agricultural growth and agricultural credit in the context of bangladesh

BANGLADESH RESEARCH PUBLICATIONS JOURNALISSN: 1998-2003, Volume: 8, Issue: 2, Page: 174-179, March - April, 2013AGRICULTURAL GROWTH AND AGRICULTURAL CREDIT IN THECONTEXT OF BANGLADESHKashfia Sharmeen 1 and Samia Tarannum Chowdhury 2Kashfia Sharmeen and Samia Tarannum Chowdhury (2013). Agricultural Growth and AgriculturalCredit in the Context of Bangladesh. Bangladesh Res. Pub. J. 8(2): 174-179. Retrieve fromhttp://www.bdresearchpublications.com/admin/journal/upload/1308125/ 1308125.pdfAbstractThe aim of the study is to provide some important findings regarding the agriculturalgrowth and productivity of Bangladesh in term of credits that are allocatedespecially for this sector by the government of Bangladesh (GoB). Here, we canobserve that GoB have already provided a significant amount of funds by fewspecialized banks to the development of agriculture and also has taken someuseful initiatives to get more fund from outside sources like IMF. A major part of thiscredit goes to the poor farmers as loan and also for buying necessary input supportssuch as seed, irrigation, fertilizer etc. Along with government, some otherorganizations (NGO-MFIs, PCBs, FCBs etc.) are encouraged to extend their lendingfacilities to these farmers. In the last several years, the growth in the broadagricultural sectors seems steady as well as upward sloping and their contribution inGDP is quite significant. A positive correlation has been found between availableagri-credit and greater production in the context of Bangladesh, whereas, severalempirical evidences have been presented here which provide both positive andweak relationship in between them.Key words: Agricultural credit, Agricultural growth, productivity, Bangladesh.IntroductionThe word agriculture is not only related to the economy of Bangladesh but also plays amajor role in the rise of her elementary citizens’ development. Since agriculture is thestipulation of food production, place for employment, ways of expanding export, offeringmore area of improvement and better standard of living for the people of Bangladesh,agricultural growth matter a lot. According to Bangladesh Economic review (2010), in2009-10 fiscal years this sector contributed 20.24% in the total GDP, earned US$ 687.53million by exporting agricultural products which is 4.24% of total export earning and alsothe broad agriculture sector of fishery and forestry contributed 15.57% and 4.49%respectively (revised estimate of BBS, 2010). Besides, about 43.6% of the total labor forcesof the country are engaged in agriculture sector (MES, 2009, BBS, 2010). Agriculture alsoplays a vital role in foreign direct investment. As of 2010, inflows of foreign directinvestment recorded to $571 million where the projects were invested 2.24% in agriculture(as of March 2011, Bangladesh Economic Review 2011, Bengali version, Ministry ofFinance). As agriculture act is one of the main drives in economic growth, Government ofBangladesh (GoB) emphasized deeply in the sector to achieve self sufficiency in food by2013 through increase production (Bangladesh Economic review, 2010). For this purposeGoB focused on the following major issues for the overall performance of the agriculturalsector such as: (i) to attain self-sufficiency in food grain, (ii) to ensure sustainableagricultural growth, (iii) to increase foreign exchange earnings, (iv) to increase fishery,Corresponding Author: Email: kashfia_sh@aiub.edu1 Kashfia Sharmeen, Department of Finance, American International University-Bangladesh (AIUB),2 Samia Tarannum Chowdhury, Department of Accounting, American International University-Bangladesh (AIUB),

Agricultural Growth and Agricultural Creditlivestock and forestry production, provide extension service to all categories of farmersand (v) to introduce high quality and appropriate agricultural technology (MOA, 1996).A huge amount of money is allocated by the government for the development ofagricultural sector. For example, in 2009/10, GoB allocated 74047.1 million taka to theMinistry of Agriculture for the purpose of increasing agricultural production, ensuring foodsecurity and reducing poverty (Bangladesh Economic Review 2010, 2011). Hence, GoBprovided subsidized agricultural credit by specialized bank (Bangladesh Agricultural Bankand Rajshahi Agricultural Development Bank) on a ground that leading to agriculturesector expedites agricultural production (Rahman