Predicting the Impact of Environmental Hazards on Agricultural Loan Loss Experience in Large Banks in Sri Lanka

This research report aims to predict the impact of environmental hazards on agricultural loan loss experience in large banks of Sri Lanka. It discusses the background of the study, research questions, aims and objectives, and scope of the study. The report also includes a literature review and research methodology. The study aims to identify the risks associated with agricultural lending and recommend strategies for risk mitigation.

Running head: BUSINESS ANALYTICS RESEARCH PROJECT
Business analytics: Predicting the Impact of Environmental Hazards on Agricultural Loan
Loss Experience in Large Banks in Sri Lanka
Name of Student
Name of University
Author Note

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Table of Contents
Chapter 1: Introduction........................................................................................................3
1.1. Problem Statement....................................................................................................3
1.2. Research Questions...................................................................................................3
1.3. Background of the Study..........................................................................................4
1.4. Aims and Objectives of the Study............................................................................7
1.5. Scope of the Study....................................................................................................8
1.6. Software Tools to be used.......................................................................................10
1.7. Deliverables of the Study........................................................................................10
Chapter 2: Literature Review.............................................................................................14
2.1. Introduction.............................................................................................................14
2.2. Agricultural loan in Sri Lanka................................................................................15
2.2.1. Overview of large banks and exposure to agricultural loans...........................19
2.3. Factors that contribute to agricultural loan loss: Causes........................................21
2.3.1. Predicting Weather Patterns............................................................................24
2.3.2. Impact of environmental hazard on agricultural Loan Loss: Effect of Weather
...............................................................................................................................................25
2.4. Risks associated with Agricultural Lending in Large banks of Sri Lanka.............27
2.4.1. Innovations in weather Risk Management in Banks.......................................28
2.5. Impact of loan loss experience on profit levels of large banks of Sri Lanka..........29

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2.6. Policy and Regulatory Interventions......................................................................30
2.6.1. Loan Policy and Governance...........................................................................32
2.7. Risk Mitigation.......................................................................................................34
2.8. Global Engagements...............................................................................................36
2.9. Recommendations...................................................................................................37
2.10. Chapter Summary.....................................................................................................38
Chapter 3: Research Methodology....................................................................................41
3.1. Introduction.............................................................................................................41
3.2. Research Method....................................................................................................41
3.3. Research Philosophy...............................................................................................44
3.3.1. Justification for choosing Positivism Research Philosophy............................46
3.4. Research Approach.................................................................................................47
3.4.1. Justification for choosing Inductive Approach................................................48
3.5. Research Design.....................................................................................................49
3.5.1. Justification for selecting Descriptive Research Design.................................49
3.6. Data Collection Methodology.................................................................................50
3.7. Data Analysis Method............................................................................................52
3.7.1. Data Analysis Method Chosen........................................................................53
3.8. Population and Sample...........................................................................................53
3.9. Ethical Considerations............................................................................................54

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References..........................................................................................................................56
Chapter 1: Introduction
1.1. Problem Statement
The purpose of this research report is to predict the impact of environmental hazard on
the agricultural loan loss experience in large banks of Sri Lanka. It is essential to evaluate the
contribution of environmental hazard on the agricultural loan loss in order to identify the
possible risk mitigation solution. For this, extensive literature search and collection of data from
primary sources is essential.
1.2. Research Questions
This section of research report will discuss major research questions that this particular
research study will address. The research questions identified for this research are as follows-
1. What is the historical quantitative experience of agricultural loan losses in large banks of
Sri Lanka as impacted by environmental hazards in the last ten years?
2. How well can environmental hazard caused historical agricultural loan loss experience be
used in the prediction of future agricultural loan losses in large banks in Sri Lanka?
3. How well can knowledge management that is gathered in this predictive formula,
contribute to the developing of innovative products that enables in early identification of
nonperforming agricultural loans so that large banks in Sri Lanka can effectively mitigate
the agricultural loan losses?

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4. What are the recommendations for reducing the impact of environmental hazards in loan
loss experience in large banks of Sri Lanka?
1.3. Background of the Study
Sri Lanka is a developing agricultural country of South Asian Region, which is self
sufficient in rice, vegetables and tropical fruits. Along with that, Sri Lanka is one of the major
exporters of plantation crop products such as tea, coconut, rubber and spices. Thus, this country
largely depends on the agricultural loan from the large banks in order to sustain in their
agricultural production (Cbsl.gov.lk. 2018). An agricultural loan can be described as an overdraft
facility that is used to meet the cost of farming and cultivation is activities associated with
agriculture and business (Beck and De Jonghe 2013, pp. 2). These types of loans are mainly low
interest loans that farmers generally avail to run their cultivation and farming businesses
efficiently. Since Sri Lanka is a developing agricultural country, it increasingly relies on the
special loan scheme by Central Bank of Sri Lanka and loans from similar large banks (Laeven
and Valencia 2013). The different loan schemes offered by the central bank of Sri Lanka are
“Krushi Navodaya Loan Scheme”, “Kapruka Ayojana Loan Scheme”, “Agro Livestock
Development Loan Scheme” and others (Beck 2013). Thus, Sri Lankan government ensure
appropriate loan for agriculture. According to the schemes and the rules of the loans, the farmers
need to repay their loans after harvesting and selling their crops. Agricultural loans in Sri Lanka
can be availed by all the eligible farmers to fund the seasonal agricultural operations and similar
activities, which include animal farming, crops or purchase of agricultural tools. Minimal
documentation is required for agricultural loan in Sri Lanka (Ariyadasa et al. 2017).

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The agricultural land in Sri Lanka was estimated to be 43.69% in the year 2014. Sri
Lanka has agricultural land of nearly 27400 sq. Km (Tradingeconomics.com. 2018). Thus, the
country heavily relies on the finances that are provided by the banks in form of agricultural loan.
The approval of bank loan is subjected to a number of criterions. In Sri Lanka, there are mainly
two cultivation seasons which are Maha and Yala (Statistics.gov.lk.2018). The cultivation
seasons are named according to the two monsoon season. Since the entire farming community of
Sri Lanka is dependent on the bank loan, it is essential for the banks to analyze and estimate the
risks associated with the approval of the agricultural loans (Chisasa, J. and Makina, 2013, p. 1).
The agricultural loans that are approved for supporting the farming activities are
subjected to a number of risks (Chisasa, J. and Makina, 2013) . Identification, analysis and
addressing of these risks are essential. One of the major risks that are identified in this context
that can affect the repaying of the loans is environmental factors (Birner 2018, p 25). The loss of
crops as a result of environmental hazards can in turn result in significant loss of the banks that
are approving loans for farming activities (Birner 2018, p 50).
Therefore, it can be said that the environmental damage not only brings about significant
losses to the farmers and livestock production, it also affects the large banks of Sri Lanka. Thus,
it is essential for the banks to consider mitigation strategies for the risks that are associated with
the implementation of other project management (Beck 2013). It is essential to understand that
the risks associated with the natural disasters and environmental hazards are not under the
control of the borrowers. The banks that are lending money to the borrower needs to introduce
several reforms such as diversification strategies, collaboration with institution, regulatory
intervention and other innovative strategies for management and reduction of the risks associated
with this type of agricultural loans (Laeven and Valencia 2014).

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The research project has been undertaken in order to predict extent of the impact of
natural disaster and environmental hazards on agricultural loan and loan loss in large banks of
Sri Lanka (Birner 2018, p 50) . This will further help in addressing of similar situations in future.
The banks cannot stop providing financial help to the farmers on account of the losses faced due
to environmental hazards. The research report will identify the major impacts of the
environmental hazard on bank loss and will further predict the possibility of developing new
strategies of reducing the losses associated with lending of agricultural loans.
As per the government rules, all the large banks of Sri Lanka are entitled to provide
agricultural loans to the farmers (Cbsl.gov.lk. 2018). This is compulsory for all the large and
medium sized banks. The banking sector of Sri Lanka is well capitalized and well regulated
(Cbsl.gov.lk. 2018).. The Sri Lankan banking sector is therefore one of the fast growing sectors
in Sri Lanka. However, the loan losses from agricultural loan gives rise to a major concern
associated with the financial stability (Chisasa and Makina 2013)..One of the major reasons
behind the same can be the fact that the Sri Lanka’s banks are generally more challenges in terms
of innovation, efficiency and value added. The market of Sri Lanka remains relatively
underdeveloped and not up to the international standards (Statistics.gov.lk 2018). Coupled with
that, the natural disasters increases the amount of loses that are faced by both the farmers and the
banks that are lending them money for farming (Li et al. 2013) .
However, in the recent years, the banking sector of Sri Lanka is large and quickly
expanding in terms of coverage. Thus, it is essential for the large bank of Sri Lanka to essentially
identify the approaches and strategies that can help in mitigation of this type of risk or reducing
the risks associated with the agricultural loan loss (Beck and De Jonghe 2013, p. 5). In this
context, the different challenges associated with the agricultural lending are needed to be

