• Credit channels in the smallholder sector

    Commercial credit for smallholders is linked to risk in much the same way as it is for commercial growers and exporters. The risk principles are the same, although the detail may be different.

    •Performance: will the crop be delivered as agreed?
    •Price: will the value cover the outstanding credit?
    •Value: will the quality be acceptable and saleable?
    •Collateral: can any collateral be provided, and if it is, can it be realized?

    Obviously it is difficult if not entirely impossible for the average commercial bank to evaluate performance risk, let alone potential quality and value, on an individual basis for thousands of smallholders.

    Providing collateral can prove difficult for smallholders.

    Land is nearly always unsuitable as collateral. Even though for most smallholders it may be their only form of visible asset, in many countries such land is often held through traditional ownership structures that make the realization (the sale in debt execution) of the collateral impossible. Even where rural agricultural land is held under title deed, communal and political pressure may make its sale impossible, so smallholder-owned land is often if not mostly unsuitable as collateral.

    Crops on the tree are also not meaningful as collateral until they become goods entered into store against warehouse receipts. That is, credit will be advanced only once the harvest is stored. This is a most suitable arrangement for crops that might otherwise have to be sold quickly to raise cash during seasonal periods of oversupply and consequent low prices, but it is not necessarily right for coffee.

    Coffee is usually best marketed when it is still fresh (new crop). Prolonged storage, (beyond the usual marketing season), or retention for speculative purposes cannot really be recommended.

    The most likely credit channels for smallholders are therefore well run cooperatives or other forms of grower organizations that have the required critical mass and that are in a position to guarantee and discipline their members. Credit to such organizations will then largely be based on the same principles discussed earlier in this section.

    However, the search for alternative credit options has produced some interesting initiatives of which two are mentioned here by way of example. Both place a strong emphasis on development and sustainability issues. 
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