Access to Finance for Agricultural Mechanization in Bangladesh: Explaining Alternative Financial Instruments

This study provides an in-depth analysis of the agricultural mechanization sector in Bangladesh, with a focus on the access to finance for acquiring modern agricultural machinery and addressing the key financial challenges faced by stakeholders. It examines existing policies, including the National Agricultural Mechanization Policy, the SME Policy 2019, and the role of financial institutions such as Bangladesh Bank in facilitating access to financing for mechanization. The study also assesses the implications of various financial instruments and identifies the gaps in these initiatives that hinder the widespread adoption of alternative financial instruments in the agricultural machinery sector of Bangladesh. In this study, the supply chain of the agricultural mechanization sector of Bangladesh was categorised into six segments: input suppliers, raw material wholesalers, local producers, importers, distributors, and end-users. Among these, local producers face the most significant financial challenges, reasons include double taxation on raw materials and product sales, which increases their cost burden. The study assessed traditional and alternative financial instruments, incorporating cross-country references and analysing eight alternative options: asset-based finance, machine leasing, supply chain finance, warehouse finance, venture capital or equity-based finance, crowdfunding, green finance, and women and youth specific finance. Whilst some, like asset-based finance and machine leasing, are somewhat familiar and utilised, most remain underexplored or inaccessible to the stakeholders of the sector. Key findings indicate that financial literacy significantly influences the adoption of alternative financial instruments. However, due to limited sample sizes, the study could not establish a definitive relationship between other aspects (age, education level, location, etc.) and market actors’ preference of alternative instruments. Recommendations emphasise promoting more familiar instruments such as asset-based financing and machine leasing before introducing fewer familiar options. The study notes that existing policies, including the SME policy, National Agricultural Mechanization Policy, and Light Engineering Policy, lack specificity regarding the agricultural mechanization sector and alternative financing. Since the sector is not officially designated as an industry, it falls under SME governance. SME Foundation, with its network of public and private banks, could play a pivotal role in facilitating fund disbursement through alternative instruments. Moreover, sector-specific policies are urgently needed, with provisions tailored to the agricultural machinery sector. Dedicated funds, concessional loans, and clear disbursement mechanisms should be introduced to address the sector’s challenges. This would require collaboration among agencies like Bangladesh Bank, the SME Foundation, the Ministry of Agriculture, and the Ministry of Industries. To facilitate access to finance, interest rates and repayment periods need adjustments. A preferred interest rate of 4 per cent was identified among local producers and machine service providers, aligning with previous government initiatives. Loan repayment terms should extend beyond two years to accommodate the unique financial cycles of stakeholders. Tax-related inefficiencies were highlighted as a critical barrier, particularly for local producers. Recommendations include preventing tax duplication, streamlining processes, providing clear online guidance through the National Board of Revenue, and differentiating tax rates across the supply chain to alleviate burdens on smaller actors. The study underscores the importance of digitalising the supply chain to enhance transparency and operational efficiency. Digital platforms for procurement, production, and sales would improve financial monitoring and support data-driven policymaking for tax exemptions, subsidies, and credit systems. The adoption of alternative financial instruments requires awareness-building and capacity-development programmes. Banks, government agencies, and private sector organisations should collaborate to improve financial literacy, promote user-friendly guidelines, and leverage existing grassroots networks to enhance accessibility. Improved financial and digital literacy is critical for fostering a more inclusive and digitally driven ecosystem for agricultural mechanization in Bangladesh.