1. Microcredit Programs for SMFs in Bangaldesh 1 Microcredit for Small and Medium Farmers from Microfinance Institutions: Comparative Analysis of Three Distinct Approaches in Bangladesh Author: Dewan A.H. Alamgir Contact address: Apt No. 206, House No. 76 [Eastern Mobarak] Road No. 8A (New) Dhanmondi, Dhaka 1209, Bangladesh Tel: 88-0173 010135 (cell); 88-02-914 6473 (office) E-mail: dalamgir@yahoo.comdalamgir@yahoo.com

2. Microcredit Programs for SMFs in Bangaldesh 2 Objective and Methodology Objectives of the Study To evaluate management system and performance of innovative microcredit products for small and medium farmers from microfinance institutions (MFIs) in Bangladesh Methodology Three MFIs [Bangladesh Extension Education Services (BEES), Centre for Action Research-Barind (CARB) and Samaj O Jati Gathan (Sojag)] selected for case studies on the basis of three criteria: i) Innovativeness of the product and delivery methodology; ii) Potential for growth of outreach; and iii) Reasonable size of current outreach. All program related policies and management system of MFIs and the products have been studied Customer satisfaction has been verified Potential for and constraints against expansion has been analyzed Financial Viability of the MFIs has been studied

3. Microcredit Programs for SMFs in Bangaldesh 3 Brief Program Description of Three MFIs Bangladesh Extension Education Services (BEES) Clients: Poor women and small and medium farming families Investments by the clients: Poultry, livestock, fisheries, crop (rice) and horticulture, and related trading businesses. Microcredit Delivery: Grameen styled group-based system; One year loan; weekly repayment system; round the year disbursement of loans @ 25% annual interest Number of Clients (Dec. 2006): 96 374 Centre for Action Research- Barind (CARB) Clients: Small and marginal farmers (men as borrowers) Investments by the clients: Crops (mainly rice) production in two seasons Microcredit delivery: Loan is given to individual farmer though informal groups are formed; No group meetings organized; In-kind loans are disbursed in two seasons through a network of input sellers; Farmers can receive inputs for any number of times during the planting season but repays his loan in single installment after harvest; 25% rate of interest Clients (December 2006): 13 000 farmers Samaj O Jati Gathan (Sojag) Clients: Small and marginal farmers (men as borrowers) Investments: Crops (mainly rice) production in two seasons and vegetables Microcredit delivery: Group-based system; Cash loans disbursed in single installment at the beginning of each planting season; repayment of loan in one installment after harvest; 15% rate of interest Clients (December 2006): 7 753 farmers

4. Microcredit Programs for SMFs in Bangaldesh 4 Management of Agricultural Finance by BEES Target group and portfolio Poor women, small and marginal farming families represented by mostly women; portfolio includes all types of agricultural production and businesses StrategyOffers agricultural loans for all types of borrowers (irrespective of landownership) from all branches; specially designated branches offer agricultural loans with specific features such as loans for poultry and livestock etc.; Separate groups are formed for small, medium and marginal farmers Policies & management Groups of 20-25 women/men are formed; Weekly meetings and savings are mandatory; Loans are disbursed for one year; Loan varies between Taka 12,000- 25,000; Weekly repayment system is practiced irrespective of type of investments Borrowers profile Clients have more than one source of income; Families engage agricultural production and trading related activities Non- financial services Production related training, especially in poultry and livestock, are offered to interested clients; results show positive effects of training in terms of better management and disease control ProsBroad based agricultural investments reduce risks; strong growth potential; no sharp seasonality in fund management for BEES; follows tested lending model ConsCrop finance is not ensured RisksNormal business risks; loan default