et al, 2011).Besides, some formal financial institutions offer microcredit services for poverty mitigationlike NGO-MFIs in addition to agricultural credit (Rahman et al., 2011; CDF, 2006; Bayes,2011). Likewise, Private Commercial Banks (PCBs) and Foreign Commercial Banks (FCBs)are also encouraged to extend leading facilities through partnership agreement with theNGO-MFIs as they have fewer or no rural branch offices (Rahman et al., 2011). Recently, anew system has been introduced (in 2009) to disburse agricultural credit at union levelopenly (field or union parishad office rather than to a bank) so that only true farmers canget the credits (Rahman et al., 2011; BB, 2011).Since, a significant portion of government’s fiscal budget is allocated for agricultureproduction and improvement, it is important to perceive whether this allocation has anyconstructive upshot or not. In this study we try to find out any long term effect ofagriculture credit on the agriculture production in Bangladesh. Here, mainly secondarydata has been used to come across the answer which eventually provides some helpfulthought.Objectives of the studyThe research will be accomplished in order to see the current position of the agriculturalgrowth and production and also the agriculture credit that is allocated for this sector bythe government of Bangladesh. Hence, the broad objectives of the research couldaddress as to find out the influence of agriculture credit on agriculture growth by assessinga literature survey that has been done in this field.MethodologyIn this study we have used secondary data available in various sources. Published Datahas been collected mainly from the annual budget of Bangladesh Government,Bangladesh Bureau of Statistics, Bangladesh Economic review and different publishedreports by the government. Besides, more information has been obtained fromacademic books and a variety of Journals. Financial figures have been taken fromvarious websites as well. Here, a literature survey method has been conducted to reachto a significant result by evaluating the findings critically.The Impact of Agricultural Credit in Agricultural GrowthThe effectiveness of agri-credit on agri-productivity is multi-fold. The foremost sector to bebenefited from the efficacy of finance is the group of growers themselves. It should beremembered that, in poverty stricken country like Bangladesh, the main source of earningincome in the rural front, has been entrenched on agriculture and production of agrobasedproducts, since long. Given the financial imbalance between the rich and thepoor, the option of having investment-ready cash, is thus limited only to the fortunate few.Many growers are there, who might have the know-how and interest to explore their luckinto various agro-based endeavors but lack the monetary back-up. If the credit reachesthe producers effectively, it will surely add-in new amount of agricultural production,which may not have been possible otherwise. In consequence, this shall maneuver apositive growth in the GDP of the country and have additional amount of disposableincome to lift the living-standard of the people. A research carried-out by Saboor et al.,(2009) on the circumstances of credit’s impact on agricultural growth leading to povertyalleviation on the premise of Pakistan, has rooted for similar view, as well.Additionally, as cited in (Rahman et al., 2011), all scheduled financial intermediaries,under the instruction of the Bangladesh Bank (BB), are required to offer different short andlong-term credit options to agricultural sector. According to the latest records of BB175http://www.bdresearchpublications.com/journal/

Sharmeen and Chowdhuryaround 63% & 37% of the enlisted banks’ credit lending (Rahman et al., 2011) has beendirected towards helping the agro-based community develop through short-term & longtermloans, respectively. It can be mentioned here, that current-credit schemes are mostlyfound to help farmers & growers with certain season-based agricultural production;whereas, non-current credit options aid the producers with deploying hi-tech machineries,setting-up agricultural industries or factories, installing varied irrigation tools etc., that canboost-up the production of the crops & help in shifting the production scale positively. In atraditional circumference, the farmers were familiarized with cultivating crops on landtaken-in from the affluent land-lords of the village. Months of rigorous effort, went-in