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A-card: Re-engineering Micro-finance for Smallholder Farmers in Bangladesh

B. K. Mahalder
Chief of Party
USAID Agricultural Extension Support Activity (AESA) Project, House # 7 (2nd & 3rd Floor), Road # 2/1, Banani, Dhaka, Bangladesh

M. U. Salam
International Consultant
USAID Agricultural Extension Support Activity (AESA) Project, House # 7 (2nd & 3rd Floor), Road # 2/1, Banani, Dhaka, Bangladesh

T. Sharmin
National Technical Co-ordinator, Care Bangladesh, USAID-AESA Office

F. J. Ahmed
Consultant
USAID Agricultural Extension Support Activity (AESA) Project, House # 7 (2nd & 3rd Floor), Road # 2/1, Banani, Dhaka, Bangladesh

Abstract/ Executive Summary:

For farmers with limited savings and assets, agriculture technology adoption costs are largely facilitated through two credit models, the micro-finance and bank models. The banking system while enabling access to credit at low interest rates, have failed to reach majority of smallholder farmer who lack necessary collateral. Micro-finance programs while transcending collateral requirement have also proved to be unsatisfactory due to high interest rates, smaller loan sizes and unsuitable tenure. Furthermore, since the bank and micro-finance provided credit is extensively cash-based, there is a tendency for its use in non-farming activities, negatively impacting productivity and profitability. The A-Card, a new model, was thus designed to re-engineer rural agricultural finance in Bangladesh to address these challenges associated with the existing models. A-Card is a debit card specially designed for smallholder farmers (SHFs), which facilitates financial access to credit for digital purchase of farm inputs at low interest rate (10%), no collateral requirement and flexible payback period (6 month tenure). A-Card is based on a four-way collaborative linked between SHFs, input retailers, commercial bank(s) and microfinance institution (acting as agent bank). This paper has presented the blueprint of the A-Card Model and its business mechanisms. A quantitative impact evaluation of the model indicates that for each kg yield per decimal land before ACard introduction, rice yield increased by 0.92 kg after A-Card introduction. The spent on fertilizers, agro-chemicals and seeds were recorded as 98.03±5.15, 25.49±2.09 and 13.88±1.40 BDT per decimal land with the use of A-Card compared to 82.05±4.43, 21.68±1.70 and 11.24±1.64 BDT per decimal land before the use of A-Card, respectively. Further qualitative assessment of the A-Card also reveals additional benefits and challenges for stakeholders - retailers, micro-finance institutions, banks and SHFs. It is concluded that the A-Card model has promoted financial literacy of the SHFs and their annual farm production business plan. This will potentially contribute to future expansion of digital financing systems in Bangladesh and other countries.

Keywords: A-card, Agent banking, Digital micro-finance, Rural credit in Bangladesh, Smallholder farmers (SHF)

Location: Faridpur district of Bangladesh

Start Date: 00-00-2016

End Date: 00-00-2017

Program Area: Resource Development and Management

Commodity: Micro-finance

Objectives:

The A-Card model combines the best features of the bank and microfinance system while doing away with the drawbacks. The innovative features of the model are: (i) Lowest possible interest rates of 10% which is substantially lower in comparison to the standard rate charged by micro-finance intuitions which average 25% or more; (ii) No collateral requirements for SHFs; (iii) Flexible tenure based on crop cycles (6 months), which reduces weekly/monthly pressure for repayment, prevalent under existing microfinance system; (iv) Non-cash based credit reduces the tendency for credit use in non-farming activities prevalent in the micro-finance and bank systems; (v) Digital payment method to reduce leakage and risk of money laundering and to enable cost savings by creating direct linkages; (vi) Improved access to better quality farm inputs and services at lower costs; and (v) Financial inclusion of SHFs into the formal banking system, through agent banking, giving them access to a range of financial services and products.

