2.2.Targeting: an essential element for effectiveness and cost control
4.2.3. Financial and non-financial loan conditions whose aim is to establish
healthy behavior 124
126
132
4.3. Support measures
137
4.4.Conclusions
140
134
Appendix – List of persons contacted
143
Acronyms and abbreviations
147
References151
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Executive summary
Interest rate subsidies were dropped with the shift in the rural finance paradigm
in the 1980s. However, new approaches have not led to satisfactory solutions to
address financing needs for agriculture, as rural financial markets remain insufficiently developed, and their exit interest rates are often too high for farmers to
finance structuring investments. The present study specifically assesses the effectiveness of providing end beneficiaries with credit at interest rates that are below
market rates, as a way to foster the development of agricultural credit supply. The
analysis relies on a historical review of practices in three large agricultural countries
that have used interest rate subsidies as a central element of their agricultural policies:
France, the USA and Brazil.
Based on these three case studies, a literature review, and an overview of how donors’
positions on the matter have evolved (World Bank, KfW, IFAD, USAID), this study
seeks to determine whether subsidized loans to agriculture have contributed to
modernizing small farms, increasing yields, and creating sustainable access to credit.
An analysis of pro and con arguments is followed by recommendations, mainly relating
to the conditions under which subsidized interest rates can have positive effects on
the development of small-scale agriculture and on its sustainable access to financial
services.
The three case studies highlight different strategies implemented by public authorities.
France: The French case study is particularly interesting, for two main reasons. French
agriculture developed strongly over the 20 th century, closing technical gaps, and thus
making France the second-largest agricultural commodities exporter at the end of
the century, despite its relatively small size compared with other agricultural countries.
This was achieved thanks to strong state support, with interest rate subsidies as a
major component. One of the specificities for France lies in the fact that, until 1990,
subsidized loans were exclusively extended through “Crédit Agricole.” This cooperative bank developed over the past century, and it was strongly supported by the
state, which controlled its apex. However, interest rate subsidies appeared to be very
expensive and difficult to control, in terms of costs borne by the state and controls
to ensure proper allocation of subsidies in accordance with state policy. The system
was criticized in particular because it led to public funds being allocated to large
agricultural enterprises. Despite these limitations, interest rate subsidies were a major
policy instrument throughout the modernization phase of French agriculture. Two
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Executive summary
A SAVOIR
aspects appeared key to achieving this result: 1) good linkage with complementary
measures (training and technical support for farmers, targeted subsidies, sector
stabilization funds, public research); and 2) long-lasting credit programs.
USA: US agriculture shifted over less than a century from being fragmented and
underdeveloped to an extensive activity that is one of the most productive in the
world, notably thanks to successive governments’ strong commitment to its support,
in particular in terms of fostering the development of agricultural credit supply.
The federal government implemented support measures for the development of
agricultural finance starting from 1916, relying on two main organizations. The Farm
Credit System (FCS) is a network of credit cooperatives, initiated and sponsored by
the federal government, but which was, from the start, intended to be owned,
managed, and controlled by the farmers. The Farm Service Agency (FSA) is a federal
agency that directly extends loans to the agricultural sector, at below market interest
rates. Today, FSA specifically focuses on vulnerable farmers, extending subsidized
loans to those who do not have access to bank credits, and guaranteeing bank
loans for the others. One of the main specificities of FSA’s credit program is close
monitoring and capacity-building services provided along with the credit. The goal
is to help borrowers step into the commercial credit system, including in terms of
acquiring the required management skills. Some regions have been highly dependent
on these programs, which took over the role of commercial banks, notably during
crises, but the cost of the system has attracted significant attention from Congress.
Administrative costs (infrastructure and human resources) represent the major cost
component of FSA’s interest rate subsidy programs.
Brazil: The provision of subsidized loans has been Brazil’s main instrument to support
its agriculture. The Brazilian case shows how the private banking sector was for a long
time left out of the financing of agriculture, although the responsibility for this
cannot be laid at the door of interest rate subsidies. Indeed, Brazil started supporting
the agricultural sector as early as the 1930s, by providing coffee producers with direct
subsidies to compensate for price fluctuations. Under interventionist economic
policies, the government then introduced a sophisticated credit mechanism with
subsidized interest rates as the backbone for its agricultural development policy.
Credits to the agricultural sector are mostly channeled through the National Rural
Credit System (SNCR), which includes targeted financing schemes that are funded
by compulsory contributions from the banking sector sometimes linked to pricesupport mechanisms, and largely subsidized. Within SNCR, the National Program
to Strengthen Family Farming (PRONAF) was initially aimed at accompanying the
government’s policy to allocate land to rural populations and supporting small-scale
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Executive summary
farms. It now also strives toward poverty-reduction objectives. This expensive program
has only been able to achieve its objectives thanks to a dense network of rural unions
and agricultural extension services, as well as a guarantee mechanism supported by
the government.
These case studies and the literature review show that the effects of interest rate
subsidies are closely related to the capacities and orientations of the structures
extending the subsidized loans to end beneficiaries. These effects also cannot be
isolated from those of other support measures implemented simultaneously. The
organization of financial and agricultural sectors are often not considered in analyses
found in the literature, which frequently include a confusion of terms, for example
between interest rate subsidies and interest rate caps, or between subsidized and
directed credit.
The present study reviews the pros and cons found in the literature in light of the
case study findings. On this basis, the study concludes that interest rate subsidies for
the agricultural sector always appear to be a relevant tool to support small-scale
agriculture as soon as the environment is favorable, or made favorable by complementary support measures, and if the mechanism, targets, and loan conditions are
properly designed. Interest rate subsidies require rigorous monitoring and management
systems to avoid divergences from their objectives, and costly systems are frequently
required for implementation.
Part 4 of the study presents operational recommendations for avoiding negative effects
in the implementation of subsidized interest rate programs. These recommendations
relate to the context, the subsidy mechanism, target beneficiaries, loan conditions,
and accompanying measures.
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[7]
Introduction
In developing countries, the agricultural sector still represents a significant proportion
of value added, exports and jobs. One of the constraints in the development of this
sector is access to financing. The donors that support this sector have modified their
approach to agricultural financing to follow the “change in paradigm” of rural finance
from the 1980s: directed credit, which was distributed by projects or development
banks more often than not under “soft” conditions, frequently led to poor management
of the loans and could hinder the development of rural financial markets. It was given
up for an approach based on the financial system as a whole. Yet, this change in
approach does not seem to have provided a satisfactory solution to the needs for
agricultural financing, as rural financial markets remain insufficiently developed and
more often than not offer exit interest rates that are difficult to bear in the case of
financing structural investments. The implementation of the new paradigm has thus
resulted in a drastic drop in the financial services supply, especially credit, for agriculture.
Interest rate subsidies, which are understood as the distribution of loans to final
beneficiaries at interest rates lower than market rates, are one of the instruments used
widely around the world since the beginning of the 20th century to develop agriculture.
Interest rate subsidies are a type of subsidization with distinctive characteristics. Their
amount is proportional to the amount borrowed. It is distributed through financial
institutions, which choose the beneficiaries based on applications. The mobilization of
loan resources generates leverage on the amount of the aid. It is disbursed gradually
throughout the duration of the loan.
One of the objectives of this study is to provide fuel for thought on the interest rate
subsidy tool as applied to the agricultural sector. The study is based on the following
elements: first, an analysis of the experience using interest rate subsidies in three
selected countries (France, the United States, and Brazil); second, how four selected
donors position themselves on the issue (the World Bank, IFAD, KfW, and USAID);
and, finally, research works on the subject, which we have used in particular to identify
the reasons that allow us to think that, in a given historical context, the subsidizing of
exit interest rates in the agricultural sector seems to have contributed to reaching the
objectives aimed for.
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Introduction
A SAVOIR
We have analyzed, from a historical perspective, experiences in subsidizing interest
rates for agricultural credit. This has allowed us to identify the situations and conditions
in which this tool was suitable. We then examined, in the light of practice, the pros
and cons of the tool, in order to work out concrete recommendations on how it
can be used. Our hope is that the results can act as a guide for donors working in
this sector.
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© AFD / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / July 2015
1. Historical analysis
We have analyzed the use of interest rate subsidies from a historical perspective in
order to shed light on:
• the purpose of establishing these subsidies;
• details on the system used (subsidy channels, eligible beneficiaries/purposes,
institutions in charge of distribution, monitoring of proper use, modes of
implementation, etc.);
• the context in which this instrument was used (in terms of agricultural situation
and financial-sector situation);
• the support measures established, if applicable (other tools of development
support);
• insofar as possible, the impact of using the instrument and elements concerning
the cost-benefit ratio;
• the conditions required for such systems to be effective, and the roles that other
public actions or the context may have.
The objective is to analyze past experiences in interest rate subsidies, to help developing countries choose whether or not to use this instrument, according to their
circumstances and their objectives.
1.1. France
The French case study is particularly interesting, for two main reasons. French agriculture
developed strongly over the 20th century, closing technical gaps, and thus making France
the second-largest agricultural commodities exporter at the end of the century, despite
its relatively small size compared with other agricultural countries. This was achieved
thanks to strong support from the central government, with interest rate subsidies as
a major component.
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1. Historical analysis
A SAVOIR
1.1.1.Transition from a largely rural economy to a modern economy
During the 20 th century, France shifted from a strongly rural economy, with a very
large agricultural labor force, to a modern economy based on the development of
industry, and then services. Agriculture has nonetheless maintained a much more
significant role in France than in its European neighbors.
Table
1
Selected macroeconomic indicators for 1900, 1960 and 2010
1900
Population (in millions)
1960
2010
38 4765
Percentage of rural population
56% 38%22%
GDP (in constant USD billion, 2000)
NA 3501 ,485
Share of agricultural sector in GDP
NA 12%1.8%
Share of agricultural sector in employment45%
20%
2.9%
Sources: World DataBank, French national education system, Agreste, Gueslin (1984).
Economic crises bring change to the agricultural sector, with a high level
of indebtedness and long-term support from the European Union
France is made up mainly of arable land, with varied characteristics that enabled the
development of a variety of farming and livestock value chains. At the end of the 19 th
century, France was still a major agricultural and rural country, but its many small
farms lagged behind technically compared to its neighbors in northern Europe. French
agriculture was severely struck by the agricultural crisis of 1880-1890 linked to
the “globalization” of trade. After World War II, productivity improved thanks to
mechanization, breeding methods, large-scale use of fertilizers and pesticides, and
the adoption of new techniques. This led to considerable increase in production
with a large concurrent drop in the agricultural population, and to an increase in the
average size of farms.
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1. Historical analysis
During the 20 th century, the agricultural economy became a debt economy, based
on lending at negative real rates until the middle of the 1980s. Indebtedness
accelerated strongly between 1960 and 1980. From the 1960s, Europe’s common
agricultural market began supporting agriculture in the six member states of the
European Economic Community (EEC), by establishing high and uniform prices as
well as the free circulation of products. The Common Agricultural Policy (CAP)
then shifted to limiting production and readjusting European agricultural prices on
the world market.
In 1956, French farmers, with the support of agricultural development players, created
agricultural management centers ( centres d’économie rurale ­– CER). Their foremost
objective was to acquire management tools, especially for mutual comparison
purposes. The CERs played a significant role in guiding the modernization of farms
and in establishing the monitoring of management, which is required for the granting
of subsidized loans.
Until 1999, the net income per agricultural worker experienced considerable growth,
this despite a decline during the decade 1973-1983, linked to successive climatic
and economic crises. But from 1999, the combined effect of decreases in European
subsidies and in volumes produced led to a period of income decline.
Agricultural credit: a crucial public policy tool for modernizing French agriculture
Faced with the absence of suitable financial channels during the economic crisis of
agriculture at the end of the 19 th century, systems of cooperative credit emerged.
One of them evolved toward what became the model of French agricultural credit:
a system that was cooperative at its base, but that received encouragement from—
and had its apex controlled by—the central government. Crédit Agricole thus
became the main public policy tool for the modernization of agriculture based on
dynamic family farms. It remained specialized in agriculture until 1971 and then
reached out to new types of clientele, all the while guarding its strong rural base.
In addition to Crédit Agricole, parallel credit unions in agricultural circles developed
in some regions, giving rise to the Crédit Mutuel bank.
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1. Historical analysis
A SAVOIR
1.1.2. Strong growth in interventions that include interest rate
subsidies, since their start in 1910
Supporting agricultural modernization and preventing desertification
of the countryside: these are the motivating objectives of state intervention
in the agricultural sector
Summary
The creation of Crédit Agricole as a public bank originated from economic analysis
of agriculture’s need for long-term and inexpensive resources, and from a political
objective of supporting a significant proportion of the population. Agricultural
modernization became a governmental priority after World War II, at a time when
industrialization was rapidly emptying the countryside of its labor force. This modernization was strengthened by the establishment of the “policy on agricultural
structures” in the 1960s. From the middle of the 1980s, France considered that an
increasing number of farmers had become competitive enough not to need interest
rate subsidies. It therefore targeted its interventions specifically on young farmer
start-up and on modernization.
The main reason public authorities were attentive to agricultural issues was their
political concern to support a large number of smallholder farmers, who were seen
as a stabilizing political element. Agricultural policy was therefore based on maintaining a large number of smallholder farmers, as access to small farm ownership was
perceived as the means for curbing rural exodus. These various concerns led to state
support for Crédit Agricole, whose purpose was to finance small farm ownership.
Since its creation, Crédit Agricole’s objective was to finance agriculture under affordable conditions. This led the bank to carry out—in addition to the distribution of
state-subsidized loans—a “self-subsidizing” of lending rates for many years. These
were granted based on its own funds, using its surplus operating income.
The Law of 5 August 1920 established the Office National du Crédit Agricole , a public
bank that took on the name Caisse Nationale de Crédit Agricole (CNCA) in 1926,
marking a bit more its calling as a financial institution made up of Caisses régionales
(regional banks). This law enabled Crédit Agricole to develop its twofold policy to
meet France’s dual objective of developing strong agriculture, in both demographic
and economic terms. These were:
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1. Historical analysis
• a social and political policy based on the model of a smallholder farmer economy
dominated by small-scale commercial production, and
• an innovative economic policy, directed toward competitive intensive agriculture.
After World War II, France’s agricultural policy shifted from one of production and
prices (from 1948 to 1960) to one of structures (from 1960) along with the framework laws on agriculture proposed by Edgard Pisani. France took various measures
to implement these policies. First, agriculture was disconnected from the market and
protected by state-set prices (a policy that was intensified later by the CAP of the
EEC). Then, subsidies were granted to certain types of agricultural investments. Finally,
a very favorable system of low-interest loans was developed, for which Crédit Agricole
was the privileged tool.
It was from the early 1960s that a real agricultural policy was defined, the policy on
agricultural structures, which was laid down in the framework laws on orientation of
1960 and 1962. These encouraged farmers to take out subsidized loans, with the
purpose of helping to create modern farms that were better equipped and larger
in size.
At the end of the 20 th century, only young farmer start-up and the rational modernization of family farms remained priorities, because these were means to prevent
the desertification of the countryside and to curb farm concentration, which was
judged to be excessive. Only loans with these objectives remained subsidized. In 2000,
the percentage of medium- and long-term bank loans for agriculture still receiving
state aid was less than 20%, although it should be noted that liquidity loans had never
been subsidized (Neveu, 2001).
The mechanisms of interest rate subsidies, a monopoly of Crédit Agricole until 1990
Summary
Interest rate subsidy mechanisms have changed over time. They were initially based
simply on providing state resources at a reduced rate. They evolved into state payment
of the difference between market cost and subsidized rate, with special conditions
as to the types of loan and the beneficiaries of subsidized credit. Crédit Agricole had
a monopoly on the latter until 1990 and had to cover the commercial risk.
Subsidized credit is a form of public aid that includes leverage and investment
orientation, and they are linked to other intervention systems. The system to audit
the subsidies is cumbersome and complex. It is based on a dedicated public structure
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1. Historical analysis
A SAVOIR
that delegates on-site auditing based on records to decentralized government
services. While this system has existed in its current form since 1961, none of the
audits provided for were carried out before 2005.
When Crédit Agricole started up, the government began to pump aid initially from
Bank of France ( Banque de France ) funds and then funds from the French funding
body for public works and housing ( Caisse des Dépôts ) in 1926, by granting lowinterest capital loans to Crédit Agricole. It was up to the latter to use these funds in
the form of loans to farmers, agricultural cooperatives, or rural artisans. Crédit
Agricole used these resources to grant low-interest loans without government
constraints on interest levels or the beneficiaries. From 1942 to 1966, when Crédit
Agricole’s own deposit-taking developed, its funds were recycled by the Treasury.
This latter used them for subsidizing interest rates, transforming short-term resources
compensated at market rates into reduced-rate long-term loans by levying 30% of
deposit-taking in order to respond to mismatch risk.
The CNCA gained its financial independence in 1966. The government then covered,
in the form of interest rate subsidies, some of the interest rate normally due by
farmers, so that the agricultural sector could continue to take advantage of reducedrate loans. To do so, the outstanding debt and the average rate of subsidized credit
were calculated each year, as were the cost of the resource used to finance them. The
subsidized interest the government paid to the CNCA each year was the difference in
the rate multiplied by the outstanding debts not yet paid back and increased by the
bank’s management facility. The government defined the conditions of access to the
various categories of subsidized loans from which it wanted agriculture to benefit.
Finally, in 1990, the government put an end to Crédit Agricole’s monopoly over the
distribution of interest rate subsidies and opened it up to other major bank networks.
To do so, the government set up an annual competition among the banks wishing to
distribute subsidized loans, in which each bank offered an interest rate corresponding
to the costs of the resources it wished to allocate to subsidized credit. The subsidy
corresponded to the difference between this cost, increased by the management
margin and the rate of the subsidized loans (Neveu, 2001).
It should be mentioned that, up to 1996, Crédit Agricole enjoyed a special transitory
regime in the form of a so-called réservataire share: a diminishing share of loans at
special conditions. Moreover, Crédit Agricole enjoyed a special form of invoicing that
circumvented the certification by the public auditing body ( Cour des Comptes, 2007).
Currently, the subsidy corresponds to the difference between the rate of interest
paid by the borrower and the rate of interest observed on the market.
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1. Historical analysis
During the entire period, the loan write-off risk was covered by the lending bank.
The surpluses at the CNCA, which were linked in particular to subsidized loan
activities, were partially allocated to these write-offs and to assistance for farmers in
difficulty. This then led Crédit Agricole to introduce selectivity in loan granting , in
the 1960s. The government participated in covering the difficult situations and
granted subsidies for debt rescheduling to aid value chains in difficulty. This was done
via a fund for easing the financial burden on farmers ( Fonds d’allègement des charges
financières – FAC), which also made it possible to help farms in difficult financial
circumstances partially pay back interests on subsidized or non-subsidized loans.
At the same time, a system of government-regulated loans was established, by which
the banks selected for distributing subsidized loans undertook to grant farmers loans
at attractive but non-subsidized rates. In 1990, the ratio of such government-regulated
loans to subsidized loans at Crédit Agricole was 3:1 ( Chambres d’agriculture, 1990).
The conditions for subsidized loan eligibility were the same as those for other
agricultural support systems, such as assistance for start-up (implemented jointly with
the young farmer’s grant), agricultural disaster aid (to supplement compensation by
the National Agricultural Disaster Guarantee Fund), or measures to deal with crises
(along with systems for repayment of bank interests, for liquidity assistance, and for
tax and social contribution relief).
The government thus intervened at several levels: setting the regulatory conditions
for access to loans and their rates; setting the amount of the various budget envelopes
for subsidized loans and dividing them up geographically among the départements ;
organizing the selection of the lending banks; checking that the regulatory conditions
were respected during each loan request; and, finally, monitoring afterwards that the
loans were used properly by the borrowers.
The subsidies allocated to the Ministry of Agriculture’s budget were transferred to
a public institution, the National Center for the Management of Farm Structures
( Centre national pour l’aménagement des structures des exploitations agricoles –
CNASEA), which became part of the Agency for Services and Payment ( Agence de
services et de paiement – ASP) in 2009. This institution paid the banks the amount
of the interest rate subsidies, in principle after the legality and reality of the credit
granted were demonstrated and verified. In reality, the banks received 90% of the
subsidies they were supposed to grant during the year, and the balance was paid to
them by the CNASEA in March of the following year, after proof of their actual
expenses.
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1. Historical analysis
A SAVOIR
Examination of applications, and thus of the verification of the conditions for being
able to benefit from subsidized loans, was shared between the banks and the
Departmental Agriculture and Forestry Directorates ( directions départementales de
l’Agriculture et de la Forêt – DDAF). The banks carried out an initial verification of
the rights of the borrower and then requested financing authorization from the
DDAF. The latter made the decision to grant the subsidy after examination of records.
Management of the loan application was then the responsibility of the banks during
the entire term of the loan, while ex-post investigations were up to the CNASEA.
In practice, however, things were different: in its annual public report of 2007, the
French audit office ( Cour des comptes ) revealed that none of the investigations
provided for in national and European regulations had been carried out up to 2005.
Yet, these investigations were a required condition for payment of the European share
of interest rate subsidies to France. This absence of investigation meant France was
subject to financial penalties. The French audit office concluded that the persistent
shortcomings in the investigations and in the ensuing conflicts were directly linked
to the complexity of the system.
The decision-making and commitment-monitoring channels remained complex
and thereby risky for the central government. Indeed, the CNASEA was the body
that paid and managed the national and European Community credits and furthermore was in charge of monitoring commitments by the government, yet it was
not responsible for decisions on the granting of subsidized loans, which were the
competence of decentralized state services. The information and internal monitoring
systems at that time did not fully guarantee the reliability of the information on the
accounting commitments of the state. Investigation programs were begun late, under
the threat of clearance refusal by the European Community authorities. The certification audits of invoices by credit institutions were conducted very late ( Cour des
Comptes , 2009).
Interest rate subsidy programs originally intended for small farms
came to support “professional” farms
Summary
The scope of interest rate subsidy programs greatly changed: intended for the majority of small farms from before World War II up to the 1950s, they were redirected
from 1960 toward the creation and modernization of “professional” farms. Their
main purposes were land purchase, disaster support, equipment, and support for
cooperatives.
[ 18 ]
© AFD / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / July 2015
1. Historical analysis
Initially, subsidized credit theoretically targeted smallholder farmers, with ceilings
that governed its accessibility. France’s policy reorientation toward modernization in
the 1960s was accompanied by a new notion: credit selectivity in order to develop
profitable medium-sized farms. At this point, surface-area thresholds were established
for access to some subsidized loans.
The subsidized credits had various purposes. Conditions of access evolved along with
agricultural policy and according to budget constraints.
Initially, disaster loans were widely allocated. But the drought of 1976 and the floods of
1977 led to the introduction of selectivity (income and loan ceilings, minimum losses).
Real estate loans, which were launched very early (1910), enjoyed favorable conditions
up to 1959 (between 1 and 3%, along with extra subsidies according to number of
children, for loan lives reaching up to 30 years), but these were subject to the value
of the borrower’s resources and of the loan granted. Government decrees in 19631965 reversed the situation by requiring a self-financing effort by the purchaser
(between 20 and 40%) and a minimal threshold in surface area for start-up, along
with an enhancement of the loan ceiling amount to around 28 ha and relatively low
rates (4.5%).
These changes provoked lively growth in loan volumes, by allowing medium- and
large-scale farmers access to subsidized real estate loans. They thus contributed tto
the concentration of farms. In 1969, subsidized loans at 7% appeared, followed in 1971
by non-subsidized loans. France decided to limit the cost of these loans for the state
by orienting them toward farmer start-up and by limiting them from 1978 through
measures of control, non-reevaluation of ceilings, and raising of rates.
Loans for equipment investment were developed above all after World War II, within
the framework of planning, and they were promoted during the agricultural modernization phase between 1960 and 1980. They became the main object of loans by
Crédit Agricole, with 40% to 65% of its medium- and long-term loans granted for
specific purposes. A special loan regime was created as early as 1931 for young farmers,
but the main official act goes back to 1946. After revision of the mechanism in 1984
(reevaluation of the amounts, extension of the loan life, and grace period, but limited
to farmer start-up), “young farmer” loans were still an important aspect, despite a
context of credit control. Other special loans were set up within the framework of
the CAP (livestock buildings and special livestock loans), and “special modernization
loans” were established in 1972 for financing farm investment programs as part of a
development plan (EEC directive, 1972).
July 2015 / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / © AFD
[ 19 ]
1. Historical analysis
A SAVOIR
Ordinary medium-term loans, the last subsidized loans of a general nature, were
eliminated in late 1983.
Procedures for aiding farmers in difficulty were set up and partially financed by
drawing from CNCA surpluses. The procedures included subsidized loans for debt
consolidation for farms threatened with bankruptcy, together with grants and
low-interest loans. They also required a recovery plan to be set up for such farms, as
well as involvement by the director of the Crédit Agricole regional structure in its
implementation. Such subsidized consolidation loans were set up to deal with the
drought in 2010, within the framework of the special agricultural support plan
( Plan de soutien exceptionnel à l’agriculture – PSEA), this in addition to grants from
the specific support plan for farmers in difficulty ( Dispositif d’accompagnement
spécifique des agriculteurs en difficulté – Dacs-Agri).
There were also loans to cooperatives. Their aim in particular was to help regulate
the agricultural market situation via financing of storage. The share of subsidized
loans among all loans to cooperatives at Crédit Agricole dropped from 66% to 33%
in the 1970s.
The cost of interest rate subsidy programs led the government to limit them gradually, from 1970. This was done by specializing them. The government then focused
almost exclusively on modernization rather than the handing down of farms. These
are factors that explain both the shrinking of the real estate market from 1974 and,
at the same time, the decline in Crédit Agricole’s share in financing purchase of land
by farmers: from 43% in 1972 to 27% in 1987 (sources: CNCA; Gueslin, 1988).
Increased specialization in subsidized loans reduced the number of potential beneficiaries. In 2005, loans for young farmers and for farm modernization represented,
in practice, 80% to 90% of loan commitments that benefited from interest subsidies.
Such loans were granted for terms of up to 15 years (Cour des Comptes, 2009). In 2007,
the system was refocused on only start-up loans for young farmers, which were the
only ones still cofinanced by the European Community up to 2015. Start-up loans
represented 54% of new subsidized loans and 70% of outstanding debts; Crédit
Agricole disbursed nearly 83% of new loans for start-ups ( Cour des Comptes, ibid).
[ 20 ]
© AFD / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / July 2015
1. Historical analysis
Interest rate subsidies became a big burden for the state budget during periods
of high inflation, due to the heavy cost of monitoring and managing the system
Summary
During periods of high inflation, interest rate subsidies became a very big burden for
the state budget. France therefore gradually reduced subsidized loans via more
precise targeting. In addition, the subsidy mechanism led to strong budgetary inertia,
due to the length of the loan life and their fixed rates. The cost to the government
thus changed according to external factors that made it difficult to control the allocated budget. In addition to the direct cost of the subsidy, the cost of the system’s
management and control, as well as remuneration of bank services, also had to be
taken into consideration. All these points led the French audit office and the Ministry
of Finance to begin questioning, from 2007, the relevance of maintaining this system
with its heavy cost and reduced impact.
From 1966 to 1978, the amount of the interest rate subsidies increased at an annual
rate of 15.9% (7.6% in volume) (Gueslin, 1985). In 1976, an inter-ministerial task force
commissioned by the government sought to assess the effectiveness of interest rate
subsidies for agriculture. The government at that time was worried about the
increased cost of the subsidy, which had tripled from €1.2 billion in 1970 to €3.7 billion
in 1976. By 1979 it reached €5.6 billion (Blogowski et al, 1983). The increase was related
to two factors: encouragement by the agriculture policy on structures to borrow, and
the growing gap between the cost of the resource and the rate of the subsidized loans.
In 2004, subsidized loans for agriculture still represented outstanding debts of €7 billion,
annual commitments of over €600 million, and an annual budget liability close to
€200 million. From 1961 to 2004, the subsidy system led to public expenditures of
around €15 billion ( Cour des Comptes, 2007). The budget liability linked to interest
rate subsidies then decreased, in particular because of the drop in interest rates. It
was markedly weaker than 20 years earlier when, in its 1987 public report, the French
audit office had already highlighted its size.
Subsidized loans represented, along with the deficiency payment for natural handicaps,
the main aid paid out as part of rural development policy.
To limit this budget cost, France took a series of measures. It gradually increased the
rates of certain subsidized loans (the rate of real estate loans rose from its historical
level of 3% to 4.5% in late 1969 to 6% in 1978 and to 9% in 1981, whereas other loans
remained stable, at around 5% for certain start-up or modernization loans). From
1970, the government furthermore set an overall annual envelope for interest rate
July 2015 / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / © AFD
[ 21 ]
1. Historical analysis
A SAVOIR
subsidies, rounded out from 1972 by sub-envelopes depending on operations and
rates. In the 1970s, the government reviewed the calculation of interest rate subsidies,
by taking into account less expensive resources. In 1983, medium-term subsidized
loans were eliminated. In 2007, a “waiting list” for loan applications was set up in order
to spread their budget impact over time. Finally, in 2008, the subsidization periods
were reduced, and an equivalent subsidy ceiling was introduced.
Competition among several bank networks, which were then authorized to distribute
loans, made it possible to limit the amount of bank commissions. Furthermore, subsidized loans for agriculture came to be partially financed by the European Union:
from Jan. 1, 2000, the EU cofinanced 25% of interest rate subsidies for modernization
loans and 50% for start-up loans for farmers.
In 2009, the French audit office revealed that the state’s financial balance was
threatened by two significant changes. First, the scheduled termination from 2015
of cofinancing of start-up loans by the European Agricultural Fund for Rural Development (EAFRD) already requires France to include in its accounts all the subsidization
commitments after that date. Second, the marked upswing in market interest rates
from 2006 led to an increase of nearly 40% in the subsidization differential.
The cost of the management and auditing of the system came on top of the direct
cost of the subsidization. The cost of the partial management of subsidized agricultural loans rose from €1.1 billion to €4.3 billion per year, according to the CNASEA, which
was state-subsidized for this management ( Cour des Comptes, 2007). The complexity
of the examination, payment, and auditing system was cumbersome for users and
led to high management costs. In 2008, for a comparable amount of aid granted, the
payment of subsidized loans mobilized the equivalent of 46 full-time jobs at the
CNASEA, compared to seven for the payment of the Environmental Cropping Plan
( Plan végétal pour l’environnement ) and the livestock building modernization plan
( Plan de modernisation des bâtiments d’élevage ).
