Module Aim and Orientation
The FINANCE module describes general financial services possibly available to farmers who want to adopt a Solar Powered Irrigation System (SPIS). The goal of the module is to inform decision-making agencies (governments, financial institutions, technology providers, development practitioners, etc.) about the financial option more suitable for farmer needs considering their specific characteristics. As a result, more farmers will have access to finance for procuring Solar Powered Irrigation Systems (SPISs), increasing the efficiency and sustainability of the agriculture sector.
If farmers possess enough money to purchase a SPIS without the need of a loan, they should consider the INVEST module.
Agricultural productivity and profitability are highly correlated with the state of development of the financial sector in a country. Therefore, agricultural financing is an important driver for growth. Unfortunately, limited access to adequate financing is a common problem among farmers, especially in developing countries. This shortage of agricultural funds derives mostly from the unwillingness of financial institutions (FIs) especially banks to finance new technologies in the agriculture sector. The main reason for this is the perceived risk of non-repayment due to the uncertainty of the sector w.r.t. price, production, highly unpredictable markets and risks associated with a new technology. Furthermore, the remote location of some farms, the shortage of knowledge about the agricultural sector and inadequate policies like strict collateral requirements constrain the access to agricultural financing.
These difficulties could be overcome with innovative finance products, the adoption of adequate insurance, increasing awareness about agricultural specific risks and the expansion of agriculture financial service providers. As a result, the financing of Solar Powered Irrigation Systems could be seen as an opportunity for financing institutions, technology providers and governments to diversify their loan portfolio, expand their range of financial products, and enhance the economic development of a country.
This module differentiates between two main financing model categories: development models and business models. Development models are mostly used by governments, NGOs and non-profit institutions that aim to enhance the livelihood and overall development of farmers. Development models would typically include grants, subsidies and infrastructure programmes. Business models on the other side are adopted by banks and financial institutions, which, besides enhancing the economic growth of a country, aim to obtain profits from the provided credit. Business models are suitable for more mature markets, where appropriate credit mechanisms are readily available.
Even if, in rural areas, the loans from family members, neighbors and friends are widespread, they are not going to be described in this module, since they do not add overall value to the market.
In this module, eight financing models are described and subcategorized between development and business financial models.
1. Bank Loan
2. Rural bank/Development bank loan
3. Loan from Micro Financial Institutions (MFIs)
4. Value chain loan
5. Leasing / Repurchase agreement
7. Informal Saving Groups
8. Pay-Per-Use business model