The Role of Intrest Rate on Agricultural Business

Intrest rate is charged on loans all over the world is the amount charged in percentage on the fund borrowed to someone by a lender for the use of the fund. Agricultural credit plays a vital role in agricultural development and farm credit has for long been identified as a major input in ensuring food security is a reality all over the world. Interest rates are determined by the supply of money and demand for money within an economy.

The demand for money is based on people’s desire for current spending and investment opportunities. The major source of the supply of money is from savings and the willingness of consumers, firms, and governments.

Agric loans are categorized into short term , intermediate and long term loans.

  1. Short term loans- are usually used as working capital for day to day running activities and have amortization period of one year or less.
  2. Intermediate loans- are used to finance equipments and it has amortization of 1-7years.
  3. Long term loans- are used to finance assests like farmlands and production facilities, it has amortization of 7-25years.

However, agriculture is faced with a lot of uncertainties like weather, poor government policies, pests, diseases etc and most farmers all over the world depend on loans to either expand their businessses, operating expenses and  acquire farm equipments.

Should farmers acess loan at high intrest rates with all these uncertainties?

No, but survey have show that it is on farmer in the developed countries that have access to loans with low intrest rate and it strengthen their macroeconomy whereas in some developing countries it is impossible for farmers to access loans with low intrest rates. Many of the farmers who are desperate to borrow do so at double digit interest rates which  will eat into their profit margins and some of them find it difficult to pay back the loan .

High food price increases are usually triggered by production shortfalls due to these uncertainties and high cost of production. Therefore, food scarcity is a serious concerns in many developing economies globally.

Government at all levels must implement favourable policies that will reduce intrest rates drastically on agricultural loans to a single digit intrest rates and make it accessible in order to boost food production. High intrest rates predispose agricultural investments to a very low profit margin and discourage investors.

 

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