The Chors (River Islands) of Bangladesh, formed from sedimentation of the silt and mud are highly fertile, nutrient-rich landmasses. The push and pull of some of nature’s most powerful forces, the ever-flowing rivers, with apparent whimsy, erodes land at one point and deposits it at another. Some chors are slightly more ‘permanent’, i.e. have remained above water level for 20 years or more while others are less so.
To say that making a life in the chor is difficult is an understatement of enormous proportions. Doing business with chor dwellers certainly cannot be any easier. As a result, only business of necessity is conducted here. Small retail stores catering to the basic needs of the dwellers, tea stalls, agricultural input stores found in the mainland are also found here, albeit at a much smaller scale.
I have had the opportunity to visit the chors for an assignment where the Swisscontact managed M4C project, under their Financial Services component, has been trying to encourage financial institutions to offer financial inclusion services in the chors. The financial institutions that have begun offering financial services in the chors, although skeptical at first, found that their loan portfolios in the chors have performed better than their mainland portfolios. Some of the key reasons are:
- The projects initially focused on increasing the capacity and productivity of the chor dwellers in farming and cattle rearing in collaboration with agri-input suppliers and agro-processors in order to make the interventions sustainable. This increased capacity and productivity resulted in higher income that has been instrumental in making the chor dwellers better able to service their debt obligations.
- M4C provided a small incentive to the financial institutions to focus on a loan product that was more suited to the cash flow pattern of the chor dwellers. The chor dwellers are mostly farmers who grow crops and rear cattle and as such only receive cash from these activities after harvesting the crop or selling the cattle. They have little to no other source of weekly or daily income. As a result, a loan product that is repaid with a single payment is what is needed.
- As none of the financial institutions had ever had a presence in the chors, it was made clear to the chor dwellers that it was to their own advantage to make sure that the financial institutions did not face any issues with respect to loan performance. To this end, the chor dwellers worked together, whenever necessary, to help out any borrower who may have experienced problems.
- The financial institutions had a presence in the chors that enabled them to keep contact with the borrowers and monitor the development of the crops and cattle. This allowed the financial institutions and the agri-input suppliers to help farmers take corrective actions to overcome issues such as pest attacks, sickness of cattle, etc. in a timely manner. This was obviously helpful in protecting the loan repayment ability of the farmers.
The experience of financing in the chors have been good but there are several ground realities that need to be taken into consideration:
- Only financial institutions intent on making a difference in the lives of the truly unbanked will be the first movers into these areas. The interventions in the chors have helped demonstrate that it is possible to lend sustainably in the chors particularly when a non-financial advisory is added to the offerings basket.
- The cost of doing business in the chor areas is higher than that of the mainland. One area where costs creep up is with respect to transportation and time. For example, due to the ever-changing landscape of the chors, travel from one chor to another for monitoring purposes can take 30 minutes by boat one week and one hour they very next week. The terrain becomes completely different during the dry, winter months when the water level subsides and the only way from one chor to another is on foot or motorcycle. As a result, all other things equal, such as interest rates and staffing, the margins are slightly lower for the chor branches than the mainland branches. The better quality of the portfolio in the chors may or may not compensate the financial institution depending on the portfolio size and quality in the two locations.
- Crop finance was only done during the times when there was not a risk of the crop being damaged by floods and other climatic phenomena. Cattle, being mobile was financed year round because, in case of extreme flood scenarios, they could be moved to higher ground. Providing loans for both crop and cattle finance is necessary for the chor branch to be able to generate sufficient business to be sustainable.
A major advantage of lending in the chors is the ability to gain first-mover advantage. Moreover, unlike in the mainland branches of most microfinance institutions, over-indebtedness (from loans from multiple microfinance institutions to the same borrower) is still not an issue because in the vast majority of the chars, there no financial institutions operating there.
It is also important for the financial institutions to collaborate closely with the agri-input suppliers and the agro-processing companies on a win-win-win basis to ensure that the chor dwellers continue to increase their productivity and therefore bankability.
The cost of operations can be reduced somewhat by leveraging digital financial services such as mobile banking and agent banking services in the chors. In particular, an agent banking operation in the chor will enable more financial transactions (loans, deposits, bills payments, funds transfers, etc.) as well as the ability of financial institutions to offer more targeted financial literacy programs.
The financial institutions have gained significant knowledge and capacity to lend safely in these areas as a result of the setting up pilot branches in the chors. Taking the time to better understand the key drivers of the borrowers’ cash flows such as good agricultural practices, the benefits good inputs have on the borrowers’ productivity have been key learnings that can be easily replicated in more chors and other remote locations.
In the end, it is clear that targeting the chors will enable financial institutions to expand their coverage to some of the most remote areas of Bangladesh while taking on less risk (in terms of better repayment and fewer incidences of over-indebtedness) than done on the mainland. As the chor dwellers become more financially literate, the financial institutions can begin to grow their business by offering more sophisticated financial products that may be able to compensate for the slightly higher cost of doing business in the chors.