Theory

General

Getting and using agricultural credit is an important part of money management, and good money management can help the farm business to grow. Borrowed money can be used to increase both farm production and wealth. However, lenders are sometimes a bit sceptical about farmers who borrow from them. As one experienced farm lender told the authors, ‘Many receivers find it hard to repay, thinking it's pocket draining, forgetting the getting'. There are two broad groups of farmers who need credit:

To whom do farmers tum to obtain credit? Possibilities include: family, friends, merchants and banks. Alternatively, they can join a cooperative (which is partly government-backed); sometimes, in such ventures, the loans are not wholly repaid.

Lenders of money usually expect some payment or reward. The cost of borrowing or hiring money is called interest. In countries where it is against religious custom to charge interest, a borrower may still have to reward the lender in some other way. Human ingenuity has led to the creation of numerous devices to handle the ethical problems involved.

The lender expects to be repaid in the future. When capital is lent, there is always a risk that it will not be repaid. The lender generally wants some reassurance against the loss of his capital. Such reassurance may be simply trusting the borrower's promise to pay, or something more tangible. Often, the lender will get the right to take ownership of a borrower's asset ifhe does not repay the loan. The term ‘mortgage’ refers to this situation. The borrower ‘mortgages’ his land, stock or any other asset of value to the lender. If the borrower defaults on the loan, the lender takes possession of the asset and may sell it to recoup his money.

In situations where the borrower has very little to give the lender as security in the form of assets, then the lender has to rely on the productive capacity of the land.