Note: the interview has been edited and condensed for clarity.
Last month I had the opportunity to conduct a final round of partner visits in Bangladesh and Nepal as MEDA’s INNOVATE project is in its final months of implementation . It was eye-opening to visit farmers in rural Bangladesh who received and used a bank loan for the first time; and to hear diverse perspectives and challenges from financial institution partners in both Bangladesh and in Nepal.
Background: From 2018-2020 iDE Nepal in partnership with Muktinath Bank piloted a new model of finance to reach rural farmers, especially women, by utilizing iDE Nepal’s network of community aggregation centers, provision of agricultural technical support, and leveraging input sales agents who managed and distributed agricultural loans on behalf of the bank. Smallholder customers who received these agri-loans (average size USD 200) mostly purchased agri-innovations and technologies to support vegetable farming productivity and resilience, especially climate-smart technologies such as drip irrigation, integrated pest management (IPM), and hail nets.
Loan Modalities: Two loan modalities were tested in the pilot. Muktinath Bikas Bank has reported a remarkable 100% repayment rate on all loan products for both models during the project period.
- Business Correspondent (BC) Loan Model: a collection center is designated as a Business Correspondent and fully manages the loans to small farmer members on behalf of the Bank, earning a small margin on the interest spread and overtime providing e-banking services. The Muktinath board has formally endorsed the product. Two of six collection centers qualified as Business Correspondents during the project period.
- Hybrid Model: Collection centers that did not qualify as a Business Correspondent coordinated closely with the Bank to promote and support management of the loans without assuming legal responsibility for the loans. These collection centers also received modest compensation. Over time, these collection centers are expected to become business correspondents.
In this blog, I share insights from my interview with Vijay Kumar Gurung (VG) , Head of Small and Micro Banking and Govinda Bahadur Raut (GR), Assistant Chief Executive Officer from Muktinath Bikas Bank Limited (MBBL) in Kathmandu, Nepal. I sat down with them to discuss their experiences and lessons learned from piloting a new non-traditional finance model for farmers in partnership with INNOVATE and iDE Nepal. The model MBBL implemented consisted of agricultural loans that are managed by community collection centers, rather than bank staff, thereby cutting costs to serve rural areas and testing a new way of reaching more rural customers. While there was some apprehension going in, the pilot enabled the Bank and its Board to understand the potential benefits of this model and pursue opportunities to expand in other parts of the country.
“If we do not serve farmers, we cannot imagine the prosperity of the country.”
CY: What were some of the challenges in launching this new loan product?
GR: One of the major upfront challenges was convincing our Board to approve this new product, as it had never been done before in our bank. Once we managed to get approval, there were also challenges at the community level. When assessing potential group borrowers, one problem was that cooperatives and collection centers were not registered. Due to their informal status, we could not lend to them like other legal entities. Also, we were not comfortable with the leadership and management of some of the groups. Although we tried to strengthen them and build their capacity, it still takes time.
CY: Out of the pilot achievements from the last 18 months, what was most critical or exciting for MBBL?
VG: Coming up with the new product itself (wholesale loan product) was a big achievement. Also getting Board approval for the product was an achievement, despite some initial apprehension. Currently the product is growing, and we're having more customers due to this new product, which is another critical success for us. Also, now I think our Board better understands the potential for this lending model. We are starting to wholesale lend to other B-class banks in other regions of the country, beyond the customers that first borrowed in the MEDA pilot. The only difference is the loan amounts are higher.
Another achievement is being introduced to climate-smart technologies . This new knowledge is proving that we're working in the right areas with potential for growth. In the future, we want to expand financing options for climate-smart technologies for our customers. Earlier, this was limited to smaller ticket items like inputs or greenhouses, but now we want to increase the product range to items like water pumps, solar water pumps, hailstorm nets, and thinking of mechanization too.
GR: Another benefit has been around social mobilization. The input sales agent, as business correspondent, acts as an intermediary between the collection center committee and the Bank. They learned about banking processes and procedures in this pilot. Earlier they were limited to community mobilization and talking to farmers about agtechnologies, but now they have new knowledge around banking and how to work with financial institutions, including how to apply for a loan, what documents are required, how to repay, etc. all for the benefit of informing rural communities how to acquire new technologies for farming through bank financing.
CY: Were there any other critical elements for the success of this project?
GR: Well, iDE Nepal has expertise in agricultural techniques, technologies and knowledge. We, as a bank have expertise in financing and assessing clients. Combining these two areas is what made this model work so well. And because iDE Nepal has been doing this in the country for a long time, they know the situation in Nepal.
VG: The training component is another aspect of this model. Bank staff, ag-extension and technical advisors, and the intermediariesall participated together in the training. This created an environment where they can share their knowledge, problems, ideas and solutions with one another. Now our field loan officers know about hail nets and what purpose they serve, or how mulching helps with productivity. And the other way around, the community representatives now know how to access loans from a bank and what kinds of documents are required. They are even convincing farmers to form into groups, to get their documents in order, such as citizenship papers and two photographs, to be eligible to apply for a loan.
Even though the project has come to an end, the business correspondents are still working in the communities and facilitating the loans. As a result of this project, such relationships have been built. Trust has been established between the bank and the communities, and our brand is now more known.
CY: Why is agriculture and reaching rural customers a priority for the bank?
VG: It's in our genes - the bank's genes. We first developed and started in rural areas, then we entered urban/city areas.
GR: We are a rural-based bank and the majority of our customers are in rural areas, so the mission and vision of the bank is a bit different than other commercial banks. Our main focus is to serve low-income people, and the majority of them are farmers. If we do not serve farmers, we cannot imagine the prosperity of the country. That's why our major focus is rural areas, because in rural areas, there are farmers. In addition to our lending, last year we established the Muktinath Agricultural Company to serve farmers in a sustainable and commercial way. These are some unique elements of our bank compared to others.
CY: Is there anything from this pilot experience that helped you learn more about farmers as customers?
GR: As mentioned earlier, the loan officers who participated in this pilot learned about climate-smart ag technologies and farming tools and techniques. They now know how agriculture works. And in a broader sense, Muktinath Bank also became more interested and focused on agriculture, because of this project. Also, most farmers in Nepal have been producing at subsistence levels, but we see opportunities to develop them into commercial farmers. For example, starting out with buying one greenhouse, and upgrading to two, then three, etc. We see the potential even among migrant workers who return to their communities, as they get involved in agricultural activities. This is a good opportunity to do a deep dive into farming practices and rural communities, while also understanding the challenges of climate change for agriculture.
VG: I'll tell you a very good story. There was one elderly woman farmer - initially she was very hesitant to take a hailstorm net, but somehow through government subsidy and the loan mechanism, she bought the net. At first, she didn't understand why this net is required or necessary. But then, there was a round of hailstorms that came, and she was very happy that she bought the net. She was even able to sell her products at premium prices because the prices shot up because supplies in the market were low due to lots of farmers who lost their crop. She's now telling others to buy the hailstorm net.