Home ›› 20 Dec 2022 ›› Editorial
Bangladesh, a remarkable story of poverty reduction and development. From being one of the poorest nations at birth in 1971, Bangladesh reached lower-middle income status in 2015. It is on track to graduate from the UN’s Least Developed Countries (LDC) list in 2026. Poverty declined from 43.5 percent in 1991 to 14.3 percent in 2016, based on the international poverty line of $1.90 a day (using 2011 Purchasing Power Parity exchange rate).
Moreover, human development outcomes improved along many dimensions. The huge delta region formed at the confluence of the Ganges and Brahmaputra River systems - now referred to as Bangladesh - was a loosely incorporated outpost of various empires centred on the Gangetic plain for much of the first millennium A.D. Muslim conversions and settlement in the region began in the 10th century, primarily from Arab and Persian traders and preachers. Europeans established trading posts in the area in the 16th century. Eventually the area known as Bengal, primarily Hindu in the western section and mostly Muslim in the eastern half, became part of British India. Partition in 1947 resulted in an eastern wing of Pakistan in the Muslim-majority area, which became East Pakistan. Calls for greater autonomy and animosity between the eastern and western wings of Pakistan led to a Bengali independence movement. That movement, led by the Awami League (AL) won the independence war for Bangladesh in 1971.
Developing countries like Bangladesh have some economic problems which are the main barriers to their economic development. The economy of BD was based on Agriculture till 1990 and it is transforming to the industry and service sector. Due to fertile soil, many rivers turned this country an agricultural one. This country has huge labor. So, labor-intensive industries like RMG (readymade garments) booms here. Bangladesh also earns remittances exporting labor to abroad. Bangladesh is the 30th (2020) in the world in purchasing power parity and it is 39th l92019) largest in the world in terms of nominal GDP and its total GDP size is $347991 billion (nominal, 2020). The pace of development can be accelerated if we are able to face various challenges efficiently, a few of which is discussed below in short.
Technology
The use of technology can accelerate a countries economic development. The developed countries are using modern technologies everywhere, without technologies they can’t think a moment. But developing countries like Bangladesh are using labor-intensive technologies in production. So, they can produce only a few products compare to a developed country.
Price stability
The average inflation rate in Bangladesh is about 5.6 per cent since 1990. The inflation increases the price of food and non-food items and it creates pressure on domestic demands. Sometimes the inflation rate goes higher and the highest inflation rate after 2000 is 11.4 per cent in 2008. Higher inflation holds a countries economic development.
Unemployment
There is a serve unemployment problem in Bangladesh because of low employment opportunities and lack of industries.About 2.5 million working people are unemployed and there is many disguised unemployed person in the agriculture sector. As a result per capita productivity is very low in this country.
Underdevelopment of Agriculture
Bangladesh is an agricultural dependent country but its productivity is very low. About 40 per cent of people and many industries directly depends on this sector. But ancient technologies of cultivation and natural calamities make this productivity lower.Before the Green Revolution flourished in Bangladesh, the local rice production was slow. After the independence from Pakistan, the war-torn country faced difficulties due to being financially incapacitated and working with a terribly weakened infrastructure. These shortcomings made rice production fall in the 1970s, further aggravated by the deadly Bhola cyclone. The Green Revolution spread rapidly in the country from the 1970s to the 1980s. The land area irrigated using modern technology went from 0.9 million acres to 5 million acres. Using HYV seeds, food grain production went from 8 million tons to 13 million tons between 1950 and 1970.
Modern fertilizers and technology were not popular at the early stage of their introduction, remedied by the Bangladesh Institute of Nuclear Agriculture, Bangladesh Agricultural Development Corporation, and Bangladesh Water Development Board. Moreover, multiple NGOs and government institutions came forward to revolutionize Bangladeshi agriculture and make the Green Revolution successful. Bangladesh’s economy’s growth averaged between 6.5 per cent and 8.15 per cent in the most recent decade until the covid-19 pandemic erupted in March 2020. When this is added with the social indicators’ performance, it indicates towards an inclusive-growth outcome.Over the past few decades, Bangladesh economy has also experienced a structural shift out of the agriculture sector towards the services and industrial sectors. Although the services sector now generates over half of Bangladesh’s gross domestic product (GDP), agriculture still contributes nearly 12 per cent to GDP. More importantly, agriculture employs about 40 per cent of the labour force and provides raw material to industries. This implies that, despite the structural transformation, agriculture remains an engine within the economy.
Farmers’ decisions to invest and to produce are closely influenced by access to financial instruments. If appropriate risk mitigation products are lacking, or if available financial instruments do not match farmers’ needs, farmers may be discouraged to adopt better technologies, to purchase agricultural inputs, or to make other decisions that can improve the efficiency of their businesses. Improving access to finance can increase farmers’ investment choices and provide them with more effective tools to manage risks. What is then preventing farmers and agricultural businesses to obtain finance? Historically, financial institutions have been reluctant to serve the sector for many reasons.