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identified. Farming is a risky business and its profitability is entirely dependent on the
profitability of the crops. There are a number of reasons due to which a crop might fail. Crops
fail due to the influence of weather, which in turn influences the productivity of the same. The
decrease in productivity of the crops often results in fluctuation of prices of the crops and
reduced productivity. In these cases, the farmers fail to repay their loans mainly because the
productivity is lowered (Laeven and Valencia 2014, p 10). Thus, identification and measurement
of risk is essential in order to stop the lending institutions to reduce the losses. Apart from that,
the agricultural yields are generally uncertain, which is associated with natural hazards. Thus,
implementation of research study is quite important in order to reduce the impact of agricultural
loan losses in large banks of Sri Lanka.
1.4. Aims and Objectives of the Study
This section of research report will be discussing the purpose and main aim of this
research project. Identification of the major aims of this research project will help in easier
identification of the objectives of the study.
The main aim of this research project is to identify the Impact of environmental hazard
on the agricultural loan loss experience in large banks of Sri Lanka. The purpose of the research
project is to predict the specific risks that the agricultural sector is exposed to, in the agricultural
sector. The research aims in collection of both secondary and primary data in order to predict the
agricultural loan losses in Sri Lanka. Based on this research aims, the research objectives and the
research questions are discussed in the following sections.
Objectives of the Study

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It is essential to identify the objectives of a research study as it helps in analyzing the
pathway of the research. The research study will be based on secondary and primary level
research and therefore accurate identification of the objectives of the research study is a
necessity. The main objectives of this research project that this paper will address are as follows-
 To understand the concept of Agricultural loan and loan losses in Sri Lanka
 To identify the different factors contributing to the agricultural loan loss
 To analyze the impact of environmental hazard on agricultural loan loss
 To assess the last 10 years’ experience of the large banks regarding the
agricultural loan losses
 To evaluate the impact of the loan loss experience on the profit levels of large
banks in Sri Lanka
 To know about the role of regulatory interventions in agricultural finance for
predicting the impact of agricultural loan loss due to environmental hazards
 To predict the impact of environment and hazards on agricultural loan loss
experience using Sri Lankan data
 To understand how developing of innovative product can help predict the
environmental hazard responsible to nonperformance of agricultural loan
 To understand the contribution of knowledge management in knowing about
mitigating the impact of environmental hazards on agricultural loans
 To recommend various strategies of reducing the impact of environmental hazards
on agricultural loan loss experience.
1.5. Scope of the Study

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It is quite significant that the banking sector of Sri Lanka is under a high risk of financial
pressure particularly to the SME and large banks (Birner 2018). According to the reports by
Fitch Sri Lanka, it has been identified that small and developing domestic franchises have
captured a high risk appetite and pressure particularly because the loans are getting affected by
the environmental hazards (Birner 2018). Along with that, it becomes considerably important for
the banks of Sri Lanka to provide at least 10 percent of the total loans to the financial assistance
for the agriculture and cultivation (Cbsl.gov.lk. 2018) . Thus, it becomes essential to predict the
losses that the banking sector of Sri Lanka is experiencing due to agricultural loan loss. Along
with that, it is necessary to identify the risk mitigation strategies that can possibly help the
banking sector in reducing the losses.
Agricultural yield is generally considered uncertain as natural hazards have a large
impact on the output of the farm (Li et al. 2013, p 5). Any changes in the weather condition can
seriously impact the production of the firm. Experienced farmers although has knowledge about
specific risk profiles for the agricultural products, management of these type of risk may not be
that efficient. However, the impact of weather on the production of crops can be managed by
making use of a number of approaches. These approaches include, use of irrigation system for
reducing the effect of drought, greenhouse production and others (Webster 2013). When none of
these approaches is able to eliminate this risk, the banking sector experiences huge loss in form
of agricultural loan loss (Birner 2018). The problem is more prominent as it is mandatory for the
large banks of Sri Lanka to offer agricultural loans to the farmers. Thus, it can be concluded that
agricultural loans are subjected to market risk (Dutz and O'Connell 2013).
The aim of this study is to predict the impact of environmental hazards on agricultural
loan loss experience in large banks in Sri Lanka. In this research project, the extent to which the

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agricultural loan loss affects the financial and banking sector of Sri Lanka. Therefore, this
research study is justified as it will enable the banking sector to identify the risk mitigating
strategies of the said risks. The following section of the research report, will give an idea of the
structure of the research study that will be followed in the research project.
1.6. Software Tools to be used
The software tools that will be required for the research study are as follows-
 MS word and MS Excel
 Plagiarism Detection tools
 Google Scholar
 MS Project for Scheduling
1.7. Deliverables of the Study
The research study will be delivered in form of different chapters that identifies the
different factors and issues associated with agricultural loan loss in large banks of Sri Lanka. The
chapters into which the entire research study is segregated concentrates on the different aspects
of the research study and works for fulfilling the identified objectives of the project. The
different chapters of this research project include Introduction, Literature Review, Research
Methodology, Data Collection and Analysis, Results and Discussion and Conclusion and
Recommendations. The overall contents of each chapter of the research project that will be
delivered are discussed in the following paragraphs. The purpose of the research is to evaluate
various data sources and understand the patterns of Sri Lankan weather condition in order to
establish a formula to find out the correlation between the effects of agricultural loan loss and

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climate of Sri Lanka. The main output of the research will be development of a formula so that a
co relation between agricultural loan and weather of Sri Lanka can be established.
Chapter 1: Introduction: The very first chapter of this research study provides a brief
introduction of the topic selected. This chapter of the research project provides an idea of the
research background, aims of the study and objectives of the study. This chapter provides an idea
of the research questions that this research project will address. The rationale of this research
study is further discussed in this chapter. The first chapter of this research project is one of the
most important chapters of this research as it forms a base of the project. The researcher has
identified the aims, objectives and the research questions which is one of the most important
factors of a research project. Accurate identification of these factors was necessary in order to
ensure accurate implementation of the research project.
Chapter 2: Literature Review: The literature review chapter of the research project is
another most significant chapter of the research. This chapter evaluates the data collected from
secondary sources that helps the researcher to get an idea of the research needs. The researcher
analyzed the data from the secondary sources. Identification of appropriate theories and
framework helps in gathering data about the research needs. Accurate identification of the
theories and use of appropriate framework helps a researcher to identify the research gaps in a
particular research project. Therefore, chapter 2 or the literature review chapter is considered to
be one of the important aspects of research study. In this research project, the researcher embarks
on an extensive literature search by collecting data from previously published research papers
and journals in similar field. These secondary data sources helped the researcher in identification
of problems arising from agricultural loan loss in large banks of Sri Lanka. Therefore, this
chapter provides quite significant data about the research project, which will helps in accurate

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analysis of the research problems. The literature review chapter generally follows a structured
framework associated with the identified objectives of the research. Based on the research
questions that are identified for the research, analysis of the secondary data sources is important.
The literature review chapter is based identification and collection of secondary data from
sources that are reliable and legit.
Chapter 3: Research Methodology: The research methodology chapter of the research
project helps in identification of the tools and techniques that are needed for this research project.
Identification of appropriate research process along with the techniques, philosophy, approach
and research design will be followed in this research project. The research approach that will be
followed in implementation of this research study is identified in this research study. This
research study is based on both primary and secondary research. The research has followed a
mixed research methodology for this research project. Along with that the details about the
research design and research philosophy will be discussed. The research methodology chapter is
therefore an important consideration of the research project as it helps in aligning the research
with the theoretical knowledge and practical applications of the research. Since the purpose of
the research is to predict the impact of environmental hazard on agricultural loan loss experience
in large banks of Sri Lanka, the use of mixed research methodology for this research study is
justified.
Chapter 4: Data Collection and Analysis: The fourth chapter of the research project
deals with collection and analysis of the data. Data is collected on basis of the tools and
techniques identified in the research methodology chapter. The findings of the research project
helped in analysis of impact of environmental hazard on agricultural loan loss. A statistical data
analysis method will be followed for collection and analysis of the data. Data is collected from

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both secondary and primary sources. The collected data will be analyzed by following the
statistical method of data analysis. Therefore, data collection and analysis of data is considered to
be one of the most important chapters of this research project.
Chapter 5: Results and Discussion: The findings of the data collection and analysis
chapter are discussed in this chapter of research project. The purpose of this chapter of the
research project is to conceptualize the findings of the data collection and analysis chapter. The
discussion chapter is important to understand whether the particular research has been successful
implemented or not. It further verifies whether the expected results are obtained from the
research. This chapter helps in extracting the relevant information associated with the research.
Chapter 6: Conclusion and Recommendations: The final chapter of the research project
summarizes the findings of the research. This chapter links the research findings with the
objectives and aims of the study. This chapter will evaluate whether the researcher is able to
access 10 years of loan loss experiences in large banks in Sri Lanka. It will further evaluate
whether the research could actually address the research objectives and aims of the study. Since
the researcher has followed a planned approach of project implementation, the project could
achieve the expected result. This chapter will further recommend the ways in which this
particular research study could have been implemented in order to obtain a more accurate result.
Thus, conclusion and recommendation is one of the most important chapters of research project
that helps in understanding the major findings of the research project at a glance.

