Credit crisis and the future of farmers

by Indeewara Thilakarathne

[email protected]

Micro-credit is the granting of small loads (micro-loans) to the unemployed, poor businessman and vulnerable sections of the population who are inaccessible to credit in conventional banking system. Micro-credit is a part of micro-financing, a provision of diverse financial services to the poor.

This concept originated with the overwhelming success story of Grameen Bank in Bangladesh which was founded by legendary Muhammad Yunus, a Professor of Economics at the Chittagong University in 1974.

Although the micro-financing may not solve the present credit crisis in the agricultural sector, infusing some finance even in minuscule scale would help ease the crisis and ensue a supply of credit for farmers at any given time from cultivation to harvesting.

As micro-financing is gaining ground especially in developing countries, Sri Lankan’s financial institutions also began to provide micro-financing facilities in some vital sectors of the economy such as agriculture, fisheries and small scale enterprises.

“SANASA Development Bank provides micro-financing for farmers covering the entire production process from crop cultivation to harvesting. Micro-credit, depending on requirement, will provide a sum from Rs. 5000 to Rs. 200,000.

The micro-financing schemes cover wider areas including fishery, cultivation, home gardening and even composting,” said Nihal Ramanayaka, AGM (Credit) of the SANASA Development Bank which has one million members grouped into 8,500 SANASA primary societies in diverse parts of the country.

According to Ramanayake, SANASA, which has been ranked among the top 50 micro-credit institutes by Forbes Magazine, has so far provided micro-financing facilities for a large number of farmers SANASA has recorded an impressive re-payment rate.

Though micro-financing may provide a short term solution to problems faced by the farmers, the agricultural sector cannot be made profitable unless drastic measures are taken to right the market conditions and also to reduce cost of production.

Prof. Mohammad Yunus states that traditional notion of micro-credit is broad and misleading. He loosely classifies micro-credit into several forms such as traditional informal microcredit (such as, moneylender’s credit, pawn shops, loans from friends and relatives, consumer credit in informal market, etc.), microcredit based on traditional informal groups (such as, tontin, su su, ROSCA, etc.), Activity-based microcredit is also given through conventional or specialised banks (for, agricultural credit, livestock credit, fisheries credit, handloom credit, etc.), Rural credit through specialised banks, Cooperative microcredit (cooperative credit, credit union, savings and loan associations, savings banks, etc.), as well as Consumer microcredit, that is Bank-NGO partnerships based on microcredit, Grameen type microcredit or Grameencredit and other types of NGO microcredit.

However, among the salient features of the micro-credit schemes, providing loan facilities with absolutely no collaterals: loans are given on trust and often the targeted groups are the poorest of the poor who are out of conventional bank system, are prominent.

Major issue in agricultural sector

One of the major issues in the agricultural sector is the absence of the purchasing mechanism for agricultural products. It has an adverse effect on rice cultivation.

Though earlier this had to a certain extent, been cushioned out by Government intervention through the Paddy Marketing Board which set a price for each unit of purchasing paddy, the situation became worse with the abolition of it.

Earlier the minimum price compelled the private buyers either to purchase paddy at the set price or for a higher price.

At present farmers find it hard to sell their bounty harvest for a reasonable price. Farmers also could not keep the harvest as the existing storage facilities are incapable of coping with the volume.

A low price for agricultural products dissuades prospective youth from engagement in agriculture, triggering off an exodus of youth to cities, in search of jobs. Though the youth themselves can not be blamed for the situation, this migration has created a shortage of labour in the agricultural sector, hampering the growth in this vital sector which is highly labour intensive.

Another factor which inhibits growth in agricultural sector is the fragmentation of land and reclamation of land for commercial housing schemes.

A low price for agricultural products has substantially contributed to rural poverty, triggering off a vicious cycle of lack of income, poor savings and zero investment.

In fact, farmers could not recover the cost of production.

Unlike in the past, as farmers have to rely on chemical fertilizer, pesticides, the cost of production has been increased.

Although micro-financing will not make a sea change in agriculture, at the initial stage infusion of money will ease the burden of the farmer who is caught in a credit crisis. Perhaps, the best form of micro-credit in this sector is Grameen credit which will not only have a control over spending but also able to unite the farming community in terms of formal groups.

Small loans would help farmers to buy required inputs without mortgaging the harvest to money lenders.

The loose-knit grouping such as the co-operative type societies would, in the long run, strengthen communities leading to the formation of social capital.

However, the salvation of agriculture cannot be handed over to micro-financing. Even if micro-financing would lift farmers out of absolute poverty, their economic and social progress is by and largely dependent on stable prices for agricultural products and the drastic reduction of basic inputs such as fertilizer and seed.

The government’s direct intervention is needed in creating a conducive economic environment for agriculture and securing a fare deal between farmers and consumers.