Agricultural Credits: What about subsidized interest rates?

Betty Wampfler

Agricultural credits: what are we to think about interest rate subsidies?

The first thing that comes to mind regarding interest rate subsidies is that, in fact, they are totally disregarded nowadays. While the financing of agriculture, in particular family farming, is currently very high on international agendas, as shown in particular by the number of international seminars devoted to this theme this year, interest rate subsidies are clearly not part of the recommended tool kit of agricultural financial backers. The favoured solutions are sectoral financing packages, inventory credit systems (“warrantage”), digital finance, agricultural insurance and even agricultural leasing, but not the form of individualised interest rate subsidies (where part of the loan interest is borne by a third party). However, subsidies are not totally banished from the “best practices” of agricultural financing agriculture solutions: in 2011, in a memo for a consortium of international institutions brought together by the World Bank, R. Meyer proposed a “smart subsidies” guide for agricultural financing, focused on the financial sector and designed not to impede competition. Interest rate subsidies in favour of farmers are not a “smart subsidy”. However, some lenders, countries and microfinance institutions are not afraid to defy the taboo. Between 2005 and 2007, Madagascar, with Japanese financing, tested several forms of agricultural and rural interest rate subsidies; in 2012 the AFD commissioned a study on agricultural credit interest rate subsidies. So, what should we think of this tool today?

Its limits are well known: it is an expensive tool, which can lead to distortions of competition and be ineffective if it is badly targeted, badly managed and not accompanied by proper support measures.

However, its potential deserves to be put in perspective. Interest rate subsidies have effectively supported the modernisation of family farming in the United States, France and Brazil. If they are concentrated not on inputs but on agricultural investment, they can be an effective means of reducing inequalities of access to equipment and, thereby, make a significant contribution to increasing agricultural productivity. They can be a powerful tool for shaping the agricultural model.  Provided that they are conditional on the full repayment of the loan, interest rate subsidies can also be an incentive to promote good financial management.    

But this potential can only be realized if interest rate subsidies are very well managed and coordinated, and are part of a series of other measures to support the modernisation of agricultural holdings (farm advisory systems, market access, access to inputs, short, medium and long-terms credits, etc.) To that end, three focus areas for the modernising of agricultural holdings could today provide favourable frameworks for the use of this financial tool: interest rate subsidies can support efforts to equip agricultural sectors; via the choice of equipment, they can help to guide the agro-ecological transition; they can also be a means of providing precious support to attract young people into family farming.

The Technical Centre for Agricultural and Rural Cooperation (CTA) is a joint international institution of the African, Caribbean and Pacific (ACP) Group of States and the European Union (EU). CTA operates under the framework of the Cotonou Agreement and is funded by the EU.