Department of Economics

Jagannath University,
Dhaka. Economics
Econ 2105 - Agricultural
Topic

Submitted By:
Team B Submitted To:
Kamrul islam Shovon (ID B210401014) Tahmina Ahmed
Onik Chanrda das (ID B210401012) Assistant professor
Sumaiya Sultana (ID B210401008) Department of Economics
Tauhid Hasan (ID B200401019)
Jagannath University ,Dhaka
Farhan Sadik Apurbo (ID B210401015)
NurJahan Jannat (ID B210401012)
Submission Date
Sherajum Munira Mysha (ID B210401010)
Sunday, March 24, 2024
 ▪ Introduction

Agricultural finance is a subset of rural finance dedicated to financing agriculture-related activities.

Agricultural finance refers to the study, examination, and analysis of the financial aspects of the firm
business, which is a crucial sector in the economy. Examples: Irrigation systems, storage facilities and
machinery. New approaches to agricultural finance reduce costs and risks. Agricultural finance depends
on the success of the agricultural sector as a whole and the competitiveness and risk profile of the client
and the value chain. Agricultural finance is not only about money it’s about empowering farmers
ensuring food security and fostering sustainable growth in rural communities.
Agricultural finance can be defined as a specialized subset of rural finance that focuses on providing financial
services and funding for activities throughout the agriculture value chain.
▪ Agriculture finance
❑ Agricultural Finance generally means studying, examining, and analyzing the financial aspects of
a firm business.
❑ According to Tandon & Dhondyal (1962), “Agricultural finance is a branch of agricultural
economics, which deals with the financial measures related to agricultural firms”.
❑ Murray (1953), “Agricultural finance can be defined as an economic study of borrowing funds
❑ by farmers from institutional or non-institutional sources”.

▪ Macro & Micro Aspects of Agricultural Finance

✓ Macroeconomics means widespread benefits to a section of the economy or the whole country.
✓ On the other hand, Microfinance refers to the financial management of a single agricultural
enterprise.
✓ Macro finance is concerned with the whole funding as an aggregate aspect, such as the total
credit demand of a country’s farmer.

▪ Importance of Agricultural Credit

❑ 1. Agricultural finance assumes vital & significant importance in the agro-socio-economic
development of the country both at the macro & micro levels.
❑ 2. It strengthens the farm business and augments the productivity of resources. When newly
developed potential seeds are combined with purchased inputs like fertilizers & plant protection
chemicals in appropriate proportion will result in higher productivity.
❑ 3. The use of new technological inputs purchased through farm finance helps to increase
agricultural productivity.
❑ 4. Farm assets and farm-supporting infrastructure provided by the large-scale financial investment
activities result in increased farm income levels leading to an increased standard of living for rural
masses.
❑ 5. Farm finance can also reduce regional economic imbalances and is equally good at reducing the
inter-farm asset and wealth variations.

▪ Sources of Agricultural Credit

❖ Institutional sources of agricultural credit refer to sources of formal financial institutions. These
include:
Commercial Banks: Commercial banks offer loans to farmers for various agricultural purposes such
as crop cultivation, purchase of agricultural equipment, land purchase, etc. These loans are typically
offered at market interest rates and may require collateral.
Regional Rural Banks (RRBs): RRBs are financial institutions operating in rural areas specifically
designed to cater to the credit needs of rural and agricultural sectors. They provide agricultural loans
and other financial services to farmers at relatively lower interest rates compared to commercial banks.
Cooperative Banks: Cooperative banks are owned and operated by their members, who are usually
farmers or individuals from rural communities. They provide agricultural credit and other financial
services to their members at reasonable interest rates and often have flexible repayment terms.
Microfinance Institutions (MFIs): MFIs provide small loans, including agricultural credit, to low-
income individuals, including farmers, who may not have access to traditional banking services. These
loans are typically smaller in size and have shorter repayment terms.
These are some of the primary sources of agricultural credit available to farmers and agricultural
enterprises. The availability and terms of agricultural credit may vary depending on factors such as
location, type of farming activity, government policies, and economic conditions.

Advantages of institutional sources of agricultural credit

❑ Lower interest rates
❑ Longer repayment periods
❑ Tailored loan products
❑ Financial literacy programs

❑ Government support
 Disadvantages of institutional sources of agricultural credit
❑ Lengthy procedure
❑ Limited accessibility for small farmers
❑ Stringent eligibility criteria
❑ High interest rates
❑ Oftel insufficient loan amounts to meet farmers' needs

▪ Non-institutional sources of agricultural credit refer to sources

outside of formal financial institutions. These include:
1. Moneylenders: Individuals or groups who lend money to farmers, often at high-interest rates and
with flexible repayment terms.
2. Traders and Suppliers: Agricultural input suppliers, merchants, and traders sometimes extend
credit to farmers for purchasing seeds, fertilizers, equipment, and other inputs, with the expectation
of repayment after the harvest.
3. Landlords: In some cases, landlords may provide credit to tenant farmers as part of their agreement,
allowing farmers to access resources needed for cultivation.
4. Friends and Family: Farmers may borrow money from friends, relatives, or community members
to finance agricultural activities, often on an informal basis.
5. Pawnbrokers: Farmers may use agricultural assets such as livestock or equipment as collateral to
secure loans from pawnbrokers.
Non-institutional sources of agricultural credit play a significant role in rural areas, particularly in
regions where access to formal financial institutions is limited. However, they often come with higher
interest rates, less transparent terms, and potentially exploitative practices, which can lead to
indebtedness among farmers.