In addition to the personnel costs of the administrations and operators concerned,
it is important to point out the significant share of the budget envelope devoted to
the remuneration of bank services. Set at 0.5% per year in 2003 and reduced by 0.05%
each year every year up until 2006, the rate of remuneration of credit institutions
seemed to exceed the costs the latter had to pay. This was especially the case of
Crédit Agricole, which made profits on a significant scale, thanks to the considerable
market share it enjoyed. Another effect of this remuneration rate was to give management costs a preponderant role in the resources devoted to certain subsidized loans.
[ 22 ]
© AFD / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / July 2015
1. Historical analysis
From 2007, the French audit office questioned the relevance of maintaining this system with its heavy cost and reduced impact. In 2009 it again concluded: “ Subsidized
loans, which require keeping up an organization and procedures that are specific,
cumbersome, expensive, and difficult to monitor, are probably not without merits
both for farmers […] and the government, which spreads the cost of this aid over
several fiscal years. However, they are not without disadvantages. Indeed, no real
assessment of the effectiveness of subsidized loans has been made. ”
The Ministry of Finance seemed to agree with the French audit office, as can be seen
in this statement: “ The state can, of course, thanks to the subsidized loan mechanism,
spread the cost of the aid over several fiscal years. However, subsidized loans eventually turn out to be more expensive for public finances than is direct aid, not only
because of the management costs levied by the banks, but also because the base
interest rate provided to credit institutions is markedly superior to the cost at which
the state becomes indebted. ” Response by the Minister for the Budget, Public
Accounts and the Civil Service, in Cour des Comptes , 2009).
1.1.3.Impacts on the French agricultural and financial sectors
While interest rate subsidies had a definite impact on the penetration
of bank use in the countryside and on agricultural modernization,
the effects differed according to the type of farm
Summary
It is not possible to ascribe the changes in French agriculture precisely to specific
factors, such as credit or subsidization. However, the claim can be made that subsidization, combined with a long-term loan supply, played a decisive role in the spread
of bank use in the countryside. Subsidized loans played a major role in agricultural
modernization and intensification, as well as in start-up for young farmers, especially
between 1965 and 1980. Subsidized loans and the Crédit Agricole system also had an
effect on the structure of agriculture, by promoting larger farms to the detriment of
smaller ones, largely due to irregularities in the management of subsidized credit.
Indeed, some of the subsidization acted to provide windfall profits for farms that did
not really need them. Farm indebtedness, which was encouraged by the subsidization,
put many farms into difficulty during the changes in the economic situation in the
1970s and 1980s. At the same time, the government scaled back its aid. The impact
of real estate loans on farms is especially controversial. In 2007, the French audit office
and the Ministry of Finance called into question the effectiveness and efficiency of
July 2015 / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / © AFD
[ 23 ]
1. Historical analysis
A SAVOIR
subsidized loan systems, in a context of limited impact due to the overall drop in
commercial rates and to the existence of other systems encouraging start-up and
investment.
The change in environment described in the previous section is the foremost factor
of change in agriculture. “In a branch with low profitability, inexpensive credit was [also]
an objective requirement for many farms. Another imperative was for agriculture
to have access to long-term loans, given the slow speed of reproduction of capital. ”
(Gueslin, 1985). The subsidized loan supply thus made it possible to make some of the
potential demand solvent, by lowering the profitability threshold of indebtedness.
The introduction of inexpensive credit from a real bank with an extended rural
network—along with encouragement to become indebted, within the context of the
agricultural policy on structures—was a decisive factor in the spread of bank use in
the countryside.
André Neveu considers that “ the subsidized loan mechanism played a particularly
decisive role in the modernization of French agriculture in the 1960s and 1970s. The
results are moreover spectacular: production increased at a rapid pace, and France
became a net exporter of agricultural products. Above all, work productivity increased
considerably, so as to reach the level of the best European or even global agricultural
countries” (Neveu, 2001). What had been a labor activity in the past became a veritable
heavy industry, with a capital-output ratio [ 1 ] rising from 6 in the beginning of the
1960s to more than 12 in the beginning of the 1980s (Gueslin, 1985).
[1 ] Capital-output ratio: (operating capital + land resources)/value added of the sector. Source: Gueslin, 1988.
[ 24 ]
© AFD / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / July 2015
1. Historical analysis
Figure
1
Share of indebtedness of agriculture
in the value added of the sector
160%
140%
120%
100%
80%
60%
40%
20%
0%
19
38 940 942 944 946 948 950 952 954 956 958 960 962 964 966 968 970 972 974 976 978 980 982
1
1
1
1
1
1
1
1
1
1 1
1
1
1
1 1
1
1
1
1
1
1
Source: Gueslin, 1988.
The share of agricultural land purchases financed by Crédit Agricole rose from 22%
to 42% between 1965 and 1973. André Gueslin considers that real estate loans definitely enabled an increase in the average size of farms. Rate of investment for this
share, including land and equipment (gross fixed capital expenditure/the sector’s
value added) rose from barely 12% in 1960 to 25% in the beginning of the 1980s
(Gueslin, 1985).
It should be mentioned that the subsidized credit implementation conditions impacted
farm structure. In the initial period, until 1960, the subsidization policy sought to
promote small-scale family farming, and credit amount ceilings were set very low to
limit the appeal of subsidized credit for large-scale farmers. From the 1960s, France’s
agricultural policy evolved toward an objective of profitable medium-sized farms.
At that time, minimum surface-area thresholds were established for access to certain
subsidized loans, and selectivity in credit access based on beneficiary profile was
introduced. However, the thresholds set by the policy were not always applied strictly,
and many large-scale farmers took advantage of subsidized loans to develop their
farming activity. This practice was regularly condemned by the audit department
of French public services and had already been taken up by the “Méline” circular of
7 October 1916.
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[ 25 ]
1. Historical analysis
A SAVOIR
Various investigations demonstrated that the credit above all benefited large-scale
farms in economic terms (Gueslin, 1985). So while the subsidization did enable the
development of farms that would not have been able to develop without interest
rate subsidies, it also benefited farms that had no need for it. This non-respect of
predefined credit ceilings led to the doubt about the subsidized credit tool, on the
grounds that it seemed to have benefited large-scale farmers without managing to
specifically target small farms.
Crédit Agricole thus contributed to the establishment of a two-tiered agricultural
system. On the one hand, there was indebted and economically viable agriculture,
which saw a mix of both very large capitalistic farms—which may have taken advantage
of Crédit Agricole during the “Trente glorieuses” (the approximately 30 years of strong
post-war economic growth) but never really needed it—and profitable medium-sized
farms that succeeded in modernization via indebtedness. On the other, there was
agriculture that encountered economic difficulties: farms of this type either suffered
over-indebtedness (with income that did not allow them to repay their loan) or refused
credit. These latter were made up mainly of small farms that had not chosen to modernize and that sometimes explored other models than productivism via a single
agricultural activity (Gueslin, 1988).
In an inflationary environment, access to inexpensive and easy credit encouraged
farmers to become indebted, especially with real estate loans that generated heavy
depreciation charges that were not compensated by improvement in profitability.
Faced with liquidity shortages, some farmers also had to deal with the dilemma of
either indebting themselves to reach a presumed economic profitability threshold,
or going out of business. In times of economic crisis, limiting subsidization envelopes
led to credit shortages and thus to the establishment of waiting lists by Crédit
Agricole’s regional banks. Overall, the proportion of interest payments in farm expenditures rose from barely 5% in 1959 to around 25% in 1982, but an overall view does
not reveal the big gaps that existed. Small farms thus increased their short-term
non-subsidized borrowing to alleviate their overall difficulties.
The situation evolved to a point where difficulties in repayment were encountered.
Up until the 1970s, defaulting on repayments was more often than not due to particular family circumstances. But defaulting increased significantly in the 1980s due
to the combination of several factors: the big drop in agricultural prices after the
first oil crisis, the setting up of milk quotas in 1984, and the rapid decline in inflation.
The credit crunch that followed in the late 1970s had big social consequences on the
agricultural sector and Crédit Agricole was greatly concerned by these, in view of the
farm takeovers and expropriations that occurred.
[ 26 ]
© AFD / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / July 2015
1. Historical analysis
Crédit Agricole sounded the alarm from 1978, warning about the potential bankruptcy situation of some farms (“ L’endettement de l’agriculture française ,” May 1978,
CNCA annual meeting, quoted by Blogowski et al., 1983). In all, 40,000 farms found
themselves in financial difficulty at the end of the 1980s (Neveu, 2007). In 1980, a
survey of 756 farms in 30 départements showed that their difficulties came from
borrowing in 18% of cases: 7.3% for overuse of credit and 10.6% for poorly adapted
finance plans (Gueslin, 1985).
From the beginning of the 1980s, smallholder farmers themselves adopted more
cautious behavior regarding indebtedness, and particularly so in the case of real estate
purchases. The reduction in the volume of state aid led to an increase in average
nominal rates paid by the farmers, and—as all this occurred within a context of
deflation—they had to bear substantial real interest rates from 1984.
In its 2007 report, the French audit office concluded the following: “ While subsidized
loans are attractive products for banks, bringing them customers and commissions,
they generate procedures that are cumbersome and difficult to monitor. In the end,
they are expensive for state finances. Despite the advantages granted to the beneficiaries, repayment of loans puts a strain on the financial situation of farms for several
years. [...]. However, the drop in interest rates has strongly reduced the advantages of
subsidized loans (which were considerable for farmers at the time when rates exceeded
15%), and no longer represent a condition for young farmer start-up or a decisive
incentive for investment, for which there now exist other mechanisms. ”
The Ministry of Finance stated a similar opinion when it quoted the report established
as part of the mid-term evaluation of the 2000-2006 plan by the audit firm Ernst &
Young (quoted in the response by the Minister of Economy, Finance and Industry and
by the Deputy Minister of the Budget and State Reform and Government
Spokesperson, in Cour des Comptes 2007). This report criticized the effectiveness
of the subsidized loan systems, deeming that the weakness of the market rates
rendered them “ inoperable. ” The Ministry of Finance stated that this aid did more
to improve the financial environment of farms than to act as a “ trigger effect, ” and
that as a result it led to risks of a windfall effect.
The effectiveness of subsidized loans must moreover be put into perspective, as other
types of aid in the form of capital have been established since their creation, with
similar goals (livestock barn modernization plan, environmental cropping plan, etc.).
July 2015 / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / © AFD
[ 27 ]
1. Historical analysis
A SAVOIR
A concrete impact of subsidization on the financial sector:
the creation of a strong agricultural bank
Summary
The foremost consequence of subsidized loans on the financial sector was that they
contributed to creating a strong agricultural bank, thanks to the undeniable commercial
advantage they represented for Crédit Agricole. They provided the latter with a
captive clientele that turned out to be less risky than that of most other economic
sectors. The use of Crédit Agricole as a vector of state aid via the subsidized credit
system, together with the limits of the credit technology applied, led to what was
tantamount to a right to credit. The result was that, up until the 1970s, loans were
provided to farms that could not afford them. To straighten out this situation Crédit
Agricole engaged in-depth modification of its financing methods in the 1980s (Neveu,
2007). Along with the elimination of the monopoly on subsidized credit in 1990,
several major banks began to become interested in agriculture. Crédit Agricole—and
Crédit Mutuel in some regions—nonetheless remained its main banks. Non-subsidized
loans took over from subsidized loans to finance agriculture, especially due to the
drop in bank rates, which reduced the appeal of subsidized loans.
The foremost consequence of subsidized loans on the financial sector was that they
contributed to creating a strong agricultural bank, thanks to the undeniable commercial
advantage they represented for Crédit Agricole. They provided the latter with a captive
clientele that turned out to be less risky than that of most other economic sectors.
However, while state aid and the monopoly on subsidized loan distribution played a
big role in the development of Crédit Agricole, its activity had already started to
change before the end of this monopoly. Indeed, in 1987, the proportion of subsidized
loans it distributed fell to less than 25% of its medium- and long-term loans.
Crédit Agricole strengthened its position as leader in the agricultural finance world
by developing a suitable culture and an ability to grant debt relief. The conventional
bank sector remained wary about smallholder agriculture and refused to adapt its
loan products. Crédit Agricole was able to adapt its loan strategy to the characteristics
of various agricultural zones: in poor agricultural zones it limited its activities to
long-term real estate loans, accompanied by medium-term loans intended for the
acquisition of a minimum start-up capital, whereas in richer zones short-term credit
financed the harvest cycle and medium-term loans gave real support to modern
agriculture.
[ 28 ]
© AFD / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / July 2015
1. Historical analysis
The use of Crédit Agricole as a vector of state aid via the subsidized credit system,
together with the limits of the credit technology applied, led to what was tantamount
to a right to credit. The result was that, up until the 1970s, loans were provided to
farms that could not afford them. To deal with the strong growth in repayment default
following the crisis of 1970-1980, Crédit Agricole developed new procedures and
tools: tools for early identification of risk situations, improvement of loan monitoring
and especially of late repayments, and establishment of pre-litigation services making
it possible to look for solutions before going to court. From the 1980s, it was clearer
in asserting (despite initial discrepancies between theory and practice) refusal of right
to credit, refusal of indebtedness as the norm, and refusal of multi-phase procedure.
In short, it gave up the old political and administrative practices inherited from the
past (Gueslin, 1988).
The end of the monopoly on subsidized credit in 1990 enabled other banks with
networks (mainly the Banque Populaire group, Société Générale, and BNP) to increase
their activities in the agricultural sector. Before that, only Crédit Mutuel had a relatively
large agricultural clientele in the traditional areas where it had branches. Until 1989,
the other major banks were satisfied with financing several large farms that had hardly any access to subsidized loans, in the wine-producing and arboricultural sectors
for example. Being able to distribute subsidized loans enabled them to expand their
field of intervention.
However, progress in this area was slow, difficult, and relatively small. The government
did gradually reduce the volume of subsidized loans granted each year. Many farmers
moreover remained attached to their local Crédit Agricole branch. Further, Crédit
Agricole counter-attacked with a more effective business policy than in the past. The
other banks entering the market, with the exception of Crédit Mutuel, initially
received only the applications that had been refused by Crédit Agricole. This led to
significant losses. The reactivity of the private banks did not turn out to be better
than that of Crédit Agricole, and they had less competence in this area because they
lacked agricultural advisors familiar with the sector. They thus could not highlight any
advantages when entering the market. Fifteen years after the end of the subsidized
loan monopoly, Crédit Agricole was still the main bank for agriculture, with market
share of nearly 70% (instead of 75% to 80%) and 80% of subsidized loans.
July 2015 / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / © AFD
[ 29 ]
1. Historical analysis
A SAVOIR
Figure 2 Market share of subsidized loans to agriculture
among banks between 1990 and 2011
BNP-Par
BPCE
CA
CIC
CL
C Mar
CM
NEF
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
19
1
1
1
90 99 992 993 994 995 996 997 998 999 000 00 002 003 004 005 006 007 008 009 010 01
1
2
1
1
1
1
1
1
1
2
2
1
2
2 2
2
2
2
2
2
2
Source: memorandums and tables provided by the credit and insurance office of the French Ministry of Agriculture.
In 2005, the proportion of subsidized loans in agricultural financing fell to 8% of total
professional agricultural loans, partially because of the drop in rates that made them
less attractive.
Figure 3
Subsidized and non-subsidized loans made
between 2000 and 2005
Non-subsidized loans
Subsidized loans
8,000
7,000
In millions of euros
6,000
5,000
4,000
3,000
2,000
1,000
0
2000
2001
2002
2003
2004
2005
Source: French Ministry of Agriculture memorandum, SG/DAFL/SDFA/N2006-1563 of 26 December 2006.
[ 30 ]
© AFD / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / July 2015
1. Historical analysis
Figure 4 Cost of credit and prescribed rates of subsidized
loans for agriculture (1991-2005)
PPVS
Cost of loan
PSE
PSM JA disadvantaged zone
PSM JA others, disadvantaged zone
MTS disadvantaged zone
MTS CUMA disadvantaged zone
PSM JA plain zone
PSM JA others, plain zone
MTS plain zone
MTS CUMA plain zone
12%
10%
8%
6%
4%
2%
0%
D
ec
.9
1
D
ec
.9
2
D
ec
.9
3
D
ec
.9
4
D
ec
.9
5
D
ec
.9
6
D
ec
.9
7
D
ec
.9
8
D
ec
. -9
9
D
ec
.0
0
D
ec
.0
1
D
ec
.0
2
D
ec
.0
3
D
ec
.0
4
D
ec
.0
5
Source: French Ministry of Agriculture memorandum, SG/DAFL/SDFA/N2006-1563 of 26 December 2006.
1.1.4. The essential role of interest rate subsidies
in the major phase of French agricultural modernization,
in conjunction with other support
The subsidization of interest rates for end beneficiaries is a policy that has been
followed by France from 1928 up to the present. This long-term continuity has been
necessary to enable real in-depth change, ranging from the implementation of changes
in the modes of production of existing farms to support for young farmer start-up,
in conditions that enable modern production. However crucial the subsidization tool
has been in certain periods, it has always been implemented in conjunction with other
actions. This aspect has been decisive in its impact on the development of agriculture:
follow-up and training of farmers, targeted grants, stabilization funds for the sector,
research, and training. This period can now be considered as finished, as the importance of subsidized loans has been considerably reduced in the agricultural aid system.
The latter is now focused on the organization and support of agricultural markets,
established by the European Union (Neveu, 2001).
July 2015 / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / © AFD
[ 31 ]
1. Historical analysis
A SAVOIR
1.2. United States
In less than a century, the United States has shifted from not very developed agriculture
with fragmented plots to agriculture that is extensive and one of the most productive
in the world. This has come about especially thanks to strong support by the government for agriculture, and especially through its help in developing a financial offer
for the sector.
1.2.1. Shift from a largely rural economy to a modern economy
During the 20 th century, the United States shifted from a largely rural economy characterized by a large proportion of the population living from agriculture in rural areas
to a modern economy based on the development of industry and then services.
Table 2
Selected macroeconomic indicators for 1900, 1945, and 2010
1900
Population (in millions)
1945
76 2010
140
310
Percentage of rural population
60%39%19%
GDP (in constant USD billion, 2010)
~500 2,26314,729
Share of agricultural sector in GDP N/A7% 1%
Share of agricultural sector in employment41%
16%
2%
Sources: United States Census Bureau; Fuchs, 2009; Bureau of Economic Analysis;
USDA Economic Research Service (USDA/ERS); Bureau of Labor Statistics; The CIA World Factbook.
From an agriculture of fragmented plots to extensive agriculture
At the start of the 20 th century, American agriculture was not very developed. It was
labor intensive and depended on animal power. It was conducted in rural areas, where
the majority of the population lived. The situation was thus comparable with that
found in some of the countries where AFD is involved. North American agriculture is
characterized by vast arable land and great geographical diversity. These conditions
led to extensive agriculture and to the development of a large range of value chains.
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1. Historical analysis
At the beginning of the last century, most of the country was agriculturally based.
The structure of agriculture then evolved, concentrating in the most favorable
regions. There, agricultural land was exploited on a nearly continual basis. It was this
concentration of farms in agriculturally favorable regions that enabled the shift from
agriculture of fragmented plots to extensive agriculture. The diversity of production
value chains was maintained thanks to the strong concentration of the sector and
to specialization on the farms. The productivity of American agriculture began to
accelerate from the 1960s.
The financing of the agricultural sector relied largely on federal action
At the beginning of the 20th century, the commercial credit supply to the agricultural
sector was limited. Rural banks were at a disadvantage because of their small size and
their isolation. American farmers thus had trouble obtaining access to formal credit
under satisfactory conditions. The problem of access to agricultural real estate loans
by farmers drew increasing attention from the US authorities at that time. This led
to the implementation, from 1916, to federal intervention to support the financing
of the agricultural sector.
The FSA (Farm Service Agency) and the FCS (Farm Credit System) continue to be the
two main components of federal action on agricultural credit markets. They are part
of a set of interventions that structured and supported these markets. The FSA is a
federal agency that distributes concessional or subsidized loans to farmers. As for
the FCS, it is an independent cooperative organization, sponsored by the federal
government and supervised by a dedicated regulatory body, the Farm Credit
Administration. The FCS is not a savings institution, but it offers short-, medium-, and
long-term loans to retail clients of the agricultural sector credit markets. Their loan
conditions are similar to those offered by commercial banks, as the purpose of the
FCS is not to offer loans with subsidized interest rates. In this respect, the activities
of the FCS do not fall within the framework of those presented in this report.
Today, commercial banks take care of about half of the financing of the agricultural
sector, and the FCS cooperative system covers 41%. The share of informal financing
has decreased considerably, and the FSA limits itself to a minority of needs.
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1. Historical analysis
A SAVOIR
1.2.2. Interventions that include interest rate subsidies,
essentially under the sponsorship of the FSA
Of these two main bodies of the federal government’s program for intervention in
the financing of the agricultural sector, only the FSA plays the role of “last-resort
lender.” Its purpose is to provide direct distribution of concessional or subsidized
loans to farmers excluded from commercial and cooperative financing systems.
The interventions, justified by political, economic, and social objectives,
have evolved along with the domestic situation
Summary
The federal government’s interventions in the agricultural sector credit markets
are carried out to meet political, economic, and social objectives. The objectives
and targets of the subsidization programs change according to circumstances,
due to the fact that they are controlled by the political authorities. The choice of
the subsidization tool rather than the grant tool is justified on the one hand by the
opportunity it creates to provide long-term support for the development of farms,
and on the other by the leveraging affect it enables on the loan resources.
The federal government’s interventions on the agricultural sector credit markets are
made to meet political, economic, and social objectives.
On the political level, the objective of food sovereignty is the underlying reasoning
for policies to support the agricultural sector. The close link between agriculture and
a country’s food independence makes the agricultural sector seem a strategic one,
as meeting the food needs of the entire population is a prerequisite for maintaining
social harmony in a country. A second political objective is to maintain family farming
to a certain degree (Dodson and Koenig, 2001).
On the economic level, the federal government’s intervention in the agricultural
sector credit markets was—and continues to be—justified mainly by the shortcomings
of these markets, which are related to information asymmetries, externalities, economic
unbalances, lack of competition, lack of liquidity, and the unfinished nature of markets.
The motivation for federal interventions is the observation that there is a gap in
financing affecting the volume and characteristics of loans and the cost. The volumes
of credit available in rural areas are generally insufficient. The variety and availability
of the credit supply are disconnected from farmers’ needs, and the conditions
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1. Historical analysis
associated with available credit do not correspond to the specificity of this need.
Agricultural credit provided by private sources is too expensive for some farmers,
and the poorest farmers cannot obtain credit at all or obtain insufficient amounts
(Brake, 1975).
The overall objectives regarding agricultural financing are to reduce regional disparities
in terms of interest rates (harmonization), to reduce the average cost of agricultural
credit (interest rates), to provide long-and medium-term credit (duration) and to adapt
credit availability to the periodic variations in demand (seasonality). The influence of
each of these objectives varies according to the context and to government policy,
as described in the chronology on the following pages.
Furthermore, in relation with food sovereignty, one of the objectives of support for
agricultural financing is to reduce food expenditures per person, so as to contribute
to economic growth. Indeed, when the share of food expenditures in the household
budget decreases, people are able to spend their money on other types of goods,
thereby favoring economic growth.
On the social level, in certain cases the Office of Management and Budget indicates
that federal interventions in agricultural credit markets can be used to influence the
allocation of resources to help the disadvantaged segments of the farming population.
The original aim was to provide assistance to victims of disasters, and then to the
poorest. Today, the main objective is to help ethnic minorities, women, and young
people.
Contrary to the FCS cooperative system, whose operating mode allows for decisions
to take the opinion of the beneficiaries directly into account, the successive federal
programs of interest rate subsidies for the agricultural sector have been decided by
the government. There are no specific procedures to take into account the opinion
of beneficiaries, and influence by farmers on the programs can be made only very
indirectly, via Congress. This difference in mode of operation makes the objectives
of subsidization programs much less adaptable to the context than those of the cooperative system, and it is also the reason for more frequent amendments over time.
The first subsidized credit program, launched in 1918, was called “Emergency crop
and seed loans.” Its main purpose was to provide emergency relief to farmers hit by
natural or climatic disasters, so that they had enough resources to pay for the inputs
they required and for the material losses they suffered.
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1. Historical analysis
A SAVOIR
The program’s motivations changed from 1932, during the Great Depression, and
became more welfare-oriented. It was followed by successive institutions over a brief
period: the Rural Rehabilitation Corporation in 1933, the Resettlement Administration
in 1935, and the Farm Security Administration in 1938.
The subsidization program then sought to support families whose farms were suffering
financial troubles. There was a dual objective to this: to keep these families on their
farms and to reduce their needs for direct welfare support. It is also during this period
that measures for financial supervision to accompany the loans began. The education
provided to the beneficiaries thanks to the supervision is an argument that even today
is used to justify the program compared to other forms of grants.
1946 saw the creation of the Farmers’ Home Administration (FmHA), which was
replaced in 1994 by the FSA. With the FmHA, the objectives of the subsidization
program changed again, as they became closer to those of economic development.
The program was refocused to target farmers deprived of access to credit but for
whom the possibility of eventual access to commercial credit could be considered.
During the 1970s, market interest rates were high, and there was a turnaround
once again. Congress decided to use subsidized loans for the agricultural sector as
an instrument of massive aid to farmers in financial trouble, in order to help them
deal with their weak incomes and difficult financial situations. This aid-type objective
continued in the 1980s, faced with the agricultural sector crisis in the early years
of that decade.
It was only in the beginning of the 1990s that, in view of the enormous public spending
associated with this program, the government decided to change its form of intervention in order to reduce the costs. Direct loans were then refocused on the most
disadvantaged segments of the farming population.
Today, the arguments made to justify the maintenance of the program take up the
points evoked in the past. First of all, the objective of social equity, seeking resource
redistribution to disadvantaged segments (currently ethnic minorities, women, and
young people); next, the benefits of the education provided to the beneficiaries
thanks to the close supervision of the loans, which would be less likely with a direct
grant program; finally the greater leverage associated with interest rate subsidies,
compared to a direct grant program, and consequently the insufficiency of direct
grant amounts equivalent to the cost of the subsidization.
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1. Historical analysis
The subsidized credits finance ownership, operating , and emergencies,
from federal borrowing and budget resources and from private financial
sector resources
Summary
The federal administration, via the FSA, has distributed three types of subsidized
credits since 1946 (ownership, operating , and emergencies), which are either distributed directly or, since 1974, guaranteed (except for emergency loans). The FSA’s
resources are managed via the Agricultural Credit Insurance Fund, which is fueled
by credit repayment and interests, public treasury borrowing , and funding passed
annually by Congress. Resources financing guaranteed loans are provided by the
private sector.
The FSA replaced the FmHA in 1994, taking over all of its prerogatives. The FmHA,
founded in 1946, had itself been preceded by several other institutions, and its scope
of intervention has markedly evolved over time.
From 1918 up to the Great Depression, the subsidized loan program provided only
emergency loans (“Emergency crop and seed loans”) to help farmers deal with disasters. From the 1930s, the government began to establish loans to cover operating
expenses in addition to the emergency loans. Then, from 1946 and the creation of
the FmHA, the subsidized loan supply was structured into three areas: farm ownership
(FO), operating loans (OL), and Emergency Disaster (EM). These loans cover short-,
medium-, and long-term needs. The structure is still in effect today.
Finally, as part of the government effort to reduce the cost of farmer assistance, a
program for guaranteeing loans distributed by other players was launched in 1974.
However, the volumes of guaranteed loans did not reach a significant level before
1984. The loans are 90% or 95% guaranteed.
Today, the FSA still offers short-, medium-, and long-term loans for ownership, operating
costs, and emergencies, according to its structure established in 1946. The FO or OL
loans can be provided either directly by the FSA, or by a private body (commercial
banks, FCS, etc.) with the FSA guarantee.
The FSA loan supply is not exclusively intended for agriculture; it includes the needs
of all rural inhabitants. For example, the FSA has proposed real estate loans for rural
housing since 1949, as well as loans for rural communities, introduced in 1954. The scope
of such loans has gradually extended since then. These loans will not be covered by
the present report, as they do not directly concern the agricultural sector.
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1. Historical analysis
A SAVOIR
Funding for the FSA comes from various sources. The Agricultural Credit Insurance
Fund (ACIF) is a revolving credit fund created in 1946. It enables the FSA to borrow
directly from the US Treasury and thereby benefit from the low cost of federal
resources, compared to market resources, to finance its loans. Congress votes on the
credits, by program, within the framework of determining the budget of the United
States Department of Agriculture (USDA). These credits cover losses and interest rate
subsidization. A budget is then allocated by the FSA to its regional offices, i.e. state
by state. In the event of a significant gap between demand and the funds allocated
to each state, reallocations or centralization of resources are possible during the year.
As for the resources to finance guaranteed loans, these are provided by commercial
banks and the cooperatives that offer these loans. In the 1980s, some banks
denounced the lack of transparency in how the FSA guarantee program is taken
into account in the federal budget: as the guaranteed loans do not give rise to an
immediate financial flow, these were not inscribed in the budget (Penner, 1983). This
situation came to an end with a reform passed in 1990, after which the corresponding
amounts were taken into account as soon as the loan guarantees were granted
(Dodson and Koenig, 2006).
The credit targets the poorest, with different conditions,
and includes systematic support for the beneficiaries
Summary
The FSA targets the most disadvantaged segments of the farmer population. The
level of interest rates of loans granted directly by the FSA is indexed on the cost of
the administration’s resources, with the addition of a small margin. Special interest
rates benefiting from extra subsidization, intended for target populations, were
moreover introduced in the 1970s and extended to guaranteed loans in the 1980s.
The loan periods make it possible to cover short-, medium-, and long-term needs.
To avoid aberrations, the period for participation in the program has been limited in
time since 1992, but these limits are not systematically applied. One of the main
specificities of the FSA loan programs is close supervision and training associated
with the granting of credits. The objective is to help borrowers acquire the capacities
they need, including in management, in order to obtain commercial credit.
The main target of the subsidized loan programs are young farmers and socially
disadvantaged groups (ethnic minorities and women). Young people are a very privileged target of the subsidized loan program, insofar as a large proportion of grants
are reserved for them during the first 11 months of the year, every year (70% of farm
[ 38 ]
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1. Historical analysis
ownership loans and 35% of operating loans) (Dodson and Koenig, ibid). A portion
of the loans, which is variable depending on the county, is also reserved for socially
disadvantaged groups and women.
Obtaining an FSA guarantee is subject to having been refused all loan applications
to commercial and cooperative lenders, whereas obtaining a loan directly granted
by the FSA requires that these same conditions be met, plus refusal for the FSA
guarantee. For directly granted loans, the borrowers must also undertake to pay back
their loan to the private or cooperative sector if their financial situation improves
during the loan period.