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Chapter 2: Literature Review
2.1. Introduction
The section of literature review evaluates the previously published literatures in the field
of agricultural loan is Sri Lanka. The evaluation of the previously published literatures would
build the base of the research study. The agricultural loan loss impact in large banks of Sri Lanka
will be evaluated on basis of the available literatures and journals in this field. Literature Review
chapter is important to consider mainly because the data obtained from this section of the
research report will be of a great use in data analysis chapter. Based on the data and the findings
obtained from the literature review, primary data collection and data analysis will be done in the
later part of this research report.
The main aim of this literature review section of the report is to discuss the published
information in a particular subject area or filed of research. Therefore, the literature review
chapter of a research study is an important consideration of every research project. The
motivation of this research paper is evaluation and prediction of the impact of environmental
hazards on agricultural loan loss in different banks of Sri Lanka. This chapter of research paper
will mainly be based on the objectives identified for this research. The literature review chapter
can be best described as a narrative review from different scholarly papers. For better
understanding of the project topic, it is essential for understanding the different concept of
agricultural loan and agricultural loan loss in Sri Lanka. The literature review chapter will further
identify the major factors that to the loan loss experience in Sri Lanka. In Sri Lanka,
environmental hazards are found to be a root cause for the agricultural loan loss. In this context
the impact of environmental hazard on agricultural loan loss will be evaluated as well.

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The losses suffered by the large banks of Sri Lanka can be best identified by evaluating
the profit levels of large banks of Sri Lanka (Chisasa and Makina 2013, p 5). Regulatory
interventions associated with the agricultural finance help in predicting the impact of agricultural
loan loss in Sri Lanka (Chisasa and Makina 2013, p 5).
Development of innovative products can help reducing the loan loss that is suffered by
large banks of Sri Lanka (Dubbeling 2014, p 10). No one has control over the environmental
hazard, which is responsible for non performance of the agricultural loan (Li et al., 2013). In this
literature review section, the knowledge management contribution in mitigation of the impact of
weather and climate hazards on agricultural loans in Sri Lanka will be analyzed.
2.2. Agricultural loan in Sri Lanka
Agricultural financing is an important characteristic of large banks of Sri Lanka. Example
of similar loan is Sarusara loan scheme. This loan scheme can be availed by the farmers mainly
due to the collaboration of Central Bank of Sri Lanka (Cbsl.gov.lk. 2018). This type of loans is
mandatory for the large banks to offer in order to uplift the social economic conditions of micro
and small farmers (Dubbeling 2014). Agricultural loans play a significant role for engaging in
cultivation of seasonal crops and by providing working capital on a much lower cost, the large
banks of Sri Lanka help the farmers to cultivate their crops (Cbsl.gov.lk. 2018). Since the
economic conditions of small scale farmers are not that good, majority of the farmers in Sri
Lanka depends on the agricultural loan that is offered by the large banks. However, if the yield is
not satisfactory, these farmers face major challenges in repaying back the loan that is offered by
the bank. In this condition, the large banks suffer huge losses. The environmental hazard is

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considered to be one of the significant reasons behind the decrease in agricultural yield and
agricultural loan loss in large banks of Sri Lanka (Huong, Bo and Fahad 2018).
The annual report of the bank of Ceylon represents the statement of profit or loss, which
is illustrated in the figure below-
Figure 1: Representing the profit and loss report of Bank of Ceylon
(Source: Web.boc.lk. 2018)
The annual report from Central bank of Sri Lanka 2017, prove that that Sri Lankan
economy increased at a moderate pace of 3.1 per cent in the year 2017 compared to that of 4.5
percent in 2016 (Cbsl.gov.lk. 2018).
The data from the commercial banks of Sri Lanka has been fetched as well. The figure
below indicates the amount of loans and advances in the private sector.

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Figure 2: Representing the Commercial Bank Loans and Advances to the Private Sector
The table below represents the commercial bank’s exposure as per the data by CBSL
Total Commercial Bank's Exposure to Private Sector as per
CBSL data (table 132)
CBSL Balance 2016 2017
Agriculture &
fishing
36,
14,63,000
41,
23,71,000
Further data are collected from the lending LCB of Sri Lanka associated with agricultural
industry of Sri Lanka. The table below represents the data about the major lending by some
largest banks of Sri Lanka.
Year of
review
BOC Peoples HNB Com
merci
al
NDB Samp
ath
Seylan
2016
9,31,22,2 11,54,30,62
5,
41,01,
6,
16,01,
2,
53,25,
4,
38,32,
2,
22,48,
41,56
,62,9
115%

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79 7 769 062 854 852 480 23
2017
9,10,74,3
81
11,90,26,16
9
5,
96,81,
649
6,
87,13,
903
3,
26,29,
800
4,
59,89,
887
2,
92,70,
288
44,63
,86,0
77
108%
Thus, it can be said that environmental hazard and weather impact the agricultural
producers’ incomes. Thus, the banks that provide agricultural loans have to accept the negative
consequences of the same. There are evidences from other developing countries as well about the
environmental hazard that affects the agricultural loan and leads to large amount of agricultural
loan loss experiences (Chisasa and Makina 2013, p 8).
The variability in climate and weather conditions affects commercial agricultural banks.
The variation in agricultural production leads to the non performing loans. A non-performing
loan can be described as a sum of money borrowed on which the debtor or the person who has
taken the loan has not paid the scheduled payments (Castro and Garcia 2014, p 5). Thus, the
agricultural loan can be described as a non performing loan since the farmers cannot repay their
loans due to agricultural loss. Majority of the agricultural loans in Sri Lanka become non
performing loan after 90 days (Dubbeling 2014, p 8). Thus, it can be said that the Sri Lankan
banks faces huge challenges on offering agricultural loans. If the farmers could have repaid back
the loan on time, the banks would have not faced such huge loss. The effect of environmental
hazards on the agricultural loan loss in banks of Sri Lanka is therefore needed to be evaluated.
Since agricultural hazard play a significant role in agricultural loan loss experiences, it is
essential to reform the policies and regulations associated with agricultural loans so that
agricultural loan loss can be reduced.

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As per the reports of Global Economy the data about the non-performing loans in the
country Sri Lanka, states that the average value of on-performing loans in large banks of Sri
Lanka is 3.83%. This alarming percentage of the loan indicates that the health of the financial
banking sector of Sri Lanka is at risk. This high percentage rate of non-performing loans in the
country indicates that the large banks of Sri Lanka suffering losses as they are not able to recover
even the principal amount that is lend to the farmers or the interest. According to Huong, Bo and
Fahad (2018), there is huge economic impact of the change of climate. Researching the impact of
climate change in agriculture is important in order to understand the agricultural loan loss in Sri
Lanka. It has been observed that significant climatic changes have a large influence in all the
regions across the globe. Researches prove that the communities that are most vulnerable to the
change in climate are the poorest in relation to the agricultural production. This adds to the loan
loss experiences of Sri Lanka. The profit level of the bank is largely affected by the non
performing loans. Thus, it becomes important for predicting of the environmental hazard on
agricultural loan and agricultural loan loss experience so that solutions to this problem can be
identified.
2.2.1. Overview of large banks and exposure to agricultural loans
According to Hartarska, Nadolnyak and Shen (2015), p. 8, the agricultural loan is
important for the farmers as they need credit in order to finance the adoption of the different new
technologies. Banks are considered to be key agents that takes care of the capital flow and and
promotes the economic growth. However, in Sri Lanka, the large banks fail to promote economic
growth as they experience agricultural loan loss (Dubbeling 2014, p 5). Therefore, although the
banks are viewed as the key agents for facilitating the capital flow, the picture is completely
different in Sri Lanka (Huong, Bo and Fahad 2018, p 10).

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Sri Lanka was among the first countries who implemented the concept of free trade in
South Asian countries (Birner 2018). Free trade in Sri Lanka has been a problem mainly because
of the low production rate of the country (Birner 2018). Sri Lanka has implemented a free trade
agreement and since trade liberalization in Sri Lanka, the growth rate in agricultural has
remained almost to an annual average of 2% (De Silva, Malaga and Johnson 2013, p 5).
Economic development of a country requires increase in Gross Domestic Product or GDP. One
of the leading factors behind the increase in GDP is the agricultural surplus, which is completely
unavailable for Sri Lanka leading to the non-payment of the agricultural loans (Li et al. 2013, p
10).
The main reason behind the agricultural loan loss in Sri Lanka is the increased frequency
and complexity of the natural disasters and similar incidents that is faced over the decades.
Scientific evidences prove that the change in climate of Sri Lanka will enlarge the frequency and
intensity of the disasters (Wickramasinghe 2014, p 14). Thus, the large banks of Sri Lanka might
continue to experience agricultural loan loss in future as well. In a research by Wen et al. (2018),
the potential effect of tropical cyclones is evaluated. The research indicates that about 37% of the
total loses in China is from cyclones (Webster 2013). China is highly affected by the
environmental hazards, which is common in Sri Lanka as well. Similarly, this research project
will be evaluating the effects of droughts and heavy rainfalls of Sri Lanka as a potential effect on
agricultural loans.
Agricultural lending is therefore considered to be critical business line for majority of the
large banks in Sri Lanka. Bank credit although forms the backbone of the agricultural activities
in Sri Lanka, financing supplied by the banks are not repaid back majority of the times mainly

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due to natural disasters. Thus, the severe weather conditions of the Sri Lanka largely affect the
agricultural lending from large banks (Babongo et al. 2018, p 18).
One environmental hazard that affects the agricultural practices of Sri Lanka includes the
landslides (Wen et al. 2018, p 10). The landslides although are considered to be a minor type of
disaster, it might significantly affect the repayment of the agricultural loan. The financial sector
of Sri Lanka has played a vital role in supporting the development of economy of Sri Lanka over
the years, yet the losses incurred from the agricultural loan slashes the profit margin of the banks
and in turn reduce the economic profit.
2.3. Factors that contribute to agricultural loan loss: Causes
Agricultural lending is a major business line of banks that are situated rural areas. Bank
credit therefore plays an vital role in different farm activities throughout Sri Lanka. The
traditional role of bank credit that indicates, that Sri Lankan banks have been making longer term
investments in land, building and in farming (Hartarska, Nadolnyak and Shen 2015, p 10).
However, in all those loans, the agricultural loans tend to become non-performing (Dubbeling
2014, p 14). The factors that contribute to agricultural loan loss n Sri Lanka is needed to be
identified. These factors are elaborated in the paragraphs that follow-
The repayment of the agricultural loan is associated with the yield (Chisasa and Makina
2013). If the crop yield is good, the farmers should not have any problem in repaying back the
loan. However, on unsatisfactory crop yield, the repayment of the loans or interest of the
principal amount becomes a problem.. In this context, the climatic condition of Sri Lanka is
needed to be evaluated.