Methodology:

Business model of A-Card The A-Card business model (Figure 3) is based on a collaborative digitized four-way linkage between SHFs, commercial bank, microfinance institution (acting as agent bank) and farm input retailers. Figure 3 shows the win-win collaborative business model of A-Card, outlining the differentiated responsibilities and benefits of the four main stakeholders within the system. The model also creates a system of checks and balances that ensures accountability and transparency for all stakeholders involved. All stakeholders within this four-way linkage have differentiated responsibilities. The microfinance institution acting as agent bank goes into a bilateral agreement with the commercial bank on profit sharing, SHF lending, agent banking operations and maintenance of fixed term deposit accounts (collateral for SHF lending). The responsibilities of agent bank-cum microfinance institution are: (i) Registering and maintaining SHF’s savings accounts; (ii) Maintaining fixed term deposits with bank; (iii) Monitoring loan repayments and monthly savings of SHFs; and (iv) Capacity building of selected SHFs in financial literacy and business planning. The responsibilities of the commercial bank are: (i) Opening bank accounts for SHFs and providing A-Card; (ii) Establishing agent banking system with microfinance institution agreeing on credit ceilings on individual loans, profit sharing, processes of credit extension; and (iii) Providing open access to digital money transfer application, and maintaining its upkeep.

As per the system philosophy of the A-Card, adoption of agricultural technology (production inputs) will lead to higher productivity (yield) and eventually higher profitability for SHFs Thus, the impact of A-Card on productivity and profitability change was evaluated. For this, 53 rice farmers in Faridpur district who received the first batch of the A-Cards in 2016-17 cropping seasons were purposely selected. The study evaluated the impact comparing two phases: Phase 1 - before A-Card introduction and Phase 2 - after A-Card introduction. A pre-tested semi-structured questionnaire was used to collect data. The impact was evaluated through changes in yield (kg per decimal land), production inputs (fertilizers, agro-chemicals, seeds, irrigation, tillage and labour) cost (BDT per decimal land), grain sale price (BDT per kg) and profitability (BDT per decimal land). Data were analyzed statistically and the mean differences of the variables were compared through t-test at 95% probability level using SPSS statistical software (IBM, 2015). Regression analysis was done between production inputs cost and the yield across the two phases, and yield between Phase 1 and Phase 2. In addition to evaluating A-Card’s impact on productivity and profitability, the benefits and challenges of the model for SHFs, micro-finance institutions, bank and retailers were assessed through one-to-one interviews with the 56 SHFs respondents, 5 input retailers and 1 micro-finance agent.

Source of Information: Bangladesh Journal of Extension Education Volume 29, No. 1&2, 2017: 1-11 ISSN 1011-3916

Article Link (Online Journal):

Funding Source:

1.

Budget:

Total Budget (Tk.) :

Achievement/Findings:

From the preliminary quantitative evaluations, it appears that the A-Card has served its purpose of ensuring borrowers (SHFs) spend money on agricultural inputs, which has translated into productivity and profitability. The qualitative assessments also indicate the additional socioeconomic benefits received by its different stakeholder groups i.e., the farmers, retailers, partner micro-finance institution and the bank and opportunities for it to perform better. The ACard Model has promoted financial literacy of the SHFs and their annual farm production business plan. This will potentially contribute to future expansion of digital financing systems in Bangladesh and other countries. The evaluation recommends the following: • Increasing the credit ceilings: A considerable number of SHFs used their personal credit in addition to A-Card credit to purchase fertilizers, agro-chemicals and seeds. Thus, the credit ceilings may need to be increased. • All SHFs invested extra capital in addition to A-Card credit for other production costs in addition to fertilizers, agro-chemicals and seeds. The A-Card model may consider to extend credit to include other essential production costs. • Centrally controlled loan processing system sometime delayed in receiving loan by SHFs affecting inputs use on time. Therefore, it may require to address kinks in the system. • Take up of the A-Card model by microfinance institutions as a new financial product is a cultural shock to the staff. Therefore there needs to adopt a better change management by the micro-finance institutions.

Knowledge Management: Journal