The guarantee ceilings are low enough to ensure that targeting is consistent with the
program’s objectives. The ceiling for loans directly granted is lower than the ceiling
for guaranteed loans. Beneficiary eligibility is assessed locally, case by case, and in
some cases can be reviewed annually.
Historically, the interest rates of loans offered by the FSA are based on the cost of
borrowing for the federal government. The FSA’s “standard” interest rates are still
determined that way today. For example, in 1998, the interest rates were based on
the average rates of US Treasury bonds plus 1%, for a 5-year term for operating loans
and 25 years for ownership loans.
The interest rates of loans guaranteed by the FSA are commercially negotiated by
the customer with the lending intermediary (commercial bank or FCS). However,
they are subject to conditions as part of the agreement with the FSA: they must be
similar to the rates of loans for comparable purposes granted without guarantees.
In the 1970s, macroeconomic conditions led the government to establish a preferential
interest rate for certain farmer populations in difficulty. It benefited from an additional
interest rate subsidy. This alternative was first introduced for direct loans, and then
extended to guaranteed loans in the 1980s. For example, in the 1990s, the special rate
was equivalent to half the average rate for 5-year US Treasury bonds, with a minimal
5% threshold under which the rate could not descend. While the level of these subsidized rates has sometimes been inferior to inflation, in periods where the market
interest rates are low, the 5% threshold creates situations in which the special rates
may be superior to the standard rates. This is especially the case for operating loans
since the 2000s (cf. Figure 5).
Some guaranteed loans can also benefit from a so-called assisted special interest rate.
This rate is subject to terms that are different from those concerning the special rates
July 2015 / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / © AFD
[ 39 ]
1. Historical analysis
A SAVOIR
for direct loans. For example, in the 1990s, the negotiated interest rate dropped four
points, without a minimal threshold.
The special interest rates concern three specific categories of borrowers. The first is
borrowers who cannot or can no longer pay back their debt at the standard rate.
The purpose of the special level is to provide temporary assistance, and beneficiary eligibility is reviewed each year: if the financial situation of the borrower
improves, the standard rate is applied anew. Next are the borrowers of emergency
loans, which have the lowest interest rates. These are set for the entire life of the loan,
independently of the borrower’s ability to repay loans at the standard rate. For
example, in 1998, the interest rate for emergency loans was 3.75%. This is lower than
the minimal threshold under which the special interest rates could not fall (5%). The
third category is that of young farmers, who can systematically benefit from special
interest rates, even if they have the capacity to pay back a loan at standard interest
rates. However, they must be able to supply capital equivalent to 10% of the amount
of the investment. The special interest rate applies until the end of the loan period.
For example, in 1998, this interest rate was 4% for the purchase of a farm.
Figure 5 shows an example of the difference between commercial and FSA rates
between 1977 and 1997, for loans covering operating expenses. For the standard FSA
rates, this difference is around 2 to 4% (with occasional overlaps). The difference is
much greater for the special rates, with a minimum of 4% and spikes occasionally
reaching up to 10%.
[ 40 ]
© AFD / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / July 2015
1. Historical analysis
Figure 5
Trend in commercial bank and FSA interest rates
for operating loans between 1977 and 2004
Un-weighted average quarterly interest rate
on new loans (percentage points)
FSA special rates
Commercial banks
Standard FSA rate
25
20
15
10
5
0
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
Source: Dodson and Koenig, 2006.
Farm ownership loans have maturities of up to 40 years for direct loans and generally
30 years or less for guaranteed loans. Operating loans vary from 1 to 7 years if they are
directly granted by the FSA; under special circumstances they can reach maturities
of 15 years. The guarantees for operating loans are available for up to five years
(Dodson and Koenig , 2006). The maturities for emergency loans are similar and
depend on the need covered (operating cost or investment).
The purpose of the limits in period of participation in the program is to encourage
beneficiaries to turn to the financial sector to finance their activity. For example, in
2006, obtaining new loans was possible for 10 years after having obtained an initial
farm ownership loan and for six years after having obtained an initial operating loan.
These limits were suspended many times by Congress because of the difficulties a
significant number of farmers experienced in respecting these limits.
From the early 1930s, the administration’s subsidized credit program included a
component for supervision of the operation of beneficiary farms. This supervision
was then extended in 1935 in order to take into account overall household economy
in support for financial management.
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[ 41 ]
1. Historical analysis
A SAVOIR
In practice, the FSA has agencies in most counties, and the local FSA staff help the
borrowers to develop long-term financial plans. The staff visit the farms several times
per year, in order to give advice on the credit needs and to help in planning. At the
end of the year, they work closely with the farmer-borrowers to help them establish
their balance sheet and to adjust the plans for the following year according to how
their situation evolves.
The close supervision is an integral part of the lifecycle of direct loans granted by the
FSA. The supervision, which is provided by FSA agents, is thus free of charge, and
mandatory in virtue of federal regulations (Government Printing Office, 2012). For
the guaranteed loans, the regulation also provides for annual supervision visits, but
these are made by the commercial and cooperative banks that distribute these loans.
The specific object of supervision in the direct loan program is to train the beneficiaries in financial management and in planning their activities, so that they can then
have access to the commercial credit supply.
Since 1990, the training aspect of this system has been formalized in the farm bill.
The loan beneficiaries are obliged to undergo two training sessions, in financial
management and in production management. The beneficiaries of direct loans are
now obliged to undergo these training sessions and receive certificates of validation,
at their expense, in the two years following the granting of a loan. The cost of training
sessions can be included in the amount of the subsidized loan. The training sessions
are taught by organizations approved beforehand by the FSA. Out of concern to
facilitate access to the system, as well as to limit time spent away from the farm, some
training organizations now propose programs online. [ 2 ]
The scope of interest rate subsidy programs has greatly increased
since the crisis period of the 1980s
Summary
The portfolio of FSA loans to the agricultural sector experienced considerable growth
at the end of the 1970s and the beginning of the 1980s, along with significant default
rates due to troubles in the agricultural sector. This growth came within the framework
of overall increase in volumes of agricultural credit. The subsidized credit programs
corresponded to a small part of the agricultural sector debt, except during crisis
[2] Example of financial management training via the Internet, at a price of USD 100, offered by the service provider
Mi Casa Enterprises: http://www.fsa-micasa.com/Section2/lets_begin.html
[ 42 ]
© AFD / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / July 2015
1. Historical analysis
periods. The scope of the special interest program varied from year to year, depending
on several internal or external factors. The share of volumes granted within the framework of the guarantee program grew from the end of the 1980s and quickly became
dominant.
During the 1970s, the American agricultural sector developed its export activities
and thus its dependence on international demand. As a consequence, a sudden drop
in this demand at the beginning of the 1980s led to serious difficulties for this already
very indebted sector.
Congress thus used the subsidized loan program as an instrument for its social
assistance policy, by passing measures that sought to force the FSA to grant loans to
farmers who were already beneficiaries, even if they were already defaulting in their
payments. In 1984, a court order prohibited the FSA from initiating foreclosures to
ensure the guarantees it had made on direct loans with delinquent repayments
(Dodson and Koenig, 2006). Following this, the FSA portfolio was difficult to control,
with annual grant volumes increasing eightfold between the beginning and the end
of the decade.
Figure 6 Trend in outstanding debt in the agricultural sector at the FSA
and its rate of annual growth between 1960 and 2010
25
50%
20
40%
15
30%
10
20%
5
10%
0
0
-5
- 10%
-10
-20%
0
196
2
196
4
196
6
196
8
197
0
197
2
197
4
197
6
197
8
198
0
198
2
198
4
198
6
198
8
199
0
199
2
199
4
199
6
199
8
200
0
200
2
200
4
200
6
200
8
201
0
60%
Growth in outstanding debt
Growth in outstanding debt
196
Outstanding debt in the agricultural sector
at the FSA (in USD billion)
Outstanding agricultural sector debt at the FSA
30
Source: USDA, Farm business balance sheet.
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[ 43 ]
1. Historical analysis
A SAVOIR
The FSA’s status as “lender of last resort,” without any other activities, gives it a
relatively limited market share of agricultural loans. This market share remained at
about 5% in the 1960s and 1970s. Since the beginning of the 2000s, it has been less
than 4%. But during the crisis period, which began in the late 1970s, it increased to
nearly 18%. Under these circumstances, the FSA did indeed take over from the
private sector in order to guarantee credit access to farmers already in financial
difficulties, and to ensure—thanks to these subsidized rates—that debt service did
not weigh too heavily on the business results of farms.
Figure 7
Trend in the share of FSA programs in outstanding debt
of the US agricultural sector between 1960 and 2010
Share of the FSA in agricultural sector debt
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20
Note: Most of the ERS references correspond to freely accessible data sheets on the USDA
site: http://www.ers.usda.gov/data-products.aspx
The data used are those that were available during the preparation of the report, in 2012.
Sources: ERS/USDA, Farm business balance sheets, 1960-2010.
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© AFD / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / July 2015
1. Historical analysis
Each year, the FSA is obliged to grant at least 25% of its direct loans based on the
special rate. However, there are years when the percentage of special rate beneficiaries
can be much higher (e.g. 60% of direct loans and 14% of guarantees in 1997). The
proportion of loans at a special rate varies according to several factors. These include
the available resources at the FSA, the level of the standard interest rates, the conditions of the program, and the financial health of the beneficiaries. The use of special
rates spiked in the middle of the agricultural sector crisis in 1981, when the market
interest rates and budgets granted were at their highest level and the government
sought to help farmers in financial difficulty via this program.
The guarantee program introduced in 1974 had trouble taking off in the first years
because of too stringent conditions, especially regarding the maximum interest rate
authorized for private partners (capped at 5%). The relaxing of this rule made it
possible for volumes to grow from 1986, as illustrated in Figure 8.
Figure 8 Trend in annual volumes of direct loans and guarantees
granted (stacked), between 1974 and 2004
Direct programs
Guarantee programs
18
In constant 2004 USD billion
16
14
12
10
8
6
4
2
04
20
02
20
98
00
20
19
96
19
92
94
19
19
90
19
86
88
19
19
84
19
80
82
19
19
78
19
76
19
19
74
0
Source: Dodson and Koenig, 2006.
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[ 45 ]
1. Historical analysis
A SAVOIR
The USDA indicates, in a publication by the FSA’s economic research service, that the
guarantees are generally considered suitable for offsetting the deficiencies of the
market, whereas the direct loans are preferable in situations in which the objective
is to redistribute resources to disadvantaged groups.
The cost of subsidizing the interest rates results mainly
from administrative costs and losses
Summary
When analyzing the cost of subsidization, we must differentiate between the loans
at so-called standard rates of interest (the amount of which is based on the cost of
the federal resource with the addition of a low margin) and the special interest rates
(which are explicitly subsidized). Administrative costs represent the main budget item
of the FSA’s interest rate subsidy programs. These are the infrastructure and human
resources costs needed to ensure service and monitoring at the local level, and they
are mainly linked to direct loans. Loans granted under special conditions are the main
component of the federal grant given. Significant losses are attributed to the direct
loan programs and, to a lesser degree, to the guarantee programs. This set of factors
leads to a higher rate of subsidies for direct loans than for guaranteed loans, except
when the latter benefit from special interest rates. Nevertheless, the share of the
cost of interest rate subsidy programs in the total amount of US agricultural sector
subsidies remains low, especially in comparison to programs for price support and
support for farmer income.
The cost of FSA agricultural credit programs is made up of the cost of the federal
financial resource, administrative costs, the cost of the interest rate subsidies, and the
cost of losses.
The loans granted at the standard interest rate, the amount of which is based on the
cost of the federal resource in addition to a low margin, could be considered as
concessional loans, if the margin added were to enable coverage of all the other costs
(see below). On the other hand, the loans granted at special interest rates are explicitly
subsidized.
Administrative costs represent 60% of the total cost of the FSA’s loan programs.
Between 1993 and 2004, a budget of USD 3.2 billion was allocated to the FSA for its
operating costs, out of a total budget of USD 5.3 billion, subsidies included (Dodson
and Koenig, 2006). These costs are mostly posted to the direct loan program, given
that it is the private partners who finance, grant, distribute, and supervise the
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1. Historical analysis
guaranteed loans. The guarantees thus require fewer administrative resources; the
administrative cost per dollar loaned as part of the direct distribution program
increased as the volumes of direct loans decreased in favor of guarantees. The
margin on the standard interest rates does not make it possible to cover all the administrative costs (and the losses); this interest rate is thus implicitly subsidized.
The following figure (Figure 9) represents an estimation of the administrative cost
of a USD 100 loan, for direct loans and guaranteed loans respectively. This figure
thus shows that between 2000 and 2004, the FSA spent USD 0.76 per USD 100
guaranteed, compared to USD 2.52 per USD 100 directly loaned.
Trend of operating expenditure ratios for direct loans
and guaranteed loans between 2000 and 2004
Figure 9
Direct loans
Guaranteed loans
Administrative cost in proportion to the
outstanding debt of the loan
3.0%
2.5%
2.0%
2.62 %
2.53 %
2.68 %
2.74 %
2.52 %
2.04 %
1.5%
1.0%
0.5%
0.52 %
0.65 %
0.78 %
0.88 %
0.98 %
0.76 %
0.0%
2000
2001
2002
2003
2004
Average
Source: data estimated by the USDA, 2006.
July 2015 / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / © AFD
[ 47 ]
1. Historical analysis
A SAVOIR
The cost of the interest rate subsidy is the difference between the standard rate and
the special rate, for the direct or guaranteed loans.
The cost of losses on loans is an important component of the total cost. The crisis of
the 1980s led to rapid increase in direct loan losses: from USD 7 million to 113 million
per year from 1981 to 1985 (Harman, 1989). These figures marked the start of a period
of significant losses: in 2006 the USDA recorded accumulated losses reaching USD
23 billion between 1985 and 2005, representing an average of USD 115 million per
year, just for the direct loan program (Dodson and Koenig, ibid.).
Because the guarantee portfolio started later, from the middle of the 1980s, the losses
are observed with a time lag compared to the direct loan portfolio. But, as in the case
of the direct loan portfolio, the guarantee portfolio also led to significant losses: in
1990, the FSA estimated the potential losses for the following years at 23% of the
portfolio, or USD 1.2 billion, with effective losses reaching USD 300 million over the
previous years (Harman, 1992).
All these factors led to a subsidy rate higher for the direct loans than for the guaranteed
loans, except when the latter benefited from special interest rates. The federal government calculates the subsidy rate as the relationship between a cost and the amount
of a loan. For example, for a 1% interest rate, it will be possible to loan USD 100 for
each dollar spent, whereas for a subsidy rate of 5%, it will only be possible to lend
USD 20 for each dollar spent. Figure 10 presents the subsidy rates estimated by the
government based on data available in the federal budget in 2006.
• Because of fewer loan losses, lower interest rate subsidy costs, and fees billed
to the lending institutions for the guarantee, the overall subsidy rate of guaranteed loans (3.6%, in light green in the figure) is clearly lower than the subsidy
rate of direct loans (11.7%, in black in the figure). One of the differences, in terms
of interest rate subsidies, is that only the guaranteed operating loans can offer
subsidized interest rates, whereas all the types of direct loans can be associated
with special rates, if justified by the borrower’s situation.
• On the other hand, guaranteed operating loans benefiting from a special interest
rate have a higher subsidy rate than direct loans for comparable purposes. This
difference is mainly justified by higher amounts for the guaranteed loans than
for the direct loans and, to a lesser degree, by different interest rate subsidy
conditions.
[ 48 ]
© AFD / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / July 2015
1. Historical analysis
• The subsidy rate for emergency loans (16%, in olive green in the figure) is the
highest, as they provide higher subsidized interest rates and are coupled with
a higher default rate than for the other programs.
Figure 10 Estimation of the average annual subsidy rates
of the various FSA programs between 1992 and 2004
20%
16.00%
15%
12.60%
10%
11.70%
11.70%
8.40%
5%
3.60%
2.90%
ans
ns
ran
gua
tal
To
To
tal
dir
tee
ect
d lo
loa
ans
y lo
enc
erg
ner
Gu
ara
nte
Ow
arm
–F
ns
loa
ect
Dir
Em
p
shi
ner
Ow
arm
–F
ns
loa
ed
nte
Gu
ara
shi
p
ed
sta loans
nda –
rd Op
rat era
e
tin
Gu
g–
ara
n
t
e
wit ed
h s lo
pec ans
ial – O
int
ere pera
st r ting
ate –
Dir
ect
loa
ns
–O
per
atin
g
0.40 %
0%
Source: Dodson and Koenig (2006).
July 2015 / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / © AFD
[ 49 ]
1. Historical analysis
A SAVOIR
The proportion of the cost of interest rate subsidy programs within the total amount
of subsidies to the US agricultural sector remains low, especially compared to programs
to support prices and farm income. The Organisation for Economic Co-operation
and Development (OECD) estimated that, between 1986 and 2009, the amount of
subsidies granted to the US agricultural sector varied between USD 10 billion and 55
billion per year (OECD, 2001), whereas in comparison, between 1992 and 2004, the
cost of the FSA direct and guaranteed credit programs hovered between USD 300
million and 450 million per year (Dodson and Koenig, 2006). The relationship between
the subsidies granted to the FSA and total subsidies varies: a minimum of 0.8% in
1999 and a maximum of 4% in 1995. In comparison, the program to support prices and
farm income managed by the Commodity Credit Corporation (CCC) represented
more than half of agricultural subsidies in 1995 and more than one third in 1999 (Dodson
and Koenig, 2001).
1.2.3. Impacts on the agricultural sector and the financial sector
The agricultural and financial sectors clearly made headway over the period studied,
but this progress resulted more from different types of support rather than a particular
intervention. Therefore, in view of the large number and diversity of the factors in
play, it is not deemed wise to estimate a breakdown of the impact among the various
factors.
Regional studies indicate positive impact on agriculture from subsidized loans
and supervision and training systems
Summary
During the century studied, the value added of the US agricultural sector made much
headway, but it is difficult to quantify to what degree the FSA contributed to this
growth. While the impact of subsidized loan programs is difficult to measure on a
national scale, their usefulness is more visible on a regional scale. There has been little
study of the impact of close supervision and training associated with the granting of
direct loans by the FSA, but the rare studies that deal with this issue are in agreement
regarding the positive impact of the training system.
[ 50 ]
© AFD / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / July 2015
1. Historical analysis
Figure 11 Comparative trends in the value of production
and the value added of the agricultural sector in the
United States between 1910 and 2010, and trends in the
debt of the agricultural sector and the debt of this sector
to the FSA between 1960 and 2010
Value of agricultural sector production
Agricultural sector debt, including FSA
Net value added of the agricultural sector
Agricultural sector’s debt to the FSA (excluding guarantees)
400
350
USD billion
300
250
200
150
100
50
0
10 14 18 22 26 30 34 38 42 46 50 54 58 62 66 70 74 78 82 86 90 94 98 02 06 10
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20
Sources: ERS/USDA (1984 to 2012; 2006).
During the century studied, the value added of the US agricultural sector made much
headway, but it is difficult to quantify to what degree the FSA contributed to this
growth. The debt of the sector increased along with growth in production and the
value added of the agricultural sector, and the FSA clearly contributed to this increase
during the financial crisis of the 1980s. However, many other factors helped make
this value added rise from USD 5 billion to 130 billion in 100 years. These factors
include the modernization of production units during the first part of the century,
significant growth in international exports by the agricultural sector from the 1970s,
globalization of international agricultural markets from the 1990s, etc.
It is difficult to draw conclusions on a national scale on the impact of FSA subsidized
loan programs, given that the scope of the program remains limited in relation to the
total volume of agricultural sector debt. An exception is the period of financial crisis
of the 1980s, for which we can observe a spike to nearly 20% of the agricultural
sector’s outstanding debt.
July 2015 / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / © AFD
[ 51 ]
1. Historical analysis
A SAVOIR
However, there are big gaps by agricultural region, state, and county (USDA, 2000,
quoted by Dodson and Koenig , 2001). In some regions, or for certain borrower
categories, the federal government covers half the agricultural sector credit need
(Dodson and Koenig, 2001). For example, the counties the most dependent on FSA
programs are located in the Northeast, the Great Plains, and the Mississippi Delta
(Maine, Louisiana, Mississippi: nearly 50%; Arkansas, North and South Dakota, Vermont,
Georgia: between 20 and 30% (ERS/USDA, 1983 to 2012)). Analysis by region could
thus confirm the impact of subsidized credit on the agricultural sector, but few studies
have dealt with these regional gaps, and it is difficult to draw conclusions based on
available documents.
Nonetheless, it is interesting to note from Map 1 below that the increase in productivity of the agricultural sector, as measured by the USDA, was higher than the national
average in the states that enjoyed significant financing by the FSA. For example,
between 1960 and 2004, average annual growth in productivity was more than 1.90%
in Louisiana, Mississippi, and Maine, compared to a national average of 1.76%.
Map
1
Trend in productivity by state between 1960 and 2004,
as an average annual percentage of change
1.9 - 2.6%
1.7 - 1.9%
1.5 - 1.7%
0.6 - 1.4%
Source: ERS/USDA, 1983 to 2012.
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1. Historical analysis
No impact study on the FSA training and supervision system has been carried out
on a national scale. However, the results gleaned from several available studies on a
state scale are very encouraging. According to an article dealing with an impact study
of the training in Pennsylvania (Ballet et al., 2010), the results obtained show that a
significant share of producers having received training consider that, at the end of
the training, their knowledge, confidence, and attitude in terms of their farm’s financial
management have improved. They also observe that their practices of farm management have improved and, finally, that their farm’s assets, net value, and profitability
have increased.
A study (Parsons et al., 2000) concerning Delaware, Maryland, New York, and
Pennsylvania drew the same conclusions. Furthermore, the Ballet et al. study (2010)
points out that the farmers are not always aware of the need of training before
having followed the program. The study thus recommends, in view of the significant
results observed, that the training program be promoted among other lenders to the
agricultural sector, so that the farmer customers of these financial intermediaries
can also take advantage of heightened knowledge in financial management for
their farm.
The FSA programs have played an important role in supporting and rounding out
the US financial sector in order to meet the financial needs of agriculture
Summary
The share of the private commercial sector (excluding cooperatives) in the financing
of agriculture developed parallel to state interventions. The FSA programs in particular
played an important role in ensuring that the sector continued to be financed during
the financial crisis of the 1980s. Despite the growth of the private sector delivering
services to the agricultural sector, the rural markets still lack competition, meaning
that there is still a role for federal interventions.
The program to distribute subsidized direct loans reaches socially disadvantaged
groups better than the program of commercial loan guarantees. As a result, the quality
of the direct portfolio is markedly inferior to that of the guarantee portfolio. The loans
distributed by the FSA have experienced considerable losses, but the link between
losses and subsidization is debatable. The losses are fully covered by the federal government but heavily criticized by some, including within the federal administration.
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[ 53 ]
1. Historical analysis
A SAVOIR
Between 1960 and 2010, the outstanding debt of the agricultural sector increased
more than tenfold, from USD 22 billion to 247 billion. During this period, the share
of the private sector (commercial banks and life insurance companies, but excluding
cooperatives) grew 40% to nearly 50% of the market, despite the major crisis that
brought the share of this sector down to 30% in the early 1980s.
As for the share of the cooperative private sector (FCS), it increased from 17% to
40%, with a slight squeeze from the late 1980s to the late 1990s. It is also doing this
period that the share of the informal sector dropped from 40% in 1960 to 7% in
2010. The federal interventions make it possible to round out the market supply in
crisis periods. This is especially the case of the FSA, whose market share grew from
several percentage points to nearly 20% at the end of the 1980s, and then under
10% in the 2000s. It would thus seem that the targeted subsidization of agricultural
sector loans acted more as a complement than a substitute to the commercial supply
(cf. Figure 12).
Figure 12 Trend of the agricultural sector outstanding debt
by type of lender between 1960 and 2010
FCS
FSA
Informal sector
Commercial banks
Life insurance companies
Agricultural sector outstanding debt
(in USD billion)
300
250
200
150
100
50
200
0
200
2
200
4
200
6
200
8
201
0
197
2
197
4
197
6
197
8
198
0
198
2
198
4
198
6
198
8
199
0
199
2
199
4
199
6
199
8
8
197
0
6
196
196
2
4
196
196
196
0
0
Source: USDA, Farm Business Balance Sheets, 1983 to 2012.
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1. Historical analysis
The private sector developed properly, but the rural markets had trouble becoming
competitive. Despite positive trends in the private sector with regard to the agricultural sector’s outstanding debt, the Department of Justice considered, as late as 1993,
that 93% of rural financial markets were noncompetitive (cf. Figure 13).
Figure 13 Competitive status of rural financial markets
as of 30 June 1993
Competitive
Other noncompetitive
Noncompetitive (3-5 banks)
Noncompetitive (1-2 banks)
Source: ERS/USDA, 1996.
The USDA checks to see that the directly distributed subsidized credit makes it
possible to better finance disadvantaged social groups (women, beginner farmers,
and ethnic minorities). Collected data indicates that the direct loan program reaches
this target better, with only 23% of direct loans for farm ownership going to nontargeted groups, versus 71% for guaranteed loans, and 50% versus 68% respectively for
operating loans (Dodson and Koenig, 2006).
The guaranteed loans show better performance than the direct loans, with—as Figure
14 shows—a portfolio-at-risk (PAR) ratio at 30 days that is systematically and significantly higher for direct loans. This is consistent with the fact that direct loans are
granted to farmers at risk and to those who cannot find private financing.
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[ 55 ]
1. Historical analysis
A SAVOIR
Figure 14 Average PAR ratio at 30 days, at the end of 2004,
for guaranteed loans, direct loans, and emergency
loans granted in 2000
Guaranteed
Direct
Direct/Emergency
18
16
14.7
14
12.5
14.5
4,4
13.0
12
10
8
6.2
6
4.4
4.4
4
3.9
4.6
2
0
All borrowers
All loans
Real estate loans
Operating or emergency loans
Source: USDA, Farm Loan Program Database.
As seen previously, in crisis periods losses are one of the major cost items of the FSA
programs. The role of lender of last resort, which was forced on the FSA during the
agricultural sector’s financial crisis of the 1980s, had serious consequences in terms
of losses recorded at the end of the 1980s and beginning of the 1990s. Over several
consecutive years, from 1989 to 1993, the loss rate of direct loans compared to outstanding debt exceeded 10% and reached up to 13.5% in 1990. However, it should be
noted that in the years preceding this crisis (at the end of the 1970s) the PAR at 15
days was positioned at less than 3% of outstanding debt (around 12% of the number
of loans) and the losses at less than 0.5% of outstanding debt. This demonstrates the
FSA’s real capacity to recover loan losses.
The problem of losses seems linked more to policies passed by Congress during the
1970s and 1980s (when the FSA was used as an instrument of welfare aid) than to the
subsidization of interest rates. The General Accounting Office (GAO) nevertheless
condemned the extent of FSA losses in a report submitted to Congress in April 1992,
and several studies question the relevance of continuing the direct loan program due
to its cost.
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1. Historical analysis
1.2.4. Conclusion: the subsidized loan system has acted
as a security net, but cost has been high
The subsidization programs act as a last-resort solution targeting the least well-off
farmers or those suffering a financial crisis. However, they also maintain their objective
of helping farms reach sufficient profitability after several years, so that they can turn
to the private sector for financing. This solution is thus systematically accompanied
by close supervision, which enables the beneficiaries to develop their management
skills.
After nearly a century of existence, the interest rate subsidy programs represent, in
terms of volumes loaned, a small share of federal action to support the financing of
the agricultural sector (except during crisis periods), and growing attention is being
paid to whether the associated costs are justified. While the system does reach the
target public, the required infrastructure is increasingly expensive for the government,
due to the decrease in volumes loaned.
In view of the small share of the agricultural sector credit market served by the FSA,
it is difficult to draw conclusions regarding the extent of the subsidized loan program’s
contribution to the growth of the US agricultural sector at the national level. However,
the information available at the regional level shows the influence of these programs
in less advantaged regions.
Increase in the share of subsidized loans in the agricultural sector’s debt during crisis
periods shows the “countercyclical” nature of these interventions. Here we can see
the state role in supporting activity at those times when the private sector withdraws
due to increased risk. July 2015 / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / © AFD
[ 57 ]
1. Historical analysis
A SAVOIR
1.3. Brazil
The distribution of loans with subsidized interest rates was and remains an important
instrument of Brazil’s agricultural support policy. The case of Brazil is interesting
because it shows how the private banking sector was largely excluded from agricultural financing for many years, but without this situation being due to interest rate
subsidy policy.
1.3.1. Agriculture, a strategic sector for Brazilian growth
The 20 th century saw the transformation of Brazil from a country with an economy
based on cash crops for export to the 6 th largest global economic power. This shift
took place after a long period of government intervention in the economy, accompanied by major macroeconomic unbalances.
The origins of Brazilian agriculture go back to the colonial period, when cash crops
were grown on large plantations. This export-oriented agriculture spread throughout
Brazil in several waves of expansion, and it provided the country with an entrepreneurial class. In 1950, the country was still largely rural. Today, despite being heavily
urbanized and industrialized, it is one of the biggest exporters of agricultural products
in the world. Together, the agricultural and agri-food sectors in Brazil make up 97%
of the country’s trade surplus.
Table
3 Selection of indicators, 1900-2010
1900
Population (in millions)
Percentage of rural population
1950
2010
17.4 51.9190.7
68.9% (1940)
63.8%
16.52% (2007)
GDP (in constant USD billion, 2000)
5.0
42.6
549.6 (2000)
Share of agricultural sector in GDP
38.2% (1920)
25.1 %
5.3%
No data available
59.7%
17.5% (2007)
Share of agricultural sector in employment
Sources: Instituto Brasileiro de Geografia e Estatistica (IBGE): Censos Demograficos, 1956-2013; IBGE: Series historicas e estatisticas
(http://seriesestati-sticasibge.gov.br); Howe, 1992.
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1. Historical analysis
Brazilian agriculture supplies the large national agri-food sector and provides a high
level of income in foreign currency. Its potential for growth is strong and depends
above all on improvement of transport infrastructures. Although Brazilian agriculture
currently employs a relatively low percentage of the working population, it has taken
on a significant dimension in state strategy to fight against poverty.
The persistence of a dual and non-egalitarian agricultural model
The development of agriculture by successive waves was the main vector leading to
the occupation of the huge Brazilian landmass. Along with growing urbanization,
agricultural land surface began to decrease from 1980. Likewise, as the agricultural
sector became mechanized, the number of people employed in it also decreased.
Agricultural production became very diversified from the 2000s, even if the major
“historical” crops like sugarcane, soy, and coffee continued to dominate production
in terms of value.
