Bureau of Economic Research, University of Dhaka The Role of Credit in Food Production, Food Security & Dietary Diversity in Bangladesh Authors Dr. Sayema Haque Bidisha Gazi Mohammad Suhrawardy Dr. Bazlul Haque Khondker Bureau of Economic Research University of Dhaka 1

Bureau of Economic Research, University of Dhaka Objectives of the Study: To review major agricultural credit programs in Bangladesh To investigate the relationship between credit and food security To understand the link between credit and dietary diversity To analyze the relation between credit and food production 2

Bureau of Economic Research, University of Dhaka OLS (Ordinary Least Squares) where, y= measures of food security/agricultural production C= credit program participation/amount borrowed x= other HH specific attributes and regional dummies = causal impact of credit on y Alternative Method where, y= measures of food security/agricultural production C= credit program participation p(x)=probability of credit program participation x= other HH specific attributes and regional dummies = causal impact of borrowing on y In addition, IV was also used. For HH dietary diversity 2 types of scores was constructed. Key Estimation Techniques 3

Bureau of Economic Research, University of Dhaka For food security considered ‘daily per capita calorie consumption’ as the key variable and access to credit has been proxied by a dummy (1=credit recipient). OLS: Credit has positive and sig. effect on food security-HH with credit consumes 60 calorie more per capita per day and this is true for all 3 sources of credit. Alternative method to control self-selection bias. Credit has positive and significant effect. Finding was valid for all 3 types of credit. Also used ‘total amount of credit’ as explanatory variable and it was positive and significant. Credit & Food Security: HIES 4

Bureau of Economic Research, University of Dhaka Similar analysis with OLS and alternative method was conducted with the primary survey data and this has also provided evidence in favor of the positive and significant contribution of credit on household food security status. In addition to these 2 method, this analysis also employs IV method to test for any plausible endogeneity of credit variable (instrumented credit dummy with 2 var: distance to nearest bank and its square). There is no sign of endogeneity so we should use OLS instead of IV. Credit & Food Security: Primary Survey 5

Bureau of Economic Research, University of Dhaka Using HIES FCS was calculated using the frequency of consumption of different groups of food consumed by a HH during 7 days before the survey. 4 groups: (i) poor consumption ( 28 and 42); (iv) acceptable low consumption (43-52) and acceptable high consumption (>52). Our estimation of OLS of FCS shows that access to credit have positive contribution to this score. In terms of separate groups (poor cons, borderline cons, acceptable cons) we do not observe significant difference between borrowers and non-borrowers. Credit & Dietary Diversity: from HIES: FCS 6

Bureau of Economic Research, University of Dhaka Figure 1: Frequency Distribution of Households by FCS Credit & Dietary Diversity: HIES: FCS FCS lies between 0 and 112 7

Bureau of Economic Research, University of Dhaka OLS did not show positive contribution of credit to this score. We also applied the alternative method but did not find expected result. Endogeneity problem? Yes, the result suggests endogeneity. Along with OLS and alternative method, IV method is applied (with distance from nearest bank and its square be the instruments) and the relevant tests suggest presence of endogeneity in credit variable. In the presence of endogeneity, IV estimates provide evidence of the positive contribution of credit in household dietary diversity. Credit & Dietary Diversity: Primary Survey: HDDS 8

Bureau of Economic Research, University of Dhaka Figure 2: Household Dietary Diversity Score Credit & Dietary Diversity: from Primary Survey: HDDS HDDS ranges between 3 and 12 9

Bureau of Economic Research, University of Dhaka OLS estimates show that, it is formal credit rather than informal or microcredit that have significant relationship with household agriculture production. Further analysis to check whether the ‘access to credit dummy’ might cause self-selection bias in estimating agricultural production regression using alternative technique also indicate positive association between credit and agriculture production. Credit and Agricultural Production: HIES 10

Bureau of Economic Research, University of Dhaka We used variable for agricultural production e.g. ‘value of agricultural production in year (2011) converted in ‘000 taka’. OLS found positive association between participation in credit program and agricultural production in last year. We tested endogeneity and applied IV method but the test of endogeneity fails so instead of IV we should use OLS. Credit & Agricultural Production: Primary Survey 11

Bureau of Economic Research, University of Dhaka Households who get necessary food items from farm production, facilitated by credit financing, are direct beneficiaries of credit as it helps them in attaining food security. The opportunity cost of not having access to credit for food production is affecting household in the form of reduced production, reduced household consumption and sale of asset. Access to credit has given the opportunity to small farmers to use their small plot of land for productive purpose and also has made the lease of additional land possible which increases the production and promotes household food security. The marginal farmers prefer to take loan from informal sources and pay interest in kind, which is estimated to be much higher than the formal interest rate as they can repay the principal amount at their favorable time. Credit, Food Security & Food Production: Major Findings from Qualitative Analysis 12

Bureau of Economic Research, University of Dhaka Significant positive association between agricultural credit, food security and food production. True for all types of credit. Credit augments household income from farm as well as nonfarm activities. Among the three types of credit formal credit turn out to be a preferred option by the credit recipient despite some known problem of collateral, transaction cost etc. Timely sanction of credit, hassle free advance is more important to farmers than lower interest rate or any waiver on interest. Inadequacy of the credit amount is another important finding. Credit from micro-credit institutions has reported to be helpful for HHs in meeting expenditure such as education, health, housing, and food purchase etc. Key Findings from the Study 13

Bureau of Economic Research, University of Dhaka Among the three types of credit formal credit turns out to be a preferred option by the credit recipient despite some known problem of collateral, transaction cost etc. Inadequacy of the credit amount is another important finding. Credit from micro-credit institutions has reported to be helpful for HHs in meeting expenditure such as education, health, housing, and food purchase etc. A careful balanced between formal and quasi-formal credit need to be considered while formulating credit policy. Policy Implications 14