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This research will be evaluating the climatic variability and bank lending in Sri Lana and
will undertake a similar methodology as that undertaken by Nadolnyak and Hartarska (2010), in
their research. This research will be following a similar approach for predicting the agricultural
loan loss in Sri Lanka. The research by Apergis, Artikis and Mamatzakis, (2011), prove that
environmental hazard has a large impact on the agricultural loan loss. The research will be
evaluating those factors so that the area associated with agricultural loan loss can be evaluated.
The Sri Lankan climate is tropical and therefore it incorporates of very distinctive dry
seasons and wet seasons (Climate in Sri Lanka, 2018). The drastic climatic change threatens the
agriculture in Sri Lanka. Sri Lanka is found to be one of the countries that are mostly affected by
the change in climate (Climate in Sri Lanka, 2018). In Sri Lanka, there is a prevalence of water
intensive and climate sensitive crops that includes rice and tea. However, the annual crop yield is
largely affected by extremely vulnerable climate change. The intense weather condition
particularly in the pre monsoon season, results in destruction of the crops. On the other hand,
most of the April and May season saw drought and unusually high temperature (Climate in Sri
Lanka, 2018). This adverse climatic condition results in reduction of the crop yield. The farmers
follow the Maha and Yala season as the traditional monsoon season. This monsoon season was
determined over 1000 years which till acts as a penultimate guide for the farmers (Beck and De
Jonghe 2013, p 8). However, the climatic condition of Sri Lanka has drastically changed over the
years. Researches prove that within the last five years, farmers are seen to forgo with the most
favorable condition of cultivation according to them, which is Maha and Yala (Dutz and
O'Connell 2013,p 6). It has been observed that the natural disasters have significantly increased
in the recent years. In the last five years, there have been three major floods (Desinventar.lk.
2018). This type of natural disasters significantly affects the production of crops. Thus, the

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agricultural loan that is linked with the crops that are expected in such seasons will suffer
extreme losses.
A key feature associated with the recent financial crisis includes deterioration in
performance of the loans by the banks (Li et al. 2018, p 8). The rate of nonperforming loans is
significantly higher mainly because of their nonpayment. The interest of the agricultural loan
becomes overdue on the agricultural loan in Sri Lanka. At certain point of time, when the
agricultural loan acquires a non-accrual status, the bank stops counting the unpaid interest, which
another major reason of agricultural loan loss. Over the years, many crises in financial aspect of
the country have been happening in the developing countries like Sri Lanka mainly due to the
absence of a stable macroeconomic environment (Webster 2013, p 10). Thus, the banks of Sri
Lanka are in need of a well-organized legislative and administrative structure that can help in
reduction of the agricultural loan loss in Sri Lanka.
Nonpayment of the agricultural loan leads to a banking crisis in Sri Lanka. The banking
crisis adds to the declination in of the GDP in Sri Lanka (Ekanayake and Azeez 2015, p10).
Although identification of the banking crises based on the evolution of the bank liabilities is a
difficult task, there is no denying the fact that majority of the nonperforming loans in Sri Lanka
are agricultural loans (Huong, Bo and Fahad 2018, p 6). The implementation of microfinance in
rural and agricultural activities can however help in repayment of the loans (Chisasa and Makina
2013).
According to the head of Agro-Climatology, Natural Resources Management Centre in
Sri Lanka, water scarcity is considered to be one of the most alarming concerns in Sri Lanka and
a recurrent problem in production of crops (Ekanayake and Azeez 2015, p 10). If the socio

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economic environment of Sri Lanka is consider, the huge losses associated with the
comprehensive climate change may lead to economic crisis in future (Dubbeling 2014, p.8). Sri
Lanka has the opportunity of learning from mistakes of the south Asian neighbors (Li et al.
2013). Thus, there are certain risks associated with agricultural lending, which is needed to be
addressed.
2.3.1. Predicting Weather Patterns
Over the last decades, the banks of Sri Lanka have been operating in an extremely
competitive environment. Therefore, it becomes essential to predict the weather patterns in Sri
Lanka so that mitigation approach for the loan loss experiences can be predicted. Data about the
weather patterns help in predicting the environmental hazards (Dubbeling 2014, p 8). Thus,
collection of weather data helps in predicting the possible agricultural loan loss in Sri Lanka. Sri
Lanka’s weather is mainly tropical and therefore, climatically, the Sri Lanka is separated into
two zones, the dry Zone and the wet Zone (Desinventar.lk. 2018). However, the country is
known for certain unpredictable weather patterns such as unpredicted floods, droughts and strong
winds, which have significant effect of the agricultural of Sri Lanka and agricultural loan loss
experience (Desinventar.lk. 2018).
According to Georgopoulou et al. (2015), a methodological framework can be adopted
for examining the climate change and the different risks associated with the banking sector. In
the research by Georgopoulou et al. (2015), the researchers have taken a planned approach for
the research project. The researchers have identified that decision making and loan contracting
associated with the agricultural loans.

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According to Lazo et al. (2011), p 12, weather directly or indirectly affects the
production and consumption of the economic sector. In order to examine the US economic
sensibility to weather variability, the researcher has chosen a practical approach. However, the
research is limited to US only, which is a lacking point of the research. This research project will
be covering the general factors that contribute to the loan loss experience in Sri Lanka.
2.3.2. Impact of environmental hazard on agricultural Loan Loss: Effect of Weather
Environmental hazards have a large impact on the agricultural loan loss in Sri Lanka.
One of the major risks associated with the agricultural banking sector is the risk of non-payment
of the loans by the borrowers. This is one of the most significant reasons behind the banks and
different financial institutions that have been reluctant in engaging in rural finance. Thus,
agricultural banking sector in Sri Lanka is facing huge difficulty that other sectors.
The natural disaster in Sri Lanka such as flood is most likely to occur in the month of
May (Desinventar.lk. 2018). Floods are most frequent in the districts of Jaffina, Kalutara,
Rathanapura, Gampaha and Ampara (Desinventar.lk. 2018). The floods and other natural
disasters such as landslides, droughts and extreme winds events largely affect the crop
production and crop growth of the region. Researches prove that tropical cyclones cause
significant national economic losses that include agricultural loan loss in Sri Lanka
(Desinventar.lk. 2018). The changing weather condition in Sri Lanka therefore can be considered
as a significant reason behind the agricultural loan loss experience in Sri Lanka. Seasonal
distribution of disaster topology indicates that in Sri Lanka, all type of disaster appear to occur
throughout the year with seasonal changes in scale. Occurrence of flood and landslides are
generally higher in May, October, November and December while drought in Sri Lanka is

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prevalent in August and March. The highest number of natural disasters has occurred within the
districts cluster of Anuradhapur and Kurunegala (Desinventar.lk. 2018). The spatial distribution
of natural disaster over the country is one of the most significant reasons behind the agricultural
loan loss (Huong, Bo and Fahad 2018, p. 10).
A good analysis to the agricultural loan loss has been provided by Chisasa and Makina
(2013), in their research paper that analyses the bank credit along with the agricultural output in
South Africa. The Cobb-Douglas Empirical analysis undertaken in this research has rightly
helped the researchers in understanding the bank credit and the related agricultural output in the
country of South Africa. This type of research can be derived in the current research in order to
understand the reasons behind agricultural loan loss in Sri Lanka. The paper although focuses on
the bank credit and agricultural output of South Africa, similar analysis can implemented in
research associated with agricultural loan loss in Sri Lanka.
Predicting Loan Losses
The small scale farmers of Sri Lanka fail to repay the agricultural loans due to the
environmental hazard (Chisasa and Makina 2013, p 5). The bank provides financial help to the
small farmers which often turn into non performing loans as the farmers fail to repay the interest.
Thus, it can be said that weather has a vital role to play in agricultural microfinance and loan
loss. The loan losses are higher in Sri Lanka most because of the drastic weather change. The
decision making and loan contracting in banks should therefore be associated with the in depth
information collection of the farmers so that the loan loss can be predicted.
The high risks related to the agricultural finance are mainly related to the non-payment of
the loans. The risks in agricultural lending are mainly hinge on capacity of the money borrower

