Role of market interlinkages in coping with fishing and climate related risks in small scale fisheries

MINISTRY OF EDUCATION AND TRAINING NHA TRANG UNIVERSITY MOHOTTI MUDIYANSELAGE DULANI SHIWANTHIKA DHARMASIRI ROLE OF MARKET INTERLINKAGES IN COPING WITH FISHING AND CLIMATE RELATED RIS

MINISTRY OF EDUCATION AND TRAINING

NHA TRANG UNIVERSITY

MOHOTTI MUDIYANSELAGE DULANI SHIWANTHIKA

DHARMASIRI

ROLE OF MARKET INTERLINKAGES IN COPING WITH FISHING AND CLIMATE RELATED RISKS IN SMALL- SCALE FISHERIES: EVIDENCE FROM SOUTHERN SRI

LANKA

MATER THESIS

KHANH HOA – 2019

MINISTRY OF EDUCATION AND TRAINING

NHA TRANG UNIVERSITY

MOHOTTI MUDIYANSELAGE DULANI SHIWANTHIKA

DHARMASIRI

ROLE OF MARKET INTERLINKAGES IN COPING WITH FISHING AND CLIMATE RELATED RISKS IN SMALL- SCALE FISHERIES: EVIDENCE FROM SOUTHERN SRI

LANKA

MASTER THESIS

Management and Climate Change Topic allocation Decision

Decision on establishing the

Committee:

UNDERTAKING

I undertake that the thesis entitled: “Role of Market Interlinkages in Coping with Fishing and Climate Related Risks in Small-Scale Fisheries: Evidence from Southern Sri Lanka” is my own work The work has not been presented

elsewhere for assessment until the time this thesis is submitted

30.05.2019

Mohotti Mudiyanselage Dulani Shiwanthika Dharmasiri

AKNOWLEDGEMENT

I would like to express my deepest appreciation to the Faculty of Graduate Studies, Nha Trang University and NORHED project for giving best conditions for me to carry out and finish my Master study

My unfeigned gratitude should go to both of my supervisors, Prof Oscar Amarasinghe and Dr Nilantha De Silva for their continuous support of my M.Sc study and research, for their patience, motivation, enthusiasm, and immense knowledge Their guidance helped me in all the time of research and writing of this thesis

Also my gratitude is always there with all the lecturers and the coordinators of the Norhed Master’s Programme

Moreover, my special appreciation goes to Gandara and Kottegoda people for making this research a success Last but not the least, I would like to thank all my family members for supporting me spiritually throughout writing this thesis Thank you all!

