Review of Related Literature

Brief Introduction

The majority of the world’s poor share one profession: farming. Most of these farmers

cultivate less than 10 acres of land, far away from paved roads and with limited access to the

improved seed and fertilizer they need to produce good harvests. Most of these farmers also lack

access to financial services that could help them buy that seed and fertilizer. If the global

microfinance industry seeks to have a long-term impact on global poverty, it must address the

needs of smallholder farmers. Most microfinance institutions are focused in urban and peri-urban

areas, but a few are starting to offer products specifically targeted at farmers.

Body

Microfinance has increasingly attracted attention from the global development

community because it is considered a powerful tool in poverty alleviation strategies in

developing countries (Microcredit Summit 2004).

Microfinance was originally conceived of as an alternative to both banks, which in most

developing countries serve only 5-20% of the population, and informal and semi-formal sources

of finance for the poor such as moneylenders. Microfinance has been defined as “a credit

methodology that employs effective collateral substitutes to deliver and recover short-term,

working capital loans to micro-entrepreneurs. 3Microfinance is differentiated from commercial

lending by the concepts of joint liability or group lending, dynamic incentives that allow for an

increase in size of loans over time, regular repayments schedules and alternative collateral

through forced savings (Gine 2003). For example, joint liability helps to overcome adverse

selection (borrowers know who in their community is a credit risk) and moral hazard (borrowers
can monitor each other), and to enforce auditing (by ensuring borrowers are honest in the case of

default) and repayment (borrowers can impose social sanctions on defaulters).

Poverty rates in the Philippines have generally declined in the last 20 years, but it remains

a persistent, widespread problem in the country. The Philippine government has made poverty

reduction a high priority. Microfinance, or the provision of financial services such as loans to

poor families, is recognized as a potent method of directly improving the lives of those most in

need. When managed correctly, these small loans can be used to build small businesses and

develop other income-generating activities that have a long-lasting impact.

Poverty level remains high (36.7%) in agricultural areas in the Philippines. The second

poorest province in the Philippines is Agusan del Sur with incidence reaching as high as 51.2%.

One of the approaches to alleviate poverty is to provide access to capital through microfinance.

This study draws conclusion on the link between access to microfinance and farm production

taking the municipality of San Francisco in Agusan del Sur as a case. A total of 95 rice farmers

were interviewed. Data revealed that microfinance client farmers were producing 27% more than

non-client farmers. The production data were fitted using five production functions namely;(1)

Neoclassical,(2) Neoclassical with interaction,(3) Cobb-Douglas,(4) Transcendental and (5)

Transcendental with interaction. Using ordinary least squares method, Neoclassical function best

fit the data with access to microfinance significantly improving farm production by 23%. Output

was most responsive to land (0.60 elasticity (E)), followed by fertilizer (0.18 E), labor (0.14 E),

herbicide (0.12 E), seed (0.02 E) and pesticide use (0.00 E). Irrigated farms were 23% more

productive than non-irrigated farms. Despite the positive impact of access to microfinance, only

34% of the farmers had availed agricultural microfinance loan from formal institutions while

only 18% took advantage during the 2nd season of 2010 rice production.
 The Zamboanga del Sur Development Project which commenced in 1972 with substantial

grants from the Government of Australia adopted institutionalization as a strategy to sustain the

development activities it started in the province. As a result, the Project acquired, in addition to

its responsibility of uplifting the economic and social conditions of project beneficiaries, the

functions of planning, structuring and guiding local institutions on matters of technology

transfer, fostering changes in values and in orientations, and obtaining support from the

A sample of Kansas farms was used to examine the impact of risk and specialization on

mean financial performance. Mean financial performance was hypothesized to be influenced by

risk, age of the operator, percentage of acres owned, financial efficiency, leverage,

specialization, and farm size. Risk, age of operator, financial efficiency, and farm size had the

largest impacts on mean financial performance. Specializing in swine, dairy, or crop production

increased mean financial performance, while specializing in beef production decreased mean

financial performance. Farms with both crops and a livestock enterprise (beef, swine, or dairy)

tended to have less variability in financial performance.

Views of large‐scale farmers, professional farm managers, and agricultural bankers on

sources of information as well as sources of and responses to risk in agriculture are explored.

The groups rated nine or more information sources at 3.0 or higher on a 5‐point scale for

production decisions. Fewer sources were rated as important for marketing and financial

decisions. Internal information sources such as records, tenants, or borrowers were highly rated.

In contrast to large‐scale farmers, both farm managers and agricultural bankers rated professional

colleagues as important information sources. Responses were similar with respect to sources of
and managerial responses to risk, and in their self‐assessment of management skills. © 1996

John Wiley & Sons, Inc.

Allow foreign equity participation in microfinance In many countries, foreign equity

participation in MFIs is limited or prohibited. As in other financial sectors, foreign presence in

microfinance could have a catalytic and strengthening effect. Foreign / social investors are

interested in investing in MFIs in developing countries, but are unable to do so due to restrictions

imposed by governments. However, MFI’s may also be unable to bear foreign exchange risk

related to foreign currency borrowing (Fernando).

Synthesis

Reference