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and its willingness in repayment of a loan. This is similar in other loans as well. These major
risks associated with agricultural lending in large banks of Sri Lanka are discussed in the
following section.
2.4. Risks associated with Agricultural Lending in Large banks of Sri Lanka
Risk can be described as a potential threat that can have an adverse effect on the current
and the projected financial condition of a bank. The Large banks of Sri Lanka offer a variety of
products in order to support agricultural lending to the farmers. Although the loans for
commercial purposes are mainly secured by buildings, equipments and land, this process is
mostly not followed for agricultural lending (Wijesiri, Viganò and Meoli 2015,p 6). Furthermore,
there are major risks related to the agricultural lending, which are essential to be evaluated. The
risks associated with agricultural lending are as follows-
Credit Risk: The credit risk is a risk associated with the current or projected financial condition
in case when an obligor fails t meet the terms of any contract. The credit risk associated with
agricultural lending is associated with the ability of the borrower to successfully plan a crop or
harvest products without any issues (Nnadi et al., 2013). Credit risk arises when the borrower of
the money fails to harvest products as planned.
The borrower’s repayment capacity is therefore vulnerable to the risk of adverse weather
condition, price of the product, land values and the production cost (Karlan et al. 2014). The
issue of adverse weather condition is prominent mainly because the climatic condition of Sri
Lanka is adverse (Castro and Garcia 2014). Thus, it can be said that the environmental hazard in
Sri Lanka has a large impact on agricultural loan loss experience faced by the country.

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Production Risk: The agricultural lending in Sri Lanka is largely affected by the production risk
as well. Banks financing on the agricultural development of a country is significnatly dependent
on the borrower’s ability of successfully raising and marketing the commodity (Dubbeling
2014). The adverse weather condition and presence of other natural perils can significantly affect
the ability of a farmers to produce crops and pay back the debt. Similar production problems can
give rise to certain unbudgeted expenses which can in turn reduce the profitability of the farmers
(HUANG and WANG 2014). Thus production risk is another major factor behind the
agricultural loan loss in large banks of Sri Lanka.
Market Volatility: The volatile commodity price poses a significant risk to the borrowers of
money. Large fluctuation is prices of the products may occur as a result of unfavorable weather,
domestic and global supply and demand of the changes. The market risk however, has no direct
connection with the environmental hazard. However, the increase in price of the commodities
can be a result of the environmental hazards that are faced by the country.
The above discussed point proposes certain major risks associated with the agricultural
lending. There are certain other significant risks associated with this type of transactions.
However, the above discussed risks directly relates to the environmental hazards and drastic
change of climatic condition in Sri Lanka.
2.4.1. Innovations in weather Risk Management in Banks
The above section identifies the risks associated with the agricultural loans. The
Innovations in weather risk management is necessary in order to provide affordable and
comprehensive crop insurance to the farmers in need. One of the efficient innovations that can
considerably reduce the weather risks associated with the payment in the banks (Birner 2018).

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Predicting the weather patterns can considerably help in management of the risks associated with
the non-payment of the loans. Innovation in terms of weather derivatives can help in predicting
the loan loss a bank might face.
2.5. Impact of loan loss experience on profit levels of large banks of Sri Lanka
On evaluation of the risks associated with the agricultural loan in Sri Lanka, it has been
observed that the profit levels of the banks are largely impacted by the non-performing
agricultural loans. The percentage of the non performing loans indicates that the financial
banking sector of Sri Lanka suffers a huge loss due to agricultural loan loss (Karlan et al. 2014, p
10). A high percentage of the non performing loans can further affect the overall economy of the
country.
Almost all the major banks of Sri Lanka and financial institutions provide loans related to
agriculture to farmers for cultivation. There are different schemes for providing agricultural
loans in Sri Lanka. Thus the management of typical rural and credit risk is needed to be
addressed (Castro and Garcia 2014, p.9). One of the most significant issues associated with the
management of this economic problem focuses on analysis of the debt capacity of potential
borrower during the environmental hazards (Karlan et al. 2014, p 12). In this approach, the
quality and the quantity of the assets of the borrower is needed to be analyzed in order to reduce
the loan loss. Here, the concept of asset back lending arises. Many financial organizations
specially the commercial banks in Sri Lanka should therefore pursue an asset backed approach of
lending so that the loan losses can be reduced. However, there is a tendency of most of the
lending institution of not accepting the any movable assets including, agricultural machinery,
equipments and vehicles related to the collateral assets. The famers who are the borrowers in this

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case fail to provide any unmovable assets. Since lending is essential for large banks in Sri Lanka,
the banks suffers a huge loss annually due to non-payment of the bank loans.
2.6. Policy and Regulatory Interventions
The process of prediction of the environmental hazard and its effect on the agricultural
loans in large banks of Sri Lanka indicates that there is a need for identifying the mitigation
approaches for the risks associated agricultural lending (Karlan et al. 2014, p. 8). Therefore, it is
essential to produce a concrete action plan for bringing in reforms to the already existing public
regulations and policies so that risks associated with agricultural lending can be mitigated
(Amirthalingam and Lakshman 2015, p. 10). The agricultural loan loss has a profound effect on
the overall economy of the country. Therefore, it is essential to identify certain way out from this
problem.
With the use of certain policies and reforms, a solution to the problems can be identified.
One of the proposed solutions is making use of certain policies such as lending quotas, placing
the interest rate caps, expansion of bank branches, and bringing about certain new and potential
regulations that have an impact on the agricultural lending. The term contract farming can be
defined as an agricultural production that is carried out according to the detailed agreement
between a buyer and the farmer (Occ.treas.gov. 2018). The contract farming establishes
conditions for production and marketing of the farm’s product. Thus, contract farming can be
carried out between the farmer and the bank. Contract farming mainly involves agricultural
production according to the agreement between a buyer and the farmers.
Another risk mitigation process that is considered for elimination of the risk associated
with the agricultural lending includes the use of crop insurance. It has been observed that the

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grain farmers are mostly affected by the environmental hazards. Grain farmers can possibly
mitigate the risks of losses of the crops from natural disasters by making use of crop insurance.
With the help of crop insurance, the markers can reduce the ill effect of soil erosion and flooding
(Karlan et al. 2014).
Thus, it can be concluded that major reforms in the loan policy and procedures are
needed to be addressed. The use of crop insurance to reduce the negative effects of
environmental hazard on bank loans can be said as the procedure that advises the government on
different policies for agricultural insurance and its enforcement.
Apart from crop insurance, other risk imitation approaches are needed to be identified.
Extensive literature search gives an idea about the use of technical assistance for improving the
capacity of the existing banks in the rural areas. This is related to exchanges of commodity for
mitigation of environmental hazards related to lending. In order to deal with the agricultural
lending problem, many banks have put appropriate focus on the different financial co operatives
to recognize the importance of such bodies in rural areas. The program is undertaken by many
nations worldwide for strengthening and to improve the financial conditions of Sri Lankan
banks. Thus, it can be said that the risk design and the implementation program is beneficial for
identification of important risk factors that are associated with environmental hazards.
Development of innovative products for development and designing of agricultural
instruments for reducing the environmental hazards is another risk mitigation approach
associated with the current condition. Previous research studies show that designing and
development of innovative products can help in mitigation of the problems associated with the
environmental hazards. Mobile banking is an effective option as offered by the banks to

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communicate with the banks. It is essential for each bank to identify measure and monitor the
risks associated and its related complexities. In order to identify and examine the bank’s risk
management system, the bank’s policies, processes and control systems are needed to be
identified as well.
2.6.1. Loan Policy and Governance
For examining the risk mitigation approach, the loan policy and governance framework
of the bank is needed to be examined as well. An effective loan policy of a bank should address
the agricultural lending activities and objectives including acceptable types of agricultural loans,
their portfolio distribution and lending market. In order to mitigate the risk, it is essential for the
policy to establish guidelines for the loan structure, reporting lines and oversight of agricultural
lending program. The agricultural lending policies should be able to establish proper financial
documentation and repayment capacity analysis. The budget or cash flow project and analysis is
needed to be addressed in agricultural lending policies. Therefore, it can be said bank’s policies
and procedure should be able to address the risks posed by the individual loans. It has been
observed that majority of the individual loans are prudently underwritten and therefore it has
more chances of facing the risk.
The agricultural lending policies should address the expectations for appropriate
mitigation of the loan policy and exceptions that includes the approval process of bank, size of
the lending transactions and policy exceptions. If there is any exception in the policy
management, bank should undertake a thorough review of the policy exceptions individually and
in aggregate. Prior to the lending, the bank management should provide the board with a detailed
analysis of the risks that is posed by agricultural lending.