30.05.2019

Mohotti Mudiyanselage Dulani Shiwanthika Dharmasiri

TABLE OF CONTENT

UNDERTAKING iii

AKNOWLEDGEMENT iv

TABLE OF CONTENT v

LIST OF ABBREVIATIONS viii

LIST OF TABLES ix

LIST OF FIGURES xi

APPENDICES xii

ABSTRACT 1

CHAPTER 1 INTRODUCTION 4

1.1 Statement of problem 6

1.2 Research questions 9

1.3 Objectives 9

CHAPTER 2 LITERATURE REVIEW 10

2.1 Current status of small-scale fisheries 10

2.2 Small Scale Fisheries in Sri Lanka 11

2.3 Risks and uncertainties / shocks and there impacts on the fisheries sector 12

2.4 Fishers’ response to risks and uncertainties: Role of Insurance and Credit 15

2.4.1 Fisheries Insurance 15

2.4.2 Credit 17

CHAPTER 3 METHODOLOGY 20

3.1 Study Area 20

3.2 Data Collection 22

3.2.1 Collection of Primary Data 22

3.2.1.1 Key Informant Discussions 22

3.2.1.2 Focus Group Discussions 23

3.2.1.3 Questionnaire Survey 23

3.2.2 Collection of secondary data 24

3.3 Data Analysis 24

3.3.1 Data obtained from Focus Group Discussion (FGDs) 24

3.3.2 Analysis of data obtained from the questionnaire survey 25

3.3.2.1 Use of Descriptive statistics 25

3.3.2.2 Inferential statistics 25

3.3.3 Theoretical Underpinnings 25

3.3.3.1 Market Interlinkages: 25

3.3.3.2 Patron-Client Relations 27

3.3.3.3 Indicative Cost of Market Interlinkage (ICMIs) 27

3.3.4 Analytical Framework 30

CHAPTER 4 RESULTS AND DISCUSSION 32

4.1 Demographic and socio economic profile of the respondents 32

4.2 Fishing and climatic-change related risks and uncertainties and, their impacts on livelihoods 41

4.2.1 Fishing related risks & uncertainties and their impacts on livelihoods 42

4.2.2 Climatic- change related risks & their impacts on livelihoods 45

4.3 An assessment of the functioning of different credit and insurance markets in fisheries as a hedge against risks and uncertainties 52

4.3.1 Different credit and insurance schemes used by fishers in coping with fishing and climatic related risks and uncertainties in Southern Sri Lanka 52

4.3.1.1 Comparing the different credit sources 53

4.3.2 Role of credit and insurance in helping fishers to cope with fisheries and climatic-change related risks in the study area 55

4.3.3 Accessibility of different sources of insurance and credit to cope with fishing and climate-change related risks and uncertainties 59

4.4 The formation of credit-product market interlinkages and their role in hedging against fishing and climate related risks and uncertainties 61

4.4.1 Marketing of Fish 61

4.4.3 Formation of Credit-product market interlinkages: the boat tying arrangements 66

4.4.3.1 Marketing Strategy of the lender fish merchant 67

4.4.3.2 Market Interlinkage and Indebtedness among craft owners 69

4.4.4 Advantages and disadvantages of boat tying arrangements for participating agents 71

4.4.4.1 Advantages 71

4.4.4.2 Disadvantages 75

4.4.5 Factors affecting the Indicative Cost of Market Interlinkages- Regression analysis 77

4.4.5.1 Pearson Correlation Coefficient 77

4.4.5.2 Coefficient of correlation 79

4.4.5.3 Hypothesis Analysis 81 4.4.5.4 The effect of predictor variables on the Indicative Cost of Market

Interlinkages 82

4.4.6 Incorporating Climate Change into the Analysis of ICMI: Scenario Analysis

84 4.4.7 Fishers’ relationship to fish merchant 87 4.4.8 Opting to borrow from the fish merchant as against other credit sources 88 4.4.9 Dealing with imperfection to effectively cope with fishing and climate related risks 90 CHAPTER 5 CONCLUSIONS AND RECOMMENDATIONS 94

LIST OF ABBREVIATIONS

ANOVA : Analysis of Variances

CC : Climate-Change

CCD : Coastal Conservation Department

CFC : Ceylon Fisheries Cooperation

CMI : Cost of Market Interlinkage

CSO : Civil Society Organization

FAO : Food and Agricultural Organization

GDP : Gross Domestic Production

ICM : Integrated Coastal Management

ICMIs : Indicative Cost of Market Interlinkage

MTRB : Motorized Traditional Boats

MFARD : Ministry of Fisheries and Aquatic Resources Development NARA : National Aquatic Resources Research and Development Agency NBSB : Beach Seines (Madel)

NTRB : Non-motorized Traditional Boats

OFRP : Fibre Reinforced Plastic craft with Outboard Motor

RFO : Rural Fisheries Organization

RFLP : Regional Fisheries Livelihood Programme

SPSS : Statistical Package for the Social Sciences

SSF : Small-Scale Fisheries

SSL : Southern Sri Lanka

LIST OF TABLES

Table 2.1: Commonly found informal insurance mechanisms in fishing

communities 17

Table 3.1: The sample of craft owners for the study 25

Table 4.1: Composition of the boat owners in the sample 32

Table 4 2: Age distribution of the sample boat owners 33

Table 4 3: Fishing Experience (Years) of the boat owners 34

Table 4 4: Efficiency of fishing unit 34

Table 4 5: Number of and kind of fishing gears owned 36

Table 4 6: Average quantity of fish landed/Year 36

Table 4 7: Average Gross Profits from fishing 37

Table 4 8: Alternative income other than fisheries 38

Table 4 9: Average income from diverse livelihood activities and their distribution 39

