07/21/14 – This guest blog is written by Leana Schwartz. She is part of the Growing Capital team, and is spending her summer doing research in Nicaragua.
We came into this summer assuming that rural farmers in Nicaragua lacked access to financial services; however what we have found is quite a different story. After five weeks of interviews in the field, collecting information we would never have access to from afar, we’ve found that it’s not lack of access to finance that is the biggest problem, but rather lack of access to affordable finance.
We’ve spent the past month talking to farmers and farmer cooperatives, each time surprised by the faultiness of our assumptions made before coming. To our surprise, many farmers listed the different lending opportunities they have, but because of the uncertainties they face when taking out loans, many decide not to pursue them. They, more than anyone, understand the risks they take each season when all of their savings from the past year are used to buy seeds, prepare the land and subsist until the rains bring what they hope to be a healthy harvest. What if the rains don’t come? This summer, we’ve witnessed one of the latest wet seasons Nicaragua has seen in years. Not only that, but the north has been dramatically devastated by the roja or rust fungus which has killed acres of coffee plantations. Farmers understand what relying on the natural environment means for their livelihood and are skeptical to take out loans because of the consequences they’ll face in the case of default.
The loan opportunities available to farmers all require collateralization. However, most rural farmers do not have many assets to collateralize. Some of the farmers we talked to don’t have formal land titles, so they aren’t able to collateralize their land, and all that’s left is their house. One farmer, Santiago from the Cordasol Community on Isla de Ometepe, told us, “I would love to have a loan, but $1,000 is not worth losing my home.” In 1998, Hurricane Mitch devastated Nicaragua, destroying hundreds of thousands of homes, and ruining agricultural lands across the country. For farmers with loans, this meant going into debt, or even worse, losing their land and/or home. In addition to collateral, high interest rates are charged for loans because reaching rural populations is challenging. Farmers like Santiago have access to financing, and understand that paying interest is necessary, but in its current state, it’s just not affordable. Rather than banks thinking farmer are too risky, we’ve found that farmers find loans to be too risky, and hesitate to get them, despite their level of interest.
While proving ourselves wrong may not have been our intention, we’re excited about what we’ve found, and find it to be an opportunity for Growing Capital. Because our focus is rural finance, our goal is to cater to farmers like Santiago and provide affordable finance. By providing proven assets such as irrigation to farmers in Nicaragua, on an affordable lease-to-purchase agreement, we will reduce risk by using the assets, rather than their farm or home, as collateral, purchasing insurance plans, and reducing costs by working through farmer cooperatives and using harvest-based payments. This summer has proven the importance of getting out into the field and testing our assumptions, and we’re excited to have two more weeks to continue learning how Growing Capital can best serve farmers like our friend Santiago.
“… lack of access to affordable finance …” and “require collateralization” – well, in a nutshell what you are saying is that farming in the areas where you researched is too risky a business to be financed by banks who have to price the risk in order not to become insolvent. Now the question is, as always: is it a good thing for a government or a government-subsidized bank to step in and instead take on risk that cannot be financed by any yardstick? Wouldn’t this become a Fannie Mae disaster too? So far I cannot see any development bank etc. that has not failed when one analyzes the numbers – they all have to be propped up by the taxpayers. So in the last analysis we are talking about propping up marginal farming with taxpqayers money where the same money, had it not been taxed away but left in the hands of those who need the food etc., might have bought more cereals than if it had taken a detour through state coffers and subsistence farmers. I think it can be shown from other parts of the world that if these farmers could compete at all they would have easily been able to e.g. set up their own cooperatives helping in financing, with seeds, machinery and livestock etc.
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