firstly,by ploughing and making the land suitable for cultivation manually, sowing seeds andfinally with the appearance of bounty crops, sharing significant portion of it, with the landlordas payment of lease, or ‘khajnaa’. Though, this approach did survive for an epic-time,and is still prevailing, in the context of Bangladesh and the Indian Sub-continent, so tospeak, the opportunity cost of it, deprived the potentially independent growers ofeconomic-freedom. This financial- autonomy comes in stages starting from the ability tobuy electronic gadgets, tools and machineries to speed up growing process of crops andprobable option of not having paid the khajnaa anymore. Therefore, the result of theinfluence and effectiveness of credit-options in agricultural growth is irrefutable.The small-scale farmers and the countryside poor are often to decide between takingmonetary assistance from either social or institutional sources. The social source mayinclude friends, family members, shop owners, agents etc, whereas, the institutional sourcehas banks, micro finance institutions and other financing organizations (Bashir et al., 2010;Okojie et al., 2010). Faruqee (2010), in his working paper, has identified three majorsources of official loan providers in the rural context of Bangladesh. They are the “formal,informal and the quasi-formal” sources of fund providers. As cited in the paper, the friends,relatives and family fall in the category of informal loan providers, and result to asignificant 8% - 21% of rural people seeking fund from this. Interestingly, the loanrepayment record also happens to be satisfactory from this source (Faruqee, 2010). Thismay be due to the terms of the finance being straight-forward and understandable, incomparison to the twisted conditions linked by a formal financing organization. Researchwhereas, also discovered a moderate 16% of the cultivators getting credit from formalsources like banks (Faruqee, 2010). Thus, the terms and conditions and institutionalprocedures need to be simplified (Saboor et al., 2009). As most of the growers have lessereducation rate or may be uneducated, their ability to understand the twists and turns ofloan-schemes may always not be possible. This might result into a cyclic action of creditdefault; failure to attain monetary assistance from various institutions at a later period andloosing the on-going production facility.When it comes to financing tools, there is also a variety in options that are available to thegrowers. Several former researches have suggested a various mix of easy credit plans thatcan aid the new farmers, beginners or small-scale agricultural entrepreneurs to start-upproduction on their own (Saboor et al., 2009). If it is availed to the small-scale farmers,with lesser overhead costs, it can motivate many unemployed farmers or growers to geton board as well. Nevertheless, several studies (Badiru, 2010; CDF, 2006 as cited inRahman et al., 2011; Rahman, 2004; Gloy et al., 2005) have shown a common practicethat, both the availability and accessibility of finance is more in NongovernmentalOrganizations-Microfinance Institutions (NGO-MFIs) due to higher presence of branches ofthe same in village-levels, in contrast to mainstream Commercial Banks, which onlyoperate in Metropolitan locations. General loans, program loans, housing loans etc. arefew of the popular loan products issued by financial institutions like the MFI’s inBangladesh’s rural sector (Faruqee, 2010). In his working paper, Faruqee (2010) hasidentified, agricultural activities, operating poultry, livestock, sericulture, fisheries andforestry are the major deeds that are covered in the program loans issued by the NGOs-MFIs. However, the down-fold of this system, is the sheer amount of added interest that isbeing charged to the farmers, in oppose to the Commercial and Private Banks.On the contrary, the NGO-MFIs make the option of financing easier to the small-scalefarmers, by eradicating pre-condition of financial security or guarantee, for finance. As aconsequence, the repayment of the loan involves higher interest rates (Badiru, 2010;Rahman et al., 2011; Okojie et al., 2010; Gloy et al., 2005). Therefore, the farmers face achoice for opting between an accessible financing option that is costly; or, availing a lesshttp://www.bdresearchpublications.com/journal/176

