Using Commodities as Collateral for Finance (Commodity-Backed Finance)
In most emerging markets, the lack of acceptable collateral is often cited as a key constraint on the provision of credit to agriculture. Three main types of collateral are typically used to finance agriculture: farmland, equipment, and agricultura...
| Main Authors: | , |
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| Format: | Policy Note |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2017
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/619781498850171182/Using-commodities-as-collateral-for-finance-commodity-backed-finance http://hdl.handle.net/10986/28318 |
| Summary: | In most emerging markets, the lack of
acceptable collateral is often cited as a key constraint on
the provision of credit to agriculture. Three main types of
collateral are typically used to finance agriculture:
farmland, equipment, and agricultural commodities. In many
economies, however, the ability to use farmland as
collateral is hindered by the absence of land titles or by
inefficient land markets. Likewise, mortgaging or leasing
out equipment is not always possible due to the lack of
mechanization in agriculture, the absence of a legal and
regulatory framework conducive to leasing, or limited
secondary markets for equipment in case of default. As a
result, the third option, use of agricultural commodities as
collateral, is increasingly being explored in various
countries, particularly in Latin America, South Asia, and
East Africa, where financial institutions have developed
credit products that use commodities as collateral for
lending. Such agricultural commodities have an established
value and market where quick liquidation mechanisms can in
theory provide sufficient funds to cover a loan extended
against them in case of a default. Overall, commodity-backed
finance using agricultural inventories is an important
component of a holistic approach to making agricultural
credit and professional storage more accessible. In turn,
more accessible credit and storage can contribute to food
security by: (1) increasing local food processing capacity;
(2) reducing post-harvest losses;2 (3) improving the quality
of the goods stored under better conditions; and (4)
potentially improving incomes for farmers (through a
combination of lower postharvest losses and better prices
from delayed marketing). |
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