If banks and other non-banking financial institutions invest more in the agriculture sector, more people could be employed. This will help reduce the poverty rate and develop the rural economy
The agriculture sector that banks have always avoided for loans has interestingly been found to be the safest investment sector for sustainable banking.
Besides, an increased flow of agricultural loans could give a major boost to the overall economic development of the country, finds a latest study by the Bangladesh Institute of Bank Management (BIBM).
As agriculture is a labour-intensive sector, its increased accessibility to long-term finance can make substantial contribution to the gross domestic product (GDP) of the country, according to the study.
If banks and other non-banking financial institutions invest more in the agriculture sector, more people could be employed. This will help reduce the poverty rate and develop the rural economy, says the study.
The BIBM study has also found that the Warehouse Receipt System, which is very successful in South African countries, will be similarly effective here in Bangladesh.
A Warehouse Receipt System enables farmers to deposit storable agricultural goods in exchange for a warehouse receipt. The receipt is a document issued by warehouse operators as evidence that specified commodities of stated quantity and quality have been deposited at a particular location.
In Africa, farmers selling through the cooperative societies often receive an initial payment which is about 60 percent of the price offered by private traders.
In India, more and more farmers are using warehouse receipts as a tool to meet their working capital and consumption need after harvest.
In Bangladesh, most of the farmers have to sell off their produces soon after harvesting. The implementation of the Warehouse Receipt System with banks being the warehouse operators can help farmers in this respect, the BIBM study finds.
Under the system, the warehouse operators – in this case banks – will provide finance to farmers for producing crops. After harvesting, produced crops will be stored in the warehouses. When the market will reach its peak, the banks will sell the stored crops and share the profit with farmers.
Dr Shah Md Ahsan Habib, professor and director (training) of BIBM, told The Business Standard that farmers in Bangladesh do not get fair prices for their crops. If we follow the Warehouse Receipt System method, it will prove helpful to them.
He, however, said due to the arbitrariness of middlemen it will be difficult to implement the system in the country. It can be easy, if the government shows a political will in this respect, he opined.
Meanwhile, private banks are found to be more reluctant to disbursing agricultural loans. According to official data, when state-owned banks provide about 8 percent of their total loans in agriculture sector, the private ones provide less than 2 percent in the sector.
There has been no diversification in agricultural sector credit. About 59 percent of agricultural credit goes to crop production, while livestock and poultry receive 10 percent, fisheries 9 percent. Only 5 percent of the agricultural loans are disbursed under the poverty reduction category. Only 1 percent loan is given for purchasing machinery, and this rate is almost zero in grain warehousing.
Integrated efforts from policymakers and bankers are the key to promoting sustainable and green financing, the BIBM study observes.
For a sound development of the market and business, it is crucial to have an undistorted and competitive structure, the study adds.
For sustainable banking activities banks should aim at addressing qualities of profitability in economic, social and environment fronts. Thus, sustainable banking cannot be desegregated from the key concerns of corporate governance, leadership and CSR practices by banks.
Waste management, bio-diversity and green transportation should get due emphasis to obtain required benefits in near future.
A paper titled “Sustainable Banking Activities of Bangladesh” suggested that, for ensuring sustained profitability, the key institutional issues especially corporate governance of the banking industry must receive due impetus.