Bangladesh rural lending shifts toward NGO microfinance as agriculture loan share shrinks

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Rural lending shifts in Bangladesh

Highlights

Bangladesh's rural household borrowing rises from 36% to 42% over two decades, while agriculture's share of rural loans declines from 25% to 16%.
NGO microfinance now supplies 75% of rural loans, with median loan sizes nearly doubling but effective borrowing costs reaching 27%, far above banks' 10% lending rates.
The share of borrowers spending over 40% of income on instalments rises to 41% overall (79% among the poorest), and NGO borrowers' reliance on moneylenders grows from 27% to 49%.

Workshop findings on rural credit trends

As reported by The Business Standard, findings presented at a food-system financing workshop in Agargaon, Dhaka, show Bangladesh's rural borrowing rate rises from 36% to 42% of households over two decades, while agriculture's share of rural loans falls from 25% a decade ago to 16%. The event is organised today, 12 October, by the Bangladesh Institute of Development Studies and the International Food Policy Research Institute, with support from CGIAR's Better Diets and Nutrition Science programme.

NGO microfinance institutions now account for three out of every four rural loans. Although the median size of NGO microloans nearly doubles in real terms, borrowers face growing repayment pressure, with flat 15% rates translating into effective borrowing costs of about 27%, compared with bank lending rates of around 10%, while informal moneylenders charge 50% to 60% annually.

The share of borrowers spending more than 40% of their income on instalments rises from 22% to 41%, and reaches 79% among the poorest 20% of households. The share of NGO borrowers who also take loans from moneylenders increases from 27% to 49%, pointing to deeper stress among low-income rural families.

Research presented at the workshop also shows borrowing per acre for farms smaller than half an acre doubles from Tk6,000 in 2010 to Tk13,500 in 2022. Banks' focus on land ownership excludes many farmers who lease land for cash, limiting access to formal agricultural finance.

Pressure on farm investment and calls for reform

Agricultural loans largely fund fertiliser, seeds, livestock and land leases, with little money going into mechanisation. Fewer than 2% of farm households own tractors or power tillers, and banks finance only 2% to 7% of agricultural machinery costs.

Repayment schedules also remain poorly matched to farm income cycles. While 60% to 80% of agricultural bank and moneylender loans allow lump-sum or annual repayment after harvest, only 4% to 6% of NGO loans offer similar flexibility.

Livestock, which contributes 7.6% of agricultural GDP and is owned by small farmers in 90% of cases, receives less than 5% of agricultural loans. Research presented at the workshop suggests cattle fattening can yield profits of 20% to 30% over six months.

PKSF Managing Director Md Fazlul Kader says financing must cover the full food system, including collection, storage, processing and marketing, while supporting environment-friendly farming. BIDS Director General Prof AK Enamul Haque calls for risk-sharing arrangements and wider use of technology to raise productivity, warning that rising debt could push farmers out of agriculture.

Microcredit Regulatory Authority Executive Vice-Chairman Prof Mohammad Helal Uddin says the sector's accumulated surplus grows from Tk3,000 crore in 2006 to Tk69,000 crore, and calls for a review of financing costs and service charges that can reach 24%. Agriculture Secretary Md Selim Khan stresses accessible machinery finance and repayment schedules aligned with harvest seasons, while participants say expanding credit alone will not improve farmers' financial security without lower costs, more flexible terms and effective risk-sharing mechanisms.

Bangladesh’s five-year economic reform agenda, outlined in our earlier report, highlighted the government’s broad policy alignment with the World Bank and the IMF on restoring macro stability and tightening banking discipline. We also noted the plan’s emphasis on boosting revenue, reviving investment, reopening closed factories, expanding social protection, and using special financing arrangements to restart industrial activity and attract regional capital.

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