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Distribution Channels for Rural Credit

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Published: February, 2018

Beatriz Figueiredo is also an author of this report

Agriculture is intrinsically associated with credit – farmers pay upfront production costs that cannot be recovered until after harvest season. If, at harvest time, they have navigated the natural risks to their crops, they may also face market risks such as price variations. Financial services around the globe aim to support farmers during production and with overcoming hardships and unforeseen events. In Brazil, however, the current design and distribution of rural credit adds a layer of uncertainty among producers as they manage their cash flows and risks.

Though Brazil’s financial institutions play a vital role in supporting rural communities and their agricultural activities, not all municipalities have adequate access to financial services. The geographical distribution of financial institutions, like banks and cooperatives, has many determinants and is not closely linked to agricultural potential. This means that the credit available for producers is often not the most appropriate for their specific circumstances or needs. The mismatch of credit supply and demand has important consequences not only for individuals, but also for the localities where they live. In light of the unintended consequences that may be caused by such design, Climate Policy Initiative (CPI/PUC-Rio) analysts, under INPUT, have partnered with the Central Bank of Brazil (BACEN) to conduct a comprehensive analysis of rural credit distribution channels.

This brief provides an overview of how the distribution channels for credit generate additional uncertainties for producers. It describes how credit is administered and distributed, focusing on the effects access to agricultural funding has at the local level. The brief emphasizes how, in some areas, the availability of resources is determined by the distribution channels, such as banks and cooperatives, rather than by the agricultural potential of those areas