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Policies and Performances of Agricultural/rural Credit in Bangladesh: What Is the Influence on Agricultural Production?

M. Wakilur Rahman
Department of Rural Sociology, Bangladesh Agricultural University, Bangladesh.

Jianchao Luo
College of Economics and Management, Northwest A and F University, China.

Enjiang Cheng
International Poverty Reduction Center in China (IPRCC), Zhejiang University, China

Abstract/ Executive Summary:

This paper evaluated the performance of various lenders’ agricultural/rural credit programs, assessed the relationship between agricultural credit and farm production, and investigated the major challenges and proposed remedial measures for future policy direction. The study employed time series data collected from various national and international data sources. Both linear and exponential equations adopted for analyzing the time series data. Pearson Correlation equation also applied to determine the relationship between credit disbursement and farm production. It is found that the performance of agricultural/rural credit of various lenders improved due to policy shift in recent years and the inclusion of new financial intermediaries-Private Commercial Banks (PCBs) and Foreign Commercial Banks (FCBs). Both the allocation of credit to agriculture and the target attainment had however been found less satisfactory, although agricultural credit and production revealed a strong positive correlation at 1% level. The findings will help policy makers and practitioners to gain better understanding of agricultural/rural financing and lead to better credit policies and programs.

Keywords: Bangladesh, Agricultural credit, Scheduled banks, Agricultural production

Location:

Start Date:

End Date:

Program Area: Socio-economic and Policy

Non-commodity: Performance, Credit

Objectives:

Present study aims to evaluate the performance of various lenders with the view of existing agricultural credit policy. The paper also tries to understand the relationship between agricultural credit and farm production such as food grain, livestock, and fisheries. Last but not least, the paper investigates upcoming challenges for extending financial services to farmers/rural poor and proposes some solutions to overcome these challenges.

Methodology:

The present paper is mainly based on secondary sources of information. Secondary data preferred for this study because of the availability and accessibility of required data from reliable sources. In fact, the study aims to evaluate the agricultural/rural credit performance of various lenders (SCBs, SBs, PCBs, FCBs and NGO-MFIs) where all of these lenders data are essential for analysis, but it is difficult to collect primary data from all of these lenders due to extensive time and costinvolved.Hence, secondary data applied in this study and data collected from Bangladesh Bureau of Statistics (BBS), Bangladesh Economic Review (BER), and Bangladesh Bank (BB) publication of various years. Meanwhile, some relevant in formation gathered from Poverty Reduction Strategy Paper (PRSP), Fifth Five Year Plan of Bangladesh, Ministry of Agriculture,Ministry of Livestock and Fisheries, and Ministry of Finance. These available sources confirmed data for the period of Financial Year 1980-81 to Financial Year 2010-11 (31 years). After collecting required (time series) data these were analyzed based on study objectives. Undoubtedly, it is difficult to establish a causal relationship between agriculture credit and production due to the existence of critical endogeneity problem. It is argued that credit does not affect the output directly rather it has an indirect effect on output through easing the financial constraints of the producers in purchasing inputs. In contrast, Sriram (2007) argued that increased supply and administered pricing of credit help in the increase in agricultural productivity and the well being of farmers. Similarly, Rashid and Zeller(2002) found that credit constrained small farms allocated less land to High Yielding Varity (HYV) rice, use less inputs and affect the productivity. More importantly, Carter (1989)argued that credit affects the performance of agriculture in three ways: (i) it encourages efficient resource allocation by overcoming constraints to purchase inputs and use them optimally;(ii) if the agricultural credit is used to buy modern farm technology it shift the entire input-output frontier—in this regard it embo diestechnological change and a tendency to increase technical efficiency of the farmers; and (iii) credit can also increase the use intensity of more fixed resources like land, family labor, and management, persuaded by the nutrition-productivity link of credit‘—that raises family consumption and productivity. Therefore, agricultural credit is used an independent variable in this study. In reality, agricultural production is influenced by several factors(socio-economic and technological factors) but present paper only considered agricultural/rural credit disbursement factor to determine the relationship between agricultural credit and production obliviously one of the major limitations of this study. Microsoft Excel and Statistical Package for Social Sciences (SPSS) were applied for analyzing the data in a meaningful way. Simple statistical techniques, that is,linear and exponential equations were adopted. These equations are very simple and convenience to use. A linear function grows at a constant rate whereas an exponential function grows at a rate which increases (or decreases) over time. It is more worthy to use exponential equation as agricultural credit and production supposed to be non-linear relationship. Meanwhile, Pearson Correlation equation also used to determine the significance of the relationship among variables.

Source of Information: African Journal of Agricultural Research Vol. 6(31), pp. 6440-6452, 19 December, ISSN 1991-637X

Article Link (Online Journal): http://www.academicjournals.org/AJAR DOI: 10.5897/AJAR11.1575

Funding Source:

Budget:

Total Budget (Tk.) :

Achievement/Findings:

Agricultural sector financial access has expanded over the decades with the combined efforts of scheduled banks and NGO-MFIs. Not to mention, Bangladesh bank policy on agricultural/rural credit has promoted the access to credit for small and marginal farmers. Although PCBs and FCBs contributed limited in respect to credit disbursement but their participation in agriculture/rural financing deemed as major movement of formal private banks to financing in rural Bangladesh. Many PCBs and FCBs have forged linkages with NGO-MFIs for expanding market horizon in a viable and sustainable manner, while SCBs and SBs have been using their existing branch network to do so. Encouragingly, performance of PCBs and FCBs were found very impressive in terms of credit recovery although they have recently involved in agricultural financing (only 3 years). Overdue asthe percentage of the outstanding loans were found declining trend for all lenders including NGO-MFIs but for SCBs and SBs are still above the reasonable level. Despite increasing allocation of agricultural credit over time, the percentages of allocation over total credit advances were considerably low (4-5%) pointed to note that none of the year (since 1981 to 2010) actual credit disbursement attained the defined target of agricultural credit disbursement. Allocation of agricultural credit to livestock and fisheries sub-sectors were found below the expected level (considering their contribution to agricultural GDP) and more precisely their target attainment was considerably low (only 50-70%). On the other hand, agricultural credit to other sub-category-marketing agricultural products, purchasing irrigation equipment, poverty alleviation, and other related agricultural activities achieved their settled target in most cases particularly in recent years. It is worth to note that the relationship between agricultural credit disbursement and production (food grain, milk, meat, eggs, and fisheries) were found statistically significant at 1% level. Having exposed the significant positive relationship between agricultural credit and production, there should have demand for favorable agricultural credit policy and implication which can increase the budgetary allocation as well as will take steps to overcome the target shortfall. Meanwhile, policy makers should emphasize on monitoring and supervision to extend the credit to the target clients. Finally, there should have incentive for financial intermediaries to encourage them to financing the agricultural sector and rural areas in a sustainable manner.

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