Financing agriculture

THE World Bank in its World Development Report 2008 pointed out: “In the 21st century, agriculture continues to be a fundamental instrument for sustainable development and poverty reduction. Three of every four people in developing countries live in rural areas—2.1 billion living on less than $2 a day and 880 million on less than $1 a day—and most depend on agriculture for their livelihoods.”

Incoming Bangko Sentral ng Pilipinas (BSP) Governor Nestor Espenilla cited financial inclusion as his primary goal. Such goal is crucial, as the Philippines remains largely unbanked, with nearly 7 out of 10 Filipinos keeping their savings hidden away at home, unsecured and unproductive.

Even more noteworthy, Governor Espenilla urged banks and financial institutions to open and ease credit access to agriculture, citing lack of financing the major reason why agriculture remains behind industry and services in terms of productivity. Where industry and services accounted for 33.4 percent and 57.1 percent respectively of the country’s 2015 GDP, agriculture contributed only 9.5 percent.

This is terribly troubling. See the tragic statistics: 10.033 million Filipinos— or over 1 out of 5 working Filipinos as of the January 2017 Labor Force Survey— worked in agriculture. In fact, the Philippines remains a largely agrarian country. According to 2015 World Bank data, up to 56 million Filipinos—roughly 55.6 percent of our 100.7-million 2015 population— lived in rural areas. As of 2015, roughly 32 percent of the country’s land area— or 9.671 million hectares out of a total 30,000,000 hectares—were considered agricultural land.

Starving farmers and fisherfolks of credit and other support had rendered Philippine agriculture unproductive and unprofitable—and has effectively impoverished farming and fishing communities throughout the archipelago. On top of the resulting widening wealth and income gap, the food security of the entire country was placed in serious peril.

This is the financial equivalent of apartheid.

On paper, this shouldn’t be the case. The Agri-Agra Law of 2009 (RA 10000) mandates all banking institutions, whether government or private, to set aside at least 25 percent of their total loanable funds for agriculture and fisheries (15 percent for agricultural lending and 10 percent for agrarian reform beneficiaries). The Agriculture and Fisheries Modernization Act of 1997 (RA 8435) clearly outlined the various modes of bringing food and agriculture to modern standards.

Performance however has been perfunctory at best and totally evasive at worst. As of June 2016, the local banking industry fell short of the 15-percent quota for agricultural lending, devoting only P374.5 billion to agriculture and fisheries or only 13.18 percent of its total loan portfolio. It was far worse for the 10-percent quota for agrarian-reform beneficiaries, as local banking institutions allotted only P29.12 billion, or only 0.97 percent of their total portfolios for this requirement.

In fact, compliance differs widely across subsectors of the banking industry. Where universal and commercial banks and thrift banks respectively allotted 13.09 percent and 9.92 percent of their loan portfolios to agricultural lending, rural and cooperative banks loaned up to 30.79 percent to farmers and fisherfolk.

The pattern is similar when it comes to agrarian-reform credit. Universal and commercial banks and thrift banks respectively devoted only 0.67 percent and 1.45 percent for agrarian reform beneficiaries, while rural and cooperative banks set aside up to 16.73 percent of their loan portfolios.

This suggests that the current “onesize-fits-all” approach to agricultural financing needs to be revisited and revamped. The Agricultural Credit Policy Council (ACPC) recently estimated that the unmet credit demand for priority agricultural commodities amounted to P364 billion in 2014. It can only be worse circa 2017.

To be sure, even BSP officials have called for a review of the Agri-Agra Law, as banks and other financial institutions are extremely risk-averse and generally consider loans to farmers and fisherfolk to be too risky. There is even anecdotal evidence of financial institutions choosing to pay the penalties for non-compliance, instead of actively seeking and assisting agricultural enterprises.

The recent launch of the Credit Information System offers an opportunity for positive change. New financing approaches are definitely needed. Initiating and implementing innovative solutions require both political will and BSP technical leadership. The private sector can and will respond. But government must incentivize the private banks for the higher risk they bear in agricultural lending.

For far too long, Philippine agriculture has been treated by Philippine policymakers as a poor stepchild of development. And yet, as the World Bank pointed out early on: “…[A]griculture and its associated industries are essential to growth and to reducing mass poverty and food insecurity.”