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An agricultural loan approval should be subjected to a thorough evaluation of the
borrowers farming and ranching experience. The in depth financial analysis of the borrower is
needed to be carried out. The in depth financial should consist of analysis of the financial
statement of the borrower including the cash flow and interim financial statements for large
farms (Occ.treas.gov. 2018). A sensitivity analysis that determines the ability of a farm’s
operation is needed to be addressed as well as a risk elimination approach for management of the
credit risks related to agricultural loans in large banks of Sri Lanka.
Apart from that, the borrower’s risk management plan is needed to be addressed so that
effective mitigation tools can be identified. The risk mitigation plan of the borrower further helps
in easier approval of the agricultural loans. In this context, the concept of loan structure is needed
to be discussed. It is essential for the lenders, which in this case are the banks, to structure the
loans based on different characteristics of agricultural business of the borrower (Occ.treas.gov.
2018). This can considerably help in easier understanding of the nature of impact due to
environmental hazards. Asset backed lending is another risk mitigation approach. Since majority
of the banks in Sri Lanka does not accept the movable assets, alternative forms of collateral is
needed to be identified.
The banks of Sri Lanka can rightly access the repayment capacity of the borrower prior to
lending. Agricultural lending requires a thorough understanding of the purpose of the loan and
therefore, the repayment capacity of the bank is needed to be analyzed. Apart from that
understanding of the burrower’s operating environment and cash flow is needed for better risk
mitigation.
2.7. Risk Mitigation

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The risk mitigation approaches for the mitigation of the risks associated with the
agricultural loan loss due to environmental hazard is needed to be analyzed. With fluctuating
market prices and extreme weather conditions, identification of the risk mitigation approaches is
necessary.
Government Programs: various government programs can help in reducing or limiting the risk
of farming. The conservation reserve program can possibly limit the risks associated with
farming.
Forward Contracting: The forward contracting is used by the grain buyers to market their
production. This type of contracts varies widely and therefore it requires careful analysis so that
the risk mitigation approaches can be identified. Forward contracting is mainly used in areas
where the yield declines while the prices increase (Occ.treas.gov. 2018). According to the
contract, if the farmers cannot deliver the required amount of grain that was promised in the
contract, the purchasing price of the grain will be increased (Bielecki and Rutkowski 2013).
Thus, the lender should know which borrower is capable of executing features such as forward
sales contract in order to determine the ability of the burrower to deliver or settle on the said
contracts.
Hedging: Hedging is another risk mitigation approach that is used for mitigation of the effect of
market volatility in case of any environmental or natural hazard. The legally binding
commitments are associated with the buying and selling of commodity (Occ.treas.gov. 2018).
Hedging is therefore an investment that is generally taken out to limit the risk of another
investment or insurance, which in this case, is the agricultural lending (Schopp and Neuhoff
2013). Hedging is generally done against the investment risks such as agricultural loan.

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Therefore, hedging can be considered as significant risk mitigation approach for the identified
risk.
Knowledge Management: Knowledge management plays a significant role in managing the
issues associated with the agricultural loan loss due to environmental. Knowledge management
can be described as a systematic management of organization’s knowledge assets for creating
values to an organization. A number of financial institution in rural areas of Sri Lanka are seen to
carry out certain activities that involves community of practices and training programs that can
help the borrowers to know about certain risks associated with the same such as technical risks,
production risk and volatile risk (Alegre, Sengupta and Lapiedra 2013). Prior to the approval of
loans, it is needed for the large banks of Sri Lanka to understand the requirements, risks and
issues associated with agricultural lending. The knowledge management in large banks of Sri
Lanka deals with mainly two criteria, one is the agricultural finance while the other being
agricultural insurance. Presence of an agricultural insurance can helps in reducing the
agricultural loan loss by a considerable amount. Thus it can be said that contribution of
knowledge management is huge in mitigation of the loan loss risk due to environmental hazard
in Sri Lanka.
Since weather of Sri Lanka largely impacts the repaying back of the agricultural loan, it is
essential for the country to ensure proper identification of the risks mitigation techniques so that
the risk of loan loss can be reduced. Development of innovative products is one of them. As
discussed earlier, the development of innovative products can be considered as one of the most
significant risk mitigation techniques. Innovative products can be related to the mobile banking
and payment platform that is offered by most of the banks. For this, it is foremost necessary for
the banks to provide technical support to the burrowers regarding the use of mobile banking

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platforms. Apart from that, development of agricultural instruments that can limit the effect of
natural hazard is anticipated as well in order to reduce the effect of agricultural loan loss. In
addition to the crop insurance, it is essential for the farmers to understand the variability of the
drastic weather changes in Sri Lanka so that the cultivation of crops can shift accordingly (AF
Ragab and Arisha 2013, p 9). It is essential for the crop growers to Sri Lanka to understand the
shift of weather and the climatic condition. Better understanding of the environmental hazard can
considerably help in reduction of the agricultural loan loss experience due to environmental
hazards in Sri Lanka.
2.8. Global Engagements
The Global Partnership for Financial Institution (GPFI) is a platform for all the G20
countries (Gpfi.org. 2018). The GPHFI is an inclusive platform associated with the G20
countries. This particular process is significantly popular among the diffrent SME finance
subgroups which are related with agriculture and finance. The banks have partnered with the
financial co operatives that aim in contributing to the global knowledge about natural disasters
and agricultural loss. This can help the farmers of the Sri Lanka to know about the natural hazard
and climate change in Sri Lanka that is one of the most significant reasons behind the loan loss
experience in Sri Lanka.
Knowledge sharing is an important aspect for dealing with the environmental hazard and
agricultural loan loss in Sri Lanka. The efforts that are put by GPFI include the countries to put
into practice, the G20 principles for innovative financial inclusion. This it can be considered as
one of the most significant risk elimination approach for eliminating the risks related to the
agricultural loan loss.

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2.9. Recommendations
In order to deal with the increasing agricultural loan loss in Sri Lanka, it is essential for
the country to follow a planned approach of dealing with the problem. Agricultural lending is a
critical business line associated with large banks of Sri Lanka. Bank credits play a significant
role in management of farm activities across the world. Financing supplied banks therefore,
plays a significant role in management of the agricultural business across the world. Each region
of the country has unique conditions that affect the agricultural production of that country. The
drastic change in weather and climatic condition of the country often result in destruction of
crops leading to agricultural loan loss. Therefore, certain recommendations are made that can
help in easier management of the problem of agricultural loan loss.
1. It is recommended to the farmers of Sri Lanka to understand the impact and the effe3ct
of environmental hazard on agricultural loan loss experience in Sri Lanka.
2. Knowledge management play a significant role in management of various issues
associated with agricultural lending. Therefore, knowledge management is recommended to be
used for management of the agricultural loan risks.
3. Repayment of the agricultural loan becomes a major issue in Sri Lanka and it is caused
by environmental hazards (Karlan et al. 2014). Therefore, it is recommended that planned
planting and harvesting of crop is essential for management of the agricultural loan.
4. Technological advances and development of innovative products can help in easier
management of the agricultural loan loss. Thus, development of innovative products in
recommended for managing the agricultural loan loss in Sri Lanka.

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5. It is recommended that banks should perform background check of the farmers before
approving any agricultural loan so that the number of non performing loans can be reduced.
6. Non repayment of the interest of the agricultural loan often results in huge financial
losses in large banks of Sri Lanka. Therefore, it is recommended that the farmers should consider
crop insurance in order to deal with the risks associated with the environmental hazards and
natural perils.
7. It is recommended that the farmers should have a clear idea of the different risks
associated with agricultural lending. This will help in easier mitigation of the risks associated
with agricultural lending.
8. It is recommended for the banks to identify the crop insurance and the assets of
farmers before approving any loans.
9. Collaboration with GPFI is recommended for knowledge management and better
understanding of the role environmental hazards on the loan loss related to agricultural loans in
Sri Lanka.
2.10. Chapter Summary
The significance of the literature review chapter is analyzing the previously published
literature in this field. The extensive literature review has helped in prediction of the
environmental loan loss in Sri Lanka and its causes. The procedure of prediction of the
environmental loan loss is related to the agricultural finance. With the increase in number of non-
paid loans is resulting in increase losses of large banks of Sri Lanka. It has been observed that
the environmental hazard in Sri Lanka is one of the most significant reasons behind the

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agricultural loan loss experience. The chapter identifies the major factors that contribute to
agricultural loan loss in large banks of Sri Lanka. The different types of risks associated with
agricultural lending are discussed in this chapter as well. Since environmental hazards and
natural perils cannot be controlled, it is recommended that appropriate understanding of the risks
associated with agricultural loans is needed to be identified. The literature review chapter
identifies the major risks and the mitigation approaches associated with the management of
agricultural risks.
The literature review chapter identifies the policies and procedures associated with
agricultural lending. Crop insurance is one most widely used risk elimination approach for
mitigation of the identified risks and reduction of agricultural loan loss in Sri Lanka. Apart from
that, certain recommendations are made on basis of the impact and effect of environmental
hazard in agricultural loan loss in Sri Lanka. It is essential to follow a planned approach of risk
mitigation so that financial losses in Sri Lanka. The environmental hazards in Sri Lanka are one
of the most significant reasons behind the nonpayment of the loans.
One of the major risk mitigation approaches that are identified for management of
agricultural risk is development of innovative products. Innovative agricultural products can help
in mitigation of the environmental issues and risks associated with the project. Previous studies
have shown that the use of innovative agricultural products can certainly help in reducing the
risks and issues associated with environmental hazards and agricultural loan loss experience.
Various strategies for mitigation of the environmental risks and hazards on the agricultural loan
loss in Sri Lanka have been identified in this chapter. Agricultural lending is related to various
risks which can be mitigated by following a planned approach and by understanding the
environmental impact on growth and harvesting of crops in Sri Lanka.

