More than 5 million farmers with landholdings of less than 5 hectares constitute 90 percent of all farmers in the country. Historically, financial institutions have been reluctant to lend to this sector because smallholders are perceived as risky due to a number of risk factors outside of their control: weather, pests and disease, and fluctuating prices.
However, given the many families who depend on agriculture and the rising demand for basic agricultural products, access to financial services in this sector is critical. Rural banks are uniquely positioned to provide financial services to this market, but need to incorporate credit underwriting measures to better help clients manage their credit and the challenges they face. Seeking to address this, the project, using the MABS Approach, assisted rural banks in developing a microagricultural loan product.
The MABS microagri-loan incorporates inherent risk-mitigating features. Loans are based on character and household cash flow rather than traditional agricultural project-based lending approaches that focus on per-unit costs and projected income of agricultural outputs only. Also, taking into account that most agricultural households have multiple and regular sources of income, the microagri-loans are structured to include weekly and monthly loan payments with only a partial lump sum balloon payment (no more than 40 percent) allowed during the harvest or sale of agricultural product. This approach significantly reduces the risk of the traditional method of 100 percent of the loan amount not being repaid in one lump sum at the end of the loan. Moreover, because most farmers have diversified income sources, understanding this and focusing on these types of microagri-loan clients tempers seasonal risks that clients often encounter under the traditional approach to agricultural lending. During MABS-4, the program sought to assist rural banks in rolling out this new approach to microagri-lending to small farmers with a target of adding 22,500 microagri borrowers. During MABS-4, the program provided additional technical assistance, training, and product assessments to increase small-scale agricultural lending and improve loan products.
Rural banks using the MABS Approach for microagri-lending became more confident with lending to this sector, while borrowers found it easy to pay their loans regularly and use the banks’ other services. In addition, MABS helped to participating banks link with farmer associations and other players along the value chain for value chain financing opportunities to sustain outreach to more farmers.
Although the MABS Approach to microagri-lending had built-in risk-mitigating measures, major weather-related storms and government-targeted and -directed credit programs made rolling out the program more difficult than expected in 2007. In light of the devastation to farms in Luzon brought on by significant wind damage and major flooding by typhoons Ondoy and Pepeng in 2009, as well as a substantial drought during the first half of 2010, banks remained cautious in offering or expanding microagri-lending.
In addition, competing government-targeted and -directed credit programs combined with loan guarantee programs such as the Agricultural Guarantee Fund Pool made it difficult for rural banks to offer fully commercial approaches to microagri-lending under the MABS Approach. Most rural banks preferred to stick to government-supported project-based lending that provided loan guarantees of up to 85 percent of the loan amount. The security that the expanded government loan guarantee programs provided had been more attractive than commercial approaches to microagri-lending, hence the MABS Approach for microagri-lending was only rolled out to 67 banks and bank branches and only 16,935 new microagri-loans were made between May 2008 to June 2012.