Lessons on the Unmet Potential of Finance Innovations in Bangladesh
This post is written by Christine McClung, Partnerships & Investment Specialist at ACDI/VOCA.
One of my favorite school projects was called the pumpkin drop. We were given a pumpkin and asked to find items around our home to protect it, like pillows, bubble wrap, balloons — whatever we could find. The goal was for your pumpkin to stay intact when dropped from a high location. Each year, we would assess the results, build on lessons learned and improve our designs for the next year.
I’m reminded of this process when working with global development projects. We set our goals and try everything we can over the project lifespan to reach or, even better, exceed them. We experiment with different interventions, approaches and partners to achieve the long-term impact that benefits the community. Like the pumpkin drop, our interventions require time, curiosity, experimentation and a dedication to continuous learning, and we adapt over time.
As I reflect on the recently closed Feed the Future Bangladesh Rice and Diversified Crops Activity, funded by USAID and implemented by ACDI/VOCA, I wanted to take this opportunity to share lessons learned from one piloted intervention with hopes that future programming can build on its progress.
Piloting asset-based financing
Owning agri-machineries is difficult in Bangladesh, particularly for smallholder farmers. The machinery is typically too expensive for farmers to purchase outright, and they are often denied traditional loans because of the perception of agriculture as too risky. We found there was limited capacity to offer financial products that may ease these barriers, like asset-based finance.
Asset-based finance is a specialized type of lending that uses moveable assets, such as vehicles, equipment or receivables, as collateral and the primary source of repayment for loans. This differs from traditional lending, in which financial institutions often only consider immovable assets, such as land or buildings, as collateral.
To make it easier for farmers to purchase agri-machineries, the Activity explored three ways to support asset-based finance:
1. Supporting moveable property legislation
Both the supply of asset-based financing and the ability to obtain it often depend on the legal and regulatory environment. The central bank often sets standards for the types of assets that can be taken as collateral security, typically excluding any moveable property. In Bangladesh, other projects were already partnering with the central bank to lead the development of the Secured Transaction Moveable Property Act to improve the agricultural sector’s access to equipment finance. The Activity hosted workshops and lobbying events with private sector actors and the government of Bangladesh to promote passing of the Act; however, things were slow to progress.
Today, the legislation is still in draft form due to the lengthy process to create effective legal and institutional frameworks. And, while the Activity still pursued asset-based finance activities (as described below) that did not require central bank legislation, proper legislation will need to be in place for asset-based financing to meet its full capabilities.
2. Promoting dialogue among industry leaders
As the Activity began exploring asset-based finance, the team identified another market challenge, the amount of credit currently tied up in agri-machineries between farmers and local service providers. The Activity estimated that outstanding tractor credit amounted to Bangladesh taka (BDT) 650 crore ($78 million) — most of it overdue. This made financial institutions even more hesitant to supply new financing for agri-machinery, particularly for smallholder farmers. In response, the Activity led a workshop with industry leaders on addressing the tractor credit problem and promoting a more tailored, asset-based finance approach in the future.
Additionally, the Activity looked for opportunities to increase the availability of agri-machineries in the region. Given the challenges with smallholder farmers accessing smaller equipment directly, the Activity facilitated a service provision model in which larger local service providers could purchase the larger equipment and offer mechanization services to farmers with the help of a government subsidy program.
The Activity saw growth in both the demand for agri-machinery and the supply through the local service providers. Yet, a gap still exists in equipment financing available to smallholder farmers.
3. Establishing asset-based finance arrangements between financial service providers and enterprises
With this progress made, the Activity partnered with a commercial bank to enhance credit offered to micro, small- and medium-sized enterprises and to promote tailored financial products for agri-machineries. With Activity support, the bank considered variations of asset-based financing for small machinery. Due to the poor credit rating and risk of default, the product never went to market and is still being cautiously considered. However, by promoting and marketing the tailored financial product, other financial institutions showed interest in testing the product independently.
Though progress on asset-based financing was slow, the Activity continued designing and piloting innovative activities to provide solutions for smallholder farmers. For example, the Activity teamed up with the online grocer Chaldal to develop a commodity exchange platform, which could increase transparency in the trading system and allow traders and farmers to access credit. The platform includes a system for warehouse receipts, which are another specialized type of asset-based finance.
Building on progress
Though the Activity encountered some challenges in progressing asset-based financing, our slow-but-steady progress shows that future programming in Bangladesh is well positioned to continue supporting it (and even extend it beyond equipment purchasing). The Activity also shows that when forced to find another route to seek the impact necessary, there are often innovative local solutions to challenges. Just as with the pumpkin drop, finding these solutions requires a commitment to learning and adaptation.