Agricultural Growth and Agricultural Creditcostly financing option that is available only in the major cities, with a pre-requisite offinancial-collateral. In order to address the issue the GoB can make the financing choiceseasier in terms of introducing favorable agricultural-credit guarantee and reducingadditional overhead interest in cases of NGO-MFIs. The same was also suggested in caseof a research held by Gloy et al. (2005).In addition to the above, any loop-holes discovered in the research, in the way of deliveryof credit to the respective recipient of the same, will educate them about alternativefeasible credit-options. In another research by Mehmood et al., (2012) on Kasur District ofPakistan, showed that in some cases it can be common for many villagers, to take-uploan showing that as an investment into agriculture and agro-based activities, but inreality putting that into social expenses like carrying out marriage occasions, dowry,dissolving legal cases etc. Practices like this raise questions on to the issues of theeffectiveness of the disbursed credit, if getting into the paradigm of agriculturalproduction, in the first place, let alone its role in increasing it.It has been noted in some previous research (Badiru, 2010; Rahman et al., 2011; CDF, 2006;Rahman, 2004; Gloy et al., 2005) that the cost of availing the credit also hinders thefarmers’ capacity to get the finance. As cited in a working paper by Nagarjan and Meyer(2005), the different costs that add up to the available finance schemes, range fromservice charge for high volume of multiple transactions of lesser amounts of the users, tothe cost for providing them with information about their savings or credit accounts severaltimes, in contrast to any urban account holder. This is due to the fact that, in contrast tothe account-holders of metropolitan areas, the rural account holders live more scatteredand based on their earning, both their savings and requirement for finance is alsocomparatively low (Nagarjan and Meyer, 2005). Thus a proper balance of cost betweenthe lender and borrower of finance must be established (Mehmood et al., 2012).Otherwise, the agri-credit payout may not again, be an input in increasing the agriculturalproduction.In many other preceding researches, proof of a positive association between agriculturalcreditand higher productivity has been established. Numerous former studies havestressed on the improvement of the financial segment, as ensuring a better accessibleand approachable rural fund-source can positively reinforce productivity (Levine et al.,2000, McMillan and Woodruff, 2002; Cull and Xu, 2005). Butler and Cornaggia (2009) alsohave explored positive connection between countries with easier fund access and raisedproductivity. If people have easier access to getting funds, more of that money can beput into setting up a business, developing new skills and expertise, exploring productinnovation, assuring proper allocation of resources, all of which can lead to expansionand growth. In other words, the size of the existing business can be enlarged with thesupport of trouble-free money access (Beck et al, 2005).Since the liberation of Bangladesh in 1971, the economy first and foremost depended onthe agricultural sector. Agriculture remains very important, as it is the prerequisite to ensurefood security and is the major source of employment and livelihood, to the greatestnumber of people in Bangladesh, as well as its contribution through forward andbackward linkage with the rest of the economy (Asaduzzaman, 2009). Without doingproper utilization of this sector, the overall economic improvement will not emerge.Keeping in line, with the importance of this sector, the Bangladesh Government hasallocated a considerable portion of agricultural credit and also encourages otherorganizations (NGO-MFIs, PCBs, FCBs etc.) to extend their lending facilities to this field.Apart, from reducing customer duty on commodities in the budget of financial year 2010-11, an allocation of Tk. 4,000 corer has been proposed as subsidy to the agricultural sector(State of the Bangladesh Economy in FY2010-11: First reading). With the reference of thispaper, State of the Bangladesh Economy in FY2010-11, which is prepared under theprogram called Independent Review of Bangladesh’s Development (IRBD) state thatBangladesh is currently negotiating with IMF for a credit deal amount US$ 1(one) Billion forthree years (2011-14) under its Extended Credit Facility (ECF) arrangement. According tothe center for Policy Dialogue (CPD) Bangladesh, a clearance for loan package isexpected to get from IMF Board in February next year. This would be the first time in threeyears that Bangladesh is opting for an IMF program. In FY2009-10, the GoB allocated Tk.5,965 corer for agriculture sector, of which Tk. 5,076 cores were assigned for the non-177http://www.bdresearchpublications.com/journal/