Advantages of non-institutional sources of agricultural credit

➢ More accessible to farmers
➢ Offers more flexible terms and repayment schedules
➢ Loans can be processed more quickly
➢ No requirement for collateral documents
 Disadvantages of non-institutional sources of agricultural credit
➢ Often charges high-interest rates
➢ Operates without regulatory security
➢ Farmers may be vulnerable to exploitation
➢ Transactions are often informal and based on verbal agreements
➢ Limited access to larger capital

▪ Functions of Rural Money Market in LDC

• An efficient rural money market is essential for implementing the monetary policies of the central
bank. Monetary policies are unlikely to be very successful if a large part of a predominantly agrarian
economy works independently of the monetary transactions.
• Rural money markets in LDCs are seldom homogenous. It is divided into two major parts;
organized and unorganized. The organized section usually compromises the central bank, the
commercial bank, Cooperative banks, credit societies etc. They work according to the company act
of different LDCs. This sector generally maintains accounts which are open to audit and periodic
inspection. On the other hand, the unorganized sector operates outside the legal framework. They
maintain sorts of accounts which are not always very sophisticated. These accounts are not open to
inspection. Indeed, a great deal of secrecy covers the financial operations of the unorganized
financial sectors. It generally consists of moneylenders, pawnbrokers and even friends and
relatives.
Finally, we can say that there are some major functions of rural money markets in LDCs. Such as
finance industries, profitable investments, self-sufficiency of commercial banks, help to the central
bank etc.

▪ Institutional functions of rural Money market In LDCs

Institutional functions of rural money markets in Less Developed Countries (LDCs) refer to the formalized
roles and services provided by financial institutions and regulatory bodies operating within rural areas.
These functions are crucial for promoting financial inclusion, economic development, and stability in rural
communities. Here are some key institutional functions of rural money markets in LDCs:
❖ Deposit Mobilization: Rural money markets play a vital role in mobilizing deposits from rural
savers. Financial institutions such as rural banks, microfinance institutions (MFIs), and cooperative
societies attract savings from rural households, farmers, and small businesses. These deposits
provide a stable source of funding for lending activities and investment in rural development
projects.
❖ Credit Intermediation: One of the primary functions of rural money markets is to facilitate credit
intermediation between surplus units (savers) and deficit units (borrowers) in rural areas. Financial
institutions extend credit to farmers, agribusinesses, small-scale entrepreneurs, and other rural
 borrowers to finance agricultural production, rural enterprises, and household consumption needs.
This helps stimulate economic activity, increase productivity, and improve living standards in rural
communities.
❖ Risk Management: Institutionalized rural money markets offer risk management tools and
financial products to mitigate risks faced by rural households and businesses. For example,
agricultural insurance schemes help protect farmers against crop failure, adverse weather
conditions, and price fluctuations. Additionally, financial institutions may offer savings products
with insurance features, such as deposit insurance, to safeguard depositor funds and maintain
depositor confidence in the banking system.
❖ Payment Services: Rural money markets provide essential payment services to facilitate
transactions and financial exchanges within rural communities. These services include cash
deposits and withdrawals, fund transfers, remittances, bill payments, and electronic transactions.
Financial institutions deploy various channels and technologies, such as mobile banking, agent
banking, and point-of-sale terminals, to improve access to payment services in remote rural areas..
❖ Financial Inclusion: Institutionalized rural money markets promote financial inclusion by
expanding access to formal financial services among underserved rural populations. Financial
institutions establish branches, banking agents, and mobile banking outlets in rural areas to reach
unbanked and underbanked individuals and communities. By offering savings accounts, credit
facilities, insurance products, and other financial services, rural money markets empower rural
residents to participate in formal economic activities, build assets, and improve their financial well-
being.
❖ Capacity Building and Financial Literacy: Rural money markets engage in capacity building and
financial literacy initiatives to enhance the financial knowledge and skills of rural clients. Financial
institutions conduct training programs, workshops, and outreach activities to educate rural
households and entrepreneurs on topics such as budgeting, savings management, debt management,
and entrepreneurship. By improving financial literacy, rural money markets empower individuals
to make informed financial decisions, utilize financial services effectively, and achieve their
financial goals.

