Credit risk modelling and sustainable agriculture: asset evaluation and rural carbon revenue

Abstract

Two important reasons for the limited access to formal credit experienced by rural small farmers in developing countries are information asymmetry and lack of collateral. For formal lenders, these conditions present a challenge to prudent risk management. Sustainable agriculture in sub-Saharan Africa may abate these challenges. This article extends Katchova and Barry's (2005) risk model to include environmental services cash flow in the asset evaluation of farms in Southern Africa. In the presence of falling land prices, future distance-to-default of carbon-certified smallholders would improve considerably with a default probability of approximately 40% as compared with that without certification.

Keywords:

• sub-Sahara Africa
• collateral
• risk management
• microfinance
• carbon credit
• sustainable development