Prof Dwi Rachmina’s Solution to Agricultural Credit Stagnation
Indonesia’s agricultural sector remains trapped in the agricultural finance paradox. Despite being the largest employer, the share of bank credit allocated to this sector has stagnated at 6 to 7 percent. Addressing this challenge, Prof Dwi Rachmina highlighted the urgency of value chain based financing transformation during the IPB University Full Professor’s Scientific Lecture, held online on Thursday (4/23).
Prof Dwi explained that the primary barriers to capital flow to smallholder farmers are high production risks and a rigid collateral system. As a solution, she introduced the Value Chain Based Agricultural Finance Transformation model. This model shifts the financing paradigm from an individual based approach to one centered on economic relationships among actors within the agribusiness ecosystem.
During the discussion session, she emphasized that the effectiveness of this model heavily depends on the commitment of all stakeholders. Based on empirical studies, this value chain model can increase farmers’ access to financing by approximately 30 to 40 percent.
One of the innovations proposed is the use of contracts as a substitute for physical collateral. “The collateral isn’t physical; it’s a purchase guarantee (PG) contract. This is where the value chain plays a role in boosting banks’ confidence in farmers regarding loan repayment,” she explained.
With a buyer’s guarantee contract in place, formal financial institutions have a stronger basis for disbursing loans.
Additionally, she highlighted the digitalization of the agribusiness ecosystem as a crucial component in achieving this transformation. However, he emphasized that technology must go hand in hand with institutional strengthening at the grassroots level.
“Its implementation requires support from other ecosystems, such as strengthening farmer institutions, including improving digital literacy. This process cannot happen overnight,” she added.
Through a policy agenda focused on digitalization, financial instrument innovation, and risk management strengthening, this transformation is expected to serve as the foundation for efficient and inclusive agribusiness development. The integration of financial systems and value chains is expected to break the “Indonesia agricultural finance trap” that has long hindered the productivity of smallholder farmers in rural areas. (MW) (IAAS/WSG)
