The Imperative for CRBs in Agricultural Financing


AS industry efforts to effectively manage Non Performing Loans (NPLs) intensify, access to commercial credit by the real sectors such as agriculture can easily become constrained. Guest columnist, Alan Goodrich, explains the critical role of Credit Reference Bureaus (CRBs) in striking a balance, in order to achieve sustainable financing for the agricultural sector.


In Zimbabwe, agriculture is considered a backbone of the economy. It provides employment and income for 60%-70% of the population, supplies 60% of the raw materials required by the industrial sector and accounts for 40% of total export earnings. Despite this, it reportedly only directly contributes 15%-19% to annual GDP, depending on prevailing rainfall patterns. This last statistic, however, understates the true importance and dominance of the agricultural sector – it is generally accepted that when agriculture performs poorly, the rest of the economy suffers in turn.

Mobilising smallholder farmers to reclaim bread basket status
It is equally well recognised that the opportunity for Zimbabwe to reclaim its mantle of being a bread basket of Africa and return to being an economic power house in sub-Saharan Africa depends largely on whether the estimated 1,5 million small-holder and communal farmers occupying a total of 21 million hectares in Zimbabwe can be efficiently and cost effectively mobilised and the value chains they rely upon re-established.

Sustainable finance is key
In order for this revival to happen, availability of finance is key – more specifically, profitable, sustainable finance – not freebies or donor-funding. For finance to be profitable and sustainable, the cost, or interest rate has to make economic sense for both the credit provider and the borrower. In the small-scale sector, in particular, the complexity and challenges of managing agricultural risk with only limited resources available, carries important implications for managing the credit risk related to the financing agriculture.

Risk implications of financing agriculture
Financing agriculture includes assessing risks and challenges such as price volatility, weather risk, poor market access, loan diversion, lack of crop and animal insurance, poor governance structures of cooperatives and inadequate monitoring mechanisms. Fortunately, to a large extent, all these risks are measurable and, therefore, their costs can be factored into product pricing and interest rates.

Assessing credit risk
Credit risk, that is, the risk that a borrower may default resulting in losses to the lender, is among the most important risks that financial institutions face and is in fact the hardest to predict. In particular, the effective management of the credit risk associated with low value loans to smallholder farmers is often faced with the following challenges:

  • Information asymmetry – lack of, or insufficient, information on the prospective borrowers (farmers and micro-entrepreneurs), including a reliable track record of formal financial services from which a conventional credit score could be derived;
  • High covariant risks associated with agricultural borrowers, particularly when operating in predominantly mono-crop areas;
  • Scarcity of collateral as borrowers generally lack assets that can be offered as loan collateral acceptable to lenders;
    Credit Reference Bureaus (CRBs) are therefore imperative market infrastructure needed to achieve profitable, sustainable finance for a variety of reasons, of which just a couple are explored here.

    The carrot and stick
    Firstly, CRBs can and should be used effectively as both a stick and a carrot when managing consumers of credit. The stick is meant to make it clear to the borrower, that any late payment or default will be recorded as an adverse record in the CRB’s systems and will, therefore, potentially negatively impact on future access to any form of financial services, or even business-to-business relationships. However, the consumer must also be made aware of the tangible evidence of the carrot, that is, paying back on time improves both the level of access to finance and also the affordability of that finance.

    Secondly, CRBs are data acquisitive. This means that they are always looking for new, alternative sources of information that will strengthen the value they bring to the assessment of creditworthiness. It would be extremely rare for a CRB to ever turn down access to data, as most of them actively seek to expand their data pools. For example, any supplier of services to smallholder farmers should be submitting data to CRBs so that good payers are rewarded and the bad payers are penalised.

    New approaches to assessing risks
    In general, credit providers have grown quite proficient at assessing risk in terms of the capacity of a prospective borrower to repay a loan. The biggest challenge that lenders face in assessing risk, given the limited information regarding formal credit history available on borrowers in the smallholder farmer demographic, is to identify those applicants that have both the ability to repay and the willingness to repay. While innovation and banking often find it hard to live with each other in the same sentence, CRBs are well placed to introduce new ideas and approaches to those credit providers that are prepared to push the envelope a little further in order to realise available opportunities. One such example is the partnership between the Financial Clearing Bureau – the CRB with the largest database in Zimbabwe – and Harvard’s Entrepreneurial Finance Lab (EFL). EFL has built scoring models specifically designed to address the “willingness to pay?” question. EFL has unique global reach and extensive experience in using psychometrics and other non-traditional data to predict risk.

    CRBs critical for sustainable finance
    Clearly, CRBs are important market infrastructure in the quest to achieve profitable and sustainable finance. This is true whether the objective is to keep borrowers accountable by using CRBs as both a stick and carrot, support the traditional decision processes of credit providers or afford the more progressive and developmental lenders the opportunity to either push the boundaries of existing portfolios or address new market segments that previously appeared to present too great a risk.
    l Alan Goodrich is the managing director of the Financial Clearing Bureau (FCB) and can be reached on