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Chapter 3: Research Methodology
3.1. Introduction
For finding answers to the identified research questions and to fulfill the aims and
research objectives it is essential to identify the tools and techniques associated with a research
project. The aim of this chapter is to identification of the methods and processes that will help in
collection and analysis of the data in an appropriate manner. The research methodology chapter
evaluates the theories that will form the base of the research project. The research methodology
chapter not only identifies the theories associated with a research project but also identifies the
tools that are necessary and the techniques that the researcher should make use of, in successful
execution of the research project. Therefore, the purpose of the research methodology chapter is
to highlight and provide insight to the several research methods, tools and techniques associated
with the research study that aims in predicting the impact of environmental hazards in
agricultural loan loss experience in large banks of Sri Lanka. The researcher has chosen both
primary and secondary data collection approach for collection and analysis of the data. The
theories and techniques associated with the research project are represented in the following
sections.
3.2. Research Method
The research is based on making use of weather data and data about the agricultural loan
loss over the past two decades in order to understand the impact of environmental hazards in
agricultural loan loss experience in Sri Lanka. The data analysis of this research is based on
collection of environmental data from last ten years, for which a methodology is set. The
research is conducted in a planned manner so that the answers to the identified research

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questions can be achieved. A methodology is set in order to execute the research study in an
appropriate manner.
At first, the researcher has collected time bound data regarding the floods and droughts
in Sri Lanka for the last ten years in order to understand the patterns of floods and droughts in
each prince of Sri Lanka. The data from the mostly affected areas and red alert areas in Sri Lanka
are identified. In the year 2018, the mostly affected areas include Gampaha, Puttalam,
Attangallla and others. The patterns of floods and droughts over the last few years in these
provinces of Sri Lanka are collected. The predictive patterns of the major floods and droughts
can help in understanding the loan losses that large banks of Sri Lanka can experience.
The environmental data that are needed to be collected from the weather statistics of Sri
Lanka includes the average rainfall, the frequency of floods and droughts, and its effect on the
agriculture of Sri Lanka. These collected data will be required to conduct the zTest and
correlation Testing related to prediction of the environmental effect in agricultural loan loss in
Sri Lanka. The z test and the correlation Testing incorporates the statistical significance
associated with the floods, droughts and loan losses.
The collected data has further helped the researcher in establishing a statistical
relationship and a formula related to the research.
A regression model is proposed for analysis of the collected data. The predictive formula
of the regression model is represented as follows-
AL = F- (a x b)
AL = Annual loss on agriculture loan

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F= Anova Significance F
a = Coefficients of Intercept
b = Coefficients of X Variable
The main aim of the research project is to predict the effect of environmental hazard on
agricultural loan loss experience in Sri Lanka. For that, the researcher has collected timebound
data regarding the floods and droughts in Sri Lanka over the last two decades. These data has
been collected mainly from the secondary data sources. Sri Lanka is known to be a flood prone
area and in order to establish the correlation between environmental hazards and the agricultural
loan loss, it is essential to understand the patterns of floods and droughts in each district and
province of Sri Lanka. Along with it, it is necessary to obtain the time bound trend in losses of
the agricultural loans in Sri Lanka. In this context, the researcher has identified the correlation
between floods, droughts and loan losses. The variables associated with the prediction of
agricultural loan loss include the agricultural gross domestic product, the bank credit that is
provided for agricultural loans, the annual rainfall and the floods. A formula is developed in
order to establish a correlation between agricultural loan loss and environmental hazard.
LnAGDP = β0 (constant) + β1lnCredit + β2 lnRainfall + β32lnFloods, where β1- β3 is
coefficients of the explanatory variables, AGDP indicates the gross domestic products, credit
includes the bank loan. The formula indicates that the AGDP is largely dependent on the
environmental factors and the loan that are allocated by the bank. The AGDP has a different
relation to the repayment of the bank loans. If AGDP is less, the bank loss is higher.
Both secondary and primary data is collected in order obtain the data that is required for
the analysis using the above formula. The formula that is proposed above has helped the

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researcher to predict a pattern of agricultural loss related to the flood and drought event in Sri
Lanka.
The data collected from the primary and the secondary sources has helped the researcher
in obtaining actual losses of the events. The collection of actual data related to flood, droughts
and rainfall. The proposed formula is refined with the help of the collected data.
3.3. Research Philosophy
Research philosophy identifies the process by which data about a research is gathered.
The research philosophy is related with the source, nature and development of knowledge
associated with a research project. Therefore, it becomes essential to understand the process by
the research will be executed. The choice of a specific research philosophy is largely impacted
by certain practical implications. Each stage of a research project is associated with assumptions
based on sources and nature of knowledge. It is important to identify the research philosophy as
it reflects the assumptions of the researcher and these assumptions serve the base of the strategy
that is needed to be developed. Within the scope of scientific research study, there are mainly
four research philosophies, which are Pragmatism, Positivism, Realism and Interpretivism.
In pragmatism research philosophy, the concepts are considered relevant only if it
supports relevant actions. The pragmatics recognizes that there are a number of ways of
interpreting and undertaking a research as there might be multiple realities. In pragmatism
research philosophy, the research question is considered to be an important determinant
associated with the research philosophy. Pragmatism is often considered as a combination of
both positivism and intepretivism research philosophy.

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The positivism research philosophy is related to the factual knowledge gained through
observation and factual knowledge (Al 2013). In positivism research philosophy, the researcher’s
role is limited only to collection and interpretation of the data. Thus, the research studies that
involve the use of positivism research are usually observable and quantifiable. The positivism
research philosophy mainly depends on quantifiable observations, which can helps in statistical
analysis (Alvesson and Sandberg 2013). Positivism research philosophy works on five main
principles which are as follows-
1. There should not be any differences in logic related to inquiry across sciences.
2. The research should have an aim of explaining and predicting.
3. A research should always be observable empirically through human senses. This
includes development of statements for testing while the research is in execution.
4. Science is not similar to that of common sense and therefore, it is not to be allowed to
bias the research findings.
5. Science should only be judged by logic and it should be value free.
The intepretivism research philosophy on the other hand involves the researchers to
interpret the different elements of the study (Brown and Stowers 2013). Interpretivism research
policy is related to of idealism philosophical position, constructivism, phenomenology and
hermeneutics. According to the interpretivism research philosophy, it is needed for the researcher
to ensure the differences among people and their perception (Chandra and Sharma 2013). Thus,
the interpretivist approach is mainly based on a naturalistic approach related to data collection
that includes interviews and observations.

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The realism philosophy of research is mainly related to the idea of independence of
human perception from reality. Therefore, the research philosophy of realism is associated with
the assumptions of scientific approach of knowledge development (Eaton 2013). Realism
research philosophy can be subdivided into two groups which are direct and critical. Direct
realism is refelcted with personal human senses. Critical realism on the hand deals with the
sensations and images in real world.
Choice of philosophy of research is largely dependendt on the practical implications and
the need of the research project. The researcher has chosen a positivism research philosophy to
implement the research project. The choice of positivism research philosophy will help the
researcher will help in appropriate data analysis. Data collection is an important aspect of
positivism research philosophy.
3.3.1. Justification for choosing Positivism Research Philosophy
The researcher has chosen the positivism research philosophy in order to implement the
research project. The choice of positivism research philosophy is appropriate for this research
project as the positivism research philosophy will help in accurate data collection and analysis of
the data. Positivism philosophy therefore helps in directing an examination in a legitimate way,
as it adheres to factual knowledge (Leedy and Ormrod 2013). The use of positivism research
philosophy will help the researcher in analyzing the shrouded data. The positivism research
philosophy depends on the quantifiable research observations leading to statistical analyses.
Since the positivism research philosophy enables the researcher to manage propel thinking in
respect to the said research, the choice of positivism research philosophy is found to be
appropriate.

