Rural Bangladesh accounts for 80 per cent of the country’s population. While small businesses and farmers have an important role to play in growth and employment generation, their full development potential is constrained by limited access to finance.

Indeed the banking sector in Bangladesh serves mainly medium and large enterprises in urban areas. Dhaka and Chittagong accounts for 78 per cent of total lending, whereas only 11 per cent of bank lending is in rural areas.

A survey conducted in the context of a study on ‘Access to Rural Finance’ estimates that only seven per cent of one million potentially eligible small businesses are currently served by the formal banking sector. This study also found that a typical small business loan in Bangladesh requires up to 29 administrative steps, nine meetings with the clients, and the processing of about 50 forms while clients spend about 20 hours negotiating with the bank.

The World Bank and the Government of Bangladesh, in collaboration with the Department for International Development (DFID) and Japan Bank for International Cooperation (JBIC) recently undertook this study to understand what is hampering the delivery of credit to rural small businesses and farmers.

It was found that even though state owned banks serve the agricultural sector to some extent, their outreach is severely constrained by their weak financial performance. On the other hand, private commercial banks do not serve small businesses and farmers because their products and procedures are not customer-friendly and are not suitable for small loans. While, no agricultural insurance scheme has been operating in Bangladesh since the government-funded disaster insurance scheme was stopped in the mid 80s due to heavy losses, the study found that two index insurance products would be technically feasible in Bangladesh, namely a rice drought index and a rice flood index. Index insurance products are been implemented successfully in a number of countries, most recently in India and Thailand.

The Government of Bangladesh and the World Bank have been discussing possible next steps to address the constraints identified in the study.

A number of dissemination events on the findings of the study are being planned in the coming months.