The structure of the Brazilian agricultural sector is characterized by the juxtaposition
of very big and very small farms. The number of these latter has greatly increased
since the 1990s, thanks to acceleration of agrarian reform and the implementation
of large-scale programs to support family agriculture. Today, the vast majority of
Brazilian farmers own their land. However, large and very large farms remain the
dominant forms of farms in terms of surface area cultivated.
Rural credit programs are one of the main instruments of Brazilian agricultural policy.
These are mainly organized by the Ministry of Agrarian Development (MDA), which
was specifically created to take care of sustainable rural development policies, via
land reforms and family agriculture. In this way, it responds to the hopes of social and
political movements campaigning for fairer sharing of land. The National Institute of
Colonization and Agrarian Reform (Incra), a body linked to the MDA, is responsible
for the implementation of the National Agrarian Reform Plan (PNRA).
As for the National Program for the Strengthening of Family Agriculture (PRONAF), it
was created in 1995 and is one of the pillars of Brazilian agricultural policy. Its purpose
is to provide technical and above all financial support to family farms. It offers a large
range of subsidized loans to eligible farmers. Loans with subsidized conditions are also
accessible to larger farms, especially those granted by the Brazilian National Economic
and Social Development Bank (BNDES) and the loans granted as part of the minimum
price policy (loans guaranteed by products stocked in accredited warehouses). [ 3 ]
[3] From 2003, as part of the minimum price policy, these credit mechanisms have been gradually replaced by other
instruments that incorporate market mechanisms, such as disposal bonuses paid to agents who purchase the surplus
production and option contracts to which producers can subscribe.
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[ 59 ]
1. Historical analysis
A SAVOIR
Public banks have a near exclusivity on agricultural financing
Brazil opted very early for a mixed banking system, by entrusting the role of economic development to the development banks that each state of the Federation wanted
to form. Today as well, the now-reformed public bank sector continues to play an
important role. While access by individuals to financial services still remains at a low
level, the increase in the number of savings cooperatives and microfinance credit
institutions is helping to expand this access.
Until recently, the level of financial intermediation by the Brazilian bank sector was
low and characterized by high real interest rates. Agricultural financing in Brazil was
for a long time almost exclusively carried out by public banks, which carried out their
activities within the framework of a set of interest rate subsidization and price-support mechanisms. The opening up of the Brazilian market to international value chains
changed the structure of commercial agricultural financing. While commercial
agriculture has had access to commercial loans, only the National Rural Credit System
(SNCR) finances family agriculture.
1.3.2. Success in adapting interest rate subsidy interventions
to the size of farms
Interventions with economic and social objectives
Summary
State interventions in the agricultural sector credit took on two forms: first, they were
part of the state interventionist policy for the economy, and then part of its social
policy. The policy to support its agricultural sector reflects Brazil’s dual structure of
big and small farms (Nassar and Ures, 2009). For these two categories, the main
instrument has been and remains financing via subsidized loans.
Brazil set up policies very early to support economic sectors it considered strategic.
The first policy was for the industrial sector, in order to replace imports with national
production. The government also considered that export-oriented agriculture
should be supported, as it supplied foreign currencies that could finance industrial
development. Later, when faced with social and political pressure from movements
representing the poorest strata of society, the government set up specific programs
to promote family agriculture, to accompany its land distribution policy.
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1. Historical analysis
The Ministry of Agriculture, Livestock, and Food Supply (MAPA) was put in charge
of large-scale commercial agriculture, whereas the policy targeting small farms was
placed under the authority of the MDA. But, in both cases, the main instrument was
and remains financing with subsidized rates.
The Brazilian subsidization programs are based on an intricate financing system
Summary
The Brazilian government began to intervene in the agricultural sector from the early
1930s, in the form of compensation paid to coffee producers to make up for price
fluctuations. Following that, Brazil’s core agricultural policy was based on an intricate
system of financing via subsidized interest rates. Most of the agricultural sector loans
are channeled through the SNCR, which includes targeted finance mechanisms (sometimes linked to price-support mechanisms for agricultural products), most of which
are heavily subsidized.
The interest rate subsidy mechanism in the rural sector is based on exit interest rates
set by the public authorities and on a compensation mechanism for the credit institutions distributing these loans. Financing for the agricultural sector programs is
funded chiefly by levies on the bank sector and by federal budget resources.
Distribution of subsidized rural loans is open to all categories of financial institutions.
However, these loans are offered mainly by public banks, as they are not profitable
enough to interest a significant number of private banks, even though involvement
by the latter is growing. PRONAF, the SNCR’s main subsidized credit mechanism
intended for family farming, is a program whose initial objective was to guide the
policy of land allocation to rural populations and the promotion of family farming.
Today, another one of its objectives is the fight against poverty.
In the beginning of the 1930s, the government determined measures for intervention
to help the agricultural sector. These were compensations paid to coffee producers
in general situation of strong price fluctuations. The main aspects of Brazil’s recent
agricultural policy are: (i) the granting of loans with subsidized interest rates, (ii) the
promotion of agricultural exports, and (iii) occasional interventions in domestic markets.
Additional help to the sector includes tax measures, funding of very active public
research, and an agricultural extension system.
Most of the loans to the agricultural sector are channeled through the SNCR. This
government-managed system includes targeted finance mechanisms and finance
instruments linked to price-support mechanisms for agricultural products.
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[ 61 ]
1. Historical analysis
A SAVOIR
As for the targeted finance mechanisms implemented through the SNCR, PRONAF
grants about 30% of the loans, with very strongly subsidized interest rates. The
Government Commodity Loan Program (EGF) facilitates access by farmers and
agricultural cooperatives to bank loans for the marketing of agricultural products
delivered to accredited warehouses, by refinancing these loans with heavy subsidization of interest rates (8.75% per year in 2000, compared to a basic bank rate of
15.70% per year). Finally, the BNDES offers various forms of long-term financing to
producers and processors, more often than not with subsidized interest rates including
3% compensation for the bank.
Various financial instruments linked to agricultural product price support can be
mentioned:
• The Federal Program for Processed Product Loans operates like the EGF but
targets processors who undertake to pay producers a minimum price set by
the government for their agricultural commodities (rate of 8.75% per year in
2000).
• The Rural Promissory Note (NPR) is a short-term system in which farmers
undertake to deliver their production at a price set in advance. This system is
open only to specific crops, e.g. rice, cotton, wheat, and corn (rate of 8.75% per
year in 2000).
• The Government Commodity Acquisition Program (AGF) program offers loans
to farmers who sell their products to the federal administration at a minimum
set price (eligible only for certain products, most usually rice, corn, and wheat).
• The Subsidy Auction Program (PEP) provides price support for certain agricultural commodities through a mechanism enabling the administration to pay
wholesalers and processors the difference between the prevalent market price
(determined by public auctions) and the set minimum price of a given product.
• Finally, for option contracts, through the specialized National Food Supply
Agency (CONAB), the government offers to purchase the harvests of certain
products at a price set at the beginning of the season from holders of these
option contracts, who purchased them beforehand through an auction system.
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1. Historical analysis
The system is rounded out by dedicated financial instruments, such as the Rural
Product Certificate (CPR), which is based on future delivery by a producer and is a
marketable and cashable security that can act as a guarantee for a loan, the Rural
Promissory Note, as well as insurance products like those of the Federal Guarantee
Program of Agricultural Activities (PROAGRO) [ 4 ] and the private offers encouraged
by the Rural Insurance Stabilization Fund, which protects insurers in the event of
exceptional disasters.
The mechanism for subsidizing loans to the rural sector is based on exit interest rates
set by the public authorities and on a compensation mechanism for the credit institutions that distribute these loans. The exit interest rates applied to subsidized loans
are 6.75% per year and from 1% and 5.5% per year in the case of many PRONAF
offers. These rates are set and decided by the authorities. For some of the loans
granted as part of the SNCR, [ 5 ] the credit institutions authorized to distribute them
receive a monthly compensation (an “equalization”) equal to the difference between
the imposed exit rate and their costs in paying interest on domestic savings, plus a
contribution to cover their administrative fees. The cost of their risk is not covered.
The system’s supporters consider that this mechanism avoids over-distortion in the
market, as it does not have an effect on the cost of resources and compensates the
banks. However, we will see later that the margins of subsidized loans are very low
compared to those generated by loans made in the open market.
The resources for loans to the agricultural sector come above all from banks’ obligation to devote 25% of transferable deposits to this financing (temporarily increased
to 30%; higher rates apply to public banks and cooperative banks). The banks can
choose to distribute the rural loans themselves or to make the resources available to
credit institutions authorized to distribute the loans. The majority of private banks
prefer this latter solution and do not apply for central bank authorization to distribute
these subsidized loans, which are not very profitable and subject to excessively complex regulations.
[4] The Family Farming Insurance Program, which was added to it in 2004, makes it possible to guarantee 100% of
loans obtained through PRONAF and Part of the Estimated Net Income of the Farm. In 2006/2007, 613,722
took advantage of this insurance.
[5] This equalization system applies only to loans financed from the Rural Savings Account resources, the workers
Support Fund (FAT), and to federal programs managed by the BNDES; it does not apply to loans financed by
levies on banks (25% of transferable deposits).
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In 2007, only 403 credit institutions, banks, and cooperatives [ 6 ] contributed to the
rural credit system by granting loans with subsidized interest rates to farmers.
However, involvement by private banks in the SNCR system increased in 2010. Even
though still small, the share of credit cooperatives in the distribution of rural loans
is growing. The other SNCR resources are the Rural Savings Account and public
resources from numerous funds.
Table 4 Origin and use of National Rural Credit System resources
in Brazil, from 2002 to 2010
Origin of resources
Compulsory resources
2002
2006
2008
2009
2010
(levied from banks)
53% 46% 47% 49%47%
Rural Savings Account
13% 19% 26% 26%30%
BNDES
17% 8% 1% 1%1%
Other public resources
12% 7% 6% 7%6%
Free (voluntary) resources
5 %9%9% 7%8%
Totals
100%89%89%90%93%
Use of resources
2002
Federal public banks
States’ public banks
Private banks
Credit cooperatives
Totals
2006
2008
2009
2010
55% 51% 46% 51%50%
2% 2% 3% 4%2%
36% 41% 42% 36%39%
7% 6% 9% 9%9%
100%100%100% 100%100%
Source: statistics of the Central Bank of Brazil, Annuario estatistico de credito rural, 2010 .
[6] In comparison, in 2008 there were 2400 financial institutions in the Brazilian financial system: 139 multiservice banks,
19 commercial banks, 4 development banks, 1 savings bank, 18 investment banks, 55 personal finance companies, 106
securities brokerage firms, 46 currency brokerage firms, 136 securities distribution firms, 36 leasing firms, 17 real estate
savings and loan firms, 6 mortgage firms, 12 development agencies, 1460 credit cooperatives, and 45 microfinance
institutions.
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1. Historical analysis
Agricultural financing through the private system increased gradually in the 2000s.
According to a WTO report (WTO, 2004), the SNCR covered only 32.6% of financing
needs of the sector for the 2001-2002 season, the rest coming from private companies
and financial institutions. On the other hand, small family farms remain strongly
dependent on the SNCR credit supply.
PRONAF is the SNCR’s cornerstone credit mechanism for family farming. It was
launched in 1995, to accompany the agrarian reform policy of allocating land to poor
farmers. PRONAF consists chiefly of a system of rural credit accompanied by a technical assistance program. The program also provides funds for rural infrastructure (road
construction, etc.). It targets small family farmers (owners, tenants, and sharecroppers)
as well as small-scale production associations and cooperatives. The loans are used
to finance working capital and investments; all the loans are granted with strongly
subsidized interest rates. Rebates are granted to beneficiaries under certain conditions, for repayments of principle made on time. PRONAF loans require a financing
plan approved by a technical agent from the agricultural extension or labor union
networks; this plan is submitted to an agency of a credit institution authorized by the
Central Bank to participate in the SNCR. The loans are distributed by public banks,
some private banks, and savings and credit cooperatives. Microfinance institutions
are also now participating in it.
Conditions for access to the loans depend on the types of agricultural holdings, as
shown in Table 5.
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Table
5
Conditions for PRONAF loan eligibility in 2001
Category A
Category B
Category C
Characteristics of the farm [ 7 ]
Beneficiary
Family
Same as B, of agrarian labor
with some reform
off-farm
income
< BRL 1,500
Category D
Same as C,
and up to 2
employees Gross annual income
No limit
Credit limit
BRL 3,000 – < BRL 500
9,000; 35% tied
to farm
operations
Interest rate
1.15% 1% 4%4%
Payment
10 years, 3-year
grace period BRL 1,500 – 8,000
BRL 8,000 –
27,000
BRL 500 – 2,000
< BRL 5,000
4 years, 1-year 2 years
grace period
2 years
Source: Minister of Rural Development, quoted in: OECD (2001).
In 1998, PRONAF was extended to the poorest rural populations. This offer was then
enlarged to benefit rural populations with even lower incomes, via a tax on formal
agricultural holdings. Since 2003, PRONAF has in fact been an instrument of poverty reduction within the government’s “zero hunger program.” In 2008-2009, the
program was once again extended to include other activities such as fishing and
aquaculture, and then renewable energies and eco-friendly investments.
The subsidization programs experienced great success in the 2000s,
especially for family agriculture
Summary
The subsidized loans granted by the bank system to agriculture increased strongly
over the 2000s. They represented the majority of bank financing to the sector.
However, they reached high levels compared to production values for only a certain
number of products. The subsidized PRONAF loans for family farming developed
[7] In order to be authorized to receive PRONAF loans, a producer must obtain a certificate of competence issued
by the Municipal Council for Rural Development.
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1. Historical analysis
very rapidly, reaching 1.6 million beneficiaries in five years. The scope of eligible holdings
was gradually enlarged.
Between 1996 and 2000, total bank financing granted to farmers and cooperatives
as part of the SNCR program rose from 6.3 billion Brazilian reals (BRL) to approximately
BRL 13.8 billion. This amount can be compared with the bank sector’s BRL 25.5 billion
in outstanding debts to agriculture, in October 2000. About 65% of SNCR loans were
granted to finance working capital needs, 17% to finance investments, and 18% to
finance marketing (OECD, 2001). PRONAF, [ 8 ] which groups together the credit
programs specifically for promoting small-scale family farming , thus represents a
rather small part of the total SNCR program.
Figure 15 Brazil – Development of subsidized loans to agriculture,
1999-2008 (in USD billion)
PRONAF
Investment
Marketing
Working capital
40
35
30
25
20
15
10
5
0
1999
2000
2001
2002
2003
2004
2005
2006
2007(e)
2008(e)
Note: (e) = estimations
Source: OECD (2011d).
[ 8] PRONAF itself includes several types of loans, for financing investments and for financing needs in working
capital.
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Overall, short-term loans to the agricultural sector did not exceed 30% of the gross
value of agricultural production. However, this figure was higher for cotton, coffee,
wheat (more than 50%), and rice. Commercial financing rounds out these subsidized
loans.
Figure 16 Brazil – Subsidized loans for financing working capital
in the agricultural sector, in relation to the value
of agricultural production (average 2005-2007)
Working capital credit
Loans for marketing
60%
50%
40%
30%
20%
10%
0%
Total
Corn
Coffee
Rice
Cotton
Soybean Sugarcane
Dry
beans
Manioc
Source: OECD (2011d).
Financing activity started up very quickly and reached approximately 1.6 million small
farms in five years (1995 to 2000) and 2 million in 2006 (Roux, 2009). The scope of
eligible holdings progressively enlarged.
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Table 6
Brazil – PRONAF loan disbursements, 1995 to 2000
Year
Contracts
Value in BRL million
1995
32,00093
1996
333,000650
1997
497,0001,637
1998
710,0001,815
1999
823,0001,955
2000
1,600,0004,240
Source: Ministry of Rural Development, quoted in OECD (2001).
Table
7
Brazil – PRONAF loan disbursements, 1995 to 2000,
by type of loans
Crop loans
Number
Working capital loans
Value (R$ 1,000)
Number
Value (R$ 1,000)
1999
672,4261,246,159131,610586,223
2000
757,5361,392,128212,191796,506
2001
723,7541,444,733186,712 708,617
2002
677,730 1,419,748275,517 965,102
2003
860,730 2,364,895 277,3821,442,003
Source: PRONAF, quoted in Abramovay and Piketty (2005).
The state bears the cost of the expensive interest rate subsidy programs
Summary
Overall, Brazil’s level of support to its agricultural sector has been small compared to
other OECD countries. PRONAF, which targets small-scale family farming, is a costly
program that has been able to achieve its objectives only thanks to an extensive network
of rural labor unions and agricultural extension services, as well as a state-supported
guarantee system.
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An OECD report in 2009 estimated that the level of state support to the agricultural
sector, for all categories combined, represented approximately 5% of the gross value
of sales from farms since 2000. This figure is small compared to the 26% average in
the OECD countries. However, the government has frequently increased its support
during crisis periods, such as in 2005-2006, when there was deterioration in climatic
conditions and market prices.
PRONAF, which targets small-scale family farming, is a costly program. Summary data
on the cost of PRONAF to the Treasury are not available. From the beginning, there
was controversy regarding the viability of the smallest farms. It has been pointed out
that the loans granted to the smallest farms are practically equivalent to donations
(because of the rebates granted for repayments on time), and that donations would
have been easier and less costly to administer than loans. It has also been estimated
that, in 1999 and 2000, two-thirds of the resources for PRONAF were used to cover
the distribution costs of banks (Abramovay and Piketty, 2005).
According to Abramovay and Piketty (ibid.), the distribution of loans to family farms
has only been possible thanks to an extensive network of rural labor unions and
agricultural extension services. The creation of a mutual guarantee fund so that
distribution of subsidized loans could be offered by the bank sector is a point that
had been recommended. But the government had to set up its own loan insurance
systems, the biggest one being the Family Farming Insurance program ( Seguro da
Agricultura Familiar – SEAF) launched in 2004. This program guarantees 100% of loans
obtained from PRONAF, as well as some of the estimated net incomes of the farm.
As the premium income from this program does not cover the expenses, the state
must pay for the deficit.
Finally, the state had to pay for reorganizing a significant proportion of loans. In the
middle of the 1990s, faced with an increase in the proportion of loans not reimbursed
according to schedule, the Brazilian government adopted a program for rescheduling
agricultural debt, with extensions of 20 to 24 years in repayment periods according
to the type of borrower. In the beginning of the 2000s, new rescheduling measures
extended the low-interest loan repayment periods for smallholder farmers and beneficiaries of the agrarian reform, and those who paid back their loans on time had part
of their debt canceled or were granted reductions. The OECD estimated that, at the
end of 2005, the total amount of non-reimbursed restructured debt amounted to
BRL 17.3 billion (USD 9.6 billion at the average exchange rate of September 2008).
This figure was nearly the value of subsidized loans disbursed for agriculture in the
same year (WTO, 2009).
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1. Historical analysis
Overall, we can thus consider that support for small-scale family farming received
significant support, which was provided from the state budget and largely implemented in the form of subsidized loans.
1.3.3. Impacts on the agricultural sector and on the Brazilian
bank sector
Contrasting effects on the agricultural world
Summary
There are very contrasting opinions regarding the impact of loans with subsidized
interest rates. For the loans reserved to family farming, the impact cannot be measured
only in economic terms. Aversion to indebtedness is the major reason mentioned
by farmers for not applying for bank loans. The complexity of procedures is also a
significant obstacle. Medium-sized farms are the ones most often excluded from
bank loans due to their past history. The portion of farmers with access to credit is
quite small, but the vast majority of those who do have access obtain it from banks,
whatever the size of their farm. With regard to PRONAF, while there is controversy
over the impact of its loans to the poorest, it has clearly contributed to promoting
the use of banks among the latter.
Various authors have tried to evaluate the impact of loan subsidization, from various
outlooks. Castro and Texeira (2005) attempted to quantify the economic impact of
loan subsidization on the country’s economy, but the results can be questioned
because not all costs were taken into account. They measured the direct and indirect
effects of these subsidies using income multipliers based on an input-output table
for two types of farms (small family farms and large farms). They hypothesized a
linear relationship between farm purchases and the value of their production, and
they came to the conclusion that, for each monetary unit spent by the state to subsidize interest rates, Brazil’s gross domestic product (GDP) increased 1.75 currency
units in the case of small family farms and 3.57 currency units in the case of large
farms. However, the method they used does not take into account (i) the opportunity
costs of the public resources used in the system to compensate participating banks,
(ii) the costs of insuring loans, and (iii) the considerable cost of arrears.
Some authors, including Valdes (2006) consider that it is the opening up of the
Brazilian market to foreign investors during the second half of the 1990s that enabled
the strong development of agriculture, by being able to link it up with international
value chains, and that within the latter significant flows of credit to Brazilian producers
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were able to circulate and supplement the rather weak supply from banks. Indeed,
we can observe that agricultural production and exports of agricultural and agri-food
products truly took off in the early 2000s; this suggests that global demand was one
of the causes, and that other solutions to limited financing had to be found.
Figure 17 Brazil – Exports of agricultural and agri-food products,
1997 to 2005
Total agricultural products
Unprocessed and semi-processed products
Processed products
40
35
Net exports
(in USD billion)
30
25
20
15
10
5
0
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source: Valdes, 2006.
We have seen that the subsidized loans targeting family farming are an instrument
that is part of a broader policy accompanying agrarian reform, with an important
political dimension. The loans distributed within the framework of PRONAF, the
program to support small farms, covered the needs of households that were allocated
land as well as those of many other small farms (more than 1 million farms were
created through the agrarian form, between 1995 and 2006, and there were 2 million
beneficiaries of PRONAF loans in 2006). To assess their impact accurately, it is important
to know whether these smallholder farmers became effectively settled on their land,
but this depends upon many other factors and leads us to the question of whether
they had continued access to credit.
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Some skeptical authors point out that the participating banks naturally gave priority
to farmers who were best integrated into the markets and who often had relationships
with major agri-industrial companies, and that this meant that farmers in the southern
states of Brazil were favored (Abramovay and Piketty, 2005). Finally, a WTO study in
2004 notes that, despite the free-market conditions in which they were allocated,
the PRONAF funds were often under-utilized (only close to half of the PRONAF
credit allocations were disbursed in 2000-2001). It would seem that this is due to the
administrative complexity of the program and the fact that some family farmers were
reluctant to become indebted, as they were not necessarily capable of working out
technical projects. According to figures provided by the Brazilian authorities, between
1995 and 2003, only 37% of the amount and 21% of number of loans distributed were
made for financing investments, indicating that PRONAF may not have contributed
much to modernizing family farming.
Results of surveys in the agricultural sector in 2006 show that fear of indebtedness
and of “red tape” are the two greatest obstacles to financing farms through bank
loans, whatever the size of the farm.
Table 8
Brazil – Reasons mentioned by farmers for not having applied
for credit in 2006, by farm size
Inadequate
guarantees
Less than 10 ha
“Red tape”
Debt
default
on previous
loans
Fear
of incurring
debts
10%
19%
7%63%
10 ha to less than 100 ha
7%
28%
12%52%
100 ha to less than 1000 ha
6%
36%
10%47%
1,000 ha and over
6%
46%
9%39%
Sources: IBGE, Censo Agropecuârio, 2006.
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It is not surprising that very small farms of less than 10 ha encounter the most difficulty obtaining a loan, due to inadequate guarantees. However, it is interesting to note
that it is the medium-sized farms (between 10 to less than 1000 ha) that experience
rejection of their credit applications most frequently, due to their banking history.
This shows, indirectly, that these farms benefited from loans the most easily in the past.
Looking at land ownership status, we can see that access to credit for the category of
farmers “settled without definitive land deeds” is most often refused because of unsatisfactory banking history, probably due to their having moved around more.
Unsurprisingly, it is farmers who own their land who have the least problem providing
guarantees to lenders. These points underline the importance of land ownership in the
issue of agricultural credit.
Table 9
Brazil – Reasons mentioned by farmers for not having applied
for credit in 2006, by land ownership status
Inadequate
guarantees
Owners
“Red tape”
7%
Debt
default
on previous
loans
24%
Fear
of incurring
debts
9%59%
Settled without definitive
land deeds
12%
32% 22%34%
Tenant
11%
24%
5%60%
Sharecropper
12%
20%
5%63%
Occupant
14%
19%
7%60%
Source: IBGE: Censo Agropecuârio 2006.
According to a study by Kessel in 2001, only one-fourth of farms had access to credit.
Furthermore, despite the establishment in 2001 of a system to finance small-scale
family farms, the first 10% of agricultural loans by private banks represented 80% of
the volume of their credit to this sector. Likewise, at the Bank of Brazil, 73% of the
volume of credit intended for agriculture went to 6% of the biggest customers.
However, the results of the 2006 survey on agriculture show that banks (including
public banks) are the foremost lenders to farms—including the smallest farms—that
have access to credit.
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Table 10 Financing for farms with access to credit, by size of farm and type
of lender, in 2006
Banks
Credit
cooperatives
Less than
Other
financial
institutions
Sellers
of inputs
and other
equipment
Companies
in the
value chain
NGOs
Parents
and
friends
Others
10 ha
90.1%
4.8%
1.0%
0.7%
1.9%
0.1% 0.8%0.6%
10 ha to
less than 100 ha
86.6%
8.2%
0.6%
1.4%
2.1% 0.1% 0.5%0.5%
100 ha to
less than 1000 ha
85.5%
8.2%
0.7%
3.3%
0.9%
1000
and over
80.4%
5.7%
1.2%
8.1%
2.8% 0.2% 0.8%0.9%
0.1% 0.7%0.7%
Source: IBGE: Censo Agropecuârio, 2006.
As soon as PRONAF was launched, there was controversy about the viability of the
smallest farms and their capacity to deal with indebtedness. The government nevertheless considered that the program would enable these farms to become part of
the financial system. The above figures show that this was the case, even if financing
came in most cases from public banks.
The subsidization programs above all had an impact on the public banking sector
Summary
Brazil’s agricultural financing policy, which was based on the compulsory granting of
loans with subsidized interest rates and on public banks, did not encourage private banks
to enter this market. The bank sector suffered significant loss of income from the
government claims on the large amount of domestic savings to finance the agricultural
sector via interest rate subsidies. With regard to the financing of family farming, the
massive restructuring of loans granted to these farms, which again occurred in 2006
and 2007, discouraged commercial banks from investing in this market segment.
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It has been shown that public banks were and still remain the main providers of bank
credit to the agricultural sector, even though non-bank private players have played a
very important role since the liberalization of the economy in the 1990s.
A 2011 survey sponsored by the Central Bank of Brazil (Lundberg, 2011) considers that
the profit margins on loans with subsidized rates (not only for agriculture but also for
housing and other government programs) are much lower than those made on loans
in the open market, and that the result is a significant drop in average profit margins
in the bank credit market.
Figure 18 Brazil – Comparison of estimated bank profit margins
for open-market credit and subsidized credit
Open-market credit
Subsidized credit
Total
35
30
% per year
25
20
15
10
5
0
June
2000
December
2001
June
2003
December
2004
June
2006
December
2007
June
2009
December
2010
Source: Lundberg, 2011.
It is nonetheless important to recall that the bank margins in Brazil are especially
high compared to those observed in similar economies. This is mainly due to banks’
perception of the risk in the private sector and the degree of macroeconomic
uncertainty.
The hold that public structures have on the financing of family agriculture, along
with the very strongly subsidized loans and partial write-offs of debts after crises,
has created a situation that prevents easy entrance into this market for the private
financial sector.
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1. xxxxxxx xxxxx xxxxxxx
1.3.4. Conclusion: little prospect of the private sector taking
over the subsidized loan supply
In its 2001 economic survey of Brazil, the OECD criticized the policy of loan subsidization, all the while stating that banks’ “ continued reluctance to lend would appear
to stem fundamentally from weakness in the system of agricultural credit, rather than
oversubsidization. ” This comment seems appropriate, at least with regard to very
small family farms established on land confiscated following agrarian reform. It must
be admitted that, in a fragile and unstable political and macroeconomic context, the
state probably had no other choice than to set up financing programs with subsidized
interest rates in order to continue its policy of land allocation to a significant fringe
of society. Indeed, the objectives it was pursuing were above all political and social.
In the case of big farms, which still dominate the Brazilian agricultural landscape in
terms of surface area, the justification for the interest rate subsidy policy seems less
grounded. This category has in fact highly benefited from the stabilization of the
macroeconomic situation and the opening of the Brazilian market to foreign investors.
The offer of subsidized interest rates to large farms must therefore be viewed as a
form of subsidy to a sector of the economy that for many years had been an important
provider of foreign currency, thereby supporting Brazil’s interventionist industrialization policy.
The rural credit system represents a considerable government claim of national savings,
and today the “price” to pay for the benefits Brazil has been able to gain from its policy of subsidized interest rates for agriculture is the state’s obligation to continue to
provide such financing. Indeed, the bank sector alone cannot easily ensure such financing
for small-scale family farming, whose accumulated debt arrears have had to be partially
absorbed by the state.
Even if it is clearly the banks that finance the majority of farms in Brazil, only a quite
small portion of these farms receive loans. A legacy of Brazil’s interventionist economic
policy is that public banks financed most agricultural credit for many years. Today, they
continue to do so for small-scale family farming , using resources and a regulatory
framework allowing the granting of loans with subsidized interest rates.
Yet, the existence of a subsidized interest rate policy does not seem to have been the
main cause for the lack of interest among private banks to work with the agricultural
sector. On the contrary, the need to subsidize interest rates seems to be more the
result of a state policy that was it self responsible for the reduced role that private banks
played in financing agriculture. For very many years, macroeconomic unbalances
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(responsible for strong recurrent inflation and for crowding out the private sector
via public debt) as well as the establishment of development banks as part of interventionist economic policies (for industrialization and import substitution), drove
private bank institutions to take advantage of profit they could realize from inflation
and to adopt other short-term strategies.
1.4. Summary and comparison of case studies
Comparative analysis of the three case studies teaches us about the policies that have
been implemented. It enables us to draw conclusions concerning their impacts and
can provide valuable information to developing countries with economic and political
situations similar to those experienced by the countries studied.
Economic similarities can be found among the three countries. The share of the
agricultural sector in the country’s GDP as well as in employment drastically decreased
in each country between the middle of the 20th century and the 2000s. The share
of the agricultural sector in France and the United States decreased approximately
sevenfold compared to the previous period. The share in Brazil decreased approximately fourfold.
Table 11 Trend in the share of the agricultural sector in GDP
and employment, in France, the United States, and Brazil,
between the middle of the 20th century and the 2000s
France
Share of the agricultural sector in GDP
12%
USA
7%
Brazil
25%
Middle of the 20th century
1.8% 1.0%5.3%2000s
Share of the agricultural sector
in employment
20% 16%60%Middle of the 20th century
2.9%2.0% 18%2000s
Source: the authors.
