When meeting with credit scoring vendors for GoodDeal, I’m often met with surprise. While they showcase methods to tighten credit evaluations, I emphasize my goal of lending to more people – especially those with little to no credit history. One sector desperately needing improved credit access is agriculture.
Agriculture is the backbone of the Philippines – providing food, materials, and employment for countless Filipinos. Yet since the 1960s, its share of GDP has steadily declined, with growth primarily limited to poultry while crop production stagnates.
One major culprit? Insufficient credit access for farmers and fisherfolk. Small agricultural entrepreneurs face overwhelming bank loan requirements and resort to informal lenders charging exorbitant interest rates. Despite numerous policies like Republic Act 10000 and extensive academic research highlighting the sector’s importance, this seemingly “small” problem persists. Why do a
third of agricultural workers still depend on informal lending? Why does the solution remain elusive?
The Demand for Credit
Access to formal credit can transform farmers’ lives – increasing productivity, diversifying inputs, and opening doors to additional financial services. Yet only 3 out of 10 farmers have access to savings accounts or formal credit. While 40% of rural and cooperative banks and 74% of government banks claim to support small-scale agricultural borrowers, the reality on the ground tells a different story.
Agriculturist Roland Atanante explains: “While there’s strong demand for credit among Filipino farmers, they’re challenged by lack of collateral, limited land ownership, and absence of formal registration.” This forces farmers into informal credit arrangements and cyclical sharecropping – trapping them in a system that prevents meaningful growth.
I know an agricultural micro-entrepreneur who can’t secure financing because he lacks proper financial records. He doesn’t realize how much he could expand, how many more people he could employ, or how many more customers he could serve with adequate capital. To him, formal lending seems impossible until he grows significantly larger – a classic chicken-or-egg dilemma. When emergency funds are needed for expenses like employee salaries, informal lenders become his only option.
Supply Side Challenges
The Bangko Sentral ng Pilipinas (BSP) reports that agricultural lending increased to 18.1% in 2022 from 17.6% in 2021, driven primarily by rural and cooperative banks. In early 2024, Philippine banks exceeded their mandated targets, allocating 192.4% of planned loanable funds to agriculture – well above the required 25% under the Agriculture, Fisheries, and Rural Development law. Despite these impressive numbers, small farmers and fisherfolk still struggle.
Money isn’t the issue. BSP data shows banking sector loans to MSMEs increased 5.8% year-over-year to ₱488.13 billion in 2024. Yet banks still fall short of their 10% mandated MSME lending – revealing significant unused capital in just one sector.
Lenders, including non-bank institutions, want to expand their customer base. The questions they repeatedly ask: “How can we lend to more people?” “Who else can we lend to?” “How can we underwrite these new markets?” These questions highlight the puzzling gap between agricultural credit needs and lenders’ desire to grow their portfolios.
Some financing companies are beginning to crack this code. “Inclusive lending and financing is key to inclusive economic growth,” says Ruben Y. Lugtu Jr., Chairman of Asialink Group of Companies. “Technology plays a big role in making financing more accessible to Filipinos day by day.”
Proposed Solutions
High interest rates result from high demand and low supply of agricultural MSME credit. Since capital availability isn’t the problem, improved efficiency and clarity could show the way forward:
Go beyond numbers. Financial institutions obsess over metrics like non-performing loan ratios, but understanding the human stories behind the data is crucial. By learning more about ground realities, we can update underwriting processes, payment schedules, and documentation requirements to better serve first-time borrowers who need flexible terms adapted to seasonal production cycles.
Leverage innovation. Generative AI and alternative credit scoring can help traditional banks and financing companies evaluate applications more efficiently and effectively. Despite resistance from traditional board members who question these new systems with phrases like “why fix what isn’t broken,” we must find a middle ground that maintains sound risk management while embracing technological advancements.
Update targets. If banks are meeting current targets yet insufficiency persists, we must aim higher. We should reconsider “alternative compliance” options that let banks fulfill agricultural lending requirements indirectly, limit double-counting of loans that satisfy multiple mandates, and gradually increase overall targets.
This seemingly “small” problem has enormous potential impact. Improved financial inclusion in agriculture can significantly reduce poverty by providing sustainable livelihoods in poor communities and ensuring Filipinos have access to quality, affordable food.
