Microfinance Services for Agriculture
Millions of impoverished people in developing countries have access to formal banking services. According to the Consultative Group to Assist the Poor (CGAP), in 2004, all forms of so-called “alternative financial institutions” held approximately 660 million small savings and lending accounts. However, when only loans were recorded, the number of accounts dropped to around 150 million loans outstanding, a relatively tiny figure when compared to the millions of people who are believed to need minor loans. This gap continues despite the widely lauded microfinance revolution, which has resulted in the establishment of hundreds of specialized microfinance institutions (MFIs) dedicated to providing small non-collateralized loans to the poor. Most MFIs, as is widely assumed, ignore farmers and agriculture.
The new financial market paradigm encapsulates some of the best practices that have contributed to microfinance’s success. There is now a solid platform for developing products and long-term institutions that are better suited to expanding financial services into agriculture and rural areas. Increasing the availability of working capital loans much work needs to be done, however, to sustainably deliver other financial services and larger and longer-term loans required for major investments to modernize developing countries’ agricultural economies.
About 75% of the world’s poor live in rural areas, where their survival is mostly dependent on agriculture (food producing agriculture and cash crop production), which is vulnerable to climatic and market changes and has relatively low profitability. Agricultural households confront several obstacles in developing their productive activities, including access to finance. The majority of farmers in underdeveloped nations are effectively striped from banking institutions.
The number of individuals working in agriculture and having bank accounts in Africa or South Asia does not surpass 5% or 6%, whereas in developed nations, agricultural banks played an early role in modernizing agriculture and incorporating farmers into the financial system.
Different types of innovations in products and services, as well as institutional features, are critical to the development of agricultural finance. In order to mitigate risk, institutional organizations such as portfolio diversification between urban and rural borrowers or between agricultural activities and less risky economic activities within rural areas are being found to promote efficient, sustainable, and accessible financial services for smallholder farmers.
Microfinance banks established to serve rural areas and meet farmers’ financial requirements have utilized portfolio diversification strategies in order to reduce their trust on crop production and increase risk management in a variety of contexts (Mali, Madagascar, Peru, and so on). These institutes began to carry out activities in urban regions.
Weather conditions have a significant impact on agricultural output. Climate change is being linked to an increase in crop-damaging weather of exceptional severity, according to emerging evidence. Thus, risk management, particularly climate risk management, is regarded as a prerequisite for expanding agricultural finance services. Climate insurance and loans combined with insurance are thus potential answers. The challenge is how low-income farmers might be compensated for agricultural losses caused by extreme weather, and how such schemes can be profitable. In reality, implementation is extremely difficult due to the requirement of available weather time-series data in order to build index-based weather insurance products, loss assessment concerns, and so on.
Many governments around the world have prioritized financial inclusion. This ignored the 1960s focus of subsidizing a crucial economic sector, particularly agricultural output. Furthermore, with the rise of financial inclusion has come the diversification of income-generating industries: in rural areas, where agriculture is largely unprofitable, rural residents are urged to invest microcredit in new productive activities. This diversification of revenue sources is intended to reduce household vulnerability. Few microfinance institutions have established an offer to meet the financial needs of farmers in this setting. And, some current projects are promising, but it will take time to assess the effectiveness of new forms of collaboration as well as public policy measures to fulfill the different financial demands of agricultural farmers.
Agricultural development with the help of Microfinance
When clearing up with an example from a research study, in India, the Balunnaghar is an agrarian community where crop production is the main source of revenue for people and a source of bread and butter. They obtained financing from nearby institutions in order to purchase crop seeds, rice, cabbages, carrots, potatoes, beans, and various vegetables. They put the borrowed money toward fertilizer and other growing and harvesting charges. And, as a result, their productivity and income levels are high, which has a favorable impact on their socioeconomic development. In India, Self-Help Group (SHG) members reported that the average increase in family savings and household asset values was between 30 and 50 percent two to three years after joining the group.
The Impact of Microfinance Programs on the Social and Economic Situation of the Poor
The magnitude of the impact varies among locations and is minor in some outcomes. This contradictory evidence could be attributed to variances in the nature of the intervention, setting, and ways of implementation. Microfinance interventions appear to have a positive impact on income, asset accumulation, and consumption. The microfinance, in combination with skill development programs, is likely to improve livelihoods. Rather of encouraging individuals to engage in low-productivity activities, this might enable them to gain more regular work, build income-generating assets, or establish microenterprises.
Overall, microfinance has become an important element of South Asia’s economic landscape. By 2005, microfinance in the region had reached at least 35 million of the region’s 270 million people, meeting around 15 percent of the overall credit needs of low-income families. Microfinance coverage was particularly excellent in Bangladesh and Sri Lanka, with more than 60 percent of the poor served.
Portfolio sizes and client outreach among the major NGO-MFIs, as well as Grameen Bank, have grown rapidly in the last two to three years, with changes in business practices accelerating in 2005. The four major microfinance service providers were reported to have 73 percent of overall client outreach in late 2004. Grameen Bank, for example, increased its membership from roughly 2 million to more than 5 million between December 2002 and December 2005. Grameen Bank has been excellent in this development. Grameen Bank attracted 100,000 active consumers each month via a new program in 2005.