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On the other hand, there were relatively specific situations in terms of composition
of the agricultural sector: in France, the landscape was marked by small family farms,
and the United States by agriculture with fragmented plots that became extensive
during the 20 th century. The agricultural sectors in these two countries saw the size
of their farms greatly increase throughout the 20 th century. In Brazil, there are simultaneously small family farms and huge commercial farms.
All three cases share the experience of strong state intervention in the financial sector.
France saw state support for emerging credit cooperatives and made Crédit Agricole
the principal tool of its public policy to modernize agriculture. In Brazil, the agricultural support system relies mainly on public banks; the cooperative system is also
encouraged, because it contributes, alongside microfinance, to improving access to
financial services. The federal interventions in the United States illustrate strong state
involvement in supporting the development of financing for the agricultural sector.
The government sponsors the credit cooperative network FCS, and the public agency
FSA directly distributes loans to non-bankable farms and provides guarantees enabling
others access to bank credit.
The three countries under study view agriculture as a government priority politically, economically, and socially, but each has their own specific objectives. France at
first had the political objectives of providing support for its large rural population
and of curbing rural exodus. It then turned to support for transforming the structure
of family farms in order to encourage modernization. The United States and Brazil
put priority on supporting disadvantaged segments of society or the poorest families,
all the while encouraging the bank sector to meet the needs of bankable farms. This
was done through regulatory requirements in Brazil and by a system of guarantees
in the United States.
The foremost agricultural objective of the United States was to guarantee the
country’s food sovereignty and meet the food needs of its entire population. France
and Brazil above all seek to maintain their ranking among the major exporters of
agricultural products. All three countries have given agriculture a prominent role and
have been attentive to its impact on their country’s economy. Brazil has relied on
foreign currency earned through agricultural export to finance the country’s industrial development. By aiming to reduce per-person food expenses, the United States
ultimately seeks to free up income for other expenditures and thereby increase
economic growth.
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In the three economies under question, establishment of government systems to
subsidize interest rates has taken on various forms, sometimes with specific loans
(France and the United States offer emergency loans, disaster loans, and investment
loans), increasingly precise targeting, and interest rate adjustments depending on the
market situation (in all three countries, the level of interest rates of the loans granted
is indexed on the cost of the resource and calculation of a margin).
France and the United States have associated the subsidization of interest rates with
a system of training and monitoring. This has been a key factor in the success of the
development of farms provided with credit. Thanks to this training, the borrowers
have improved the financial and accounting management of their farms. In Brazil, the
rural credit system is associated with broader interventions in the rural world, in
particular with regard to road infrastructures.
The subsidization system has nonetheless turned out to be very expensive and
difficult to control, both in terms of the volume of costs for government budgets
(interests, management costs, and arrears costs) and of verifying that the subsidies
are allocated properly, in accordance with government policy. In France, this system
has especially been criticized because public funds have been partially used to benefit large-scale farms. In the United States, the cost of the system is the focus of much
attention: the administrative costs (infrastructures and human resources) represent
the main budget item of the expenditures of the FSA’s interest rate subsidy program.
In Brazil, PRONAF has turned out to be very costly, despite a financing system based
on levies on bank sector resources.
Involvement by the private bank sector has been a goal in each country: Brazil has
experienced more interventionism; France had a de facto monopoly situation until
1990, when agricultural credit was opened up to all banks; and the United States set
up a loan guarantee system from the 1970s. In the United States and France, the bank
sector was encouraged to become involved in agricultural credit in a context of competition; this was decisive in mobilizing sufficient resources and in improving the
management of agricultural loans. In all three countries, the subsidization policy has
been continued over the long term, and this stability is a decisive factor behind its
impact. In France, long-term continuity was necessary to enable real in-depth change,
ranging from the implementation of new modes of production on existing farms
to support for the start-up of young farmers in conditions guaranteeing modern
production.
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These case studies do not really provide us with proof of a negative or positive impact
on the development of the agricultural sector by interest rate subsidization, as the
effects of this latter are closely related to the capacities and objectives of the bodies
that distribute subsidized credit. Furthermore, these effects are inseparable from the
effects of other measures for support to agriculture and agricultural financing carried
out over the same period. Finally, the analyses found in literature on the topic often
do not or hardly take into account the degree to which the financial sector—as well
as of the agricultural sector—are structured.
Nevertheless, the subsidization of interest rates, among other measures, has contributed to the modernization and intensification of agriculture in France, the United
States, and Brazil. The subsidization of exit interest rates to benefit the agricultural
sector has been an important factor in the development of the agricultural finance
market, which has often been hindered by cost structures for both supply and
demand, making it difficult to provide a credit supply both affordable for small-scale
farmers and profitable enough for the lenders.
The subsidization of interest rates has definitely played a role in the spread of bank
use in the countryside, in all three economies studied; however, this has sometimes
led to insufficiently controlled indebtedness for some farms. The programs set up
have sometimes promoted large-scale farms to the detriment of small family farms,
either because this met an objective of transforming subsistence agriculture into
commercial agriculture, or due to lack of control of the effective utilization of subsidized rates, which have sometimes been partially absorbed by the most influential
holdings.
The impact on the bank sector is very visible, but in different ways depending on the
countries studied. France has been marked by the creation of Crédit Agricole, the
centerpiece tool of subsidization, which “reconciled” the bank sector with small-scale
agriculture, and which started as an administrative cooperative system enjoying a
monopoly on subsidies but went on to become one of the major universal French
banks. In the United States, government intervention via the FSA was able to provide
continuity in agricultural credit during crisis periods and respond directly to the needs
of non-profitable farms. This way, it enabled the private commercial sector to develop
at the same time. In Brazil, on the other hand, the regulatory constraints of the agricultural credit program made the system too unprofitable for private commercial banks,
with the result that the distribution of subsidized loans became a near exclusivity of
public banks.
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A SAVOIR
The case studies of France, the United States, and Brazil do not allow us to conclude
that the strong agricultural development observed in these three countries was
partially due to subsidization programs. However, these studies can be useful for
developing countries wanting to use the subsidization tool, as they indicate which
points worked well and suggest how to develop an effective system. Among others,
we can mention the points below.
• Subsidization of interest rates must not be an isolated measure. It must be part
of a coherent public system providing long-term support to agriculture and
implemented along with other actions in order to have decisive impact on agricultural development: monitoring and training of farmers, targeted subsidies,
sectoral stabilization funds, and research and education.
• Through the long-term monitoring that credit involves, a subsidization program
is a good support instrument for a monitoring and on-site training system for
farmers. This enables increase in the effectiveness of the subsidized credit as
the farm develops.
• This supervision also helps avoid serious situations. At certain times in the past,
the ease of allocating credit has led the systems to grant loans to farms that
were not equipped for this burden, sometimes putting small and already fragile
farms into long-term debt.
• For this reason in particular, regular assessments of interest rate subsidization
systems are essential, in order to adapt and adjust the system as soon as
necessary. This makes it possible to avoid generating unwanted situations as
well as to ensure better effectiveness of the subsidization program.
• Impact from a subsidized loan system on agricultural development seems to
require implementation over the long term.
• In each case studied, the subsidization programs have been a heavy cost for
government budgets, if we consider the costs of interest subsidization, the
program of monitoring and training farmers, the loan losses, and the system
to audit how the subsidy was used.
• To prevent the subsidization process from crowding out the private financial
sector from agricultural credit, it must be designed so as to complement the
private-sector supply and support its development.
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• When a country chooses to subsidize interest rates, an audit system is needed
to check that the loans and aid granted are used properly and in accordance
with the targets that have been defined. To avoid the risk of non-application of
this audit system, the supervision and audit processes and methodologies must
not be complex or expensive.
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2. Review of donor policy
on subsidized credit
interventions
A study of the strategic and operational reference documents of the World Bank,
IFAD, KfW, and USAID, as well as several targeted interviews, were carried out to
analyze the trends in donor intervention policy regarding subsidized credit.
2.1. History, strategy, and forms of donor intervention
International donors organize their actions to develop the rural financial sector
according to three levels: macro (governmental policy, legal and regulatory framework,
supervision), meso (infrastructures for the financial sector and real sectors), and micro
(support for financial institutions). Each donor has a history, objectives, and strategic
intervention policies that affect the form and content of its interventions.
There has been internal debate at the World Bank on subsidized credit lines
and on whether intervention should follow strictly free-market rules
Summary
The World Bank supports agricultural development as part of a more overall policy
of poverty reduction and food security. Targeted and subsidized agricultural credits
were an important component of its agricultural support, and these became a subject
of controversy from the 1970s. Like many international donors, the World Bank shifted
in the 1990s from the former to the new paradigm of development financing. But
this shift was the topic of much discussion. The lack of strategic documents focusing
on specifically agricultural finance illustrates its limited influence on the World Bank’s
development policy. The World Bank may offer, under very stringent conditions,
credit lines to financial intermediaries. But these credit lines are in no way subsidized,
and direct grants are often preferred. Nevertheless, the World Bank’s interest rates
are purposely positioned in the lower range of the market.
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A SAVOIR
The World Bank supports the development of the agricultural sector as part of its
overall policy of poverty reduction and food security. Targeted and subsidized
agricultural credits are an important historical component of its support to the
agricultural sector.
This model of agricultural credit began to be criticized in the 1970s. The World Bank’s
agricultural credit policy, published in 1975, opposed interest rate subsidies, except in
exceptional circumstances in which the beneficial effects of the subsidy could be
guaranteed. The volumes of credit lines corresponding to targeted and subsidized
agricultural loans nonetheless increased significantly during this period. It was at the
end of the 1980s that these programs began a decline, which continued in the 1990s
with the closure or rapid suspension of all agricultural credit projects coming within
the framework of the former paradigm.
In the beginning of the 1990s, internal discussions on subsidized credit took place
within the World Bank. The 1993 publication of the Operations Evaluations
Department’s report A Review of Bank Lending for Agricultural Credit and Rural
Finance (1948-1992), attracted considerable attention, as it on the one hand
acknowledged the limits of subsidized credit lines for developing the financial sector,
but on the other also pointed out the merits of this type of support in terms of
development of the agricultural sector, the many perverse effects wrongly attributed
to subsidization, and the need not to terminate this type of financing abruptly.
As part of the widespread shift by international donors to the “new paradigm,” the
World Bank then replaced operations based on granting agricultural credit with a
more overall rural financing approach that sought to provide capacity building for
financial institutions in order to facilitate their operations in rural areas.
The lack of strategic documents focusing specifically on agricultural finance illustrates
its limited influence on the World Bank’s development policy. In the last decade, the
World Bank has launched few interventions specifically for agricultural finance
support. In the beginning of the 2000s, agricultural financing was even considered to
have little prospect for developing on a viable economic model, and it is only recently that the World Bank has re-included a full-fledged agricultural finance section in
its policy for rural finance support. The current World Bank strategy for the development of rural finance is based on three levels: micro, meso, and macro.
In the World Bank’s micro-level interventions, the granting of credit lines to financial
intermediaries is possible, but very restricted, so as not to disturb the functioning
of the financial market. For example, the interest rates offered to these financial
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intermediaries are not subsidized, the credit lines must be accessible to all the institutions of the intervention zone being considered, and the financial institutions must
meet certain criteria established by specific guidelines.
In 2009, for example, the World Bank formed AgriFin, an agricultural finance support
fund financed by the Bill and Melinda Gates Foundation. It strives to show that financial services to smallholder farmers and other rural businesses can be profitable for
financial institutions, and the fund provides these latter with direct grants to reinforce
their technical capacities. Another example is the matching grant facility, which offers
grants to smallholder farmers, via agricultural organizations, to further equipment
purchases. These grants are systematically accompanied by a training offer prior to
the financing, and the amount of the grant cannot exceed half of the amount of the
assets purchased. The other half is financed by the market, via credit granted by a
financial intermediary.
While World Bank policy is not to subsidize interest rates, it nonetheless has leeway
in setting its interest rates. This possibility enables it to offer financial intermediaries
and governments interest rates positioned in the lower range of rates effectively
offered by the markets in which it intervenes, especially so that the cost of World
Bank resources remains comparable to those of the resources offered by other international donors to these same parties.
Subsidized credit lines are no longer offered by the International Fund
for Agricultural Development
Summary
The granting of subsidized credit was IFAD’s traditional form of action to support
agricultural development, but it has been gradually replaced by other forms of action.
IFAD actions to support inclusive rural financial systems focus mainly on the micro
level and, to a lesser extent, on the meso level. Macro-level actions are rarer and are
nearly always carried out in partnership with players that have extensive experience
in this type of intervention. IFAD’s policy is to encourage its agents to determine its
support to agricultural financing according to an analysis of demand established
specifically for each action. The two types of tools available are credit lines and direct
grants. IFAD policy discourages credit lines, the granting of which is subject to many
conditions. Equity investment and financing in the form of direct grants are presented
as more suitable forms of intervention, but their use is subject to certain changes in
IFAD policy.
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A SAVOIR
IFAD’s purpose is to finance development projects, specifically in rural areas.
Development of agriculture and agricultural finance are thus the core activities of
this institution. Its strategy for support to agricultural financing has been studied from
several documents and interviews. IFAD’s Rural Finance Policy (RFP) document (2000),
updated in 2009 (IFAD, 2009), following an evaluation in 2007 (IFAD, 2007), describes
its policy in detail. IFAD’s 2010 document specifies the recommended approach for
implementing its rural finance policy point by point.
The review by Meyer (2011) is the fruit of an initiative by partners of the “Improving
Capacity Building in Rural Finance” (CABFIN) project, of which IFAD is a member. This
review states that, despite its status as a review, its objective is to act as a practical
guide for all the CABFIN members and to be used in addition to current guides. Finally,
three technical notes in the process of being finalized deal with credit lines, matching
grants, and guarantee funds respectively. Interviews with Michael Hamp, Senior
Advisor in Rural Finance, and Benoît Thierry, Country Program Manager for Nepal
and Thailand, made it possible to fine-tune several points.
IFAD’s traditional form of intervention to support agricultural development is the
granting of subsidized credit lines, even though these have been gradually replaced
by other forms of intervention. Interventions at the micro level represent IFAD’s core
action, with around 80% of support for the development of rural financial systems
positioned at this level. The meso level is developing more and more, but intervention
at this level, without a partner, is not part of the core strategy of IFAD. This is especially due to the time spans of this type of intervention, which are too long. Finally,
macro-level interventions are rarer and are carried out nearly exclusively with partners
that have extensive experience with this type of intervention. IFAD emphasizes that
the skills and timeframe required for this type of intervention do not correspond to
its basic purpose.
Because of budget limitations, IFAD is seeking to achieve improvements in effectiveness
for the 2013-2015 period. A new more pragmatic approach could consist in carrying
out fewer projects but at a greater scale. This strategy would make it possible to
develop more large-scale projects that target the development of rural finance (rather
than projects in which rural finance is considered as a small component) and that deal
with the three levels of support (micro, meso, macro).
IFAD gives priority to a bottom-up approach in determining its interventions. The
choice of the form of intervention is thus closely associated with an analysis of the
finance request; this makes it possible to identify suitable support aspects to develop
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a finance offer adapted to it. IFAD interventions to support an agricultural finance
offer can take the form of credit lines or direct grants. These latter can be global and
work on developing support that can benefit several countries. They can also be
associated with a specific line of credit for a given country, for example to encourage
the government to invest in finance projects that show promise but that are not
priorities for the government. These grants generally represent a small share of the
total amount of support. Finally these direct grants can also be distributed as part of
matching grants to finance specific productive investments. The beneficiaries contribute
to a significant share of such investments, by providing funds or assets and, in some
cases, by taking out a loan from a financial intermediary.
IFAD’s current policy is not very favorable to credit-line interventions, including for
non-subsidized credit lines. When IFAD grants credit lines to financial intermediaries
working in retail or wholesale markets, they are subject to many very precise conditions
(e.g., lack of liquidity in the market, management of the credit lines by private actors
and not government institutions, transparent reporting , adequate supervision, etc.).
Even though equity investments are not part of the range of tools available to IFAD,
the credit lines can be used by the beneficiary governments, sometimes via specialized
intermediaries, to acquire equity investments in financial institutions working in rural
financial markets. With an aim to developing equity investment, IFAD’s 2009 Rural
Finance Policy suggests working “directly with rural finance institutions and the private
sector. ” The 2009 RFP thus sets equity investment against credit lines, insofar as the
former stimulate rather than curb the mobilization of alternative financial resources.
Furthermore the RFP recommends increasing direct grants allocated to rural finance.
KfW’s approach focuses solely on the financial sector, with priority
on agricultural development
Summary
KfW is in charge of implementing finance development as part of the policy defined
by Germany’s Federal Ministry for Economic Cooperation and Development (BMZ).
Support for rural development, and especially development of sustainable agriculture
to improve food security, has been defined as one of the priorities of the Ministry.
Germany was one of the first countries to adopt a systemic approach to define its
strategy for developing the financial sector, following the change in the development
financing paradigm. Agricultural financing is dealt with via the development of the
financial sector for now, but it has been decided recently that a more specific
approach is required. As at other institutions, agronomists and financial experts do
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A SAVOIR
not view agricultural financing as having the same objectives. This leads to internal
debates, especially regarding the limitation of resources for interventions imposed
by the new rural finance paradigm.
KfW is very active in supporting financial institutions as a shareholder, lender, or
funder of technical assistance. Support for the development of agricultural financing
is done by giving priority to this sector within the overall approaches to financial
sector development. In practice, some interventions combine subsidies and credits
to the end beneficiary for financing investments, in particular by taking into account
local practices.
KfW is in charge of implementing German finance cooperation, as part of policy
defined by the BMZ. The Ministry’s strategy in support to rural development is laid
out in an overall strategy document published in 2011. A specific strategic document
is currently being drafted on the promotion of sustainable agriculture to contribute
to food security ( Entwicklungspolitisches Konzept zur Forderung einer nachhaltigen
Landwirtschaft als Beitrag zur Ernahrungssicherung). These documents do not specifically deal with the question of financing and simply mention savings and investment
among the important tools for implementing rural development policy. Since the 2008
food crisis, support to rural development, and especially development of sustainable
agriculture, has been defined as one of the priorities of German development
cooperation policy, with the goal of improving food security.
The case study of KfW’s strategy is based on a literature review and on two interviews.
The source documents are the memorandum on BMZ sectoral policy on the development of the financial system (BMZ, 2004), the BMZ strategic memorandum on
food security (BMZ, 2011), the overall policy document on agricultural finance in
Africa (GIZ et al., 2012), the report by the KfW evaluation unit for 2009-2010 (KfW,
2011), and the financial cooperation procedures (KfW, 2003). We were also provided
with four ex-post evaluations in the field of agricultural finance, concerning
Accessbank in Azerbaijan (KfW Evaluation Department, 2009 a ), the Dakahliya rural
finance program (KfW Evaluation Department, 2009 b ), UNCACEM in Mauritania
(KfW Evaluation Department, 2007), and the BNA in Tunisia (KfW Evaluation
Department, 2005). Interviews were carried out with Claudia Schmerler, Senior
Financial Sector Economist in charge of agricultural financing within KfW’s Financial
Sector Development division, and Christoph Kessler, head of KfW’s Agricultural and
Natural Resources division.
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Germany was one of the first countries to adopt a systemic approach to define its
strategy for finance sector development, this within the framework of the change in
the finance development paradigm: in 1993-1994 it produced its first financial sector
strategy document, with a cross-cutting strategy applicable to all sectors of the
economy (BMZ, 1994). Currently, agricultural financing is dealt with in an overall
strategy document concerning financial sector development (BMZ, 2004). A new
strategy document dealing with agricultural finance is currently being drafted; this
shows that a specific approach has been judged necessary. The German Economic
Cooperation and Development Ministry also refers to documents produced by
international consultation groups, in particular through the “Making Finance Work
for Africa” project.
Within KfW, agronomists and financial experts do not view agricultural financing as
having the same objectives. This leads to internal debates, especially regarding the
limitation of resources for interventions imposed by the new rural finance paradigm.
Agronomists above all seek to have instruments with which they can finance agricultural development actions. They measure the impact and sustainability of actions
at the level of agricultural value chains and consider the financial institutions as means
to achieve their objective. Financial experts are concerned with the sustainability
of access to finance, and thus of the financial system. It is thus within the framework
of approaches adopted to enlarge and develop the financial system that German
development cooperation supports the development of agricultural financing.
KfW is very active in supporting financial institutions. It may act as shareholder, lender
(with very concessional terms, depending on the case), or provide the funding for
technical assistance. It can do so by using existing financial institutions, or by creating
them. Loans to financial institutions for financing agricultural investment are long-term
loans, preferably in local currency, when its intervention conditions enable it to do so.
For enlarging and developing the financial system, the Ministry supports different
types of approaches: “Upgrading” (the professionalization and institutionalization of
NGOs), “Downscaling” (setting up an SME-oriented activity at commercial banks);
“Greenfield” (creation of new financial institutions), and “Linkage” (establishing contact
between pre-existing banks and solidarity groups). Support for the development
of agricultural financing is done by giving priority to this sector within the overall
approaches to financial sector development.
Whatever its position in the partnership, KfW supports its partners’ strategy and tries
to influence it so that it is oriented toward development of rural areas when it makes
sense for the institution. This may involve actions in the institution’s business plan,
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A SAVOIR
if KfW is a shareholder, or technical assistance to develop specific agricultural credit
financial products. More specifically concerning “the target group of rural clients,”
the Ministry considers that “ to achieve sufficient reach, it will be necessary to adjust
the financial instruments or develop new ones to meet the special conditions of rural
areas and agricultural finance. These instruments would above all include improvements to risk management and the introduction and use of modern guarantee
mechanisms, as well as the deployment of inexpensive agencies (e.g. mobile windows)
close to customers, in order to reduce transaction costs ” (BMZ, 2004).
In terms of support to rural finance, KfW is also an investor in the Rural Impulse Fund,
which gives preference to microfinance institutions oriented toward rural finance. This
support takes place through commercial credit lines granted to viable microfinance
institutions.
The Ministry adopts a pragmatic approach on some aspects, different from freemarket positions. For example, it advises continued support to public development
banks that operate correctly. The Ministry has financed many development banks
and has seen very mixed results, with many negative ex-post evaluations of this type
of intervention. But it maintains a pragmatic position, written down in its strategy
documents, which observes that “ some public development banks, mostly in Asia,
have started up considerable reforms in recent years. These financial institutions play
a special role in providing financial services to rural populations and to regional and
local authorities, where purely private commercial sector approaches continue to fail
frequently ” (BMZ, 2004). Based on this, it advocates the adoption of an open
approach to financing assistance to the public and private bank sectors, based on the
actions and governance of the institutions.
In practice, some interventions combine subsidies and credits to the end beneficiary
for financing investments, in particular by taking into account local practices. In Kenya,
for example, KfW is conducting a small-scale irrigation project in an area with strong
agricultural potential, whose production will go to export markets and Nairobi. As
part of this project, KfW is providing a credit line to the Kenyan government, with
very concessional loan conditions defined by the International Development
Association (IDA), which on-lends it on concessional terms to two private banks
recruited through a bid for tender. These private banks then distribute it to smallholder farmers in the form of crop credits and investment credits, on commercial
terms. The investment credits enjoy a subsidy of 50%, also released by the bank. The
subsidy portion, which is high in this context of profitable commercial agriculture,
was set because there are projects offering high levels of grants in the same zone
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(African Development Bank – AfDB and IFAD). The Agriculture and Natural Resources
Division considers that, for agricultural investments whose aim is to change mode of
production, there can in some cases be situations requiring financing with subsidies.
USAID uses partial portfolio guarantees to back up intervention
in the agricultural sector to fight sustainably against hunger
Summary
The overall mission of USAID is to help countries recover from disasters, lift themselves
out of poverty, and start up democratic reforms. Development of the agricultural
sector, especially through access to the USAID financing component, is thereby part of
this mission. Like numerous international donors, USAID financed, mainly in the 1960s
and 1970s, many agricultural credit programs whose performances were controversial.
USAID increased its involvement following the G20 Summit of 2009, during which
President Obama asked Congress to double its agricultural development effort in
order to fight sustainably against hunger, and proposed USAID to lead the effort.
USAID interventions in agricultural development are structured around four major
themes that seek to increase agricultural productivity and improve access to markets
for producers. The development of agricultural finance is not a strategic theme in
itself, but it contributes to several of these themes. The three forms of intervention
used by USAID to support agricultural finance are: portfolio guarantees, financing
technical assistance specific to financial intermediaries, and financing technical assistance
to reinforce the demand for financial products. The objective of the portfolio guarantee
is to induce banks to start up agricultural finance activities that they judge risky, by
sharing the risk with them. There are no exit interest rate conditions attached, and
impact on these rates is not an objective.
Our study of USAID strategy is based chiefly on a literature review and an interview
with a USAID representative. The three main source documents are the USAID
Agricultural Strategy (USAID, 2004), its Policy Framework 2011-2015 (USAID, 2011 a ),
and the impact brief of USAID’s Development Credit Authority (DCA) (USAID, 2011b).
The interview was carried out with Mr. Kofi Boakye, in charge of East and Southern
Africa at DCA.
USAID financed many agricultural credit projects between 1950 and 1985. These
projects sought to accelerate adoption of new technologies on small farms. The
objective was to help the development of smallholder farmers by making up for their
lack of capital and by reducing their reluctance to take risks, thanks to subsidized
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rates. USAID would provide credit lines to a country’s central bank or agricultural
development bank, which were then redistributed by financial intermediaries at
the local level, to targeted populations and for specific purposes (improved seeds,
fertilizers, pesticides, equipment, etc.). The projects financed turned out to have
mediocre or poor performance. From 1973, the year it launched an extensive evaluation of its agricultural credit programs, USAID sought to learn lessons from its
experience, and it changed policy direction. Nearly two decades later, during the G20
Summit and under the impulse of President Obama, USAID saw its role and involvement
in support for global agricultural development increase.
Though not specialized in rural finance development, USAID does work in this area
through several of its areas of agricultural development support, with the goal of
increasing farmers’ productivity and their market access. There are four areas of
intervention: promoting producers’ opportunities and capacities to market their
products; improving the social, economic, and environmental viability of agriculture;
mobilizing science and technologies to reinforce innovation capacities; and, finally
reinforcing education, agricultural training, and research.
USAID has two ways of working with financial institutions: through partial portfolio
guarantees for financial institutions involved in financing agriculture and through
technical assistance to some financial institutions that benefit from its guarantees.
The main objective of the portfolio guarantee is to induce banks to start up financing
agricultural finance activities that they judge risky, by sharing the risk with them.
There are no exit interest rate conditions attached, and impact on these rates is not
an objective. The guarantee moreover includes a contractual clause stating that the
financial institution cannot benefit from this guarantee if it receives a subsidized
credit loan for the same portfolio.
In theory, the DCA, which manages the partial portfolio guarantees, can grant credit
lines. [ 9 ] However, it rarely uses this tool, which requires development-bank skills and
an adequate portfolio-monitoring organization. Nonetheless, our interviews indicate
that it is not impossible that USAID develops this tool in the future.
[9] The 1998 Appropriation Act, adopted by Congress in October of that year, enables USAID to grant loans and
guarantees for all projects consistent with the development objectives defined in the Foreign Assistance Act.
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Finally, USAID also intervenes indirectly to support the supply side (financial institutions), as it carries out demand-oriented actions by proposing technical assistance to
producers and their organizations. This “access to finance”-oriented intervention may
include training actions for the demand side and actions to create favorable conditions
for the development of rural finance (markets, technical know-how, quality of seeds
and inputs, etc).
2.2. Donor positions on subsidized credit lines
Summary
Donors do share some positions on certain aspects of subsidized credit lines.
However, whereas the World Bank and KfW are strongly opposed to subsidized
credit, IFAD—without being favorable to it—tolerates it in certain special circumstances
and under specific conditions, and USAID, which in principle is opposed to any form
of subsidization, does not credit it with the negative effects that the others do.
The World Bank is strongly opposed to subsidization at all levels
Following heavy criticism of its past agricultural credit subsidization practices, the
World Bank is today strongly opposed to subsidized credit, be it credit proposed to
the end client or credit lines for financial intermediaries. It considers that interest rate
subsidization does not always reach its target, and that the instrument is sometimes
misappropriated to benefit the most influential stakeholders. They furthermore
postulate that the funds are not always used, as the market is lacking in demand and
in competent intermediaries to distribute them. Subsidized credits can also represent
an unjustified advantage for the financial intermediaries that lend them, to the detriment of the development of the retail market (representing in particular an obstacle
to other institutions entering the finance market). Finally, the World Bank views that
there is broad impact from market distortions, which also affect agricultural markets
and value chains (overuse of fertilizer, for example).
The World Bank’s strong opposition to interest rate subsidies applies not only to the
agricultural sector, but also other activities, and this for the same reasons (misappropriation of funds by the powerful, market distortions preventing new players from
entering the market, etc.).
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A SAVOIR
IFAD is opposed to subsidization of exit interest rates to end beneficiaries,
but leaves its operational teams leeway to propose it when the situation requires
The following statements from the IFAD Decision Tools for Rural Finance (IFAD, 2010),
act as a good introduction to the institution’s current position regarding subsidization:
“Financial services that focus on on-farm activities and agricultural businesses, without
necessarily targeting poor people. Fresh thinking has identified some of the key features
of successful agricultural microfinance, replacing the heavily subsidized, unsustainable
and unsuccessful approaches of the past. ” Even though IFAD looks down upon credit
lines, its position is less rigid than that of the World Bank. With regard to loans granted
to financial intermediaries active in the retail financial markets, IFAD indicates that
subsidization is not desirable but can be tolerated and remains conceivable under
certain conditions. The choice of subsidizing a credit line or not depends on the
specific characteristics of each project. In certain cases, the subsidization can be defined
via an established formula according to market rates. However, this approach is not
systematic.
On the other hand, IFAD has a much stricter position on the subsidization of exit
interest rates offered to end beneficiaries. Their 2009 rural finance policy recommends
“ not [to] subsidize interest rates at client level or support the establishment of interest
rate caps or other mechanisms that distort markets. ” IFAD is opposed to the use of
credit lines and, in particular, the subsidization of these lines. This is partially from the
poor historical results of credit programs for agriculture, be they credits guaranteed by
states and lent directly to farmers, or lines of credit granted to agricultural development
banks. IFAD also notes that, in the past, the drop in repayment rates endangered some
programs because of the size of losses generated. It nonetheless recognizes that these
programs took place in a context in which the regulation and supervision of financial
institutions was unsuitable, and the culture of easy money very widespread. While
the programs seem to have had limited impact due to their difficulties, the grants
nevertheless seem to have distorted rural financial markets (IFAD, 2000).
