Thirty-year-old Oliar Rahman Firoj has been farming summer tomato for the last three years in Bagharpara, Jessore region in Southern Bangladesh. He dedicates his 100 decimals of land to cultivating summer tomatoes, as the net income from this high-value crop is 4-5 times higher than winter tomato varieties. However, the initial investment for this crop is also higher as the farmer needs to purchase heat tolerant tomato variety seeds, install raised beds and rain shelters, and learn hormone and integrated crop management techniques (training, pruning, staking, sanitation, disease and insect pest management).
Sourcing money for this larger up-front investment has been Oliar’s primary challenge in previous years. In his first years of planting summer tomatoes, Oliar received credit from traditional money lenders. But these loans came with high interest rates, cutting into his resulting profits. Oliar considered purchasing inputs on credit, but this also reduces profits, as purchasing inputs on credit costs at least 30 percent higher than the cash value.
Luckily this year, at a meeting with BRAC Brank and USAID’s Agricultural Value Chains (AVC) Project, Oliar was introduced to an alternative source of financing that would allow him to manage the up-front investment in quality inputs, while still reaping the financial benefits of growing a high value crop.
AVC has been working in the Southern Bangladesh to improve selected value chains and build linkages between farmers and financial institutions. After a long negotiation with AVC, the BRAC Bank agreed to launch a new agricultural loan product specifically for the farmers in the Southern Delta on a pilot basis. The product provides farmers with a single installment loan at an interest rate of 11 percent per year. Farmers have three to six months to repay the loan, versus the weekly loan repayment plans set up by traditional money lenders. As a test case, BRAC disbursed BDT 50,000 each to 7 tomato farmers in Jessore region.
Oliar was excited about this new credit option, as the lower interest rate and more manageable repayment schedule allowed him to buy the agro inputs he needed. Oliar wanted to capitalize on a gap in tomato supply in the market, and started raising tomato seedlings in early February, transplanting them to the field in early March (three months earlier than the normal summer planting schedule). The borrower farmer wanted a second loan to pay the first, and then pay off the second loan with the harvest profits in June.
“The amount that I borrowed from BRAC Bank saved me BDT 6,000 just by purchasing the inputs in cash this year. Besides, I was relieved from tensions of weekly repayment for traditional lenders. Thanks to the BRAC Bank for supporting the summer tomato farmers. I purchased fertilizers in advance for the next season and dared to expand areas for summer tomato cultivation as I had cash in hand from the bank loan,” said Oliar.
In order to develop the financial literacy of the farmers, AVC developed a booklet titled “Agriculture Loan – Responsible Borrowing” in association with United Finance Limited. The booklet highlights the decision making factors that the borrower should keep in mind when considering credit and financing options. In addition, AVC also organized a Training of Trainers on financial literacy and effective use of credit in the region as part of an awareness-building campaign. Through this event AVC catalyzed a behavior change among the participating farmers and processors, encouraging them to keep financial records and track specific expenses to facilitate better financial planning. Several farmers also opened bank accounts for the first time for daily transactions.
The pilot program between AVC and BRAC was successful in prompting at least 25 farmers to apply to open bank accounts with the goal of receiving bank loans to finance investments that will allow them to grow their production and profits. With access to financial services, including bank accounts, credit, and formal loans, farmers’ bargaining power in society increases, as they are equipped with the tools to earn more, save more, and invest more in their business.