The dilemmas of rural finance

Photo: Quddus Alam/Drik News

Rural finance in developing countries is characterised by what Partha Dasgupta describes in "An Enquiry Into Well-being and Destitution" as an irony and a tragedy. The irony is that credit is readily available for rich people who can save and may not require it, whereas it is beyond the reach of the poor who are in desperate need. The tragedy is that the imperfect markets for credit nurture poverty through a process of ruthless exploitation.
Thanks to the dramatic expansion of micro-credit to the poor (about 6 percent of total credit from institutional sources at the moment), the intensity of this tragedy in Bangladesh has diminished, but the irony has assumed a new shape. The extreme rich and extreme poor in Bangladesh have much better access to credit than those who lie in-between. This is the irony of what the World Bank describes as the "the peril of the missing middle."
The "missing middle" in the credit market encompasses micro, small, and medium enterprises, and small and medium farmers. The share of agricultural credit in total bank loans in Bangladesh has plummeted from 9 percent in 1982-83 to 3 percent in 2005-06. The net flow (new disbursement minus recovery) of agricultural credit in Bangladesh was negative in five out of ten years during the period 1996-97 to 2005-06.
A survey shows that roughly 25 percent farmers owning land up to 0.5 acres have no access to credit. The corresponding figures of farmers owning 2.5 to 5 acres and of farmers with holdings in the range of 5 to 7.5 acres are, respectively, 34 and 40 percent. By contrast, only 17 percent of large farmers, owning more than 7.5 acres, did not get credit.
During 2003-06, 52 percent micro and small enterprises had no access to credit from formal sources. Another private sector enterprise survey shows that 16 percent of enterprises with one employee were dissatisfied with access to finance, while the analogous figure for enterprises with four employees was about 32 percent. This figure declined to about 8 percent for enterprises with more than ten employees. In statistical terms, the "missing middle" refers to lack of credit for about one million small and medium enterprises (out of 6.8 million enterprises), and about 4.3 million small and medium size farmers (out of 12.5 million farmers).
[For the full version of this article please read this month's Forum available with The Daily Star on Monday, November 5.]
Akbar Ali Khan is former Finance Secretary and Advisor to the Caretaker Government.