Agricultural Finance

Capability Statement, Key Experts & Reference


Feeding the Growing World Population Sustainably

Demand for food will increase by 70% by 2050; at least $80 billion annual investments will be needed to meet this demand. Agricultural finance empowers poor farmers to increase their wealth and food production to be able to feed the potrntial future 9 billion people (World Bank).


Challenges in Agricultural Finance

The increasing need to finance and develop agriculture arises from the severe rise in global population and the need to feed it sustainably. Despite moderate improvements in the last two decades, harvest yields and returns on livestock farming are still dramatically lower in developing countries compared to OECD countries. They are a result of a combination of factors including suboptimal farming practices, lack of access to farming technology and equipment, substandard quality and/or untimely delivery of farm inputs, and long-term soil degradation due to monocultures and excessive use of chemical fertilizer.

Farmer incomes are also diminished by post-harvest effects such as scarcity or high cost of storage facilities (forcing farmers to sell produce at low-cycle prices or letting it perish), lack of access to market information and value chain partners. Insurance solutions available to farmers in more developed countries – that would offer protection against low yields or commodity price fluctuations – are typically either not available at all or only at prohibitive cost.

As a result, food security continues to be a serious challenge in many developing countries. The effects of undernutrition and unbalanced nutrition are especially severe in low-income countries of Sub-Saharan Africa which are most strongly affected by climate change effects such as delayed or shortened rain seasons. Although national governments, donors and non-government food aid organizations are very actively intervening in developing country agricultural sectors, some of the interventions (e.g. food giveaways or food price controls) also have negative impacts on the local farmers.

All of these facts and risks highlight the urgency for sustainable agricultural practices and investments into adapted technologies to increase the efficiency and resilience of local agriculture in a context of increased macro risks. While finance is by no means the only ingredient required in this equation, lack of access to finance at adequate conditions (e.g. pricing, tenors and repayment structures) is a key hindrance across developing country financial markets which has been stunting transformative change in their agricultural sectors.

To achieve financial inclusion there is an urgent need to innovate new ways to promote finance and investment throughout the agricultural value chain, thus improving the situation of local farmers and food-processors. The development of agricultural finance markets is constrained by a variety of factors which include: 1. inadequate or ineffective policies 2. high transaction costs to reach remote rural populations 3. absence of adequate instruments to manage risks To overcome these constraints, innovative new services and technologies need to be developed which address the two key challenges faced by lenders which currently discourage the allocation of funding to smallholder farmers: 1) the perception of higher systemic (i.e. co-variant) risks compared to a portfolio of non-agricultural borrowers and 2) the proportionally higher transaction costs of dealing with this clientele due to their more dispersed locations and more complex analysis compared to urban or peri-urban MSME clients of a similar size.

Over the last 10 years, LFS has developed a strong expertise in the field, with relevant tools to address the above issues. We have built up know-how that enables us to address the needs in Agricultural Finance innovatively for banks, microfinance institutions and specialised agriculture lenders which have already been applied in a number of projects and in different regions. In this portfolio, LFS takes into account the special characteristics of businesses that are prevalent in agricultural activity. For example, the fluctuating cash-flow patterns due to seasonality, a lack of bankable collateral due to informal land ownership regimes or exposure to unpredictable weather conditions. Based on our experience in serving this target group we have found the challenges displayed in Figure 1 to be typical of rural finance, to which we respond with the indicated methods.


Challenges and Responses of Agricultural Finance

Systemic Risk from Climatic Conditions & Price Fluctuations

Diversify crops in portfolio

Engage multiple actors of the value chain to share risks of price change

Use of weather derivatives and other crop insurance

Also target non-agricultural rural enterprises

Remoteness & Dispersion, High Transaction costs per Customer

Technology to create low-cost delivery channels - mobile technology for financial analysis and money transfers like loan officer app and wallets

Establish alternatives to traditional branch structure for client interaction through agent banking

Invest in getting to know clients to create long-term relationship, to compensate for lower transaction sizes and businees voliumes

Collateral Challenges, Irregular Payment Capacities

Train agro-specific staff with deep regional knowledge of farming

Develop technical cards for primary crop types, providing yield ranges, expected cash flows, etc.

