nep-cfn New Economics Papers
on Corporate Finance
Issue of 2010‒07‒31
four papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Credit risk management in financing agriculture By Wenner, Mark D.
  2. Innovations in rural and agriculture finance: Overview By Kloeppinger-Todd, Renate; Sharma, Manohar
  3. Innovations in rural and agriculture finance By Kloeppinger-Todd, Renate; Sharma, Manohar
  4. Is the level of financial sector development a key determinant of private investment in the power sector ? By Ba, Lika; Gasmi, Farid; Noumba Um, Paul

  1. By: Wenner, Mark D.
    Abstract: A griculture is an inherently risky economic activity. A large array of uncontrollable elements can affect output production and prices, resulting in highly variable economic returns to farm households. In developing countries, farmers also lack access to both modern instruments of risk management—such as agricultural insurance, futures contracts, or guarantee funds—and ex post emergency government assistance. Such farmers rely on different “traditional” coping strategies and risk-mitigation techniques, but most of these are inefficient. Formal and semiformal arrangements—such as contract farming, joint-liability lending, and value-chain integration—have arisen in recent decades, but they too are limited and can be very context sensitive. One consequence of inadequate overall financial risk management is that farmers in general face constrained access to formal finance. The smaller the net worth of the farm household, the worse the degree of exclusion. Formal lenders avoid financing agriculture for a host of reasons: high cost of service delivery, information asymmetries, lack of branch networks, perceptions of low profitability in agriculture, lack of collateral, high levels of rural poverty, or low levels of farmer education and financial literacy. But, predominantly, bank managers around the world say they will not finance agriculture because of the high degree of uncontrolled production and price risk that confronts the sector. A farmer can be an able and diligent manager with an excellent reputation for repayment, guaranteed access to a market, and high-quality technical assistance, but an unexpected drought or flood can force him or her to involuntarily default. In emerging countries with fair to high levels of agricultural market and trade integration, large commercial farmers may escape this predicament because they have the ability to purchase insurance, engage in price hedging, obtain financing overseas, or liquidate assets quickly in the event of a default. Consequently, formal lenders tend to overemphasize the use of immoveable collateral as the primary buffer against default risk, which means they provide services to a limited segment of the farm population. Small- and medium-sized farmers, who constitute the vast majority of farm operators, often do not have secured-title land, which is the preferred type of collateral; if they do, its value may be insufficient to cover the loan in question. Even if farmers have sufficient titled land to collateralize loans, they may refuse low-interest formal loans and assume high-interest informal ones that have no collateral requirements instead. They may also use savings to finance agricultural production because they are averse to risking their most prized possession—land. The result is limited supply or access to formal agricultural financing, even though much of the population of Sub-Saharan Africa and South Asia is rural and depends on agriculture and livestock rearing for their main livelihood activities.
    Keywords: agricultural finance, agriculture finance, Risk management, Rural finance,
    Date: 2010
  2. By: Kloeppinger-Todd, Renate; Sharma, Manohar
    Abstract: Everywhere in the world, small agricultural producers are entrepreneurs, traders, investors, and consumers, all rolled into one. In all these roles, small agricultural households constantly seek to use available financial instruments to improve their productivity and secure the best possible consumption and investment choices for their families. But the package of financial services available to small farmers in developing countries is severely limited, especially for those living in remote areas with no access to basic market infrastructure. When poor people have limited saving or borrowing options, their investment plans are stifled and it becomes harder for them to break out of poverty. If households have no access to insurance and are unable to accumulate small savings that enable them to pay for household and business expenses, especially during lean seasons, they are forced to limit their exposure to risk, even if high returns are expected, once again making the pathway out of poverty more arduous than necessary. Inadequate access to financial services is thus part of what is often called the “poverty trap.”
    Keywords: agricultural producers, agriculture finance, Developing countries, households, Investment needs, Microfinance, Poverty traps, Rural finance, Small farmers,
    Date: 2010
  3. By: Kloeppinger-Todd, Renate; Sharma, Manohar
    Abstract: Most rural households lack access to reliable and affordable finance for agriculture and other livelihood activities. Many small farmers live in remote areas where retail banking is limited and production risks are high. The recent financial crisis has made the provision of credit even tighter and the need to explore innovative approaches to rural and agricultural finance even more urgent. This set of 14 briefs clearly points out the importance of business realities faced by small farmers, including low education levels, the dominance of subsistence farming, and the lack of access to modern financial instruments. These conditions mean that new and innovative institutions are required to reach small farmers. Emerging communication technologies provide new opportunities for rural banking by reducing business costs and alleviating information asymmetries. New financing instruments, such as weather index-based insurance and microinsurance, also have great potential for managing the risks faced by small farmers. In addition, bundling financial services with nonfinancial services like marketing and extension services offers new opportunities for small farmers to increase their productivity and incomes. Finally, an enabling policy environment and legal framework, enforcement of rules and regulations, and a supportive rural infrastructure all contribute immensely to making sustainable access to finance a reality. Table of Contents: •Innovations in rural and agriculture finance: Overview by Renate Kloeppinger-Todd and Manohar Sharma •Financial literacy by Monique Cohen •Community-based financial organizations: Access to Finance for the Poorest by Anne Ritchie •Rural banking in Africa: The Rabobank approach by Gerard van Empel •Rural banking: The case of rural and community banks in Ghana by Ajai Nair and Azeb Fissha •Rural leasing: An alternative to loans in financing income-producing assets by Ajai Nair •Determinants of microcredit repayment in federations of Indian self-help groups by Yanyan Liu and Klaus Deininger •M-PESA: Finding new ways to serve the unbanked in Kenya by Susie Lonie •Biometric technology in rural credit markets: The case of Malawi by Xavier Giné •Credit risk management in financing agriculture by Mark D. Wenner •New approaches for index insurance: ENSO insurance in Peru by Jerry R. Skees and Benjamin Collier •Microinsurance innovations in rural finance by Martina Wiedmaier-Pfister and Brigitte Klein •Combining extension services with agricultural credit: The experience of BASIX India by Vijay Mahajan and K. Vasumathi •Bundling development services with agricultural finance: The experience of DrumNet by Jonathan Campaigne and Tom Rausch
    Keywords: Agricultural innovations -- Developing countries, agriculture finance, Financial crisis, microinsurance, Poverty reduction, rural banking, Rural finance, Rural households, Small farmers,
    Date: 2010
  4. By: Ba, Lika; Gasmi, Farid; Noumba Um, Paul
    Abstract: This paper seeks to assess the extent to which a country's overall level of development and that of its financial sector, in particular, are factors that attract private capital into infrastructure projects. The authors investigate these effects in a 1990-2007 dataset on the power sector in 37 developing countries. The results suggest that economic growth is a key determinant of private investors'investment in infrastructure projects, and that investors tend to take countries’ governance quality into account in their decisions to invest. The empirical results highlight that the development of the financial sector also plays a significant role in private investors'decisions to enter infrastructure sectors. In particular, the degree of country risk and exchange rate volatility is found to be negatively related to the volume of private sector investment in power projects. Furthermore, when the banking sector and the capital market are separately treated in the analysis, the existence of a well functioning capital market is the main attracting factor. In addition, the existence of an independent energy regulatory authority significantly improves the level of private investors'implication in energy projects. When accounting for the interactions between the overall economic development and the financial sector development variables, the effects of these variables are still significant and the results also confirm the importance of an independent energy sector regulator.
    Keywords: Emerging Markets,Debt Markets,Economic Theory&Research,Access to Finance,Private Participation in Infrastructure
    Date: 2010–07–01

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