Sharmeen and Chowdhurydevelopment sector which is 85% of the total budget the Ministry (Titumir et al., 2010).Similarly, 69% was allocated for non-development sector for the Ministry of Forest and 56%for the Ministry Fisheries and Livestock (Titumir et al., 2010). According to allocation for thenon-development sector is Tk. 5,684 cores, it is 84.35% for Agriculture Ministry and 56% forMinistry of Fishery and Animal Resources.More specifically, about 111,168.80 million Taka was distributed to the farmers asagricultural loan in 2009/10(Bangladesh Economic Review 2010; 2011). In addition, GoBtakes the effort to provide necessary input supports (such as seed, irrigation, fertilizer etc tothe farmers. For instance, in 2009/10, about 49,220 million Taka was released as subsidy onfertilizer and for other agricultural inputs (Bangladesh Economic Review 2010; 2011). Forirrigation expansion, the allocation of budget was Tk. 427 crore in this FY2010-11 (Titumir etal., 2010).All these effort is taken to escalate the agricultural growth, because this disbursement ofagricultural credit is a key factor in the development of the agricultural sector, whichachieved a growth rate near 4% in FY2008-09 and 4.39% growth rate has been projectedby Medium Term Monitory Framework (MTMF) of the government, in FY2009-10 while, GDPis growing at a constant pace of close to 6% in all these fiscal years (Titumir et al., 2010).Now, the question is whether this credit facility actually drives the agricultural growth ornot. If this credit really did not contribute into the agricultural growth, then is it wise toallocate such a big portion from budget for a developing country like Bangladesh?One of the major factors that need to be assured is if the huge amount of agri-credit thatis being arranged to be paid-out to the growers, are put into the model of agriculturalproduction or agricultural activities, in the first place. Or, are they just discharged fromvarious formal/non-formal lending institutes and used/misused in other activities, otherthan agriculture. As, if this cannot be certained, the greater amount of lending that GoB,arranges for the growth of the crop-sector cannot be attained. Also, holding equalimportance is the issue of making the funds easily accessible, as well as, the terms of thecredit, understandable. This in return, will encourage our growers to take financial aid fromvarious lenders and use it for their production activity.There were not so many researches done on the relation of credit and productivity, strictlyon the perspective of Bangladesh. However, namely researches like that of Rahman et al,(2011) have shown evidence of a highly optimistic co-relation (0.938; with statisticalsignificance at 1% level) between available agri-credit and greater production. The studyhad also come up with highly positive results based on data collected and carrying outstatistical tests. It was revealed, that farmers who have access to agri-credit, have 1.21times higher production of crops, in contrast, to the farmers and growers who don’t havecredit support for their cultivation of crops. Specifically, food grain production, fisheriesproduction have higher correlation (0.948); whereas, livestock products like milk, meatand eggs have been found to have moderate correlation (0.772, 0.938 and 0.688respectively) all statistically significant at 1% level.Based on the secondary statistical research work, on the context of Bangladesh, that hasbeen conducted so far, it can thus be said that, there is a positive correlation betweenraised credit accessibility in agriculture and higher production yield. Options like makingthe farmers/growers buy/rent farming machineries, help them get seeds, fertilizers,cultivation-equipment etc. aide them in working towards a very optimistic yield of crops.ConclusionIn recapitulation, it can be mentioned that agriculture is the only viably-substantiallivelihood earner in rural Bangladesh. It not only provides the poorer with economicfreedom,but it also has the capacity to alleviate poverty. The agricultural growers arefaced with a range of credit-options to get themselves into the efficiency-cycle,including, short-term, long-term financing instruments; as well as, with various sources offinance like formal, informal and quasi-formal. The availability of various purpose-basedand program-based loan options has in one way made life more simple, as fund whichwas earlier unthinkable, is now approachable for the agro-growers; on the other hand,multiplied impediment arises out of complex loan-term interest calculation, which is attimes, far beyond the comprehension of the mostly illiterate rural population. Onus is uponthe farmer to weigh down the cost and benefit of funding methods that are availablehttp://www.bdresearchpublications.com/journal/178

