Tailoring financial services for the rural economy

Posted June 30th, 2011 by |
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Tailoring financial services for the rural economy

Mohd Fahad Ifaz

Financial Express – 30th June 2011

While agriculture’s share of Gross Domestic Product (GDP) in much of the world has dropped, the developing world still depends on agriculture to provide livelihoods. The rural economy of Bangladesh has experienced significant structural changes during the recent decades. Firstly, the land available for crop cultivation has been shrinking at about 1.0 per cent per annum, which meant a reduction of average farm size from 0.81 hectare in 1983/84 to 0.61 hectare in 1996 with simultaneous increase in fragmentation and subdivision of holdings. Secondly, numerical dominance of marginal and small farms has increased as fast as 2.7 per cent per annum, while those of the medium and large farms have actually fallen. Speaking numerically, this means that in future Bangladesh agriculture will have overwhelming dominance of small farms with even smaller number of medium farms and that there may not be any large farm according to the present definition. As these trends continue, the average farm size will further decline to 0.34 hectare in the year 2015, when the incidence of poverty is targeted to be halved. It implies that production organisation and also marketing functions of millions of very small farms under individualistic management is highly unlikely to remain economically viable.

These rural small farmers and businesses will be and already are severely constrained by lack of access to finances. The rural small farmers and businesses are central to country’s development, in terms of both current employment and contributions to GDP. Yet the operations of the rural agricultural and nonagricultural enterprises suffer due to their inability to access finance from both banks, and microfinance institutions (MFI). According to the report of Bangladesh Access to Rural Finance Study for every taka deposited or collected in rural areas only half of it goes back as loans. The study also estimates that only seven per cent of one million potentially eligible small businesses are currently served by the formal banking sector. This study also found that a typical small business loan in Bangladesh requires up to 29 administrative steps, nine meetings with the clients, and the processing of about 50 forms while clients spend about 20 hours negotiating with the bank. This is mainly because the institutions are unable to develop appropriate financial products matching the demand of the farmers or rural small business. This creates a gap between the rural population and the financial institutions and this need to be bridged if Bangladesh intends to experience a steady growth rate. However there is an ongoing effort from the MFIs to craft financial and non financial products and delivery mechanisms befitting to rural economy but that too has been questioned for its process and implication.

The need to expand rural outreach for financing is being recognised by the banks and other financial institutions. The commercial and agricultural banks along with the micro finance institutes needs to develop new business models to increase farmers’ and rural micro and small enterprises access to finance on a sustainable manner. The commercial banks need to re-engineer their operations to enter a new market segment profitably for both parties. The MFIs on the other hand, need to transform from the conventional group methodology to individual lending which several MFIs have already started. It is worth mentioning that commercial banks see rural financing as a risky venture, however almost 80 per cent of the population is in the rural areas so for the banks to have sustainable growth in their business needs to cater to this target group.

Farmers suffering from the weather fluctuations and natural disasters like floods are very common. Innovative products such as Crop based Dedicated Credit Lines, Financing through Contract Farming or Integrated Agricultural Service Providers and index based agricultural risk insurance schemes can be some of the major steps to make sure the wheels of the rural economy keeps moving.

In Bangladesh no agricultural insurance scheme has been in operation since the government-funded disaster insurance scheme was stopped in the mid 80s due to heavy losses. However two index insurance products would be technically feasible in Bangladesh, namely a rice drought index and a rice flood index. Index insurance products are been implemented successfully in a number of countries, like India and Thailand.

Mobile money is seen by many as a way to leapfrog traditional banking and provide billions access to finance. Bangladesh Bank (BB) has taken a bold step to introduce mobile banking through the public and private banks in Bangladesh. This will have a higher penetration in the rural economy as banks do not have to have a physical presence in the areas but can still provide the banking services to the rural customers. The Government can reach the farmers more efficiently while giving away services like diesel or fertiliser subsidy.

Agrani Bank Limited one of the most prominent banks in the country ,along with Katalyst and Winrock; development organisations involved to make “market systems work better for the poor” is developing a dedicated credit line for the poor maize farmers specially those who reside in the char areas. Anyone with the slightest idea about the economy of Bangladesh has the knowledge on how far these char dwellers are from the financial services available to the rural economy. More banks both public and private along with MFI`s should come forward to cater these segment of the economy, who with their limited resources have been brave enough to keep the wheels of the economy rolling.

The writer is a business consultant, and can be reached at email: [email protected]