Visit client prior to repayment to maintain close understanding of the situation, as well as provide brief financial literacy lessons

Build value chain relationships to create alternative collateral methods

Design products that match the farmers cash flows.

Heterogenity of Rural Customers

Understand credit needs of all types of rural clients

Provide customised financing services for each category of client.


Meeting the Challenges: LFS Services in Agricultural Finance

LFS has developed a wide range of tools and services that can be applied to agricultural finance projects. These include institutional strengthening exercises, revision of processes, policies, development of new products, staff training and coaching as well as innovative and cost-efficient means to reach out to farmers sustainably.

One solution that LFS implemented in projects is the use of mobile technology in data entry and data transfer to branches for immediate decision making which reduced costs, improved accuracy and lowered transaction time (See box 1). In another case, the application of score cards increased efficiency by optimizing the balance between risks, outreach, prices and transaction costs. Particularly in Access Bank Madagascar and Access Bank Tanzania, mobile banking solutions were applied for financing agricultural instruments. With such systems, LFS has enabled its customers by reaching out to numerous farmers in remote areas for financing their needs in a cost-effective manner.

Agricultural Finance Strategy for Maha Awba, Myanmar

LFS was engaged by IFC to support a dedicated MFI in Myanmar to develop an Agricultural Finance strategy and an institutional model for supporting farmers via a lean branch network, introduction of digital technology in the lending process and use of an agent network as catalyst for information gathering and input distribution. The business plan foresees the development of 20 lending hubs, 240 branches and an outreach to 360,000 farmers once the capacity has been built.

Value Chain Lending Product at AccèsBanque Madagascar

In AccèsBanque Madagascar, LFS has designed and implemented an “Agro-lending” product that allows a farmer to use warehousing as a form of collateral. This has reduced the risk for the bank, as many of the small farmers lack traditional collateral and the bank is now ensured of the safety of the crop. This system further benefits the farmers by facilitating the sale of their crops via AccèssBank’s current accounts, through which payments can be done in seconds.

Village counsellor approach at Credo Bank

In Georgia, Credo has developed innovative approaches in agricultural lending including the Village Counsellors (VC) scheme. Through these VCs, Credo can now keep a strong presence in villages and manages to serve farmers in a flexible and tailor-made manner. VCs support loan officers, provide information to farmers and coordinate marketing activities for Credo.

Credo provides a broad range of agricultural products, including loans, overdrafts, credit lines, and insurances. Credo has been piloting an agricultural scoring system which will speed up the credit decision making. This includes the use of tablet computers by loan officers and direct data transfer to branches.


Bertolt Hertzfeldt
Manager, Advisory Services

Bertolt is Manager of LFS Advisory for Central and East Asia and is an MSME and Agricultural Finance Expert with 20 years of experience in project coordination and management of MSME Banks. He possesses ample experience in the field of MSME banking as well as regional experience in the CIS, Central Asia and East Asia. He is well versed in MSME and Agriculture Credit Technologies, Risk management, Due diligence and Institutional analysis, Corporate Governance and Capacity Building measures for the above-mentioned areas. Since 2011, Mr. Hertzfeldt has served as Project Manager and Senior Consultant for LFS on institution building projects in Russia, Myanmar, Uzbekistan, Kazakhstan, Kyrgyzstan, Pakistan and China. He has been engaged in Agricultural Finance projects in the regions of CIS and Asia, notably supporting an MFI in Mynamar to develop an Agricultural Finance business model to reach out to a large number of farmers via a lean branch structure. He has further expanded his expertise in combining agriculture lending technologies with P2P technology in a tailor-made institution building project in Beijing and Baoding in China.