SPIS Toolbox - Analyze Access to Finance
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2. Analyze Access to Finance
In general, the introduction of modern irrigation technology requires comparatively high investments, which often go beyond the financial capacity of a farm household. This also applies to SPIS. This means that a promotion approach for irrigation technology must consider access to the required capital.
In order to finance investments in irrigation, the following sources, or a combination therefore exist:
- equity of the farm household;
- commercial loans and leasing (market conditions);
- subsidized (soft) loans to end borrower;
- group saving schemes and lending;
- subsidies and development grants; and
- sponsoring.
Lack of external finance is often a limiting factor for medium sized farm households due to limited equity and limited credit rating with commercial financing institutions. Financing institutions are usually also very hesitant to open their loan portfolio to new technologies in the agricultural sector as the repayment duration for loans is usually long and risks exist with regard to crop failure. In addition, the lack of conventional loan collateral signifies an obstacle for banks. This is elaborated further in the INVEST module that provides information and tools for financial service providers already financing or planning to finance SPIS.
Knowledge about and connections to financial support for SPIS will be essential for promoters because potential SPIS users will be very much interested in this. The aspect of access to finance has to be a mandatory part of the initial analysis and information compilation of the promoter. At local level, producers often do not have access to information on alternative financing options for innovations.
Government has an important role to play in improving the framework conditions, such as minimizing market distortions, promoting private sector involvement, and supporting public goods and financial and physical infrastructures. One important tool for governments is subsidies to make modern irrigation technology available to medium-sized farm households. Subsidies usually exist for individual components of an irrigation system such as the pumping system (subsidies for PV pumping), water storage (subsidies for water tanks and farm ponds) and the irrigation system (subsidies for sprinkler and micro irrigation systems). They are mostly conditional (water and energy saving, cropping intensification) and time-bound, with a decreasing subsidy percentage over time.
The promoter needs to provide such information as part of his promotion material and subsequently as a basis for initiating projects. An important aspect is to not only provide information on the existence of financing sources, but to also provide information on how to access these.
With regard to potential follow-up activities related to the development of the financial sector response to modern irrigation financing the following guidelines are recommended by GPFI / IFC:
- Effective government support should be developed.
- Financial infrastructure should be strengthened (credit bureaus, improved collateral registries, alternative forms of collateral).
- Consistent and reliable data sources should be developed for end borrowers and financial operators (financing options and conditions, agricultural production, supply chains, and market pricing information).
- Producers and financial service providers should be supported to increase knowledge and capacities with regard to financing modern irrigation solutions, so that they can come up with innovative solutions. These may include partial guarantee schemes and risk sharing facilities as an effective mechanism to foster lending for irrigation modernization purposes.
Outcome/Product
- Financing options information sheet (including conditions, institutions, contact details);
- Recommendations for financing, options for a range of target groups.
Data Requirements
- Typical investment costs of technology options;
- Information on financing options in the region;
- Information on subsidy schemes in the region; and
- Information on donor and grant schemes.
People/Stakeholders
- Agricultural advisor/development practitioner;
- Financing institutions;
- Governmental services; and
- Donors and donor-supported development projects.
Important Issues
- Modern irrigation technology requires (partial) external financing.
- Subsidy schemes are often available to support the introduction of modern irrigation technology.
- ICT technology and / or regular information dissemination could be used to increase access to finance.
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