CREDIT - HOW CAN IT BEST BE PROVIDED?

Credit is a critical service for smallholders. With access to credit they can buy the services and inputs that enable them to grow crops suitable for export. There are several sources of credit: each has its own advantages and disadvantages.

The need to overcome the potential for default, due either to an inability or refusal to repay loans, requires careful screening and selection of borrowers, monitoring the use of the loan, and establishing procedures to minimize the risk of default. Companies often provide credit to smallholders in return for a commitment to market their crops through the same company. Loans are recovered by deducting the cost of the loan from the price paid to the smallholder for the crops grown.

The choice of crop for which credit is given is important. Food crops can easily be sold locally or diverted for household consumption. In general, the fewer alternative users/buyers of the crop, the better the chance of success in loan recovery, though if the right measures are taken, success is possible even with multiple buyers.

It is essential to establish - and adhere to - an effective credit-monitoring system that can be audited. Close monitoring of smallholders (e.g., to minimize default) and their suppliers (e.g., to minimize late payment) is required to ensure that the maximum benefit is derived from the credit. More generally, good communications help foster good company/smallholder relations and a sense of trust, which has the positive effect of reducing payment default.