Sound risk assessment and management is a fundamental element of sustainable agricultural and rural finance provision. The risks involved in financing agriculture can be broadly classified into three categories. The first relates to agricultural production. The second type of risk relates to the farmer and his or her well-being, assets and skills. The third type of risk relates to financial institutions and their capacity to manage risk. Efficient risk management strategies and instruments are required in all three categories.
Good risk management strategies and instruments are very important to financial service providers. When they issue loans, there is a risk of borrower default. When they collect deposits and on-lend them to other clients, they put peoples' savings at risk. Anyone who conducts cash transactions or makes investments risks the loss of those funds. All financial intermediaries regardless the type and size face risks that they must manage efficiently and effectively to be successful. Failure to do so will result in financial losses and, investors, lenders, borrowers and savers will lose confidence and funds begin to dry up.
The establishment of collateral in relation to a loan transaction means that the lender is assured of recovering, if necessary by court action, the material value of the loan. In practice, this means that the outreach of financial services is often influenced by the collateral that borrowers can offer. This is particularly evident in rural areas and in particular with regard to lending to agricultural production and other, related activities. Risk associated with agriculture is perceived as very high and financial institutions therefore reluctantly enter into this sector unless the collateral requirements can be satisfied. Conventional collateral includes the mortgage of land or pledging of moveable assets. It also includes third-party guarantees or endorsements. Poor people have few assets to pledge and land titles are often uncertain. This has in some cases led to the use of collateral substitutes such as group guarantees and solidarity funds. However, small-scale farmers are normally left outside the mainstream of agricultural credit and loan provision for investments in agriculture.
A womens group discusses the operation of a revolving fund set up under the Special Programme for Food Security