Agriculture and microcredit

Vegetable gardening with microcredit (Shyamoli ASA landless women group)

In Agriculture, all categories of farmers need credit -- small and marginal farmers need most. Historically with some lone exceptions, microcredit programmes have not addressed the credit needs of small and marginal farmers -- the tomorrow's poor -- apparently for the following reasons:

a) Tomorrow's poor as they are, small and marginal farmers have not been in the priority list of microcredit providers. Providers, for obvious reasons, have been more concerned with the to-day's poor. From the point of expanding programme coverage, there is, ironically a great advantage of not covering the tomorrow's poor -- as the number of current poor are covered under the programme, there is an assured flow of the poor from the pool of tomorrow's poor. Thus, there is a continuously expanding pool (market) of the poor to bring under microcredit coverage.

b) It appears that microcredit providers consider investment in agriculture risky. Traditionally agriculture was dependent on the whims of nature -- it was vulnerable to floods, draughts and pest attacks. So microcredit providers do not want to risk their investment in agriculture.

c) Seasonality of agricultural production appears to be another factor dissuading microcredit providers to advance credit to agriculture sector. It is perceived that since return on the investment in agriculture has seasonal lags from 3 months to 12 months, agricultural borrowers will not be able to repay loans in weekly installments, and will not be able to make weekly savings, two prominent norms of microcredit lending. The likely consequences of this could be: (a) loan default; (b) reduction in loan revolving rate -- reducing interest income; and non or no mobilisation of savings which are used indirectly as collateral and as revolving loan funds.

d) Low repayment of agricultural loan appears to be another factor influencing the decisions of microcredit providers against lending in agriculture sector. Historically in many countries in the region, the picture of record of repayment of agricultural loan is very dismal indeed. In Bangladesh, for example, repayment rate of agriculture between 1990-91 through 1998-1999 raged from 12.31 per cent to 27.35 per cent.

e) Microcredit providers also seem to consider agriculture as a technical occupation funding for which would need technically qualified credit officers and workers. Since they do not generally have technically qualified credit staff, they have refrained from funding to agriculture sector.

2. The tomorrow's poor of Asia Pacific region need microcredit -- credit without collateral. Microcredit providers in the region need, on the one hand to review and extend their priority area for funding to include the poor agriculturalists. They should appreciate the fact that like any other poor, the agriculture poor have also a right to credit. On the other hand, they should also appreciate that the agriculture poor are also bankable -- the perceived problems of providing credit to the agriculture poor are not real. Let us discuss.

First: investment in agriculture need not necessarily be risky. In all Asia and Pacific region countries, the dependence of agriculture on nature has decreased significantly and at the same time productivity in agriculture has increased remarkably. The introduction of irrigation has relieved agriculture substantially of draught; flood-control and drainage programmes have significantly reduced the damage of agriculture from floods.

Secondly: The introduction of irrigation-seed-fertilizer technology has increased cropping intensity and changed cropping pattern including short-duration crops and high value crops. Growing urbanisation has led to the increase in the demand for high value crops. Seasons in agriculture crop production cycle have become shorter in duration and seasons now overlap with one another. In many areas, one can observe year round production -- characterised by cropping patterns incorporating cereal crops with vegetables production and so-called cash crops. There is also intercropping. Credit support will definitely further intensify multi-crop and inter-crop cropping patterns. Further the small and marginal farm households, who need microcredit support, are multi-occupational. For them the concept of livelihood is more appropriate than employment. Livelihood describes an adequate and secure stock and flow of cash and food for the household and its members throughout the year, and the means to meet contingencies. The small and marginal farm households are like the foxes in the Greek proverb, the fox knows many things. They seek livelihoods by adopting different income generating activities. Some multi-occupational small and marginal farm households, like other poor households, will also be able to make weekly savings and repay loans in weekly installments, some can make it partially, some others would need some adjustments in the repayment schedule.

Thirdly: Microcredit providers need not stay away from funding small and marginal farmers seeing the poor recovery of loan in agriculture sector because the poor recovery in agriculture is not inherent in the system -- it is because of (a) lack of adequate and proper supervision; (b) corruption in the system; (c) political lending; (d) bad culture of exemption of credit again motivated by political reasons; and (e) untimely distribution of loan and inadequate size of loan. Microcredit programme as we all know, is free from these vices. Further to note is that among the agricultural borrowers, small and marginal farmers are good repayers of loans.

Fourthly: Agriculture certainly is a special type of production system, but it is not so technical as would not be understood by microcredit staff appraising loan applications. One may appreciate the fact that the poor and illiterate farmers of Asia and Pacific have adopted modern agricultural technology very successfully. At the same time, we also know that for providing very specialised kinds of services, the Asia Pacific region countries now produce a large number of agricultural graduates every year. The microcredit providers can hire them.

Experiences: The first government sponsored experimental project on microcredit in Bangladesh targeted small and marginal farmers and landless agricultural labourers. The project results show that small and marginal farmer also use microcredit efficiently and repay loans regularly. They also make regular savings. PKSF recently, has started funding in agricultural activities of the poor. The PKSF experience is also very encouraging. Some PKSF partners also are providing microcredit to small and marginal farmers. Their experiences also suggest that microcredit can be provided to small and marginal farmers.

Conclusion: Small and marginal farmers constitute the majority of farming population. They are multi-occupational, productive and efficient. They are good re-payers of loan. They, generally have inadequate access to productive assets and very insignificant access to formal sources of credit. As a result, they pass through a process of loosing their scanty resources, and join the pool of poor -- they are the tomorrow's poor.

Access of small and marginal farmers to microcredit can significantly help them to avoid sliding down the poverty ladder. Providers of microcredit have not generally addressed the credit need of small and marginal farmers because of their priority of funding to the poor and because of some perceived problems which include, among others, (a) risk of investing in agriculture; (b) seasonality of agricultural production; (c) poor loan repayment performance of agricultural lending; and (d) technical nature of agriculture production system.

This small note shows that the perceived problems of lending in agriculture sector targeting small and marginal farmers are not real and argues that microcredit providers should extend their priority area of lending to cover small and marginal farmers -- the tomorrow's poor -- who like the poor, have a right to credit. The norms and disciplines of microcredit which, among others, include weekly meetings and weekly savings need not be compromised for such lending. Only the repayment schedule will require some adjustments, and that again not in all cases. The supply of microcredit to small and marginal farmers needs to be supported by the provision of extension services and marketing and storage facilities. These services can be provided by microcredit institutions themselves and also by the relevant government departments. We can put to agriculture microcredit a label, say 'small farmers microcredit' and formulate right policies and design appropriate methodologies it.

Dr M A Hakim is General Manager, Palli Karma-Sahayak Foundation (PKSF). Views expressed in this article do not necessarily reflect the views of PKSF.