Opinion

Agricultural Credits: What about subsidized interest rates?

Christine Westercamp

Agricultural finance: should we rehabilitate interest rate subsidies?

In line with the “paradigm shift” of rural finance in the 1980s, lenders have changed their approach with regard to agricultural financing, abandoning in particular interest rate subsidies. However, the inescapable fact is that the implementation of the new paradigm has resulted in a dramatic fall in the availability of credit for farming. Interest rate subsidies were part of the tools of the old paradigm, but are they the cause of its excesses? Can they be revisited to help improve access to credit for farmers? What are the conditions to ensure that they are used in a sound and effective way? These issues have been the subject of a search that resulted in the publication of a book published by the AFD entitled "Crédit agricole : que penser de la bonification des taux d'intérêt ?" ("Agricultural Credit: what to think of the subsidized interest rate?") The question is complex and the answer depends on both the environment and management of their implementation.

Interest rate subsidies have been widely used widely throughout the world since the beginning of the 20th century as an instrument to develop agriculture, in particular by major agricultural countries such as France, the United States and Brazil. In these countries, they have played a major role in the development of agriculture and its financing, helping to support the modernisation of agriculture and intensification. Supplementary measures (farmer training, rural infrastructures, etc.) are an integral part of this success. Such subsidies have also been an important factor in the development of the market in agricultural finance. Nevertheless, they have sometimes had perverse effects (over-indebtedness, favouring large farms to the detriment of small family-run structures) and have proved very expensive and difficult to control.

Such subsidies remain an interesting support tool for agriculture provided that i/ the context is favourable or made favourable by support measures, ii/ the system, targets and lending terms are correctly conceived.

The subsidies must be part of a consistent long-term, global public support system. They rely on the financial system and therefore need it to works well and include at least one high-quality financial intermediary (FI) capable of distributing subsidised loans. Otherwise, the creation of such an intermediary is a prerequisite.

The subsidy scheme must be based on the open selection of high-quality financial intermediaries. The latter must make their lending decisions independently and bear at least part of the risk. The total volume of the intervention must be in proportion to market needs and the capacity of the FI partners. The relevance of the scheme must be reviewed regularly and it must be monitored and controlled rigorously in order to avoid distortions in relation to the objectives, hence the need for a control system defined in such a way as to limit its costs. The exit strategy must be established as soon as the intervention is implemented and widely disseminated: it has an impact on the lending terms. The targeting of the subsidies in terms of objective and beneficiaries is a key component of the scheme’s effectiveness.

Lastly, support measures are indispensable at different levels of intervention: end beneficiaries, FI, communication, agricultural environment.

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.