How Cambodia’s agricultural loans can get better value for money – Analysis – Eurasia Review
Through East Asia Forum
By Nith Kosal *
Agriculture remains an important sector in the developing world. In Cambodia, it is one of the top three economic sectors. But for a long time the sector has faced several critical barriers. One of these barriers is the gap between farmers and financial support, and the failure of the Agricultural and Rural Development Bank (ARDB) credit-credit program to bridge it.
The ARDB is a public bank which aims to contribute to the development of agriculture and the rural economy. But the bank appears to be moving away from this goal.
The bank’s subsidies mainly focused on rice (76% of total credit in 2019), in particular the financing of rice storage, drying facilities and collection of paddy purchased from farmers. Yet most of the businesses that receive funding from the ARDB are medium-sized businesses run by knowledgeable individuals who are able to independently find sources of funding from private banks and are members of the ARDB. Cambodian Rice Federation. These companies collect fragrant paddy and export the rice to markets around the world.
The government wants to reduce rice production costs for exporters and help farmers benefit from selling paddy at reasonable prices. But most of the agricultural producers and traders have not benefited from this subsidy program, including farmers who produce different products as well as traders exporting white paddy to neighboring markets.
White rice farmers in Takeo province claim that due to lack of collateral, they are forced to borrow from informal institutions with high interest rates of 7-10% per month. They use these loans during the short planting season. In the meantime, they also often owe production materials to local traders. Their ability to repay debt depends on the success of the harvest season.
ARDB loans for working capital and investment projects have an interest rate of only 5 percent and 5.5 percent per annum, respectively, while private banks have interest rates about 18 percent.
For the ARDB to contribute more effectively to the agricultural sector, it needs to extend loans to a wider range of primary producers and create a new system in the form of an agricultural hub. This hub would allow stakeholders to facilitate and delay agricultural investments. This could involve granting loans with technical assistance and other forms of support, rather than simple loans themselves. This mechanism has proven useful in the United States, Canada and other developed agricultural countries.
Developing countries face many major challenges in agricultural development. Recent studies show that Cambodian agriculture still suffers from a lack of physical and virtual agricultural infrastructure, low labor productivity, lack of technical equipment, high rental costs, high production costs, uncertainty, difficulties in accessing funding and a lack of effective leadership.
Cambodian farmers generally need help to reduce production costs, build irrigation infrastructure, prevent pest damage, build climate-resistant farms and ensure high yields. Their actual needs also vary depending on the type of crop they produce, the animals they raise and the particular circumstances they face.
The ARDB should compile and categorize customer information into regional groups and business types in order to facilitate assistance to farmers through defined strategies. Cambodia could prepare a team of technical experts from the Ministry of Agriculture, Forestry and Fisheries to collaborate with the ARDB. This team can provide agricultural assistance, practical training and business advice.
When new customers come to borrow, bank loan officers could provide more detailed information on loan terms and customer support through this agricultural hub framework. Farmers and investors generally understand their financial challenges and the kind of support they would need, but so far support has been mostly lacking. The public bank could act as an effective mediator to facilitate the reconciliation of borrowers and financial backers. Customers can gain the power to communicate and seek help from the bank’s stakeholders – agricultural and financial companies who are members of the bank and who may be able to provide expertise and assistance to farmers in need.
While credit processes and administrative services must be fast, reasonable, reliable and secure, public banks should improve their processes by adopting new technology, including mobile apps, to allow borrowers to fill out loan and savings forms, conduct financial transactions, and find information about their loans online.
Failure or success in the agricultural sector depends primarily on the markets. A new hub would allow farmers to have better access to information, as well as to find new markets and commercial and financial partners.
* About the author: Nith Kosal is a junior researcher at Forum of the future, Phnom Penh.
Source: This article was published by East Asia Forum. This article is taken from the author’s recent article Public ownership of banks: product diversification and potential factors to subsidize agriculture.