Agricultural Microfinance: Serving the Poorest

12 February 2010 at 09:00 11 comments

Josh Weinstein, KF9, Philippines

Last week I went to a town called La Castellana about an hour south of Bacolod to visit the NWTF branch there.  I was there to meet a handful of Kiva borrowers and interview them about the progress of their loan.  Over the course of two days, I met six women that currently have a loan with Kiva, and another four that I am going to post to the site this week.  La Castellana is a town in the mountains that is largely supported by agriculture.   It is also one of the major areas impacted by agrarian reform and home to some of NWTF’s poorest clients.

The Philippines is a country of ~90 million people, half of whom live in rural areas.  Eighty percent (80%) of Filipinos living below the poverty line are in rural communities, supported primarily by agriculture.  Over the past three decades, agricultural land ownership in the Philippines underwent a transformation via a series of legislation known as Comprehensive Agrarian Reform Program (CARP) passed in 1988.  Designed to provide landless farm workers a piece of land, the program has redistributed farmland in 1.1-hectare units.   It is a controversial topic, and its effectiveness at combating poverty is debatable.  Regardless of whether or not CARP has worked, the ARBs (Agrarian Reform Beneficiaries) – the recipients of the farmland – are the poorest of the poor.  In Negros alone, there are 112,000 ARBs working 170,00 hectares.  There are no economies of scale on a one-hectare farm.  Fertilizer, farming equipment and labor are expensive, and they don’t have the capital.  The average land tract size for ARBs in Negros is 1.25 hectares, with input costs of 35,000 pesos (~$800 USD) per hectare.  The government gave them land but failed to provide adequate funding, agricultural training, or meaningful support.  In many ways, the cards are stacked against them.  So, unable to make ends meet, many just rent or sell their land back to the owner.  It is a vicious cycle, but microfinance can offer a solution.

Microfinance institutions offer agricultural loans.  For these loans, traditional microfinance with center meetings and a weekly repayment system does not work.  The ARBs require a big sum of cash upfront to buy inputs at the beginning of the growing season.  As with other types of clients, there is no collateral, because they have nothing to put up.  They can’t pay back the loan until harvest time, at the end of a 9-12 month cycle.  In addition, they require higher loans than typical clients (about ~60,000 pesos – 12x greater than the first loan cycle for Project Dungganon)  to cover input costs and pay themselves a salary during the interim between planting and harvest.  Because there is only one payment, the nominal and effective interest rates, making it is less profitable for the MFI.  The average income per hectare for ARB planters is only 18,000-20,000 pesos.  Translated monthly, this would only mean roughly 1,700 pesos per month – significantly less than what you would need to feed the average Filipino family of five persons.  These aren’t the only issues.  A report from CGAP describes some of the external factors influencing repayment:

Agricultural finance is notoriously risky.  Many farmers need credit to purchase seeds and other inputs, as well as to harvest, process, market and transport their crops. While borrowing on the basis of anticipated crop production might seem logical where collateral assets are few, such loans  expose the lender to production and price risk. Natural disaster, a decline in market prices, unexpectedly low yields, the lack of a buyer, or loss due to poor storage conditions are only some of the factors that can result in lower-than-expected revenues.  Such a fall in revenues can often lead to high default rates on agricultural loans.

For all these reasons, many of the ARBs default on their loans.  Agricultural programs often rely on grants and subsidies initially from NGOs and, later, the World Bank and IFC.  Traditional funders for MFIs would not lend for agricultural loans, because, understandably, they need to make money.  After all, microfinance is not charity.  If an MFI also operates a rural bank, like NWTF, it can draw funds from there, but it is still high-risk.  MFIs have something called a “loan loss provision” worked into their products, which accounts for defaults in advance and raises the interest rate for the loan product.  The maximum portfolio-at-risk (PAR) rate – an estimate of the potential defaulters – according to international standards is 5%. However, the PAR rate for agricultural loans might be as high as 30-50%.   It is just not possible to allow for 30% default in the loan product, because the interest would be too high and clients could not afford to pay.  Therefore, you have to accept high default rates, and mitigate the loss in other ways.  For example, encouraging farmers to diversify their businesses improves the chances of repayment.  A report from the Microfinance Council of the Philippines discusses this issue:

By diversifying their sources of income, farmers protect themselves from the seasonal risks inherent in agriculture.  On the part of the creditors, risks are minimized if their clients have other sources of income because they can pay on a  regular basis and have alternative sources of payment when their main livelihood activities fail.  Regular payments also instill discipline among borrowers.

Many MFIs in the Philippines have microcrop programs in place.  Other countries have successfully implemented agricultural loans as well.  It is a difficult challenge, and one that requires a coordinated effort by MFIs and other NGOs that consists of providing capital, training, technology, and support.  It also requires a degree of financial risk that causes many funders to turn their backs.  Perhaps there is a role for Kiva here, but there are some issues with that.  For one thing, lenders would have to accept losses in the order of 30%.  Regardless of how it is funded, agricultural microfinance makes a meaningful difference in the lives of the poorest people in the Philippines, so it is worth working toward a solution.

