Lending to Agribusinesses in Zambia

Lending to Agribusinesses in Zambia

Abstract

Microfinance has been celebrated in the last decade as a new paradigm shift in lending
that has achieved immense success in improving the living standards of the poor through
the provision of financial services. Institutions involved in microfinance around the
world have used innovative loan contract mechanisms to profitably lend to the poor and
achieve very high repayment rates while allowing the borrowers to profit and grow their
enterprises. While high repayment rates have been realized by microfinance institutions
focused on lending to consumers and to retail-type micro enterprises, few microfinance
institutions focused on lending to agricultural producers have achieved comparable
success. This article compares the mechanisms employed by major microfinance
institutions with a successful lending institution in Zambia that serves agricultural
businesses. Findings are: ZATAC uses progressive lending and group lending contracts
adapted in some ways to suit seasonal agricultural production credit requirements. The
institution also uses various forms of collateral substitutes like other microfinance
institutions. We also find that ZATAC uses other mechanisms such as automatic loan
repayments tied to production, cooperative sanctions, contracted production and
provision of business development services that eventually improve loan repayments
significantly and enable the lender to lower interest rates.

Microfinance Around the World

Microfinance is a relatively new concept in the finance world that has rapidly evolved in
the last two decades. Its popularity has mainly been with its use of various innovative
approaches to providing financial services to the poor, who would not qualify for these
services from the conventional formal lending institutions. Microfinance has been
broadly defined as the provision of a broad range of financial services such as deposits,
loans, payment services, money transfers, and insurance to poor and low-income
households and their micro enterprises (ADB 2000). Unable to provide sufficient
collateral to obtain loans from the traditional banking system, even when they had viable

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