Some of the justifications of this policy unfavorable to credit lines and subsidization
of interest rates are in common with those of the World Bank. In terms of market
distortions and of putting into question the sustainability of the supply, IFAD considers
that exit interest rates that are subsidized—and thus too low—act as a barrier to market entry and risk discouraging some lenders from working in the zones concerned.
Furthermore, subsidized interest rates do not encourage financial institutions to collect
savings or to look for other kinds of financing, thereby affecting the viability of these
financial institutions. Finally, subsidization can put into question the sustainability of
the supply, insofar as these rates may prevent lenders from recovering all of their costs.
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With regard to demand, IFAD, like the World Bank, views that subsidized rates can
have perverse effects, as they may attract persons with influence who misappropriate
the funds. It also believes that subsidization affects the culture of repayment because
of the “gift effect.” Finally, its decision tools (IFAD, 2010) state that subsidization of
interest rates undermines interventions by donors that do not subsidize their rates
in the beneficiary zones, and are thus likely to reduce the amount of total aid they
offer in a given zone.
However, according to the IFAD personnel interviewed, gaps between IFAD policy
and practical implementation in the field may exist. Definition of the characteristics
of projects is in fact the responsibility of the operational teams. The IFAD policies
guide the teams, without necessarily restricting them. The teams in charge of defining
IFAD policy play a consultative role in project validation. This way, some projects may
include—subject to approval by the decision-making bodies—a subsidization component including at the end-client level, even though these practices are not always
in accordance with IFAD’s policy.
KfW is opposed to interest rate subsidies, in line with the Kampala principles
Among the donors reviewed, it is perhaps KfW that most strongly shares the World
Bank’s opposition to subsidization, especially since the adoption of the formalized
financial system approach in 1994. The German Economic Cooperation and Development Ministry considers the following, in its overall approach to the financial sector:
“ Interest rates other than market interest rates benefit customers who already have
access to credit. Many poverty-reduction projects in developing countries have shown
that borrowers are capable of paying positive real interest rates at market conditions.
In the financial system approaches by BMZ, interest rates should be in line with
the market ” (BMZ, 1994). This applies outside of specific international agreements,
such as that for environmental loans to the Global Environment Facility (GEF). KfW
acknowledges that the market rates are not always easy to determine, especially when
there is no market. In this case, reference rates are defined for discussion, with the
goal of covering costs.
The work carried out as part of the “Making Finance Work for Africa” (MFW4A)
project of the German development cooperation agency ( Deutsche Gesellschaft fur
Internationale Zusammenarbeit – GIZ) strengthens this position opposed to interest
rate subsidies. GIZ has adopted the Kampala principles set out following the Kampala
Conference of June 2011, which insists on the need to enable the stakeholders in
charge of loan distribution to have access to forms of long-term financing. The overall
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policy document on agricultural finance in Africa, which is the practical policy of
these principles, nevertheless recommends, when implementing “smart subsidies,”
avoiding subsidies for inputs, for interest rates for clients, and for production.
Generally speaking, KfW does not directly subsidize end users. If small-scale producers
do not have access to credit, subsidies can nonetheless be considered within a different
framework, in subsistence programs or in transition phases (subsidies for activity startup, direct advice, etc.). “ In the longer term, these ensure that poor sections of the
population also become eligible as bankable clients, able to pay cost-effective interest
and the charges. ” (BMZ, 2004). German development cooperation thus identifies the
need to be flexible in some cases with regard to the rule of not subsidizing end beneficiaries, this with the goal of enabling these populations to become bankable. This
flexibility concerns subsidies for supervision, but not the subsidization of interest rates.
USAID: a flexible position, related to the inexistence of finance markets for small
farms in most developing countries, which cancels out the risk of market distortion
Contrary to other donors, none of the literature reviewed seems to clearly specify
the official stance of USAID on interest rate subsidies. USAID is by principle opposed
to any form of interest rate subsidies at any level. And there seems to be no internal
debate currently on the appropriateness of using this tool, namely because USAID
does not grant credit lines in the field of agricultural financing. According to our
interviews, if the DCA were to initiate credit lines to financial institutions in the
future, it would probably do so at a rate lower than those of the market, thanks to
its privileged access to US Treasury resources, but without subsidization at the
end-client level.
USAID’s outlook with regard to possible perverse effects and market distortions due
to interest rate subsidies is a bit different from that of the other donors. Its view is
that the subsidization programs set up by other donors, be it at the financial institution
level or the end-borrower level, do not necessarily have perverse effects in distorting
competition, since most developing countries do not have a market for financing
small farms. Generally speaking, few financial institutions exist in these markets, and
farmers would not be able to afford their rates anyway.
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Conclusion
Along with the change in paradigm in rural finance, all the donors interviewed have
witnessed in-depth change in how they intervene in agricultural financing. The operational teams involved in rural development encounter difficulties in setting up financing
for agricultural development actions due to the constraints imposed by the new
paradigm. This leads to debate between the “agronomists” and the “financial experts.”
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3. Analysis of arguments
for and against
the use of subsidization
3.1. Introduction
Summary
Assessing the effects of interest rate subsidies comes up against the problem of
clearly determining the relationship between the effects observed and the specific
causes. The effects of subsidization are in fact very much related to the capacities
and objectives of the institutions that distribute subsidized credit. They are moreover
inseparable from the effects of other measures to support agriculture and agricultural funding carried out over the same period. Furthermore, the level of structuring
of the financial sector is, like the agricultural sector, often not sufficiently taken into
account in the analysis.
Literature on the topic, which is rather opposed to subsidization, regularly mentions
situations referring to subsidized credit programs of the 1970s and 1980s that were
part of the former paradigm.
In these programs, subsidized credit rates were often set up directly within the
framework of development programs, without going through financial institutions.
These programs lacked competence in loan management, and their objectives were
defined in terms of impact on agriculture and not in terms of quality of credit. More
often than not, the outcome of credit repayment was poor. When the loans were
issued by financial institutions, it was chiefly by public agricultural credit banks. Many
of these were faced with political interference and thus had limited management
capacity and autonomy. Furthermore, interest rate subsidies were sometimes
combined with policies that sought to force the granting of loans (for example, in the
United States). The result of this was rapid deterioration in repayment and, ultimately,
significant losses.
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Because of the shift from the former to the new paradigm in the 1990s, recent literature
is more often than not opposed to subsidization. The documents supporting it highlight
the positive impacts observed in terms of agricultural development in a certain number
of projects. They dismiss certain perverse effects falsely attributed to subsidization
but do not take a position with regard to the effects on the development of financial
markets that serve the agricultural sector or on the sustainability of the financial offer
associated with subsidization.
Furthermore, financial market liberalization in the developing countries and termination of the majority of interest rate subsidy programs that were part of the former
paradigm did not lead to the positive effects that had been expected. Further, the
perverse effects that some people had attributed to subsidization still remained.
Therefore, as mentioned by the FAO document on the subsidization of interest rates
in rural areas (FAO, 1994), the impact of other economic policies was probably stronger
than that of modification. For example, the treasury policies set up by states with
strong liquidity needs had an impact on banks, wherein the latter preferred either to
invest in treasury bonds with very lucrative interest rates rather than lend to the
agricultural sector, or on the contrary to compensate the low level of interest paid
on compulsory reserves (that regulations set at a high level) by very high interest rates
in their activities to finance the economy, including the agricultural sector.
The several studies that have carried out a cost-benefit comparison of subsidization
programs have put forward an incorrect analysis of how to attribute the effects of
the different measures implemented. The estimated effects are thereby attributed
by default to subsidization, even though other measures could have contributed to
generating the impacts analyzed.
3.2. Presentation of the pros and cons
The pros and cons regarding interest rate subsidies that we have identified can be
divided into two categories. Some concern the interest rate subsidy tool in general,
and others are specific to agricultural sector financing. In all, seven major categories
of issues emerge:
1. How the markets work: pros and cons related to the forces of the credit market
and impact on the agricultural market, both from theoretical and practical points
of view.
2. Sustainability: pros and cons related to whether or not subsidized interest rates
have the ability to develop a sustainable supply of credit to the agricultural
sector.
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3. Reach: pros and cons related to the customer target reached and its size.
4.Cost: pros and cons related to the cost of interest rate subsidy programs.
5.Beneficiaries’ capacities: pros and cons related to the impact of interest rate
subsidy programs on the behavior of beneficiaries and their judgment capacity.
6. State involvement: pros and cons related to public policies and state intervention.
7. Donors: pros and cons dealing with the methods of donor intervention, with
subsidized credit for the end beneficiary being one of the support tools.
In each category, there are both pros and cons for subsidization, but in most cases they
must be put into perspective.
Frequent confusion
In the literature on interest rate subsidies for the end borrower, interest rate subsidies
are often confused with caps on exit interest rates; this consists in financial intermediaries in the retail market setting a rate lower than market rates, thanks to a form of
external subsidy provided to that intermediary. The level of subsidization of interest
rates can be set in consultation with the donor or the government and result in a
maximum interest rate to apply to specified loans, which are financed based on
low-cost refinancing. Setting a maximum interest rate in this situation makes it
possible to guarantee the redistribution of all or some of the interest rate subsidization to the end beneficiary. On the other hand, interest rate ceilings consist in third
parties (government, regulatory authorities, etc.) setting a maximum exit interest rate
that one or several lenders do not have the right to exceed for certain types of loans,
regardless of whether or not these lenders are subsidized. Interest rate ceilings have
perverse effects because they limit the ability of the institutions concerned to set
their own exit interest rates at a level that enables them to cover their costs and
implies that they cannot make a profit serving customers who cost them dearly.
Likewise, subsidized credit and forced directed credit are often confused, because
subsidized credit is necessarily directed, insofar as—like any subsidization—it must
define a precise target using eligibility criteria. If the credit is just directed, the financial intermediary maintains freedom in selecting its borrowers. The problem occurs
when the directed credit is forced, i.e., when the financial intermediaries concerned
are obliged to grant loans to certain targets and cannot select their borrowers, as was
the case during the financial crisis in the agricultural sector in the United States.
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Furthermore, many of the arguments encountered in existing literature do not apply
specifically to subsidized credit. The facts highlighted are generally true, but may also
be true for any subsidy or any loan. Attempts at misappropriation by persons with
influence, for example can be observed in all subsidization programs.
3.3. Arguments for and against subsidization
as a tool of intervention
Does subsidized credit supply endanger financial intermediaries?
Summary
One disadvantage of subsidization is that it is an obstacle to the transparency of the
cost of credit and that it gives potential customers the habit of prices lower than real
costs (an argument against). To prevent this perverse effect, it is often recommended
to prefer credit combined with a grant rather than subsidized credit; however, this
system is more expensive and thereby reduces the effectiveness of the subsidy. Good
communication can also improve transparency. Generally speaking, the quality of the
distribution mechanism will be more important than its form.
Opponents of interest rate subsidies consider that, when exit interest rates are
lower than inflation, this subsidization hinders the establishment of an efficient and
sustainable credit supply with regard to impact on risk for financial intermediaries, to
the development of a suitable resources policy, and to the preservation of capital
(argument against). However, this risk of making the situation of the financial intermediaries insecure can be tempered by suitable forms of implementation.
In comparison with subsidies directly distributed by donor programs, the subsidization
of interest rates of loans distributed by independent financial intermediaries facilitates
the setting up of the exit strategy, thereby reinforcing the sustainability of the supply
developed thanks to the intervention (argument for). For some people, access to “inexpensive” credit nevertheless encourages a poor repayment culture (argument against).
But the unsatisfactory results in repayment have been observed within financial
intermediaries that the lack the capability to analyze and monitor their agricultural
portfolio, or that are limited in their ability to select customers. These poor results
thus ensue not from subsidization but from the methods of managing the portfolio
concerned.
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The three arguments against interest rate subsidies should be put into perspective,
as they occur only when there are insufficiencies in the implementation of the program. They can best be tempered by precautions in implementation. The argument
for interest rate subsidies represents an advantage compared to simple grants.
One risk of interest rate subsidies is that it sends customers the wrong information
about the cost of the credit, which leads to their turning away from financial institutions at the end of the interest rate subsidy program. This reality must be taken into
account as soon as subsidized loan programs are set up, via communication on the
portion that has been subsidized. This would help mitigate the negative effect on
the culture of credit. International experience shows that, at the end of subsidized
loan programs, demand for credit decreases. Indeed, while farms with insufficient
profitability stop using credit, the majority of modernized farms accept indebtedness
at market rates when they have no other option.
Subsidization of the final interest rate is practically equivalent to grant distribution
that is conditional on obtaining credit, and it rounds out this latter in order to reduce
the cost of an investment for the beneficiary. The differences with this type of mechanism (implemented, for example, by KfW in Kenya) are on the one hand the lack of
transparency regarding the interest rates of the subsidization mechanism and, on the
other, a less cumbersome management system in the case of subsidization, insofar
as it can rely on the bank’s infrastructure. Generally speaking, regardless of whether
it is a subsidy in the form of subsidized interest rates or other forms of grants, the
quality of the distribution system is the basis for preventing perverse effects. Indeed,
a “bad” program distributing grants will have more perverse effects than a “good”
program providing subsidized interest rates, and vice versa.
With regard to sustainability of the supply, subsidization can be analyzed as a factor
behind the destabilization of financial intermediaries and be held responsible for the
increase of their risk at several levels. First of all, subsidization is an incentive to quickly
increase the number of loans to the agricultural sector. Financial intermediaries with
weak capacities of evaluation poorly measure and are exposed to risks regarding the
quality of their portfolio and the sustainability of their supply. Next, subsidization
can lead financial intermediaries to lend to borrowers with a higher risk profile. The
fact that subsidization encourages financial institutions to finance not very profitable
agricultural activities via credit is interpreted as being orientation toward high-risk
clients. Craig and Thomson (2003) consider that this can act as a significant risk for
American community banks (and for the investors of these banks), as the least profitable
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farms also have a higher risk profile. The increase in risk for financial institutions linked
to poorly controlled development of their agricultural credit portfolio can nonetheless
be mitigated by appropriate technical assistance measures.
Furthermore, as subsidized credit lines offer access to an inexpensive resource, they
do not encourage financial intermediaries to look for alternative sources of financing.
This can thus ultimately put into question their financial viability after the termination
of the subsidized credit line. In addition, the financing conditions of subsidized loan
programs have, in the past, often led financial intermediaries distributing subsidized
credit to consider attracting deposits as secondary and not to make use of this alternative source of financing. However, this bias could be corrected by the promotion
of deposits in the design of programs that include a subsidized credit line.
Another argument against subsidization, when exit interest rates are inferior to inflation,
is that they lead to losses in capital that are harmful for the development of a sustainable agricultural finance offer. This argument, often encountered in the desk review,
is too simplistic, insofar as it does not take into account all of the underlying costs
from which the interest rate results. Any losses that have repercussions on the capital
are due to rates that did not make it possible to cover the total costs, i.e. the total of
the transaction costs, the cost of resources (including inflation), and the cost of risk.
Inflation is indeed one of the parameters of the equation that determines if the
interest rates cover the costs, but this is not the only one. Subsidization of exit interest
rates is possible only if it is combined with a form of subsidization that takes into
account all the costs.
In comparison to subsidies directly distributed by the donor programs, subsidization
of interest rates of loans granted by financial intermediaries independent of the donor
facilitates the setting up of an exit strategy for the external support, thereby reinforcing
the sustainability of the supply that has been developed. Compared to grants for
which distribution by an independent intermediary is less obvious, this specificity has
the advantage of facilitating the donor’s exit strategy, as the financial intermediary
does not depend on this subsidized loan service. The intervention can be taken over
by loans distributed by the financial intermediary, which will be able to develop its
activities in financing the sector.
Some opponents of subsidized interest rates suggest that the poor repayment
behavior observed in many subsidized credit programs are encouraged by the “gift”
effect created by this subsidization. However, as there have been varied results
in portfolio quality among the financial intermediaries involved in subsidization
programs, it is not possible to confirm these assertions. A comparative study of six
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Asian financial institutions (Meyer and Nagarajan, 2000) involved in subsidization
programs mentions good repayment rates as a factor of success. In particular, the
Bank for Agriculture and Agricultural Cooperatives (BAAC) in Thailand, Bank Rakyat
Indonesia (BRI), and Grameen Bank in Bangladesh are mentioned. The CECAM rural
microfinance network of Madagascar, which has developed a program of investment
credit at subsidized rates, is mentioned as an example of portfolio quality. The credit
and portfolio-management methodology, the recovery procedures, the fee scale for
arrears, and the culture of repayment (encouraged by setting up savings programs),
as well as the existence of central credit registers, seem to have more influence on
the quality of the portfolio than does the interest rate of the credit.
Poor repayment thus seems to be due to the quality of management by the financial
intermediary rather than to interest rate level. The poor repayment performances of
many subsidized loan programs entrusted, as part of the former paradigm, to poorly
managed development banks or to agricultural development projects have thus been
mistakenly attributed to subsidization. Sometimes, the cause of arrears is also the
subsidization program methods that impose constraints on financial intermediaries
in their selection of loan applications and in applying their risk analysis methodology.
The rare measures of forced credit are indeed acknowledged to have harmful impact
on portfolio quality, and thus on the sustainability of the finance offer proposed to
the beneficiaries.
Subsidization can lead to misappropriation
Summary
Like any kind of subsidy or grant, interest rate subsidies attract persons with influence,
and there is often accusation that support benefits are misappropriated from
their initial purpose (argument against). Selection of beneficiaries by professional and
independent financial intermediaries can greatly remedy these perverse effects. This
argument against interest rate subsidies can thus be tempered by suitable forms of
implementation.
As with all forms of distribution of resources at low or no cost, subsidization can lead
to misappropriation. Fund misappropriation has been observed for some projects, but
this can occur for all forms of grants or subsidy, and the danger is not specifically
linked to subsidization of interest rates. On the contrary, distribution of subsidies in
the form of subsidized credit limits this perverse effect. Firstly, use of subsidized
credit as a means of aid distribution means the subsidization has a non-negligible
cost; this therefore reduces the attraction of these funds compared to resources
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distributed in the form of pure grants. The need to repay loans helps to make sure
that only individuals with serious intentions receive donations. Secondly, this problem
is related more to the independence and discernment of the distributing financial
intermediaries than to the interest rates. Even though public banks are often associated
with problems of interference from their governments, each one in reality has its own
specific operating method. The development players interviewed as part of the study
mention several successful experiences with this type of partner. The selection of
the partner that lends the credit is thus a key factor in the success of programs of
subsidized interest rates offered to end clients.
An expensive system
Summary
The systems used for subsidization are expensive, especially for auditing, and this has
an influence on the cost of this type of intervention (argument against). However,
comparison cannot be made with non-subsidized credit distribution, because of the
nature of subsidized interest rates. In this respect, we can on the contrary observe
that subsidization of interest rates reduces the cost of subsidization implementation,
as it uses an existing distribution system (argument for). The cost argument against
subsidized interest rates must thus be put into perspective.
The systems used for subsidization are expensive, especially for auditing. Strict control
of the use of funds is essential in any system of subsidization. It is based, at the time
when it is set up, on strict rules of access to the subsidy, precise decision-making
procedures, and clear attribution of responsibilities. An independent auditing system
is also necessary to ensure that all these rules are properly applied and the subsidies
properly distributed during the setting-up process and afterwards. Auditing must be
carried out thoroughly on supporting documents, as well as on-site for a sample of
beneficiaries. Compared to direct grants that are not reimbursed by beneficiaries,
the credit aspect requires more monitoring: subsidization of interest rates requires a
system for selecting borrowers, for distributing funds, and for following up repayments
and arrears. In past experiences, these systems have often been developed specifically
within the framework of subsidized credit programs, directly by donors or governments.
In this case, the cost of distributing subsidized credit is significant for the program
and can even become dominant if the volumes of subsidization decrease (as happened
in the United States).
On the other hand, when subsidized credit is distributed by existing professional
financial intermediaries, the cost of the distribution system is not borne by the program,
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and the granting of subsidized credit is therefore less expensive than providing
direct grants, for which the donor must set up its own system for selecting the end
beneficiaries.
A capacity-building opportunity for selected beneficiaries
Summary
Some critics of subsidized credit programs have attacked the significant resources
implemented to monitor loans traditionally distributed directly by specialized public
intermediaries. But this long-term monitoring facilitates the setting up of supervision
that helps end-beneficiary capacity building, which is a key element of success in programs seeking a change in farmers’ practices (argument for).
Furthermore, thanks to the use of credit as a means of distributing the financial
support, the beneficiaries of this aid become the customers of a financial service
rather than aid beneficiaries, thereby limiting the development of a welfare culture
traditionally associated with subsidies with nothing demanded in return (argument
for). Furthermore, the repayment obligation means that serious borrowers will be
selected, thereby increasing the effectiveness of the subsidies (argument for).
Subsidization can lead to promoting indebtedness among borrowers, as farmers
can feel an incentive to become indebted in order to benefit from the support that
is offered (argument against). But this argument must be qualified by the fact that
the risk can be tempered by suitable methods of implementation: distribution by
professional and independent financial intermediaries can remedy this type of bias.
As we have seen, credit subsidization is often accused of being too expensive, even
though it can be distributed by existing financial intermediaries. This reduces the cost
of the subsidy, in comparison with other subsidies for which administration systems
must be established. In addition, long-term monitoring linked to the period of repayment enables monitoring that facilitates the setting up of training for beneficiaries.
We can in fact see that the failure of modernization programs to provide new technologies is often related to the lack of command of the latter. The historical analysis has
shown that farmer-borrowers may need support in the financial management and
development planning of their farms, as well as in the use of new agricultural resources
they have at their disposal thanks to access to credit. Subsidized credit programs are
thus better suited to monitoring beneficiary performance than are direct grants. And
while direct grants do not structurally require monitoring, monitoring is needed to
evaluate outcomes whatever the type of grant or subsidy.
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Furthermore, beneficiaries of interest rate subsidies have the status of loan applicants
and not of grant recipients. They are responsible for repayment. This helps avoid
development of the welfare culture created by grants demanding nothing in return.
Interest rate subsidies are also more of an incentive for beneficiaries to better invest
and use their investment, insofar as return on their investment is needed to repay
the loan. In contrast, a poorly used grant will be a waste of public funds but will not
put the beneficiary into difficulty. According to an OECD reflection document on
the financing of agricultural investment (OECD, 1970), “[While interest rate subsidy
measures are used selectively], governmental aid via interest rate subsidies is likely to
encourage, in a relatively short time, the making of economically reasonable investments: debt service is such that the financial burden forces the farmer to respect
certain principles with regard to the orientation and management of his enterprise
in the long term. ” This point is especially significant when it comes to encouraging
environmentally-friendly investments (equipment that is often more expensive).
Distribution of aid in the form of interest rate subsidies makes it possible to implement
one of Meyer’s recommendations (2011) concerning grants to economic entities:
“Developing a cost-recovery mechanism can help ensure that only people with serious
intentions receive grants.”
Not only serious intentions, but also acceptance of indebtedness is required. Opponents
of interest rate subsidies criticize the obligation to become indebted in order to have
access to aid; however, while it is true that subsidization can be an incentive to borrow,
this incentive is not necessarily harmful. As seen previously, subsidization makes it
possible to develop credit demand while decreasing the risk taken by the farmer,
which is important for farmer populations generally adverse to risk. Here, the lending
by competent financial intermediaries plays a crucial role in the selection of solvent
borrowers within demand that has been expanded thanks to subsidization. The
phenomenon of over-indebtedness can thereby be limited, as long as the financial
intermediaries have the means and capacities to make a good-quality selection. The
general environment also plays an important role here, in particular through the
existence of central credit registers or systems of information exchange between
financial intermediaries on borrower indebtedness.
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A form of intervention that can orient market dynamics in accordance
with public policies
Summary
Subsidized financing is a form of intervention that can orient market dynamics in
accordance with public policies. Its leverage makes it possible to reinforce state action
in comparison with pure grants (argument for). Like any public policy instrument, it
can be affected by problems of governance (argument against). The special case of
programs of subsidies distributed by public banks subject to state interference is
sometimes wrongly generalized as an argument of the riskiness of subsidization, in
terms of possible interventions by persons with influence. Examples from Asia (that
of Thailand, among others) show that public banks, like subsidization programs, can
be effective when the environmental conditions are met.
The definition of public policies is a huge topic that goes beyond the range of this
study. The need for government interventions arises in particular in situations in which
competitive markets are inefficient, as is the case for agricultural financing. The failure
of some government interventions must not lead to weakening them, but to improving
their design. The limits of this type of intervention reside in the difficulty of anticipating
all the effects of an intervention on the markets and in ensuring that the interventions
decided as part of public policy implementation are carried out in accordance with
political objectives aiming for the common good, and that they are not misappropriated to serve private interests.
It is true that the governance structure of public banks and their dependence on
subsidies, which ensues from the obligation of low exit interest rates, makes them
vulnerable to public interference. However, this problem is not linked to the subsidization tool, but to the fact that this credit is distributed by public banks subject to
destabilizing state interventions (the most frequent being interference in the selection
of borrowers or deferral of payments). The situation of these banks is even more
fragile when the share of subsidized credits in their portfolio is large (which makes
them dependent on concessional sources of financing) and when the conditions
associated with this credit prevent them from choosing their customers freely (subsidies of high interest rates, precise directives regarding priority segments, Meyer and
Nagarajan, 2000). Nonetheless, not all public banks are confronted with this problem.
Furthermore, the distribution of subsidized loans is increasingly entrusted to private
financial intermediaries.
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Impact of support in the form of subsidization, for the donors
Summary
Some donors have easier access to resources in the form of subsidized credit lines than
in the form of grants. The local financial market is an important element in determining
loan conditions that will make it possible to support an agricultural development
program. It is affected by intervention from other donors.
Subsidization of interest rates enables interventions without grant resources for some
donors that benefit from privileged access to concessional resources. Support for
end beneficiaries can then be provided more effectively and more rapidly than with
grants, which can have more complicated release mechanisms.
However, some donors refuse to intervene in areas where subsidized loan programs
have been established. Conversely, in areas where a subsidized loan supply exists, be
it via donor intervention or government intervention, programs based on market-rate
credit have difficulty intervening effectively because the farmers there prefer the
subsidized loans. In both cases, subsidization can therefore finally reduce the total
amount of aid targeting these areas.
3.4. Arguments for and against subsidization
within the specific framework of agricultural financing
The financial service market for the agricultural sector is not very well developed,
and has little supply or solvent demand
Summary
It is generally recognized that agricultural credit markets do not work perfectly, and
that this can justify government interventions to meet the demand (argument for).
The perverse macroeconomic effects put forward by opponents of subsidization,
especially in terms of distortions of the rural credit and agricultural markets (argument
against), must be put into perspective. Indeed, agricultural credit markets are very
often practically inexistent and therefore do not run the risk of distortion. Economic
theory also states that incomplete markets cannot find a balance; the problem in this
case is development of the credit supply. Furthermore, the markets do not take into
account the positive externalities of agricultural development, especially in terms of
social impact, thereby justifying government interventions (argument for).
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Literature on the topic is in agreement on the fact that market forces cannot correctly
meet the credit needs of rural areas and agricultural activities. One reason is that
there are few financial intermediaries present in these areas (i.e., it is an “incomplete
market”). Those that do venture into this market struggle with structural problems
that are difficult to overcome and that increase their costs, especially low density of
population in some areas and the lack of infrastructure. Furthermore, for borrowers,
farm profitability may seem insufficient to cover the costs of loan distribution. These
conditions are not conducive to the establishment of market interest rates. And, as
some externalities (e.g. social impact) are not taken into account by the markets,
support for the development of an agricultural credit market seems necessary, thereby
justifying interest rate subsidies.
It is important to note that these arguments are not specific to the problems of
subsidization of rates for the end client. Rather, they give broader justification of the
need to support the development of the agricultural finance market. This issue is part
of the wider debate on the appropriateness of interventions in the agricultural finance
market. The choice of the subsidization tool is made after the decision to support the
financing of the agricultural sector.
This theory is backed up by the observation that, despite several decades of market
liberalization, formal agricultural finance markets are still more or less inexistent in
some rural areas. This is proof that the shift to the new financial sector paradigm and
liberalization have not enabled markets to play their role in these areas. Interest rate
subsidies can thus be a tool to help initiate the development of an agricultural finance
market, by initially making up for the gap between farm profitability and the level of
interest rates of loans determined by the underlying costs.
This way, subsidization encourages the simultaneous development of the technical
and financial capacities needed to gradually achieve independence from subsidization.
Interest rate subsidies, in combination with other supports, would thus act as a catalyst
for the development of agricultural finance markets, especially by encouraging some
financial intermediaries to focus increasingly on the agricultural sector.
Despite imperfections in how markets operate, opponents of subsidization highlight
the perverse macroeconomic effects of interest rate subsidies, especially in terms of
market distortions [ 10 ] for the end client. Market distortions are harmful to lenders
[10] The two distortions here mentioned are also discussed in the following section, from the point of view of
sustainability of the offer.
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whose interest rates are not subsidized: the distortions either prevent them from
entering the market, or force them to abandon it. It is the farmers who will suffer
from the non-development of a sustainable credit offer when the subsidization
comes to an end. The impact is also negative on the conditions offered to farmers
for savings. This is because the low exit interest rates induce the financial intermediaries
to limit interest on savings, with the assumption that maintaining these exit interest
rates after the end of the interest rate subsidy program will require a low resource
cost. However, if interest rates on savings are low, the rural population will not invest
its savings in the financial markets.
Nevertheless, these arguments remain theoretical points that have not yet been
proven. None of the economic studies in the desk research were able to provide clear
quantitative proof with regard to the effects of the various measures.
Assertions to the effect that farmers are less sensitive to interest rates
are controversial
Summary
One argument against interest rate subsidies is that agricultural producers are less
sensitive to access to credit than to the interest rate practiced and that, consequently,
interest rate subsidies should not lead to increase in agricultural credit demand
(argument against). While access to credit must undeniably be a prerequisite, we can
see that the phenomenon of adverse selection put forward by economic theory
implies that the quality of demand increases when interest rates decrease; this has
the effect of increasing solvent demand (argument for). The ensuing growth in formal
credit is a tool for fighting exorbitant rates. Furthermore, the conclusions of studies
on sensitivity to interest rates must be put into perspective; they tend rather to show
that micro-entrepreneurs are relatively sensitive to interest rates. The development
of a farm moreover needs considerable structural investments that require the use
of medium- or long-term loans, for which the impact of interest rates is much more
significant than that of short-term loans traditionally used by micro-entrepreneurs
(argument for).