Some studies show that small loans can help customers minimize their reliance on irregular revenue sources and enhance their ability to sustain consumption when faced with economic shocks. Thus, there is evidence that microfinance contributes to client household vulnerability reduction, however evidence for overall poverty reduction is less obvious. In general, while this is rarely defined, the contribution of microfinance is determined by each client household’s starting point, or relative poverty level, as well as the type and quantity of microfinance obtained.
There is evidence of a favorable influence on income, education, women’s empowerment, and employment; nevertheless, the effect appears to be minimal. Participants’ asset generation and consumption/expenditure may grow as a result of microfinance programs. Another effect on education outcomes is higher school enrollment rates, albeit this is especially prominent in the South Asian setting for girls’ schooling. A 1996 study of two villages in Bangladesh showed that all of the girls from Grameen Bank client households had received some schooling, compared with 60 percent in nonclient households.
Microfinance has a favorable impact on poor people’s household earnings. Participation in microfinance has resulted in a diminishing of seasonal changes in farm income. Participants’ consumption increases as a result of asset creation. In the context of Bangladesh, micro-savings for women have a substantial impact on their individual expenditure. When compared to other poor groups, the ‘poorest of the poor’ were more likely to benefit from participation.
Client households in both rural and urban areas improved income levels by 8 to 40 percent as a result of the use of microcredit and acquired physical assets (productive and household) and financial assets (cash savings) in significantly higher proportions than non-clients, according to studies from the 1990s of MFIs in Bangladesh (ASA, BRAC, Grameen, and other MFIs using the Grameen model). A World Bank study found similar results, using panel data from a 1991-1992 baseline followed by a 1998-1999 resurvey of clients from three major microfinance programs (Grameen Bank, BRAC, and the Bangladesh Rural Development Board) to calculate an increase in annual household expenditure of Tk 20 for every additional Tk 100 of credit provided to women.
Gender differential impact study finds that female employment has increased mostly as a result of non-farm employment growth. According to studies, self-help groups (SHGs) mediated by micro-credit have helped women achieve control over assets and, as a result, self-esteem, knowledge, and authority. It has been shown that borrowing by a woman rather than a man enhances household consumption. Individual loans were primarily utilized to meet the productive and consumption needs of households and, in rare cases, to finance self-managed enterprises. In terms of the effects of microfinance interventions, one of the most contentious concerns has been the influence on poverty reduction.
A study from Nepal also considers a SHG approach under the Women’s Empowerment Programme (WEP), which combined savings-led microfinance with a strong literacy curriculum that covered group strengthening, business development, empowerment, and community activism. The evaluation found that more than two-thirds of women reported an increase in their household decision-making role (sending a daughter to school, buying and selling property, family planning, and children’s marriage). This increased role was attributed to WEP meetings held several times a week that used literacy materials to emphasize the potential for change. The majority (90 percent) were engaged in an income-generating activity after joining WEP, usually a household enterprise rather than an individual enterprise, compared with less than one-third before membership in the group.
The Rural Maintenance Program (RMP) of CARE Bangladesh was started in 1982 as a public works program that provided employment to destitute rural women. Women are recruited for a fixed four-year period. They receive wages and participate in a compulsory savings plan, setting aside a portion of their wages as savings. Women also receive information on microfinance and on local MFIs and are encouraged to approach MFIs for working capital and expansion needs after they complete the RMP. More than 40,000 women are engaged in the RMP at any one time and around 10,000 exits every year. While not all women succeed as micro entrepreneurs, the RMP has an impressive track record. Three years after the end of the program cycle, 79 percent of graduates continue to be self-employed in microenterprise activities.
Microfinance offers the majority of low-income individuals in South Asia with access to financial services, but it remains mostly independent from the financial system, with few examples of direct service supply to the poor by mainstream commercial institutions. The Primary Agricultural Cooperative Societies continue to dominate the Indian scene, while cooperatives are often regarded as a failure throughout South Asia. Apart from cooperatives, the ordinary low-income household in the region had little access to financial services before to the 1970s, and if the microfinance movement had not begun, they would not have much access today. Further, most South Asian countries have a reasonable banking system in urban areas; however, despite the fact that the majority of these populations live in rural areas, their access to formal financial services is limited.
The cooperative movement in South Asia was founded to reach out to those who were previously excluded from the formal financial system, such as farmers, artisans, and other low-income individuals. The inability of cooperatives to adequately serve this goal is notable since, seven decades later, in the 1970s, it was still thought necessary to nationalize commercial banks throughout the region, and the first attempts to introduce microfinance were attempted.
Microfinance has made a significant contribution to the financial sector by demonstrating it is feasible to make working capital loans to the poor. The microfinance movement of the past few decades has fundamentally changed the financial sector, a change process that is gathering momentum. And there are opportunities to take the microfinance movement to the next stage of its development, a stage in which a more inclusive financial sector can be shaped to better serve the needs and interests of the poor.
However, before an inclusive financial system may develop in some countries, considerable obstacles must be overcome. In Sri Lanka especially, the dominating presence of very large government subsidized microfinance programs hinders the growth of well-managed MFIs and commercial banks that want to enter the sector.
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