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219 Chapter Twelve Agricultural Microfinance and Risk Saturation Charlotte Heales Introduction Smallholder agriculture is central to the development agenda. In February 2012 Bill Gates declared, “If you care about the poor then you care about agriculture ” (Gates Foundation Media Center 2012). The Food and Agriculture Organization (FAO 2012) estimates that smallholder farmers make up 90 percent of the world’s “extreme poor.” Smallholders have traditionally been considered “underserved” by credit services, as the costs of administering loans in rural environments have not made them appealing candidates for the financial services market (Morvant-­ Roux 2008). It is perhaps unsurprising, then, that microfinance institutions (MFIs) in South America, sub-­ Saharan Africa, and Asia have sought to create products that can meet the needs of smallholders. Such attempts have been trumpeted by policy organizations such as the International Fund for Agricultural Development (IFAD) and the Consultative Group to Assist the Poor (CGAP; IFAD/CGAP 2006). However, some aspects of microfinance, particularly the risk inherent in credit, make it an inappropriate way of promoting agricultural production without output or market support. Certainly, my examination of two very different Malawian contexts shows that agricultural microfinance is having difficulty performing in the way that it was envisioned. Agriculture is an unstable livelihood rife with risks, and yet smallholder farmers are considered to be “risk averse” (Boussard 1992; Maclean 2013), a characteristic that has often been frustrating to those encouraging the uptake of new technologies or increasing smallholder investment in land. However, this risk aversion is hardly surprising when one considers the fact that pre- and postproduction conditions (weather, soil, markets) make smallholder farming 220 Charlotte Heales a precarious livelihood with exceptionally high stakes (Bryceson 1996; Bryceson , Kay, and Mooij 2000; Frankenberger et al. 2003). When innovation fails, smallholder farmers may be left unable to feed themselves or their families. Agricultural communities have not been seen as good investments by organizations offering financial services because rural populations are generally difficult to service, given the inherent institutional problems with lending to isolated populations. But the subsidization of rural credit by governments has also proved controversial, and some have argued that interfering in the credit market in this way ultimately impedes the establishment of viable commercial rural credit markets (Robinson 2001; Von Pischke, Adams, and Donald 1983; see also Bateman, chapter 1, this volume). It could be considered strange that microfinance is being used to promote agriculture since credit, when used for higher-­ risk investments, would seem likely to increase risk rather than mitigate it. In the discourses around microfinance , however, credit is seen as a way of easing the risks that poor people face. Neil McCulloch and Bob Baulch (2000) argue that through the mechanism of income smoothing, microfinance allows individuals to react to economic shocks and spread the costs over time, thus making them manageable. In agriculture , risk is not a one-­ time event; rather, it pervades the livelihood itself. Frank Ellis (1998) notes the difference between rational risk management and coping strategies. While coping mechanisms are reactive, risk management is about planning for the future. Using microfinance for income smoothing is essentially to use it for consumptive purposes, whereas including microfinance in a livelihood strategy is to use it for investment. In the first scenario, the risk becomes shock, and then the loan is used. In the second, the loan is used whether or not the shock comes; the money is spent, and interest is owed. If the shock does occur then the investment has not only been wasted, it has also created an additional liability. By encouraging risk-­ taking behavior—in this case investment in agriculture that results in debt—microfinance may actually increase the level of risk faced by farmers. This chapter will explore how microfinance is used in two locations in Malawi to shed light on this apparent tension between the aim of microfinance to support rural agriculture and the problems inherent in the microfinance lending model. With the literature on smallholder risk in mind, I will examine whether the program is a success on its own terms: whether it is in fact providing credit to financially excluded poor women who invest in agriculture. I demonstrate that the risks associated with agriculture affected the implementation Agricultural Microfinance and Risk Saturation 221 of agricultural microcredit products, making it difficult for them to target intended users.Thus, credit programs that did not address risk and factors associated with macroeconomic instability, like market availability, were not able to serve the needs of the communities I examined...


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