On the demand side, it can be asked whether farmers are that sensitive to the levels
of interest rates practiced and whether interest rates influence demand. Opponents
of interest rate subsidies respond that farmers suffer more from the lack of access to
credit supply than to the level of interest rates. They believe that farmers’ sensitivity to
interest rates is limited. Because of the seasonality of their activity, they are allegedly
more sensitive to non-monetary conditions (such as the repayment schedule) than
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to the level of interest rates. While these observations are accurate, they do not take
away from the value of interest rate subsidies, as priority in many cases is access to
credit. In such cases where the supply does not exist, it must be developed before
we can talk about subsidized credit. Next, the agricultural credit products must be
determined, whatever their conditions (interest rate subsidies or not), taking into
account non-monetary constraints (mainly in terms of schedule and loan life).
Several documents put into perspective the importance of these observations.
“Subsidies as an Instrument in Agricultural Finance: a Review,” published by the
CABFIN group, is clearly opposed to interest rate subsidies. However, this document
implies that farmers are sensitive to rates because one of the negative impacts of
subsidization is that, when demand increases, financial institutions must “ration” credit,
with the risk of giving priority to applications by rich producers with political connections. This review refers to studies, with or without specialization in an agricultural
clientele, that evaluate the sensitivity of micro-entrepreneurs to interest rate levels.
For example, an experiment carried out by Compartamos in Mexico (“Access to
Finance,” Karlan Dean and Jonathan Morduch, 2010, in Meyer, 2011) showed that
demand increased when interest rates were reduced by 0.5 percentage point on a
cluster of customers. Another experiment, carried out in Bangladesh, showed a
significant change in behavior of borrowers, who paid back their loans more quickly
following a significant increase in interest rates (“Do Interest Rates Matter? Credit
Demand in the Dhaka slums,” Dehejia, Montgomery and Morduch, 2009, in Meyer
2011). Finally, a study carried out in China, specifically on farm households, concluded
that only 20% of borrowers with the poorest risk profiles had a totally inelastic
demand, while the others had an elastic or very elastic demand.
In the case of farms in particular, these various observations are all the more valid
because the loan life is longer. Microcredit is generally short-term, but financing for
investments whose profitability is deferred over time (planting, young animals, etc.)
or for investments for farm modernization requires access to long-term credit, for
which the impact of interest rate levels are stronger the longer the loan life is.
Subsidization can then make sense in these cases. The purpose of the credit and
therefore the nature of the project financed are therefore to be taken into account:
even if the most important aspect for this type of financing is to adapt the other
characteristics of the loan to special scenarios (maturity, total or partial grace periods
in the schedule), subsidization can make sense if the interest rates are too high for
long-term loans.
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The phenomenon of adverse selection, discussed by the American economist Joseph
Stiglitz in 1993, sees a correlation between the levels of interest rate and the type of
borrower: high interest rates seem to be associated with credit markets whose
demand is formed by not very reliable borrowers. The most reasonable borrowers
are left out of the market when the level of interest rates rises, and this increases the
amount of repayments or the loan life, as well as the risk of not being able to meet the
repayments of a possible loan. In this case, the banks can no longer select the good
borrowers, because they have withdrawn themselves from the market. Conversely,
when interest rates decrease—through subsidization for example—borrowers enter
the market again, and banks can once again choose their clients from a demand whose
makeup does not have a negative bias.
With regard to farm profitability, having to meet high interest rates requires better
profitability so that an investment can pay for the interest charges. In the case of not
very high interest rates, less profitability is required. This automatically increases the
number of bankable applications. The market increases, enabling financial intermediaries to take advantage of economies of scale, and thereby makes it possible to open
up to markets that had been inaccessible until then. Consequently, by encouraging the
growth of formal credit through the increase of solvent demand and the promotion
of a suitable credit supply, subsidization can contribute to reducing the volume of
loans lent at exorbitant rates.
The impact of interest rate subsidies on the rationalization
of agricultural production: a topic for debate
Summary
The critics of interest rate subsidies consider that these can curb the rationalization
of agricultural production and wind up maintaining not very profitable activities
(argument against). But this takes into account neither the impact of investments on
farm profitability, which can justify subsidization as an occasional boost, nor social
externalities. The low profitability of many agricultural activities is, on the other hand,
an appropriate argument to justify the use of subsidized rates in well-targeted cases
(argument for). In cases where the purpose of subsidization is to further structural
evolutions that enable farms to achieve a profitability that will then enable them to
borrow at commercial rates, sustainability does not require an ongoing supply of
low-interest loans (argument for).
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Some commentators go even further in their analysis of profitability and talk about
rationalization of agricultural production. Critics of subsidization consider that these
can curb the rationalization of agricultural production and wind up maintaining not
very profitable activities. Doliguez and Wampfler (2007) quote the works of economists
(Servolin, 1972; Mollard, 1978; Cavailhes, 1981; Coulomb, 1993) that tend to show that
the profitability of capital in agriculture is lower than in other sectors. This is explained
by the fact that farmers do not seek extra profits once they are capable of making
their activities sustainable and of making money from them. This limits the capacity
of farms to pay high interest rates. Justifying subsidization by the low profitability of
farms (compared to industrial or service businesses) must nonetheless be studied
case by case, given the diversity of situations of farms (form, size, nature of activities)
and of agricultural markets (price and market environment, level of pay from work, etc.).
The agricultural market forces naturally push aside the less profitable farms, which
are gradually absorbed or replaced by bigger and more efficient ones. Critics therefore
accuse subsidization of financing farms that are not very profitable and of thus keeping
them in business; this would hinder the rationalization of agricultural production or
its reorientation toward more promising value chains and the resulting benefits that
the economy of the countries concerned could have gained from it.
But this argument does not take into account the fact that subsidized credit can be
used to finance investments that would change production structure. They would thus
improve the profitability of the farms financed, enabling them to work in normal
market conditions afterwards. This has been confirmed by some observers, especially
in the early 1990s at the World Bank’s Operations Evaluation Department, which noted
the beneficial impact of certain programs that incorporated interest rate subsidies
on the farms supported (WB Independent Evaluation Group, 1994).
This beneficial impact can be seen in the increase of agricultural production and
the improvement of farm assets. If the objective of interventions to support the
development of agricultural finance supply is ultimately the development of the
beneficiary farms, it seems that subsidization can effectively provide positive results
along these lines, when it is implemented under the right conditions. A key factor for
success is good targeting of the farms that are supported, especially by taking into
account their prospects for profitability. Involvement by a financial intermediary can
facilitate the targeting of this type of farm, thanks to the analysis skills that are essential
to its activity. The targeting determines the type of development that will be encouraged: if the subsidization focuses on the financing of value chains and/or specific
production, it may further excessive concentration on certain sub-sectors (e.g., cotton)
or types of farms with high-intensive capital (to the detriment of family farms).
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Nor does the above argument take into account the development context of France
or the United States. In these two countries, concentration of the agricultural sector
took place during the last century, when industry was already developed and the
tertiary sector in the process of developing. These two sectors thus needed the
surplus labor left over from farms. This change is not systematically transposable in
developing countries. In countries where industry and services are not developed
enough to absorb a significant amount of labor, rapid concentration of agriculture
without significant parallel growth of other sectors can, on the contrary, lead to
increase in unemployment and urban poverty. This is therefore not necessarily the
right solution, especially in the context of very strong demographic growth with
increase in population of both urban and rural areas.
As we have seen, subsidized credit can be used to finance investments that will change
production structure. The impact will be improved profitability of the farms financed.
In this case, once the changes are made and profitability improved, the farm will be
able to borrow at market rates.
It is important here to make the right distinction between the sustainability of impact
on agriculture and the sustainability of the financial offer. Here, impact is measured
on the agricultural sector, and its sustainability can be ensured without a continued
supply of low-interest loans. Financing can continue at market rates if the farmers are
put into contact with a financial intermediary.
Leverage on resources and orientation toward viable beneficiaries
Summary
The subsidization tool has specific characteristics compared to other forms of agricultural support. Although some farmers can be excluded from the financial support
offered by subsidization because they do not have access to credit (argument against),
the selection made by the financial intermediaries presents the advantage of improving
the targeting of beneficiaries. Assuming they have identical available resources, the
subsidization tool enables broader reach than do direct grants, thanks to a bigger
lever affect (argument for). Interventions in the form of guarantees have an even
broader reach but do not solve the problem of profitability.
One of the faults mentioned by critics of interest rate subsidies as a tool for supporting
agricultural financing is that farms that disqualify from credit are left behind in aid
distributed in the form of credits. But supporters of subsidization respond that it is
more advantageous to have the financial intermediaries select the farms most apt to
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develop, if we consider the goals of economic development and of targeting the
subsidies with maximum effectiveness. According to this theory, these farms would
go out of business in any event, even without the existence of interest rate subsidy
programs. It would therefore seem to be better to avoid providing subsidies for
non-viable farms.
Finally, the World Bank review (OED, 1993, quoted by Buttari, 1995) points out that
there may have been unwarranted criticism of targeting, because of mistaken evaluation of the size of the beneficiary farms. In the cases inventoried, it was not the
smallest farms that benefited from the subsidy, but medium-sized farms that had
trouble accessing credit and that could thus apply for this support.
Furthermore, some studies are inconsistent in that they criticize both the massive
financing of non-profitable farms by subsidization programs and the fact that some
farmers are left behind by them. This inconsistency is typical of the tendency to gather
the arguments “against,” without specifying the different contexts to which they apply.
The use of subsidization also provides the advantage of financing a greater number
of end beneficiaries than do direct grants. Direct grants with an equivalent amount
of resources are often insufficient to meet the needs. However, it is possible to get
around the limits in the reach of grants by combining grants and loans, as for certain
types of grants that require something in return from the beneficiary.
Some players that are little inclined to subsidize rates put forward portfolio guarantees
as an instrument to help develop the financing of the agricultural sector. Guarantees
do provide an even greater leverage than does subsidization. However, they cannot
reach the same segments of farmers. They generally do not provide enough incentive
to financial intermediaries for becoming involved in the financing of small family
farms, and they do not solve the problem of the gap between the cost of medium-/
long-term credit and profitability of activities.
A form of legitimate support from public authorities?
Summary
While they do not claim to be able to solve the rural infrastructure deficit over the long
term, interest rate subsidies can temporarily make up for the loss suffered by farmers
if public authorities have not provided adequate infrastructure (argument for).
Transportation, electricity, and telecommunications infrastructures are the responsibility of the public authorities. For farmers in rural areas where such infrastructures
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are limited, the cost of transactions with the agencies of financial intermediaries can
be expensive or even excessively expensive. Some studies estimate that the nonfinancial cost (transportation, etc.) of credit in northeastern Brazil is between 10 and
13% of the amount of the loan, regardless of the loan life. In Nigeria, Ohio State
University (OSU, 1987) found non-financial costs for seed loans ranging from 10.8 to
13.1 % of the amount of the loan (Pizzaro, 1994). The infrastructure deficit (in transportation, electricity, telecommunications, etc.) also makes transaction costs more
expensive for the financial intermediaries. It therefore has an impact on how rural
markets work and access to markets for selling production—and therefore on the
profitability of rural businesses. In this light, interest rate subsidies can be viewed to
compensate these constraints, at least for as long as public policies do not improve
the quality of rural infrastructures. Subsidized interest rates do not eliminate the
causes of overly expensive transaction costs over the long term, but they do make
it possible to limit the consequences for farmers.
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Summary
Interest rate subsidies are a special form of grant distribution to support agricultural
development. They cannot be an isolated measure: as a public policy tool, their use
must come within a coherent, global, and long-term system of public support for the
development of family farming.
Providing interest rate subsidies has advantages and disadvantages compared to direct
grants. The quality of the distribution mechanism is the most important factor for
preventing perverse effects. These recommendations concern the implementation
of actions that include subsidization of loans for the end beneficiary. They are based
on the lessons learned from the historical analysis, from research carried out on the
subject, and from analysis of arguments for and against subsidization.
If a subsidization system is set up, it must meet clear political objectives. If it does not
implement a predefined public policy—in this case the development of agriculture
(or a certain type of agriculture)—it has no meaning. Implementation of such a program
therefore makes sense only in countries that have an agricultural policy and that are
prepared to implement the program without direct state interference, which risks
diverting the program from its original objectives and from transparent operation.
Special attention must thus be paid to the practices of governmental bodies, as in the
case of implementing any grant.
Donor interventions in the form of subsidization of exit interest rates must be part
of existing public policies in the beneficiary country and meet the latter’s objectives,
even if it is a non-sovereign intervention (direct loan to a financial intermediary, without
state involvement). Interest rate subsidies are one of many public policy tools. Their
role is not to solve all the problems of agricultural financing, but to round out other
interventions to support the financial sector.
The recommendations, organized into three areas, concern the intervention context,
the forms of implementation, and supervisory measures.
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A SAVOIR
4.1. Recommendations regarding the intervention context
Relying on good-quality financial intermediaries in a functional financial system
Summary
Interest rate subsidies are a form of subsidy that relies on the financial sector. As such,
it cannot be effective if the financial system works poorly. Prior analysis of the agricultural finance situation is essential to avoid weakening the existing system. If there
is no local financial intermediary to distribute the subsidized loans, the government
interventions will have to first of all focus on creating such an intermediary before
considering the setting up of subsidized credit.
In the event of serious dysfunction in the financial sector, the subsidization tool cannot be implemented under satisfactory conditions and will be ineffective. Unfavorable
conditions include hyperinflation or fluctuating inflation. Subsidization cannot have
a decisive effect when the state taxes the financial sector in a way that discourages
the activity and increases its cost, making financial intermediation ineffective (high
taxes on financial operations or very high compulsory reserves). The conditions for
setting up a support program using interest rate subsidies have not been met if (i) the
financial intermediaries lack professionalism and/or diligence (i.e., there is lack of
transparency, absence of reliable activity report, high risk of corrupt practices, etc.)
and the intervention’s supervisory authorities are not effective, or (ii) if there is no
financial intermediary where the intervention is to take place.
Before setting up an intervention, it is essential to study the agricultural financing
system, including financing by the financial sector and financing by trade partners
within value chains. The interventions being considered must be analyzed in the light
of the impact they could have on the mechanisms of existing agricultural financing
networks, so as not to weaken them. It is also important to evaluate whether capacities
to use the subsidy well exist in the sector.
If the prior analysis identifies considerable shortcomings in the financial sector, such
as financial intermediaries in a vulnerable situation or an insufficient presence in rural
areas, a phase to set up a distribution channel will be necessary before considering
an interest rate subsidy program. If there is no existing market, this can enable the
creation of one or more institutions, or help one or more institutions start working
in the target areas. It is important to avoid the setting up of programs in which subsidized credit is distributed by ineffective and poorly managed financial intermediaries,
or by financial intermediaries that would cover the sector out of opportunism. In
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order to operate correctly when there is no good-quality financial intermediary working
with the target clientele, the first priority will be to enable access by agricultural
value-chain entrepreneurs to financial services. This will involve supporting financial
intermediaries that wish to develop in this sector but that cannot do so at affordable
rates for the demand (due to a still insufficient scale).
Subsidization is the basic tool for creating a financial intermediary, or helping an
existing one start working in targeted rural areas. It can apply to technical assistance
or to operating costs, on a degressive basis. For the financial intermediary, subsidization
can be an extra tool for developing its activity. To start up sustainable financial services,
it is important to subsidize the financial intermediary’s resources, so that it can lend
at “market” conditions. If no market exists, the objective will be to set up interest
rates that will enable the financial intermediary to cover its long-term costs (i.e. its
estimated costs if it enjoys sustained growth).
Subsidies to financial intermediaries can be provided by different mechanisms: direct
grants or subsidized resources, for which all or part of the subsidy is maintained at
the financial intermediary level. The subsidized share of subsidized resources can be
allocated to the end beneficiary via subsidized exit interest rates—or to the financial
intermediary, enabling it to increase its margin. Subsidies dispensed by a subsidized
resource mechanism have the advantage of being proportional to the activity (and
thus of encouraging the financial intermediary to meet the set objective); the disadvantage is that disbursement is mainly carried out when the program is well underway,
even though the financial intermediary needs to invest mostly at the launch phase.
Suitability thus depends on the capacity of the financial intermediary to pre-finance
the investment needed to launch a new agricultural credit product.
When a financial intermediary begins activities, it is better if it first sets up short-term
credit, so that it can build its knowledge of the market. Interest rate subsidies are not
always justifiable in the case of short-term credit. The time for considering setting
up subsidized credit to finance investments comes later.
Like any form of support involving credit, subsidization makes sense only
for profitable investments in a favorable and stable context
Summary
Before deciding on the types of credit to subsidize, analysis of the profitability of
investments to be encouraged and of the conditions of this profitability must be
carried out.
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A SAVOIR
For farmers investing thanks to interest rate subsidies, favorable economic conditions enabling them to sell their products must exist. There must also be no risk of
distortion on the domestic markets due to state interventions (e.g. caps on the
prices of agricultural products to limit the food expenditures of the urban population) or to outside food aid. Government policy must encourage investment by
establishing facilities and stimulation measures, and it must exercise a reasonable
tax policy. Furthermore, research and agricultural extension bodies that can provide
supervisory, technical, and management measures must help the entrepreneurs of
the value chains receiving subsidized credit to use their investments well, by helping
them to develop their production techniques adequately. Finally, the beneficiary’s
projected operating account must cover the cost of the credit and make the
financed investment sustainable.
4.2. Recommendations concerning how to implement
the subsidization tool
Identify the objectives of the subsidization properly
Summary
There are two ways to apply subsidized interest rates for the end client, with a goal of
supporting economic development. The method of implementation will be different
for each one, and they will involve different exit strategies. The implementation might
be a one-off measure to finance the structural evolutions of the agricultural sector
or to orient it toward techniques or investments concerned with positive externalities
(in particular “green financing”). It may also seek to launch investment-oriented credit
activity designed to be permanent.
The subsidization tool can be used with two very different strategic objectives: to
finance structural evolutions, or to support the launch a sustainable investment
financing activity by a financial intermediary.
When this tool is designed as an “occasional” measure to finance structural evolutions
in the agricultural sector, it puts into motion a form of Keynesian policy that seeks to
start up a virtuous circle: investments enabling modernization and change in the
conditions for profitability of the agricultural activity (increase in the production and
income of agricultural entrepreneurs) and continued operation of the farm under
improved conditions no longer requiring the use of subsidized loans. This is what was
done in France within the framework of the policy on agricultural structures, launched
in the 1960s.
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These measures can be occasional, insofar as farms that have invested in assets are
expected to be able to continue their activity using loans at market interest rates.
However, in past international cases, they have been given a long-term perspective
in order to reach a significant impact in the agricultural sector. Changes in techniques
or equipment with the environment in mind also fall within this category; in this case,
change does not lead to improvement in profitability in strictly financial terms but in
improvement in global profitability. It then makes sense that it is not the farmers who
pay for the positive externalities generated, and that the cost differential be covered
entirely by government intervention.
Interest rate subsidies can also be used as a temporary measure to help financial
intermediaries start up a new investment-oriented credit activity, thereby acting as
a catalyst. In this case, subsidization has a dual role. The first role consists in supporting
one or several financial intermediaries in launching a new loan product or in serving
a new segment of clientele: in this case, the purpose is to compensate the heightened
cost of launching such an activity, by using subsidization to set an interest rate under
the break-even rate. Such subsidization can be expected to be gradually decline as
the skills of the financial intermediary and of the activity develop. If this happens, the
unit costs of the subsidization will decrease, and it will wind up disappearing. The
second role is to encourage farmers to invest; this is a way to overcome farmers’
eventual reluctance to change their practices. Here as well, it is possible to reduce the
subsidization in the long term, once the profitability of the investment concerned is
demonstrated by practice, and the risk taken by the farmer has diminished accordingly.
Subsidization has often played the role of social measure to support small farms. It has
very often been used for political purposes to transfer income to farmers (especially
in France, the United States, and Brazil). This may be part of a policy with social
objectives, to help maintain a sector made up of small farms (to prevent rural exodus
and increase in unemployment and in urban poverty). In this case, it is a long-term
measure that will not be able to cover its costs and that will therefore require
adequate budget spending. This is generally more up to the state budget then to
international aid.
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A SAVOIR
4.2.1. A healthy subsidization system that is regularly evaluated
and audited
Distribute subsidized loans via good-quality financial intermediaries recruited
through an open selection process
Summary
The selection of partners in charge of distributing the subsidized credit is key to the
success of the program. The opportunity to participate should be open to all financial
intermediaries that meet certain criteria. The process should make it possible to
welcome any new partners.
Many subsidized credit programs have been poorly managed because of the distribution structure of the loans, often by non-financial and non-sustainable programs
or by public banks suffering from poor management and state interference. In line
with the new paradigm of rural finance, it is recommended that these programs be
distributed by professional and sustainable financial intermediaries. These partner
lenders are the “implementation agencies” of a subsidization program. The success
of the latter depends on the quality of these financial intermediaries. It is therefore
important to evaluate them beforehand with regard to their management, their
client relations, the effectiveness of their operations (examination of applications,
waiting periods, and customer management), the quality of their portfolio, and their
governance.
To set up the program without financial market distortion, the recruitment of partner
lenders must be done transparently, based on calls for proposals; be designed to
recruit several financial intermediaries, so as not to privilege a single partner with
monopolistic profits; and open up regularly to the possibility of new financial intermediaries joining the program, so as not to exclude new participants from the market.
Ensure that the financial intermediaries can make their lending decisions
independently
Summary
The implementation mechanism must provide for the financial intermediaries to be
able to make their decision to grant loans independently. They must be free to select
their customers from within the identified target clientele. It is the financial intermediary that must, at least partially, assume the risk for subsidized loans.
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Two types of dysfunction have led to poor results in the past. The first is interference
from the state or from persons with influence in the system of subsidized loan distribution, which has led to persons with influence siphoning off the aid. The second
is that the obligation to lend to any beneficiary meeting certain criteria has led to
lack of control over risk and to dissuading the financial intermediary from taking on
full responsibility.
These experiences teach us that the partner financial intermediaries must have complete independence when granting subsidized loans, and they must assume the risk
of the loan—at least partially—in order to fulfill their role of selecting good-quality
borrowers. This freedom of choice does not mean that specific eligibility rules for
access to subsidized loans cannot be set in order to limit windfall effects. The financial
intermediaries must be explicitly protected from state interference.
Adapt the volume of the intervention to the need and capacities
of the partner financial intermediaries
Summary
The total volume of the intervention must be large enough to avoid distortion in terms
of competition among farmers. At the same time, the volume of the intervention
entrusted to each partner lender must take into account the latter’s capacities, so as
not to create unbalances in its activity.
Access to a subsidized loan means access to a partial subsidy for investment. If the
subsidized loan volume is reduced, only some farmers will be able to benefit from it.
This will create distortion on the agricultural production market, as it favors those
who get served first. When the subsidized loan volume is too low, there can be a
crowding-out effect, by which the best farmers will be chosen in the best of cases.
But in any event it creates disparities, and it is also probably more likely that individuals
with connections in the decision-making channels will be chosen. The process can
be reasoned in terms of privileging model farmers, if the introduction of a new mode
of production is involved. However, without support measures, it will be difficult to
promote the latter.
At the same time, the volume of subsidized loans that each financial intermediary
establishes must be thought out in terms of its capacities. If the credit distribution
goals are set too high and encouraged by strong incentive measures, the financial
intermediary may turn away from its existing activity to focus its skills on subsidized
loan distribution, for which its competency is not as great. The end of the project will
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see a decrease in not only the financial intermediary’s independent activities, but also
its level of competency in them. In short, the project may have negative overall impact
on the financial intermediary and thereby on the sustainability of the financial services
supply.
This impact on the financial intermediary can be felt at two levels. The first is on its
lending activity, as the subsidized loan distribution may imperil its existing products
used for the same financing purposes. It is therefore important to analyze this aspect
when defining transition strategies. Human resources and operating resources may
also be diverted from credit intended for other purposes, and the financial institution
may be discouraged from marketing its existing products. The second level of impact
concerns the financial intermediary’s activities related to savings and access to
resources: if the subsidization is carried out based on subsidized credit lines, the
financial intermediary may no longer use its usual suppliers of resources and thereby
make fewer efforts to promote savings.
To avoid this type of perverse effect, it is best to limit the volume of subsidized loans
entrusted to each financial intermediary according to its existing activity. For example,
if the financial intermediary already conducts an activity in rural areas, a reasonable
proportion should be set between its existing loan portfolio and the subsidized loans
to distribute. Analysis must be carried out case by case based on an evaluation of the
activity of each financial intermediary and the real consequences on the operating
of its subsidized loan distribution (What are its implementation strategy and transition
strategy?).
Crédit Agricole in France is an example of a financial intermediary which was able to
develop its activities successfully, despite the fact that a significant proportion of
those activities were devoted to subsidized loans. But this was possible in a situation
with an ongoing policy of heavy use of subsidization to support agriculture, backed up
by state support for this institution. It is not a model that can be applied everywhere.
Thus, there are other cases of financial intermediaries that were partners to development programs for the distribution of subsidized loans and that abandoned their
other activities, in particular savings deposits, to set up these programs (e.g. IFAD
project in Nepal).
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Evaluate the subsidization system regularly
Summary
The system’s relevancy must be evaluated regularly in order to allow for adjustments.
Performance objectives will have to be determined and will be one of the bases of
evaluation. They may include objectives for developing savings in order to encourage
bank use.
Regular evaluations must be carried out as the project unfolds, in order to take into
account changes in the environment as well as the program’s impact on both the
partner financial intermediaries and the end beneficiaries. Such evaluations can adjust
the project system if necessary and ensure that it is being implemented properly, by
taking into account its impact at various levels.
With regard to the agricultural environment, and especially the evolution of agricultural markets and practices, it is important to make sure that the investments
promoted by the project in the new context are appropriate. It is also necessary to
monitor the evolution of the financial services supply in the target areas (existence
of financial intermediaries, conditions of financial products offered, evolution of
volumes, competition situation); this can lead to identifying new potential partners.
The impact on the partner financial intermediaries must also be evaluated regularly.
This includes impact on the evolution of their financial services (conditions and
volumes, credit and savings), the evolution of the organization, and the evolution of
their competencies in the sector. At the beneficiary level, the main aspects to evaluate
are the proper technical usage of investments, their profitability, the evolution of the
overall economic situation, the evolution of savings deposited in the financial sector,
and the use of financial services. Proper implementation of the project overall should
also be evaluated regularly: reaching set goals, proper implementation of the system
to check eligibility conditions, good impact from the subsidization on the end beneficiary, and effective distribution costs for the financial intermediary.
The protocol agreement with the financial intermediaries must include quantitative performance measures that will be followed regularly, especially during these
evaluations.
Impact evaluations based especially on the continued collection of quantitative data
should continue over the long term (at least during the entire loan repayment period),
in order to measure the impact on the end beneficiaries of the project, on the sector
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(identification of possible imitation phenomena), and on the partner financial intermediaries. These evaluations will have to focus in particular on the appropriateness
of the use of subsidization in order to meet the program objectives.
Establish an effective and lightweight auditing system
Summary
The auditing system is essential to avoid the perverse effects of the subsidy systems,
so that they do not benefit certain categories of population or financial intermediaries.
It must remain lightweight to keep costs down.
In any subsidy system, auditing is essential to make sure that the subsidies reach the
targeted beneficiaries according to the defined eligibility criteria. A system of permanent auditing must thus be set up. Auditing must be done systematically on documents and above all on a sample of cases on-site. It is important to enact the recommendations of the auditing reports. The protocol agreement must provide for penalties and possible early withdrawal of the project if the eligibility criteria are not respected.
While cost must be a factor when choosing the auditor, the latter must also have
good incentive to carry out the auditing correctly. The auditor chosen may be a
consortium made up of a local accounting firm and one or more reliable technical
partners not involved in the project, which will be paid a set annual fee. Choosing
reliable technical partners is difficult: it is rare to find organizations that are technically competent, available for the length of the project, and impartial. The choice is
nevertheless essential for any program that includes grant or subsidy distribution.
In the case of setting up interest rate subsidies based on the financial intermediary’s
own resources, subsidized via an interest rate subsidy fund, payment of the subsidies
can take place only after the investment has been made, and after presentation of
supporting documents. This is what is practiced in Madagascar as part of the program
of the United Nations Capital Development Fund (UNCDF) and the European Union,
which was launched with the CECAM network and extended to the entire microfinance network. In this case, the financial intermediary sets up credit with subsidized
conditions and receives payment of the financial compensation for the subsidization
on an annual basis, after the receipts of the investments are presented.
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Plan the exit strategy from the program design phase
Summary
Like in any grant/subsidy program, the exit strategy must be planned from the setting
up of the intervention. The customers will have to be informed about the subsidization
of the interest rates, so as to prepare them for when market conditions will come
into effect at the end of the program.
The exit strategy has to be planned differently, according to whether the program is
a one-off measure to finance structural evolutions in the agricultural sector, or the
launch of a permanent activity for investment credit.
If the program is a one-off measure to finance structural evolutions in the agricultural
sector, it will be necessary to evaluate how much time will be required for the loan
implementation phase to achieve the aims in terms of these structural evolutions.
The use of international aid to support the program can be considered for the entire
planned length of the program, under the condition that it unfolds properly. International
aid only during the start-up phase can also be considered: if initial investments are
of an exemplary nature, the financing can be replaced by local budget resources,
which may be made available under less favorable conditions. At the end of the program,
the financial intermediary will in any event not continue to offer the loan under
subsidized conditions. According to demand and the evolution of profitability in the
sector, it will perhaps replace the subsidized supply with one under market conditions.
The structural evolutions underway may enable the clientele to pay market rates for
investing in equipment. Whatever the case, the program will have the impact of having
increased the clientele’s bank use, thanks to its having established a relationship
between the customers and the financial intermediaries.
If the program is to help launch a permanent activity for investment credit, the
objective of the subsidization phase will be to anticipate the decrease in distribution
costs to the financial intermediary and to encourage customers to invest. At the end
of the project, the financial intermediary, thanks to the experience it will have gained,
should continue distribution of loans for investment in equipment, under conditions
whose evolution should be planned from the phase when the loans are set up.
Depending on circumstances, the subsidization may be divided in different proportions
between the financial intermediary (covering launch costs) and the beneficiaries
(reduction of rates to act as an incentive, in a launch phase). This will result in an evolution of exit interest rates according to the share intended for the end beneficiary.
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In both cases, communication on the length of support and the evolution of the
supply will have to be clear, as much for the financial intermediary as for its clients
and environment. This communication will play an important role in particular for
informing the beneficiaries about the real cost of credit; it will thereby enable the
cost transparency that is required for a credit supply under market conditions to be
able to take over from a subsidized supply.