Table 4 10: Average family income/year 40

Table 4 11: Asset position of the boat owners 41

Table 4 12: Fishing related risks & and their impacts on livelihoods at Gandara – Results of Pair-wise Ranking exercise 42

Table 4 13: Fishing related risks & and their impacts on livelihoods at Kottegoda- Results of Pair-wise Ranking exercise 43

Table 4 14: Climate change related risks & and their impacts in Gandara–Results of the Preference scoring exercise 46

Table 4 15: Climate change related risks & and their impacts in Kottegoda– Results of Preference scoring exercise 47

Table 4 16: Annual number of incidences of damage and loss of crafts and gear due to climate change 49

Table 4 17: Average number of non-fishing days due to climatic change related factors (days / year) 50

Table 4 18 :Different credit and insurance systems used by fishers in coping with fishing and climatic related risks and uncertainties in Southern Sri Lanka 52

Table 4 19: Comparison of Terms and Conditions of loans from different lenders

53

Table 4 20: Accessibility of different strategies used for fishing and climatic-change related risks and uncertainties in Gandara- Results of Preference Scoring Exercise 59

Table 4 21: Accessibility for the different strategies using for the fishing and climatic-change related risks and uncertainties at Kottegoda- Results of Preference scoring exercise 60

Table 4 22:Percentage distribution of fishers who use different methods to sell their fish catches 65

Table 4 23: Experience of fishers with boat tying arrangements 67

Table 4 24: Maximum to minimum loan amount received by borrower fisher 69

Table 4 25: Extent of indebtedness of the borrower to fish merchant 69

Table 4 26: Variation in ICMI (Indicative Cost of market Interlinkages) among fishers in the study area 70

Table 4 27: Advantages of boat tying arrangements- Preference Scoring 72

Table 4 28: Non- accountable goods and services receiving from merchant- Gandara 74

Table 4 29: Disadvantages of boat tying arrangements - Outcome of the Preference Scoring at Gandara 76

Table 4 30: Estimated correlation matrix results 78

Table 4 31: Table for coefficients 79

Table 4 32: Model Summary 80

Table 4 33: Model Summary 81

Table 4 34: Increase in non-fishing days under climatic-change scenarios 85

Table 4 35: The estimated values of ICMI response to the non-fishing days due to three Climatic-change scenarios 85

Table 4 36: Type of social relationship of borrower fishers with the lender-fish merchant 87

Table 4 37: The suggestions of fishers to improve the insurance and credit market for fisheries sector 93

LIST OF FIGURES

Figure 2.1: Impacts of Climate change on fisheries 14 Figure 3.1:Study area 21 Figure 3 2 : Analytical framework……… Figure 4 1: Comparison of the severity of Climate-Change related risks with other Fishing related risks- Gandara and Kottegoda 51 Figure 4 2: Different insurance and credit systems used to cope up with the fishing and Climatic-change related risks in Gandara 56 Figure 4 3: Different insurance and credit systems used to cope with the fishing and Climatic-change related risks in Kottegoda 57 Figure 4 4: Vicious Cycle of Indebtedness and vulnerability 86 Figure 4 5: Fishermen’s belief that boat tying arrangements are exploitative relationships - Gandara and Kottegoda 88 Figure 4 6: Main reasons for obtaining credit from Mudalai than go for another credit sources 89

3 Specification for the variables used

ABSTRACT

Fishing is subject to a host of risks and uncertainties Apart from short term and long term variability in fish catches and income, there are risks of damage and loss of fishing equipment due to the hazardous environment in which they operate There are also market risks due to fluctuations in supply and input prices Changes

in climatic parameters have exacerbated the already exiting fishing related risks, making high demands from fishers in coping with them Insurance and credit form two types of financial capital that fishers could resort to in coping with shocks However, both insurance and credit markets are inadequately developed in fishing societies Emergence of private insurance agencies providing insurance and credit for fishing related risks are unlikely due to informational asymmetries and collateral issues, which drive fishers to informal sources on insurance and credit Boat-tying, by which fishers borrow from fish merchants against the borrower’s promise to hand over all his future catches to the merchant, is a particular form of interlinkage of credit and product markets, through which both agents insure themselves against diverse risks and uncertainties inherent in the fishing environment While fishers are able to cope with diverse risks and uncertainties through loans provided by the fish merchant, they are confronted with the issue of receiving a lower price for their produce, which is the ‘Indicative cost of market interlinkages’, a kind of risk premium that fishers pay for this source of informal insurance The present study is aimed at addressing the role of market interlinkages in coping with fishing and climatic related risk and uncertainties and

to assess the various costs and benefits associated with the institution of tying’ and to suggest measures to improve fishers’ “Resilience” against fishing and climate- related risks, by correcting inefficiencies in credit and insurance markets