Agricultural Growth and Agricultural Creditand choose the best option. Govt. and local monitoring is not always feasible to identify ifthe entire financed amount goes into agriculture-related activities in the rural front.However, the optimistic correlation amid approachable credit and amplified agriculturalproductivity is irrefutable.ReferencesAsaduzzaman, M. 2009. Getting Agriculture Moving Once Again: Strategic Options for Post-HYVAgriculture in Bangladesh. UK Department for International Development, Dhaka.Badiru, I.O. 2010. Review of Small Farmers Access to Agricultural Credit in Nigeria, NSSP Policy NoteNo. 25. Washington. D.C.: International Food Policy Research Institute.Bangladesh Bank (2010). Annual report FY 2009-10, Bangladesh Bank, Bangladesh.Bangladesh Bureau of Statistics (BBS), 2010. http://www.bbs.gov.bd/Bashir, M. K., Mehmood, Y., and Hassan, S. 2010. Impact of Agricultural Credit on Productivity ofWheat Crop: Evidence from Lahore, Punjab, Pakistan. Pakistan. Journal of Agri. Sci., Vol.47(4): 405-409.Bayes A (2011). On rural credit market, The Financial Express, Vol. 226. Dhaka, Bangladesh, June 21,2011, available at: (http://www.thefinancialexpress-bd.com/).CDF. 2006. Bangladesh Microfinance country profile, Credit and Development Forum (CDF),http://www.microfinancegateway.org/gm/document-1.9.27395/38050_file_Bangladesh_Microfin.pdf.Faruqee, R (2010), “Microfinance for Agriculture in Bangladesh: Current Status and Future Potential”,Working Paper No. 8; April 2010, Institute of Microfinance (InM),http://www.inm.org.bd/publication/workingpaper/workingpaper8.pdfGloy, B. A., Gunderson, M. A., and LaDue, E. L. 2005. The Costs and Returns of Agricultural CreditDelivery, Amer. J. Agr. Econ. Vol. 87(3): 703–716Mehmood, Y., Ahmad, M., and Anjum, M. B. (2012). Factors affecting Delay in Repayment ofAgricultural Credit: A Case Study of District Kasur of Punjab Province. World AppliedSciences Journal, Vol. 17 (4): 447-451.MoF. 2011. Bangladesh Economic Review 2011 (Bangla version). Dhaka: Ministry of Finance (MoF),Government of Bangladesh (BoG).MoF. 2010. Bangladesh Economic Review 2010. Dhaka: Ministry of Finance (MoF),Government of Bangladesh (GoB).MoF. 2010. Budget at a glance 2010. Dhaka: Ministry of Finance (MoF), Government of Bangladesh (GoB).Nagarajan, G., and Meyer, R. L. 2005. Rural Finance: Recent Advances and Emerging Lessons,Debates and Opportunities. Reformatted version of Working Paper No. (AEDE-WP-0041-05),Department of Agricultural, Environmental, and Development Economics,The Ohio StateUniversity (Columbus, Ohio, USA).Okojie, C., A. Monye-Emina, K., Eghafona, G. O., and Ehiakhamen, J.O. (2010). Institutionalenvironment and access to microfinance by self-employed women in the rural areas of EdoState. NSSP Brief No. 14. Washington. D.C.: International Food Policy Research Institute.Rahman, M. M. (2004). Channeling commercial fund to NGO-MFIs: A case study of Bank-NGOlinage program of Sonali Bank. unpublished Master‘s thesis, Department of Economics andsocial Sciences, BRAC, University, Dhaka, Bangladesh.Rahman, M. W., Luo, J., and Cheng, E. 2011. Policies and performances of agricultural/rural credit inBangladesh: What is the influence on agricultural production? African Journal ofAgricultural Research, Vol. 6(31): 6440-6452.Saboor, A., Hussain, M., and Munir, M. 2009. Impact of Micro Credit in Alleviating Poverty: An Insightfrom Rural Rawalpindi, Pakistan. 2009. Pakistan Journal of Life and Social Science, Vol. 7(1):90-97.Titumir, R. M., Alam, M. S., Maher, M., Rayan, K., and Rahamn, M. M. 2010. Bangladesh EconomicUpdate: Growth, Tax, Inflation and Consumers. Bangladesh Economic Update, Vol.1. No.1.[The Bangladesh Economic Update is an output of the Economic Policy Unit of the UnnayanOnneshan]179http://www.bdresearchpublications.com/journal/