If you are interested in learning more, NWTF put together a documentary on the program.  Take a look:

Please help NWTF achieve its mission of serving the poorest communities in the Philippines by joining the NWTF Lending Team. Also, if you have any other questions about agri-loans or NWTF and their work in general, please send me an email.

Entry filed under: All, blogsherpa, KF9 (Kiva Fellows 9th Class), NWTF (Negros Women for Tomorrow Foundation), Philippines. Tags: , , , , .

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  • 1. Maribeth F. Estrella  |  9 September 2010 at 03:29

    Thanks for this article and blogs. Currently we are into Social performance mangement (SPM) and agriculture microfinance (AMF) focus. I am interested on how agri-loans can be successfully implemented by microfinance like NWTF. Please send me more of this as this will serve as good insights in our venture on these aspects, specifically the AMF. I am currently connected in Simbag sa Pag-asenso, a bicol term for Response to Progress, one of the leading MFI in the province of Albay, Philippines and expanding to other Bicol provinces.

    I will look forward to your kind response.

    Thank you and God bless.



  • 2. Ratan lal daroga  |  27 March 2010 at 06:53

    I am a agriculture graduate and working with farmer from 4 years

  • 3. Pharesm  |  20 March 2010 at 05:55

    even when there’s perfectly good traditional knowledge of the people about how to live on the land, its easy to succumb to the use of widely advertised industrial fertilizers and pesticides, in hopes to get more harvest faster and easier.

    But in addition to sapping farmer’s profits into the pockets of large corporations, that stuff is bad for the land and bad for all who eat the food.

    Just wait till Monsanto takes an interest here in the Philippines and sells their “genetically engineered for Monsanto profit” seeds, that produce sterile plants, so you can’t keep 10% of the harvest for next year’s seed, you are forced to buy new Monsanto seeds every year. And of course, Monsanto Crops are resistent to Monsanto pesticides, so you can dowse your fields to the hilt with poison. Your whole family may die, but the Monsanto crops will be just fine.

    I truly wish the Philippines people will meet success with organic farming and that going back from sugar- or any other form of monoculture to greater variety, will keep their lands healthy and beautiful.

    Too much countryside in the world has been devalued by industrial monoculture for coming decades or more. People tend to not believe what can happen to lush, fertile land, until they see it and its too late.

    • 4. Richard H. Roth  |  11 June 2010 at 21:35

      I too am interested in financing diverse organic or sustainable farming systems and I am having a very hard time finding projects that actually boost the quality of the land and the health of the community. I belong to the Kiva Teams “Growing Health” and “Organic Pathways”. It distresses me that most agricultural projects include chemical fertilizers and pesticides.

    • 5. midori  |  30 August 2011 at 21:31

      I agree with Pharesm, Monsanto is the cause of more irreversible environmental damage than we could imagine.

  • 6. david oglaza  |  16 February 2010 at 01:42

    What about GM crops would this not reduce the risk of failure? I know that GM crops are becoming big business as some farmers see the financial benefit although all eaters including me do not always see the health benefits!

  • 7. marydear  |  14 February 2010 at 17:49

    Such a well written post – it really kept me reading without being to bogged down in details. I learned a lot about some things i had been wondering about – thanks Josh

  • 8. Daniel Mayhugh  |  12 February 2010 at 18:06

    Hi Josh,

    Hope you’re enjoying Bacolod and Negros Occidental. The NGO I work for has a base in Bacolod and Dumaguete, so we work throughout 90% of Negros. We work with the poorest of the poor (like those sugarcane workers you see in the fields) and since June of last year we’re teaching all our clients sustainable small scale agriculture. Our use of organic farming, using vermiculture, is showing lots of potential. I may be premature, but I have a feeling organic farming will be the largest component in eliminating poverty in rural areas. Like you’ve discovered, farming inputs can be very expensive. This is mostly due to buy fertilizers and pesticides. Eliminating those 2 lines of expense substantially reduces the needed investment.

    Thanks for coming to the Philippines and investing your life in helping the poor.

    Best Regards,

  • 9. Jan & John, KivaFriends  |  12 February 2010 at 11:52

    thanks, Josh. and that video from NWTF is so full of hope. jan

  • 10. Jeff  |  12 February 2010 at 10:24

    Excellent report, Josh. I have learned a lot from your report about the difficulties that the MFI faces in helping these farmers, difficulties that I didn’t previously appreciate.


  • 11. Adam  |  12 February 2010 at 09:48

    I hope that funds can be used not to make farmers more dependent on external inputs supplied by agribusiness, but rather give them additional knowledge and training (to supplement their traditional knowledge, which I’m sure is very well-suited to their lands) to be independent and successful.

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