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Positivism research philosophy gives rise to quantitative methodology involving the
collection of scientific data (Mitchell and Jolley 2013). The research about the collection and
analysis of the impact of environmental factors in loan loss experience in Sri Lanka can be
implemented in an appropriate manner by choosing positivism research philosophy.
3.4. Research Approach
The relevance of the objective or the hypothesis chosen for the research project can be
tested by using appropriate research approach. Approaches for the scientific research can be
divided into deductive research approach, inductive research approach and abductive research
approach.
The Deductive research approach is mainly concerned with the development of
hypothesis. The hypothesis is based on existing theories that helps in designing the research
strategy for testing a hypothesis (Novikov and Novikov 2013). Deductive approach is based on
reasoning from particular data. The deductive approach helps the researcher to test the collected
data against observations in order to seek a pattern within them. There are a number of
advantages of choosing a deductive approach which includes the possibility of explaining casual
relationships between the concepts and variables associated with the research project (Thomas
2013). The deductive approach allows the researcher to measure the concepts quantitatively. The
deductive approach further helps in generalization of the research findings to a certain extent.
The inductive approach is alternative to the deductive approach. Inductive approach is
associated with inductive reasoning. Thus the inductive research approach involves certain
search pattern from the observations and development of explanation theories (Uprichard 2013).
Thus, the use of inductive research philosophy involves lesser theories at the beginning of the

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research project. Inductive research therefore begins with a detailed observation. When
following an inductive approach, it is essential for the researcher to develop certain empirical
generalizations in order to identify the preliminary relationships associated with a research
(Neuman 2013). Inductive reasoning is described as a bottom up approach in which the
researcher mainly makes use of the observations in order to build up an abstraction and describe
the phenomenon. While following inductive research approach, generally hypotheses are not
found in the former stages of the research project.
In abductive approach of research, the research is mainly devoted to the explanation of
incomplete observations and surprising facts. For this research project, a deductive research
approach is opted. In justification behind the choice of deductive approach is provided in the
following section.
3.4.1. Justification for choosing Inductive Approach
The researcher has chosen a deductive approach for the research project in order to
collect a recognizable proof related to the effect of environmental hazards in agricultural loan
loss experiences in Sri Lanka. The choice of the inductive approach has permitted the researcher
in uncovering the different ways for conducting this research study. Deductive approach helps in
exploration of a known theory or phenomenon to test (Taylor, Bogdan and DeVault 2015). Thus
the deductive approach is not chosen for this research project as it is not associated with the test
of any hypotheses. The inductive research approach generally deals with research questions,
aims and objectives of the research. The research aim is identification of the role of
environmental hazard in agricultural loan loss experience is Sri Lanka. A set of research
questions has been set, which is will help in evaluating the effect of environmental hazard in

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agricultural loan loss in Sri Lanka. The research topic is not puzzling or astonishing and
therefore, neither deductive approach nor abductive approach is chosen for the research project.
The inductive research approach is therefore considered to be appropriate for the research
project.
3.5. Research Design
The research design can be described as the plan that can help the researcher to find
solutions to the research problems and research questions. Research design incorporates use of
the point by point examination configuration that assists in building up of a system that is needed
for information gathering and investigation. In order to conduct this research project, selection of
an appropriate research design was essential. The utilization of appropriate research design helps
in uncovering the issues that the researcher wants to identify (Bryman 2016). There are mainly
three research designs which are considered for scientific research projects, which are
explanatory research design, descriptive research design and exploratory research design. For
this research project, the researcher has chosen to make use of descriptive research design. The
descriptive research design helps in depiction of the course of events associated with the research
in an accurate manner. It is a part of conclusive research. The conclusive researches verify the
insight and aid of selection of a course of action. The research designs are generally well defined
and structured (Fowler 2013). Thus, the researcher will be following a Correlational research
design in order to establish relationship between the identified variables in order to understand
the statistical relationship between them.
3.5.1. Justification for selecting Descriptive Research Design

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The research project aims in analysis of the extent to which environmental hazards in Sri
Lanka contributes to the agricultural loan loss experience. The descriptive research design is
found to be accurate for the research project as it involves the observation and description of the
subject (Brannen 2017). For quantitative researches, the use of descriptive research design is
found to be appropriate as it involves establishment of the associations between the variables of
the research. There are mainly three main types of research design which are observational
methods, case study methods and survey methods. For accurate prediction of the issues
associated with the research the researcher has chosen survey methods for collection of data
associated with a research. The descriptive research design involves both qualitative and
quantitative methods, which is considered to be appropriate for this research project. Thus, the
choice of descriptive research design is accurate.
3.6. Data Collection Methodology
One of the major aspects of a research project is collection and analysis of data from
primary and secondary sources. The data collection methodology mainly reflects the research
need and the results of the research project. The data collection methodology can be divided into
two categories which are primary data collection method and secondary data collection method.
Primary Data Collection: The primary data collection methodology is associated with
the collection of data from such sources that has firsthand knowledge about the research problem
and possible solutions to the problem. Therefore, the primary data can only be gathered through
surveys, interviews and observations (Hair et al. 2015). Results from the survey helps in
quantitative analysis of the data while the results from the interview are generally analyzed in a
qualitative manner. Primary research helps in gathering the accurate information related to the

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research problem. The primary data collection method is therefore considered for this research
project. On the other hand, interview is another reliable technique that is used for collection of
data associated with the research. Interviewing the operational personnel or research experts
helps in collection of the information associated with the research project. The observation
technique for data collection may not be as effective as the other two methods which are
interview and survey.
The researcher has chosen to make use of surveys as a method of collection of primary
data. Surveys are considered to be one of the most widely used techniques of primary data
collection. The survey will be conducted on a predetermined sample size. The success of data
gathering through primary data collection technique is subjected to the availability of the
respondents of the research. Online surveys are mostly used for gathering data from huge
number of respondents. Data gathering from huge number of respondents is not possible with the
interviewing method.
Secondary Data Collection: The secondary data collection process can be described as
collection of that information that are already published in books, scholarly articles and research
papers. Data from the journals, books and the research papers are being utilized in scientific
research studies. Secondary data collection method has an advantage over primary data
collection method. With secondary data collection, it is allowable to collect data in a huge
amount. Thus, the secondary data collection methodology allows the convenience of huge
amount of information availability. The data collected with the help of secondary research
methods helps in improving the reliability of the collected data as it is collected from the sources
that are already published. The research will be making use of both primary and secondary data
in order to analyze the impact of environmental hazards in agricultural loan loss experience in

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Sri Lanka. Collection and analysis of both primary and secondary data will help in better
understanding of the research problems and will further help in finding solution to the research
problem.
3.7. Data Analysis Method
The researcher has chosen to make use of both primary as well as the secondary data
collection method for collection of data associated with the research project. The data analysis
method can be described as a technique for converting the collected information to certain useful
data. The process of data analysis is categorized into two major sub divisions which are
qualitative data analysis and quantitative data analysis.
Qualitative Data Analysis: The qualitative data mainly refers to the information which
are non numeric. This includes interviews, transcripts, notes, videos, images and text documents.
The process of qualitative analysis of data is divided into five main parts which are content
analysis, narrative analysis, discourse analysis, framework analysis and rounded theory. There
are a number of processes associated with the collection and analysis of qualitative data. At first,
the qualitative data analysis method is based on the utilization of the items and development of
the codes (Lewis 2015). Qualitative data analysis further includes underlying pattern
identification, which helps in finding solutions to the identified research problem. After
identification of the underlying patterns, data summarization is considered to be the last step for
analysis of data using qualitative research method. Qualitative research is considered to be an
exploratory research that is used for gaining understanding of the underlying reason and opinions
about the collected data.

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Quantitative Data Analysis Method: The quantitative data analysis method is expected
to turn the data collected into meaningful data by applying rational and critical thinking.
Therefore, the use of quantitative data analysis mainly includes calculation of different
frequencies of variables and related differences between chosen variables. Therefore, a
quantitative research approach is related with finding of evidences in order to support and reject
the hypotheses that are formulated in the earlier states of research project. Quantitative data
analysis is therefore based on statistical data analysis. The statistical data analysis enables the
researcher to get accurate data related to the research problem (Patten and Newhart 2017). The
primary data is collected through the method of survey, and is critically analyzed and interpreted
on basis of statistical data analysis method. Thus, the data accuracy is not compromised. The
quantitative data analysis method that is chosen for the research project is appropriate for this
project.
3.7.1. Data Analysis Method Chosen
For understanding the role of environmental hazard in agricultural loan loss experience in
Sri Lanka, the researcher has chosen both qualitative and quantitative data analysis process for
analyzing the data collected from primary and secondary sources. Thus, the research will be
following a mixed methodology. The choice of the mixed research methodology is found to be
appropriate for the research project as it will help in better analysis of both primary and
secondary data.
3.8. Population and Sample
For collection of primary data, a survey will be conducted through Google form. The
obtained data from the survey will be transformation into numeric values for performing the

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statistical analysis or quantitative analysis on the collected data. A survey with 50 respondents is
chosen in order to ensure collection of primary data. The researcher has applied simple random
sampling technique for selecting employees from each bank. This is a technique of probability
sampling. This sampling method is chosen as it eliminates the biasness and sampling fluctuation
of the data. Along with the primary data, secondary data will be collected, which includes 10
years report on the agricultural loan loss data of the large banks of Sri Lanka for analysis of the
collected data. The weather data will be evaluated in order to understand the agricultural loan
loss in past two decades. This will help in predicting whether the weather hazards are the main
reasons for agricultural loan loss in Sri Lanka. As discussed earlier, a descriptive method of
quantitative data analysis will be used for statistical analysis of the data that is collected. The
outcome of the secondary data analysis includes comparison of the findings from the primary
data analysis.
The data analysis will be undertaken by making use of SPSS and will be supported by the
Tableau Dashboards.
3.9. Ethical Considerations
In collection of the primary data, certain ethical considerations are needed to be followed,
which are as follows-
1. The safety and anonymity of all the participants of the research should be ensured on a
a priority basis by the research personnel.
2. The researcher is responsible for managing the privacy of the data and the details
shared by the participants.

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3. Obtaining of the permission from the research participants is necessary prior to the
data collection process.
4. While communicating with the respondents, the data transparency is needed to be
maintained for providing correct information to the research participants.
The researcher is needed to fulfill the regulations and the ethical issues that are associated
with the research participants in order to undertake and conclude a research in an ethical manner.
No research participants are bribed for sharing the data and the data obtained from the survey
will strictly be used for educational purposes only.

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