CREDIT POLICY TO REINFORCE FAMILY FARMS:BRAZIL'S EXPERIENCE IN THE 1990s

Abstract

The Brazilian national policy to support family farms (Pronaf) was implemented in 1994 to promote the productive capacity of the rural poor by providing credit to this population with no access to formal bank credit. This policy was aimed at reducing inequity and poverty in the Brazilian society. It was a huge innovation since agriculture had traditionally been based on large landholdings. The first beneficiaries were small family farmers whose activity was mainly based on family labour, with a maximum annual income of 27 500 reais, at least 80% of which came from the property. The State commercial banks were responsible for the financial intermediation. Basically, the program relied on interest rates subsidies, which were necessary in the Brazilian macroeconomic context (Real Plan). Although the number of beneficiaries was significant, until 1998 the Program favoured smallholders of Southern Brazil, who had higher income and better market integration, because bank risk aversion still kept them from lending to the poorest. Demand and protests by several groups led to the program's extension to population with lower annual income, through larger interest rate subsidies. Despite the increasing number of contracts, the program has several drawbacks. Amongst them, is its hugely increased costs, particularly through banks fees, including high administrative and bank spread costs, both paid by the government. Another is that for the poorest smallholders, the policy is finally equivalent of a direct subsidy and has not succeeded in guaranteeing a long term link with formal banks.