Reimagining Farmers as Partners: Leveraging Savings for Credit Risk Mitigation in the Agricultural Sector

Delivered on May 23, 2023 at the Agricultural Credit Policy Council event held at the PICC

Financial inclusion remains an essential factor for sustainable economic development, particularly in the realm of the agricultural sector. Having access to a broad range of financial services – which includes not only credit but also savings, insurance, and money transfer services – equips individuals with the necessary tools to weather financial shocks, invest in opportunities, and subsequently improve their livelihoods.

However, recent data reflects a concerning trend in this regard. Based on the Financial Inclusion Survey of 2021, the percentage of adults in the Philippines with savings sharply declined from 53% in 2019 to 37% in 2021. This dip may be partly attributable to the economic upheavals caused by the COVID-19 pandemic, which could have led to reduced household income or increased medical expenses.

Moreover, the utility of savings accounts reflected a similar downturn. In 2019, 76% of account holders actively used their savings accounts, but by 2021, this figure had plunged to a mere 56%. In raw numbers, this decline signifies a decrease of approximately 9.7 million savers, from 38.6 million in 2019 to just 28.9 million in 2021.

Among the sectors most affected by this trend is agriculture, forestry, and fishery (AFF), which, despite making significant contributions to the economy, remains financially underprivileged. The 2021 Financial Inclusion Survey disclosed that only about 30% of the 2.3 million workers engaged in AFF reported having any form of savings. This indicates that less than half (only 30%) of our colleagues in the agri-fishery sector are saving or have savings.

Delving deeper into the data, we find that of those AFF workers who are saving, a mere 27.2% or around 191,000 are saving through formal channels. A significantly larger portion, 82.2% or approximately 577,000 individuals, are resorting to informal means. These statistics illustrate that the sector is severely lagging in formal savings, with a disproportionately higher percentage of informal savers compared to the overall population.

The need for comprehensive financial inclusion strategies

The substantial decrease in the number of savers, especially in the agricultural sector, is indeed disheartening. The trend underscores that simply providing appropriate savings products, while a vital step, is insufficient in addressing the larger issue. Comprehensive strategies that extend beyond the financial sector are required. This means initiatives designed not just to promote savings, but also to increase income, as these two factors are intrinsically linked.

To this end, the proactive role of the Bangko Sentral ng Pilipinas (BSP) in driving financial inclusion is highly commendable. The BSP’s initiatives towards fostering innovations in savings products design, collaborating with various government agencies to enhance financial services delivery, and launching a financial education strategy to increase financial literacy are all notable steps in the right direction. The ultimate goal of these interventions is to empower individuals with financial capability, which involves not just understanding but also effectively using financial services to improve their lives.

Interconnectivity

While significant strides have been made towards financial inclusion, certain challenges persist. Much of the innovation in the banking sector relies heavily on internet-based technologies. Yet, connectivity remains a significant hurdle in rural areas, where a large portion of the agricultural workforce resides. Additionally, the cost of owning a smartphone, which is often required to access digital financial services, is prohibitive for many farmers.

These challenges, however, are not insurmountable. One potential solution is to increase the presence of agency banking in areas where internet connectivity is weak. Agency banking, which involves non-bank retail outlets providing banking services, can help bridge the gap between the banking sector and the rural populace.

Furthermore, promoting the interoperability of savings products among strong cooperatives within the banking system could also be beneficial. A prime example is the Cebu People’s Multipurpose Cooperative (CBMPC), with its demonstrated capability in managing savings products and five decades of service. By aligning savings products across different financial institutions, we can foster a more inclusive and interconnected financial ecosystem that caters to the needs of the agricultural sector.

Savings product design for financial inclusion

The paradigm within financial institutions must shift from perceiving the economically disadvantaged as unable to save, to recognizing that they indeed can, given appropriate financial products. The importance of this shift becomes evident when considering institutions like the Cebu People’s Multipurpose Cooperative (CBMPC) and the Rural Bank of Solano (RBS), both of which have successfully demonstrated this principle.

Both CBMPC and RBS have designed their savings products with minimal opening and maintaining balances, thereby reducing barriers to entry for those with limited income. By adopting such an approach, these institutions have successfully extended financial services to the unbanked populace.

A distinctive characteristic of these institutions’ approach is the integration of financial education within their product offering. Recognizing that financial literacy is crucial for their clientele, CBMPC and RBS offer resources and programs to enhance understanding of savings and other financial concepts among their customers. This strategy does not only ensure the proper utilization of their products, but it also empowers their customers to make informed financial decisions.

Further reflecting the flexible and customer-centric nature of their product design, CBMPC and RBS allow savings to be used as collateral for loans. This system enables customers to access credit that might have been unattainable otherwise due to lack of traditional collateral. Importantly, the savings used as collateral remain accessible in times of emergencies, sickness, death, or disasters, further enhancing the financial security of their customers.

Credit extension at these institutions is linked with agricultural insurance. This approach mitigates the risk of loan default due to crop loss or other agricultural setbacks. It provides a safety net for both the farmers, who might otherwise be unable to repay loans after a poor harvest, and for the institution, which reduces its credit risk.