4.2.2. Targeting: an essential element for effectiveness
and cost control
Targeting for the subsidization is an essential element for effectiveness and cost
control; it concerns both the purpose of the loans and the eligible beneficiaries. In
France and in the United States, subsidized loans were initially distributed very broadly,
and with a social objective. The high costs of these programs then led the public
authorities to refocus them on specific clientele and for specific purposes, in order to
increase their effectiveness. As the OECD noted following the lessons it learned from
agricultural loan subsidization experiences throughout the world, loans with reduced
interest rates thanks to state subsidies can contribute to achieving the objectives of
agricultural policy if they are used selectively (OECD, 1970).
Target the purpose of the financing properly
Summary
The impact of subsidization and its use are maximized in the case of financing investments (equipment, animals, planting), but subsidization can also be used under certain
circumstances to finance needs in working capital (inputs). The financing of real estate
investments must be considered with much care.
Loans to finance short-term economic needs can generally be accepted under market
conditions. Interest rates become much heavier for medium- and long-term credit,
and their weight can prevent an investment from being profitable. The profitability
of an investment may be late in coming , if it is not high enough to cover market
interest rates over the medium and long terms. Furthermore, there is greater uncertainty in the long-term (regarding prices and markets), and this weighs on the level
of income, which must be secure enough to be able to repay a loan. As confirmed by
the Triodos Facet study (2011), which was based on six case studies, it is in reality the
medium- and long-term needs that turn out to be practically impossible for farmers
to finance, even though their short-term needs are also far from being covered.
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Furthermore, in the context of structural change, investment in equipment has a
higher impact than does the purchase of inputs, thereby justifying subsidization of
the former. However, while improvement in agricultural performance in developed
countries requires investment in equipment, the use of inputs may be a crucial stage
for improvement of agriculture in developing countries: for this reason, subsidization
of short-term credit should not be totally excluded.
Purchase of land is a special case: while clarification of the land tenure situation of
farmers is a precondition that has decisive influence on the carrying out of investments on farms, the question of financing land purchase through subsidized credit
is a tricky one. Real estate loans are in any event conceivable only in countries where
the land tenure issue is sufficiently developed. In these contexts the OECD’s warning
must be taken into account: “ a particular difficulty arises when interest rate subsidies
are granted for land purchase: their effect risks putting greater price pressure on land,
and the long-term advantage for the agricultural community could thus become
negligible ” (OECD, 1970). The France case study has shown the mixed results of
subsidized real estate loans, especially for smallholder farmers.
Define the target clientele, in order to have sustainable impact
Summary
In order to encourage sustainable impact, the definition of the target clientele must
take into account its risk and profitability profile over the long term (after the end of
subsidization).
The target clientele of interest rate subsidy programs is clientele with the capacity to
make the investment financed profitable, thus making its use sustainable. This in turn
leads to change in agricultural modes of production. One of the advantages of the
interest rate subsidies approach is that it is financial intermediaries, whose business
it is to choose clients with sustainable activities, that are put in charge of selecting
the beneficiaries.
This aspect must be taken into account when defining the program: it is important
to target farmers who not only would not invest in equipment without interest rate
subsidies (to avoid windfall effect and generate an additional positive effect), but who
also meet the required conditions to make that investment profitable (to ensure the
sustainability of impact). Determination of the target can thus be based on several
criteria: surface area under cultivation, potential surface area, age, crops cultivated,
or farm income (there are several management centers that can check the estimation
of this income).
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4.2.3. Financial and non-financial loan conditions whose aim
is to establish healthy behavior
Limit the proportion of subsidization, with a view to making impact sustainable
Summary
Setting the level of subsidization is a tricky exercise that must be carried out taking
into account the constraints of credit supply and demand. It is better for it to be as
low as possible, to avoid attracting persons with influence who could seek to misappropriate the subsidization benefits to their own advantage. When the purpose of
subsidization is to launch an investment credit activity via a financial intermediary,
the level of subsidization will have to be negotiated with the latter, taking into account
the foreseeable long-term evolution of its costs.
An interest rate is a price whose purpose is to balance the supply and demand for
credit. Subsidization is relevant in a context in which supply and demand are not
compatible: the purpose of subsidization is to make them compatible.
On the demand side, the acceptable interest rate is determined by the investment’s
profitability: theoretically, the interest rate must be positioned below the investment’s
internal rate of return (IRR). In addition to this theoretical reasoning, the risk inherent
in any change in mode of production as well as in family farming’s aversion to risk,
which is more difficult to quantify, are to be taken into consideration. It is thus necessary to plan, at least initially, a margin of incentive for the end beneficiary. This is all the
more important when financing green investment, in which the impact of changing
techniques leads to positive externalities rather than profitability for the farmer
concerned.
On the supply side, the interest rate must be superior to the cost of implementation.
Here as well the cost of the risk must be taken into account. In a new market lacking
statistics, a financial intermediary will tend to make a conscious evaluation of the risk,
and thus to over-evaluate. It can later decrease the interest rate based on concrete
experience.
The interest rates may be different according to the beneficiary. This has been the
practice of the PRONAF program in Brazil, which, to support small farms subsidizes
interest rates for them at higher rates than for big farms; this goes against the economic logic that would provide less expensive credit to big farms, which thanks to
their size can enjoy economies of scale.
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It is better to avoid too much subsidization, which could create the risk of corruption
if it attracts elite who seek to misappropriate the subsidy to their own advantage. In
this regard, it is preferable for the subsidized rate to be at least higher than inflation.
This is because the more attractive the conditions of such support are, the more
persons with influence will be tempted to use that influence to misappropriate the
support for themselves. They may go so far as to put so much social pressure on the
personnel of a financial intermediary that it becomes difficult for it to resist and to
apply procedures correctly, especially in terms of the eligibility criteria. The loan thus
granted under favorable conditions could then be used to invest in private affairs. If
loan disbursements are only in kind, they can be used on the personal farm of such
persons with influence (who are not part of the program’s target) or sold to people
who are not participating in the program.
When subsidization is set up to enable the launch of an investment credit activity
that will have to become permanent, the level of subsidization will have to be negotiated with the financial intermediary, taking into account the foreseeable long-term
evolution of costs. It is important to take into account costs at different levels: the
distribution costs (costs of rural agencies that are growing, costs of rural credit agents
with a mature portfolio—continuing education, monitoring, payment of interest, and
travel costs) the costs of management, and the cost of risk (which could be lessened
in the long-term by setting up a disaster fund, mechanisms for price stabilization, and
an insurance mechanism).
Define suitable non-financial conditions
Summary
As with any agricultural credit, the non-financial conditions of loans are as important
as the financial conditions and must not be ignored in a subsidization program. These
are loan life, grace period, repayment schedules, guarantee demanded, and possibility
of advance repayment.
The architecture of the credit products must be clearly defined, according to each
situation. When doing so, the schedules of the farms’ liquidity flow (not only the
income from the production for which the program is intended, but also all the agricultural and non-agricultural income from the target farms; the expenditures of the
entire farm, including the schedule of social security contributions, back-to-school
costs, etc.) and the possible deferred profitability of the investment (planting, young
animals, etc.) must be taken into account to determine the schedules.
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The loan life must be long enough to enable the profit generated by the investment
pay for the repayment, with a margin to take into account the risks that weigh on
agricultural income. The possibility of paying back the loan in advance and at no
charge must be provided for and explained to the beneficiaries. They must be encouraged to use this possibility as a way to reduce their expenses. The guarantees that
are demanded must also be adapted to the real means of the farms.
Also, to limit the risks of the loan being diverted to purposes other than what was
intended, good practices in agricultural credit recommend, whenever possible, disbursing the loan to the lender so that it releases it in kind for the borrower. This
nonetheless means that the lender could use the subsidy for other than what was
intended or other than for the target, and that the lender’s duties must be included
in the auditing process.
Require borrowers to contribute their own resources
Summary
A practice that is common to subsidy systems and to investment credit, and that thus
must be doubly applied in the case of interest rate subsidies, is that borrowers be
required to contribute their own resources. This guarantees borrowers’ personal
involvement in the project and maximizes the leverage of the subsidization.
One of the good practices recommended for subsidizing economic activities is participation by the beneficiaries, according to their capacities in a given context (Meyer
2011). Likewise, for credit, some microfinance methodologies are based on the
borrowers contributing their own resources beforehand, which is all the more relevant
in the case of medium-term loans for financing investments.
This prior contribution must not be confused with the blocked-deposit system
practiced by many microfinance institutions; this consists in blocking some of the
credit, which may or may not be contributed beforehand by the borrower, in an
account in the borrower’s name at the financial institution, thereby acting as a
financial guarantee. The financial consequence of this practice is the increase in the
real interest rate of the loan, insofar as the borrower cannot freely use some of his
or her credit, but pays interest on everything.
In the case of both a prior contribution and a blocked deposit, the purpose of
this equity is to measure the borrower’s interest in the investment by demanding a
personal commitment.
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If personal resources are required, they will be part of the project’s financing plan.
This contribution can be built up gradually, as part of a project-savings plan if the
financial intermediary offers this product. However, we should remember that this
requirement for personal resources must be evaluated flexibly: entrepreneurs who
have heavily invested to create their businesses do not necessarily have the means to
provide cash for part of the investment to finance with credit. The existing activity
should therefore be taken into account in some cases as personal resources, as a way
of affirming the borrower’s real investment in the activity.
4.3. Support measures
Provide technical and management support for the end beneficiaries
Summary
As interest rate subsidies often apply to investments, it is essential to provide the end
beneficiaries with both technical and management support in the proper use of these
investments.
Support measures are essential in order to obtain impact from programs designed
to introduce new techniques. Whenever possible, it is best that they be entrusted to
institutions already existing in the beneficiary’s environment. At the technical level,
this will involve introducing new agricultural techniques and their proper use, as well
as monitoring the implementation of new skills. In terms of management, support is
needed in monitoring accounts (simplified operating account, liquidities forecast)
and planning for the development of the farm (farm development plan, investment
project).
As the U.S. example shows, the advantage of subsidy distribution in the form of interest
rate subsidies is that the relationship with the beneficiary is established over the long
term, thereby facilitating the establishment of supervision. It is generally advised that
support be provided by bodies independent of the financial intermediaries, even
though this practice is sometimes put into question.
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Provide technical assistance to the financial intermediaries in order to set up
the distribution of the subsidized credit
Summary
Technical assistance for the financial intermediary, which implies a need for subsidies,
will often be necessary to ensure that the subsidized credit is distributed under the
right conditions. This is especially true if the financial intermediary has no experience
in financing agriculture, and in particular when the purpose of the subsidization is to
launch an in-house activity to provide loans for investments.
For the program to be carried out properly, the donor must make sure that the partner
financial intermediaries have the means to implement it under the right conditions.
Above and beyond this first objective, the program will seek to establish the right
conditions for the financial intermediary to be able to continue offering credit to
farmers after the program’s intervention period. This ties in with the priority to be
given to financial intermediaries working in the local market, in accordance with the
principle of subsidiarity stated in the AFD strategy for a mix of loans and donations.
Assistance provided to the financial intermediary will differ greatly depending on its
experience in agricultural financing, its existing system, and its network. The idea is
to accompany the financial intermediary so that it sets up all the elements needed for
proper distribution of the subsidized loans. This may require a support grant that will
have to be worked out based on sharing of costs for the launch of a new activity or
for the development of an existing activity. The purpose of this grant will be to support
the financial intermediary in setting up effective operations during the launch phase,
by financing aspects such as knowledge of the market and development of suitable
tools and procedures (evaluation of demand, monitoring loans, loan management
system, etc.).
AFD sometimes finances such changes based on calculation of the comparative
financial advantage included in the subsidization of a credit line for a financial intermediary (AFD, 2009 and 2011). This type of mechanism does not come within the scope
of this review, but it could be used to provide the extra subsidy needed that comes
in addition to the share of subsidization allocated directly to the interest rate. It would
nevertheless seem simpler and more transparent to use a separate grant. If this is
not the case, it is important to separate—in both the initial negotiation and in the
implementation follow-up—the subsidy intended for transfer to the end beneficiary
from that intended to provide support for change within the financial intermediary.
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This also has an effect on reports on the use of the subsidy, as it is important to
identify the subsidies going to the end beneficiary (and thus to the agricultural sector)
and those going to the financial intermediary (and thus to the financial sector).
Communicate information to the financial intermediaries and the end beneficiaries
Summary
Communication measures must accompany the program, targeting both the financial
intermediaries and the end clients, in order to guarantee the sustainability of both
supply and demand after the subsidization program.
The goal of communication targeting the financial intermediaries is to make sure that
all those wishing to develop an activity in agricultural financing be aware of the conditions for participating in the program and be able to apply for partnership.
Communication targeting the beneficiaries must be done in close coordination with
the partner financial intermediaries. It must focus on the conditions of the credit
supply (purpose, eligibility criteria, conditions), the length of the program, and the
importance of developing savings in order to implement the investment projects.
Improve the borrower’s environment, according to needs
Summary
Support measures may also be needed to improve the farmer’s environment, e.g. for
land tenure, infrastructures, or agricultural insurance.
For coherent implementation of a country’s agricultural policy, measures to improve
the environment surrounding the agricultural activity are also needed. Some concern
the agricultural financing directly, such as the land-tenure issue and mechanisms for
risk reduction. The land-tenure issue is of particular significance, as a clear tenure
situation is often a prerequisite for improvement of the farm, soil preservation, the
planting of trees, and thus for the implementation of conditions favorable to the use
of the investment. Furthermore, a clear tenure situation, with a land registry and the
possibility of taking out mortgages, facilitates guarantees for agricultural credit.
Poor quality of infrastructures in rural areas has an impact on farmers. For this reason,
when setting up interest rate subsidization, providing states with support for infrastructure development at the same time as providing them with grants is crucial for
obtaining long-term impact.
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4.4.Conclusions
Interest rate subsidies can be a worthwhile tool for supporting agriculture,
as long as conditions are favorable and the tool well designed and implemented
Summary
Subsidization continues to seem like a worthwhile tool for supporting agriculture, as
long as conditions are favorable or made favorable by support measures, and as long
as the system, targets, and loan conditions are thought out properly. Rigorous monitoring and management are required to avoid straying from the objectives, and this
often leads to high costs for the system.
The main recommendations about the implementation of programs that include
subsidized credit concern the context of the intervention, the subsidization system,
the targeting of the support, the loan conditions, and the support measures, as
detailed below.
Context of the intervention
Interest rate subsidies must first and foremost be part of a coherent, global, and longterm system of public support for the development of family farming. Furthermore,
like any intervention based on credit, interest rate subsidies for agricultural loans can
only be created in countries with a functional financial system and a positive and
stable economic situation. A local financial intermediary capable of distributing subsidized credit must exist before implementation of such a program can be considered.
If none exists, government intervention will be needed to help one or more financial
intermediaries that wish to branch into this sector, and subsidy-type support will be
required.
Subsidization system
A crucial element behind a successful program is the selection of the financial intermediaries that will become the partners in charge of distributing the subsidized credit.
Any financial intermediary (public or private) that meets certain criteria should be
eligible to participate in the program. New partners should be able to join in the
program if the occasion arises. The system must be designed in such a way that
lenders can make their loan attribution decisions independently. They must thus be
free to select their customers, within the identified target population.
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4. Recommendations
The risks associated with the subsidized loans must be assumed by the lender, at least
partially. The total volume of the intervention must be large enough to avoid excessive
distortion of competition among farmers. At the same time, it is important to make
sure that the partner lenders have the capacity to participate in the program so as to
avoid creating unbalances in their activities. The system’s relevance must be evaluated
regularly to allow for adjustments. Performance objectives must be defined and be
one of the bases of evaluation. These can include objectives for developing savings
in order to encourage greater bank use.
An audit system is essential to avoid the perverse effects of subsidy systems wherein
certain categories of the population or the financial intermediaries take advantage
of the benefits. Keeping the audit system lightweight for cost reasons is one of the
obstacles to achieving effectiveness in such programs
The exit strategy must be progressive and planned as early as the implementation
phase. A communication plan about the subsidization of the rates will be needed to
prepare customers to use commercial credit after the end of the program.
Targeting of support
Targeting of the interest rate subsidy is essential for both effectiveness and cost
control, both in terms of what the loans are used for and with regard to the borrower.
The impact and usefulness of subsidization are maximized when the loan is used for
investments (in equipment, animals, planting, etc.). But the subsidization can also be
used under certain circumstances, to finance working capital (for inputs). Financing
real-estate investments must be considered with great care.
Targeting of the borrowers is also important for achieving sustainable impacts: indeed,
the target clientele must be defined taking into account its risk profile and potential
for long-term profitability (after subsidization ends).
Loan conditions
Determining the loan conditions is crucial for obtaining sustainable impacts from a
subsidization program. Setting the level of subsidization is quite complex, and must
take into account the constraints of existing credit supply and demand. The level
should be as low as possible in order to avoid attracting persons with influence who
might seek to misappropriate the subsidization benefits to their own advantage.
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4. Recommendations
A SAVOIR
When the purpose of the subsidization is to launch an investment credit activity
within a financial intermediary, the level of subsidization will have to be negotiated
with the latter, taking into account the foreseeable changes in its costs over the long
term. The non-financial conditions of loans are as important as the financial conditions
and must not be ignored in a subsidization program: loan life, grace period, repayment
schedules, guarantee demanded, and possibility of paying back the loan in advance.
In the case of financing and investment, a contribution from the borrower should be
required so as to guarantee his or her personal involvement in the project and to
maximize the leverage of the subsidization.
Support measures
Support at various levels of the intervention is essential for a successful subsidized
loan program. It is important to provide technical and management support to guide
the final beneficiaries in using their investments wisely. Technical assistance for the
financial intermediary, which involves a need for subsidies, will often be necessary to
ensure that the subsidized credit is distributed under the right conditions.
Communication measures targeting both the financial intermediaries and the end
customers must be included in the program in order to ensure sustainability of both
supply and demand at the end of the subsidization program. Support measures
may also be necessary for background issues such as land tenure, infrastructure, and
agricultural insurance.
[ 142 ]
© AFD / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / July 2015
Appendix
List of persons contacted
Aurélie CHEVRILLON Agriculture, Rural Development and Biodiversity Division,
Sustainable Development Department – AFD
Camille SÉVERAC
Financial Institutions and Private Sector Division,
Private Sector, Banks and Local Authorities Department – AFD
Didier SIMON
Economist, Agricultural,
Rural Development and Biodiversity Division,
Sustainable Development Department – AFD
Jean-Luc FRANÇOIS Head of the Agriculture,
Rural Development and Biodiversity Division,
Sustainable Development Department – AFD
Agriculture, Rural Development and Biodiversity Division,
Sustainable Development Department – AFD
José TISSIER
Marie-Cécile THIRION Research and Development Division,
Studies, Research and Knowledge Department – AFD
Mathilde GASPERI
Agriculture, Rural Development and Biodiversity Division,
Sustainable Development Department – AFD
Mustapha KLEICHE Financial Institutions and Private Sector Division,
Private Sector, Banks and Local Authorities Department –
AFD, Energy–environment sector
Naomi NOËL
Agriculture, Rural Development and Biodiversity Division,
Sustainable Development Department – AFD
Philippe SERRES Financial Institutions and Private Sector Division,
Private Sector, Banks and Local Authorities Department –
AFD, Microfinance sector
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[ 143 ]
Appendix
A SAVOIR
Vatche PAPAZIAN
Agriculture, Rural Development and Biodiversity Division,
Sustainable Development Department – AFD
Claude TORRE
Agriculture, Rural Development and Biodiversity Division,
Sustainable Development Department – AFD
Aphichart ASSAKUL
Agriculture, Rural Development and Biodiversity Division,
Sustainable Development Department – AFD
Renate KLOEPPINGER ex Rural Finance Advisor, World Bank
Philippe BOULLET
Director of the Conseil National of CERFRANCE
Alain FOURNIER
Director of Ambre Conseil,
part of CERFRANCE Lot-et-Garonne
Gilles THIERRY
Responsable Agriculture at Crédit Agricole
André BAUDELET
Statistician at Crédit Agricole
Benoît THIERRY
Country Program Manager Nepal and Thailand,
Asia and the Pacific Region Division (APR),
Department for Operations – IFAD
Francesco RISPOLI
Technical Adviser, Rural Finance,
Technical Advisory Division,
Programme Management Department – IFAD
Michael HAMP
Senior Advisor, Rural Finance – IFAD
François DOLIGEZ
Iram, Université de Rennes 1
Patrick MUNDLER
Directeur département études rurales – ISARA Lyon
Christoph KESSLER
Head of Agriculture & Natural Resources Division,
Africa – KfW
Claudia SCHMERLER Senior Officer in charge of Agriculture Finance,
Financial Sector – KfW
[144 ]
Eva TERBERGER
Direktorin, Evaluation Department – KfW
Matthias ADLER
Principal Financial Sector Economist – KfW
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Appendix
Ron WEBER
Evaluation Department – KfW
Maurice DESRIERS
Service Statistique & Prospective –
French Ministry of Agriculture
Sylvie JOURNO
Bureau du crédit et de l’assurance,
gestionnaire des prêts bonifiés –
French Ministry of Agriculture
Kofi OWUSU-BOAKYE Office of Development Credit –
U.S. Agency for International Development (USAID)
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[ 145 ]
Acronyms and abbreviations
AATIF
Africa Agriculture Trade and Investment Fund
ACIF
Agricultural Credit Insurance Fund (USA)
AFD
Agence Française de Développement
AfDB
African Development Bank
AGF
Government Commodity Acquisition Program (Brazil)
ASP
Agency for Services and Payment (France)
BAAC
Bank for Agriculture and Agricultural Cooperatives (Thailand)
BMZ
Bundesministerium für Zusammenarbeit
BNDES
Brazilian National Economic and Social Development Bank
BRI
Bank Rakyat Indonesia
BRL
Brazilian real
CABFIN
Improved Capacity Building in Rural Finance
CAP
Common Agricultural Policy
CCC
Commodity Credit Corporation (USA)
CER
Agricultural Management Center (France)
CGAH
Accredited and Authorized Management Centers (France)
CNASEA
National Center for the Management of Farm Structures (France)
CNCA
Caisse Nationale de Crédit Agricole
CONAB
National Food Supply Agency (Brazil)
CPR
Rural Product Certificate (Brazil)
DACS-AGRI Specific Support Plan for Farmers in Difficulty (France)
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[ 147 ]
Acronyms and abbreviations
A SAVOIR
[ 148 ]
DCA
Development Credit Authority (USAID)
DDAF
Departmental Agriculture and Forestry Directorate (France)
EAFRD
European Agricultural Fund for Rural Development
EEC
European Economic Community
EGF
Government Commodity Loan Program (Brazil)
EM
Emergency Disaster (USA)
ERS
Economic Research Service
FAC
Fund to Ease Financial Burden (France)
FAT
Workers Support Fund (Brazil)
FCS
Farm Credit System (USA)
FmHA
Farmers’ Home Administration (predecessor of the FSA)
FO
Farm ownership (USA)
FSA
Farm Service Agency (USA)
GAO
United States General Accounting Office
GDP
Gross domestic product
GEF
Global Environment Facility
GIZ
Deutsche Gesellschaft für Internationale Zusammenarbeit
GSE
Government-sponsored enterprise (USA)
IBGE
Instituto Brasileiro de Geografia e Estatistica
IDA
International Development Association
(World Bank fund for the poorest)
IFAD
International Fund for Agricultural Development
Incra
National Institute of Colonization and Agrarian Reform (Brazil)
IRR
Internal rate of return
© AFD / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / July 2015
Acronyms and abbreviations
KfW
Kreditanstalt für Wiederaufbau
(Credit institution for reconstruction)
MAPA
Ministry of Agriculture, Livestock, and Food Supply (Brazil)
MDA
Ministry of Agrarian Development (Brazil)
MFW4A
Making Finance Work for Africa
NGO
Non-governmental organization
NPR
Rural Promissory Note system (Brazil)
OECD
Organization for Economic Co-operation and Development
OL
Operating loans (USA)
PARPortfolio-at-risk
PEP
Subsidy Auction Program (Brazil)
PNRA
National Agrarian Reform Plan (Brazil)
PROAGRO Federal Guarantee Program of Agricultural Activities (Brazil)
PRONAF
National Program to Strengthen Family Farming (Brazil)
PSEA
Special Agricultural Support Plan (France)
RFP
Rural Finance Policy
RNEA
Net farm income
SEAF
Seguro da Agricultura Familiar (Brazil)
SME
Small and medium enterprises
SNCR
National Rural Credit System (Brazil)
UNCDF
United Nations Capital Development Fund
USAID
United States Agency for International Development
USDA
United States Department of Agriculture
WTO
World Trade Organization
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Presentation of the authors
Christine WESTERCAMP, is a senior consultant at HORUS Development Finance
and has been working in microfinance since 1987. A specialist of rural and agricultural
finance, she provides sector and microfinance program support for financial institutions, governments, and regulatory bodies.
Miryam NOURI, Miryam Nouri is a consultant at HORUS Development Finance.
She is specialized in strategy and mobile banking, especially for projects to implement
mobile financial services to increase bank use in the rural world.
André OERTEL, André Oertel is a senior consultant at HORUS Development Finance.
He has been a specialist in microfinance and SME financing since 1991. He supervises
SME finance projects and advises banks, microfinance institutions, and institutions in
charge of financial sector regulation.
July 2015 / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / © AFD
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A SAVOIR
Already published
in the collection
À S avoir N O. 1: La régulation des services d’eau et d’assainissement dans les PED
The Regulation of Water and Sanitation Services in DCs
À Savoir N O. 2: Gestion des dépenses publiques dans les pays en développement
À Savoir N O. 3: Vers une gestion concertée des systèmes aquifères transfrontaliers
Toward a Joint Management of Transboundary Aquifer Systems
À Savoir N O. 4: Les enjeux du développement en Amérique latine
Los desafíos del desarrollo en América Latina
À Savoir N O. 5: Transition démographique et emploi en Afrique subsaharienne
À Savoir N O. 6: Les cultures vivrières pluviales en Afrique de l’Ouest et du Centre
Rainfed Food Crops in West and Central Africa
À Savoir N O. 7: Les paiements pour services environnementaux
Payments For Ecosystem Services
À Savoir N O. 8: Les accords de libre-échange impliquant des pays en développement
ou des pays moins avancés
À Savoir N O. 9: Comment bénéficier du dividende démographique ?
How Can We Capitalize on the Demographic Dividend?
À Savoir N O. 10: Le risque prix sur les produits alimentaires importés –
Outils de couverture pour l’ Afrique
À Savoir N O. 11: La situation foncière en Afrique à l’horizon 2050
À Savoir N O. 12: L’agriculture contractuelle dans les pays en développement –­
une revue de littérature
Contract Farming in Developing Countries – A Review
À Savoir N O. 13: Méthodologies d’évaluation économique du patrimoine urbain :
une approche par la soutenabilité
À Savoir N O. 14: Assurer l’accès à la finance agricole
Creating Access to Agricultural Finance
À Savoir N O. 15: The Governance of Climate Change in Developing Countries
À Savoir N O. 16: Renforcer la mesure sur la qualité de l’éducation
À Savoir N O. 17: Gérer l’instabilité des prix alimentaires dans les pays en développement
Managing food price instability in developing countries
[164 ]
© AFD / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / July 2015
Already published in the collection
À Savoir N O. 18: La gestion durable des forêts tropicales –
De l’analyse critique du concept à l’évaluation environnementale
des dispositifs de gestion
À Savoir NO. 19: L’Afrique et les grands émergents
À Savoir N O. 20: Abolishing user fees for patients in West Africa:
lessons for public policy
À Savoir N O. 21: Coopérations Sud-Sud et nouveaux acteurs de l’aide
au développement agricole en Afrique de l’Ouest et australe –
Le cas de la Chine et du Brésil
À Savoir N O. 22: L’enseignement privé en Afrique subsaharienne :
enjeux, situations et perspectives de partenariats public-privé
À Savoir N O. 23 : Les stocks alimentaires et la régulation de la volatilité des prix
en Afrique
À Savoir N O. 24: Les enjeux du développement en Amérique latine (Deuxième édition)
Los desafíos del desarrollo en América Latina (Segunda edición)
Os desafios do desenvolvimento na América Latina (Segunda edição)
À Savoir N O. 25: Tools for what trade? – Analysing the Utilisation of Economic
Instruments and Valuations in Biodiversity Management
À Savoir N O. 26: Gestion du patrimoine urbain et revitalisation des quartiers anciens :
l’éclairage de l’expérience française
À Savoir N O. 27: Les évaluations d’impact dans le domaine du développement
Development Impact Evaluations
À Savoir N O. 28: Les agricultures familiales du monde
Family Farming Around the World
À Savoir N O. 29: Crédits agricoles : que penser de la bonification des taux d’intérêt ?
July 2015 / Agricultural Credit: Assessing the Use of Interest Rate Subsidies / © AFD
[ 165 ]
What is AFD?
Agence Française de Développement (AFD), a public financial institution that
implements the policy defined by the French Government, works to combat
poverty and promote sustainable development.
AFD operates on four continents via a network of 72 offices and finances and supports projects that improve living conditions for populations, boost economic
growth and protect the planet.
In 2014, AFD earmarked EUR 8.1 bn to finance projects in developing countries
and for overseas France.
www.afd.fr
Agence Française de Développement
5, rue Roland Barthes – 75598 Paris cedex 12
Tel: 33 (1) 53 44 31 31 – www.afd.fr
Copyright: 3 rd quarter 2015
ISSN: 2105-553X
July 2015
Agricultural Credit:
Assessing the Use of Interest
Rate Subsidies
CONSULTANTS
COORDINATION
Christine WESTERCAMP
Miryam NOURI
André OERTEL
Aurélie CHEVRILLON and Mathilde GASPERI
chevrillona @ afd.fr
gasperim @ afd.fr
AFD Sustainable Development Department
A SAVOIR
29
Agricultural Credit: Assessing the Use of Interest Rate Subsidies / July 2015
Since the beginning of the 20th century, interest rate subsidies have been one
of the tools used all around the world for developing agriculture, especially
by major agricultural countries such as France, the United States, and Brazil.
However, a general consensus against their use now exists among donors,
despite the fact that all of these latter still use them more or less directly.
In each donor institution, there is debate between the “financial” faction,
who oppose such subsidies, and the “agronomist” faction, who cannot effectively organize agricultural development projects that rely solely on rural
financial markets, as the latter are insufficiently developed and usually offer
exit interest rates that are prohibitively high for financing investments in
infrastructure. The issue of interest rate subsidies is moreover stirring
up intense discussion within international bodies, in particular the OECD
Development Assistance Committee (DAC). This study takes a critical look at
the consensus against interest rate subsidies and examines the arguments
for and against them.
Agricultural Credit:
Assessing
the Use of Interest
Rate Subsidies
A SAVOIR
29
Christine WESTERCAMP
Miryam NOURI
André OERTEL
A SAVOIR