5. Microcredit Programs for SMFs in Bangaldesh 5 Management of Agricultural Finance by CARB Target group and portfolio Small and marginal farmers with access to water supply; crops (rice) in two seasons and some vegetable production; StrategyFinance inputs only (water, seed, fertilizer, pesticide); focus on farmers only; in- kind loan ONLY, i.e. no cash disbursement of loan. Policies & management Organize farmers around tube wells; No weekly group meetings are held; But prepare farm budget at the beginning of season; borrowers receive vouchers (Delivery Order) to buy inputs from authorized dealers; dealers receive payments from CARB; farmers may receive vouchers any time of the season; Loans are repaid in one installment after harvest; Interest on loan is calculated using days product. Borrowers profile Mostly sharecroppers, marginal and small farmers Other services None ProsUtilization of loans for farming is ensured; guarantees access to inputs on time; Interest calculated using days product, which benefits the borrowers ChallengesPortfolio is very concentrated; strong seasonality of disbursement and recovery creates difficulties in fund management; limited vertical growth prospects; portfolio is not uniform throughout the year; issues related to management of dealers. RisksFlood and draught; financial viability of the MFI

6. Microcredit Programs for SMFs in Bangaldesh 6 Management of Agricultural Finance by Sojag Target group and portfolio Small and marginal farmers with access to water supply Portfolio: Crops in two seasons and some vegetable production StrategySeasonal crop loans are offered from all branches to farmers; cash loan disbursed; agricultural finance is a part of diversification of regular microfinance program. Policies and management Group of 20-25 men formed; monthly meetings are organized; one loan for each season; Single installment disbursement at the beginning of the season; Single installment recovery at the end of harvest; Loan size linked with land to be cultivated Borrowers profile Sharecroppers, small and marginal farmers; 40% overlap with microcredit borrowers; Borrowers often have one source of income Non-financial service Simple extension work by the staff members ProsEnsures resource at the beginning of farming seasons; lending to a new market segment. ConsLimited vertical growth of loan portfolio; strong seasonality of MFI’s cash flow; one type of loan creates risks. RisksRisks of flood and draught. Risk due to portfolio concentration

7. Microcredit Programs for SMFs in Bangaldesh 7 Financial Viability Indicators of the Three MFIs Indicators BEESCARBSojagSector Leader (ASA) 2005200620052006200520062005 Operating Self- Sufficiency (%) 12212485132151175275 Financial Self- Sufficiency(%) 100.36101.37510799.4121170 Return on Asset (%) 0.010.06(3.23)0.70.340.7510.7 Clients/Loan Officer 177266205185269382631 Average Loan Size (Taka) [1 USD =Taka 68] 6,6666,1463,9654,4107,5277,1117,129 Portfolio/ Loan Officer [Taka] 589,969942,787219,340339,306725,4281,362,8311,780,000 Loan Recovery Rate (%) 99 100 99.9399.7899.7

8. Microcredit Programs for SMFs in Bangaldesh 8 Common Issues: Lessons Learned Target groupBoth women and men’s groups produced similar results in terms of recovery of loan Lending technique Group and individual methodology seems to produce similar results; both approaches provide emphasis of selection of right borrowers. PortfolioBEES approach produces balanced portfolio as opposed to concentrated portfolio of CARB and Sojag. But CARB and Sojag have been very successful in financing the main agricultural product and farmers who are traditionally bypassed by MFIs. Growth prospect BEES’ has more potential of vertical portfolio growth. CARB and Sojag may have limited growth due to link of size of loan with size of land. Fund management Strong seasonality of disbursement and recovery in case of crop loan. Unique fund management and financing arrangement is needed for the MFIs. Demand for loan Borrowers demand diversified loan products in case of CARB and Sojag but they only offer crop loans under agricultural financing program RisksBusiness and external risks Extension services Demand is high for extension and disease control services

9. Microcredit Programs for SMFs in Bangaldesh 9 Replication of Agricultural Finance Methodology Potential for Replication BEES’ approach will be easy to replicate, which is an extension of existing microcredit management system. Strong management decision from the part of a MFI will be critical to replicate CARB approach of agricultural inputs finance. Similarly, Sojag’s approach of crop finance where men are the borrowers will also need strategic decision from the part of a replicator. Critical Aspects of Replication Process Presence of microfinance program makes agricultural finance more viable Selection of clients is critical to ensure good recovery of loan MFIs need to develop internal polices, process and control systems to match with the nature of the program. Skilled human resource is essential for expansion Small-scale pilot testing is recommended before launching agricultural finance product Extension service is very import