The experiences of CBMPC and RBS highlight the potential of well-designed savings products to promote financial inclusion and resilience among disadvantaged groups, such as the agri-fishery sector. By adopting a customer-centric approach, emphasizing financial education, and leveraging insurance and flexible collateral options, financial institutions can support their customers’ financial wellbeing while also managing their own risk.

Enhancing financial resilience in the agricultural sector through savings-secured loans

Savings-secured loans represent a significant innovation in the field of financial services, especially in terms of offering a lifeline in times of emergencies. The unique feature of these loans is that they use a customer’s savings as collateral, which allows the borrower to maintain access to these funds in times of urgent need.

In the agricultural sector, a unique set of financial challenges exist due to the cyclical nature of farming activities and the susceptibility to various risks such as weather, pests, and market fluctuations. Savings-secured loans offer a potential solution to these challenges and could significantly enhance the financial resilience of farmers.

One of the key advantages of savings-secured loans is that they enable farmers to use their savings as collateral. This feature allows them to access larger loans, or loans with more favorable terms, which may have been out of reach otherwise. Given the financial requirements of agricultural activities – significant initial outlays for seeds, fertilizers, equipment, and labor – access to substantial credit is essential. The use of savings as collateral bridges this gap, offering farmers the much-needed financial leverage at the start of the farming season.

For financial institutions, the use of savings as collateral significantly reduces credit risk. In the event a borrower defaults on the loan, the institution has recourse to recover its funds from the savings held as collateral. This safeguard makes the issuance of larger loans to farmers, who are often seen as high-risk borrowers due to the unpredictability of their income, a more viable option.

Beyond immediate financial needs, savings-secured loans also offer long-term benefits. They allow farmers, especially those who are economically disadvantaged, to build a credit history. A robust credit history can enhance their credibility as borrowers and increase their chances of accessing more substantial loans in the future, thereby enabling further growth and investment in their farming activities.

Savings-secured loans also incentivize borrowers to practice financial discipline. The necessity to repay loans promptly to regain access to their savings can motivate farmers to manage their funds wisely and maintain regular repayment schedules. This habit, in turn, fosters financial resilience and stability.

The inclusion of such flexible savings products in the offerings of financial institutions not only serves the customers by providing a financial buffer but also benefits the institution. It reduces the risk of loan default and encourages consistent use of financial services, thus leading to a sustainable and financially inclusive growth model.

From risky clients to partners in development

Farmers are often seen as high-risk clients by financial institutions. This perception arises from a combination of factors that affect farmers more than most other sectors:

• Income volatility: The farming sector is subject to the volatility of agricultural input costs and the instability of produce prices, which may fluctuate due to factors beyond a farmer’s control.
• Susceptibility to external shocks: Farmers are at the mercy of weather conditions, pest infestations, diseases, and market changes, all of which can drastically impact income.
• Lack of collateral: Many farmers lack the necessary assets to pledge as collateral for loans, limiting their access to credit.
• Lack of credit history: Many farmers have not previously accessed formal financial services, and therefore lack a credit history that would demonstrate their creditworthiness to potential lenders.
• Limited financial capability: Farmers often have limited financial knowledge and skills, reducing their ability to effectively manage financial products and services.

Despite these challenges, it is essential to acknowledge the crucial role that farmers play in society and the economy. They contribute significantly to food security, a fundamental aspect of any nation’s stability. Additionally, the agricultural sector serves as an economic driver for growth, providing employment opportunities and contributing to GDP.

Therefore, financial institutions need to reassess their view of farmers. They should be seen as partners in development, rather than risky clients. This shift in perspective is crucial in driving inclusive growth and development, especially in economies heavily reliant on agriculture.

To make this partnership successful, financial institutions can adopt the following strategies:

• Integrating appropriate financial products in credit extension: Products like crop insurance can help mitigate the financial risks associated with farming. Also, savings-secured loans, which use savings as collateral but allow withdrawals in emergencies, can provide farmers with the flexibility they need to manage their financial lives.
• Providing financial education: Providing financial literacy programs can help farmers better understand and manage financial products and services, improving their financial capability and making them more reliable borrowers.
• Extending government support: Collaboration with government agencies, especially in areas such as disaster risk reduction, can provide additional safeguards against the inherent risks associated with farming. This collaboration can also facilitate the delivery of financial services to the agricultural sector.

Government support

Active participation of the government in supporting farmers is crucial, especially in providing subsidies and assistance that the private sector may find challenging to cover. For instance, the government can step in to subsidize the cost of farming equipment, high-quality seeds, fertilizers, and irrigation facilities, to reduce the burden on farmers. The government can also subsidize crop insurance, which can serve as a safety net against the loss due to unpredictable events like natural calamities, pest infestations, or market fluctuations.

Furthermore, the government’s role is paramount in implementing disaster risk mitigation strategies and providing post-disaster relief and recovery support. This assistance can ensure the continued delivery of financial services to the agricultural sector, even in the face of adverse events. Such government interventions not only shield farmers from severe financial distress but also make farming a more viable and sustainable profession, encouraging economic growth and food security.

In sum, viewing farmers as partners in development necessitates a change in perspective from financial institutions, along with the provision of appropriate financial products and support mechanisms. This partnership not only promotes financial inclusion among farmers but also contributes to a more resilient and sustainable agricultural sector.