▪ EXAMPLE
Bangladesh is predominantly an agricultural country where agriculture sector plays a vital role in
accelerating the economic growth. The majority of population here directly or indirectly related with
“Krishi” (The Bengali term “Krishi” means Agriculture) which contributes a significant portion to GDP
(14.23% according to the Bangladesh Economic Review 2018).
Bangladesh Krishi Bank (BKB) has been established under the Bangladesh Krishi Bank order 1973
(President’s Order No 27 of 1973) in order to boost up our economy by providing financing facilities to our
Agriculture Sector. BKB is being run as a Banking Company under the Banking company Act-1991.
The main objective of BKB is to provide easier and hassle free credit disbursement facilities to the farmers,
people engaged in agricultural activities i.e. Crop production, Fish culture, Animal Husbandry etc &
entrepreneurs involved in development of agro-based industries and cottage industries. Its primary aim was
to bring people out of General High Interest Rate Lending System-over which the bank is working over
than three decades. The Bank is guided in accordance with the policies and principles of the Government
of the Peoples Republic of Bangladesh. BKB has an authorized capital of Tk. 15,000 Million (Taka Fifteen
thousand Million) only and paid up capital of Tk. 9,000 Million (Taka Nine thousand Million) only which
is fully paid by the Government. The Bank started commercial functioning since 1977 to generate more
loan-able fund from the idle rural and urban savings and invest them for the betterment of our economy.
The Bank operates its function through its 1038 branches (except Rajshahi and Rangpur Division) & all are
Online Branches. It has 16 foreign exchange (Authorized dealer) branches. In the field level the Bank has
9 Divisional, 54 Chief Regional and Regional offices for close supervision of the branch activities.
❖ Vision:
Providing loan facilities for achieving self sufficiency in food production and strengthening rural
economy.

❖ Mission:
Besides reaching banking facilities to the people’s doorsteps, giving agricultural, SME and agro
based industrial loans for achieving self sufficiency in food production and elimination of
poverty.
❑ Noninstitutional functions of rural Money market In LDCs
❑ Social Capital Formation: Money markets in rural areas contribute to the formation of social
capital by fostering trust, reciprocity, and mutual assistance among community members. Informal
savings groups, village-based credit cooperatives, and traditional lending practices often rely on
social ties and shared norms to facilitate financial transactions. These networks not only provide
access to financial resources but also serve as platforms for social interaction, collective problem-
solving, and community solidarity.
❑ Income Generation and Poverty Alleviation: By facilitating access to credit and investment
opportunities, rural money markets contribute to income generation and poverty alleviation in
LDCs. Small-scale entrepreneurs, farmers, and artisans can use microloans to expand their
businesses, increase productivity, and improve their livelihoods. Additionally, savings mechanisms
such as ROSCAs and informal savings groups help households accumulate assets, build resilience,
and smooth consumption during lean periods, thereby reducing vulnerability to poverty.
❑ Informal Insurance Mechanisms: In the absence of formal insurance services, rural money
markets often serve as informal insurance mechanisms to cope with various risks and shocks. For
instance, informal savings groups may pool resources to provide financial assistance to members
in times of illness, death, or other emergencies. Similarly, rotating credit associations and
community-based lending initiatives offer a safety net for vulnerable households facing income
fluctuations or unexpected expenses.
Overall, the noninstitutional functions of rural money markets in LDCs reflect the adaptive strategies and
resilience of rural communities in navigating financial challenges and leveraging local resources to support
economic development and social well-being.
 ▪ Recommendations
❖ Enhancing Access to Credit: Improving farmers’ access to credit through microfinance institutions
and government programs can help them invest in better resources and technology.
❖ Diversifying Financial Products: Offering a range of financial products tailored to the agricultural
sector, including crop insurance and loans for equipment and irrigation systems, can mitigate risks
and encourage investment
❖ Financial Literacy Programs: Educating farmers about financial management, savings, and
investment can empower them to make informed decisions and improve their economic stability.
❖ Technology Integration: Utilizing digital platforms for loan applications, payments, and
dissemination of information can streamline processes and increase transparency.
❖ Government Support: Continued government support in the form of subsidies, grants, and training
programs is crucial for the sustainability and growth of the agricultural sector.
❖ Public-Private Partnerships: Encouraging collaborations between the government, financial
institutions, and private sector can lead to innovative financing solutions and shared risk
management.

▪ Conclusion
❖ The development of agriculture finance and the increase of agricultural productivity should play a
larger role in closing development gaps in the LDCs in the Asia-Pacific region. However countries
should avoid the trap of focusing only on increasing productivity in agriculture as if there would
be no linkages with the other economic sectors. Similarly, focusing exclusively on increasing
productivity in manufacturing and services and completely neglecting agriculture is an approach
doomed to increase the already large rural-urban inequalities. A better strategy is to consider
agricultural development in an integrated manner that is mindful of agricultural and agro-industries
linkages and the need to promote structural transformation of the economy. Governments in LDCs
should play a developmental role and take ownership of this process with support from
developmental partners.
 REFERENCES

1. Agriculture and Economic Development by Subrata Ghatak & Ken Ingersent

2. https://www.bb.org.bd/en/index.php/publication/publictn/0/45
3. https://en.banglapedia.org/index.php/Rural_Finance
4. https://www.krishibank.org.bd/about-us/
5. https://www.elibrary.imf.org/view/journals/022/0013/002/article-A005-en.xml