One major reason is geographical. Low population density and large geographical dispersion of clients in rural areas make it difficult for banks to operate at a profitable scale. The lack of financial institutions branches has translated in a limited provision of saving, insurance and credit products to farmers and agribusinesses. A second factor inhibiting financial institutions from serving the sector has to do with the systemic risk characterising agricultural activities. When natural hazards or adverse weather conditions take place, they typically affect a large number of farmers and firms simultaneously, making it more challenging for financial providers to diversify their portfolio of clients, since when one client fails to pay, many others will be in the same situation. This problem is aggravated by the paternalistic behaviour or political motives that governments may have. Policies ranging from bailouts to relieve households from their debt obligations to political loans to the sector may distort firms and farmers incentives and discourage financial providers to enter the market. Kanz (2012) finds that India’s largest bailout program (the Debt Waiver and Debt Relief Scheme for Small and Marginal Farmers) did not alleviate problems of debt overhang of its beneficiaries. Instead, program recipients increased their reliance on informal credit and reduced their productive investment. His findings suggest that beneficiaries were concerned of the stigma of being identified as defaulters due to the program, and the effects this may have in their future access to formal credit. Another challenge that banks face when serving the agriculture sector is that financial infrastructure in rural areas is in general very poor. Tracking identity of clients or monitoring production outcomes becomes extremely difficult in rural areas. If financial provides cannot track their clients back, then the punishment of default or underperform for a farmer is low, especially if contract enforcement is low. Hence, potential lenders or insurers may well decide not to engage with the sector in the first place, or to respond by excessive credit rationing or over-reliance on traditional forms of collateral, which many farmers lack.
Agriculture value chains can provide opportunities for smallholders to access high value markets, advanced technology, and networks of various value chain actors such as processors, traders, and service providers, as well as reduce the cost of doing business.
So, what is holding back the participation of smallholders in value chains? Poor access to finance is a critical pain point for smallholders. It makes it hard for them to survive and grow, and impedes their participation in a value chain. Agriculture value chain finance provides a set of financial instruments that can be applied for agribusinesses at different stages, which helps smallholders access the financing they need to expand. There are several financing options besides bank and nonbank credit.
A good example is asset-based finance, or using a firm’s valued assets such as accounts receivable, inventory, machinery, and equipment as collateral, or through sale or lease, while not depending on real estate securities and third party guarantees. Asset-based finance offers cash-in-advance with discount, typically faster than traditional bank credit. It provides various forms of financing, such as invoice discounting, purchase order finance, factoring, and warehouse receipt finance; but in reality these instruments are not accessible to smallholders as they are not well involved in value chains. Digital finance, mainly through internet banking and mobile banking, will bring more opportunities for smallholders and other value chain actors to access timely and low-cost financing. Asset-based finance can benefit from digital technology. For instance, digital production records can fill the information gap between suppliers and financial institutions, and can be used for invoice discounting. Digitising warehouse receipts is another promising way to help smallholders raise funds, backed by transparent and traceable data on quality and quantity of crops. This system can allow smallholders to access post-harvest loans. Likewise, digital savings can be an important tool for smallholders. Given smallholder farmers’ unpredictable cash flow, a digital platform enables them to save ahead for input purchases and prepare for unexpected and urgent expenses, through branchless transactions via mobile networks. Digital insurance platforms offer reasonably low-cost crop insurance for smallholders. Users can register online and pay their premiums with their mobile phones. Weather-index insurance enables smallholders to effectively manage crop loss risks through automated weather stations and satellites. Finally, online trade platforms can facilitate business connections between smallholder farmers and others on the value chain, and further promote trade and supply chain finance.
The above are just some of the benefits for smallholders of using digital financial services so they can better participate in value chains. Meanwhile, still many issues remain to further promote digital value chain financing for agriculture.
Developing relevant digital infrastructure and agent networks needs relatively large upfront investment. Comprehensive policy and regulatory frameworks should also be in place to promote healthy digital financial services, and digital finance literacy among smallholders is a must. By addressing these challenges, we can unlock the potential of digital finance to support smallholders on agricultural value chains.
Agricultural supply chains are typically characterised by seasonal harvesting which leads to large inventory build-ups, while demand for finished goods shows a relatively flat pattern throughout the year. The inventories are often held by farmers and intermediate processing plants. These agents thus incur significant holding costs, which are exacerbated when they have poor access to capital. Capital costs for agricultural businesses differ widely. In the United States, the debt level of farmers causes so much concern – especially for younger and smaller farms – that the question arises whether they will remain viable. In the European Union, farmers exhibit lower levels of debt at declining interest rates, and are less likely to face financial distress in the near future.
Further, agriculture supply chains are more complicated than other supply chains. Agriculture supply chains not only have many more participants but also depend on various external factors. The first 2 legs of the supply chain i.e., farmer to commission agent and commission agent to trader/processor lack collateral, which the traditional banking system requires, and also lack liquidity which adds stress to the entire supply chain. SCF is an absolute necessity to bring stability and flexibility to these agriculture supply chains by bringing the lowest cost of capital to where it is needed most. A customised and demand-based credit will shift the focus from survival to improving efficiency, aid innovation, and investment in newer products and methods of farming thereby increasing the yield and income of farmers.
The writer is MD and CEO of Community Bank. He can be contacted at masihul1811@gmail.com