‘boat-The study was carried out in two representative small scale fishing villages; Gandara and Kottegoda in Southern Sri Lanka Except for a few secondary sources, the study was almost pivoted on primary sources of data, collected via Focus Group Discussions, Key Informant Discussions and a Questionnaire Survey

with 103 of small-scale fishers selected, using stratified convenience sampling method, with strata representing the two craft owner categories; Fibre Reinforced Plastic Boats with Outboard Engine (OFRP) and Non Mechanized Traditional Boats (NTRB) The study revealed that there were a host of risk and uncertainties, both fishing-related and climate-related, which adversely affect fishing activities

In the face of risks and uncertainties, which threaten their livelihoods, fishers need

to cope with them and build resilience Thus, there is a high demand for insurance and credit in fishing communities Private insurance agencies providing insurance did not exist in the study area, even some state insurance agencies failed to provide effective insurance due to informational issues In the absence of insurance, fishers have turned to credit However, fishers’ access to formal credit was also limited due to collateral issues, where fishing assets were considered to

be associated with collateral-specific risks and thus were not acceptable to formal lenders Thus informal sources of credit appeared as the most important sources of both insurance and credit in the study area

Since loans provided by fish merchants are devoid of interest, repayment period, accumulation of any interest when payments are delayed, pressure on repayment, etc they formed the most attractive source of credit to fishers By lending credit to fishers, the fish merchant guarantees himself of a regular supply of fish while the borrower fisher insures himself against damage and loss of fishing equipment and falling into distress, which marked the formation of credit-product market interlinkages In boat-tying arrangements, credit provided by fish merchants perform both, a credit function and an insurance function However, in increasing his profits, the merchant resort to, among other strategies, to lower the price paid

to the producer, which is the ‘indicative cost of market interlinkage’, which varied among borrower fishers, influenced by many factors, including a number of non-accountable diffused services exchanged between agents It was also found that boat-tying arrangements have trapped fishers into a vicious cycle of indebtedness, especially in a situation where impacts of climate change are exacerbating existing risks and uncertainties, leading to considerable income short falls and distress

While boat-tying was the common risk-coping strategy adopted by fishers in Gandara, the Kottegoda fishers had been dependent mainly on ‘self-insurance’ strategies, such as savings and activity diversification Such strategies not only assist in coping with risks, but also lead to a smoothening of inter-temporal fluctuations in fishing incomes The existence of an environment in which opportunities for engagement in alternative livelihood opportunities was the key

to Kottegoda fishers’ ability to adopt self-insurance strategies The fact that, comparatively less livelihood opportunities are available for Gandara fishers, it is recommended to motivate and induce them to save, especially in fisheries cooperatives, which provide easy access to distress loans, lent against the provision of ‘group guarantees’ as collateral

Key words: Insurance, credit, credit- product market interlinkages, risk and

uncertainties, Climate-change

CHAPTER 1 INTRODUCTION

Fisheries can be broadly categorized into Small-scale fisheries and large-scale fisheries, which are distinguished by objectives of fishing, technological differences, scale of operation, social and cultural influences, etc (Pathmanandakumar, 2017) By comprising with numerous and dynamic sum of activities such as minor traditions technologies, fish processing and marketing, low capital spending fishing methods, net preparation and boat building, the small-scale fisheries are ensuring the livelihood for many millions of the pastoral population while providing vital contribution to the food security and poverty elevation at the developing countries, but this indispensable role of small-scale fishers is yet to be fully described (FAO, 2019)

The SSF in Sri Lanka is confined to the coastal fisheries, which is responsible for almost 50% of the country’s total marine fish production Almost 90% of the active marine fishing fleets are represented by the coastal small-scale boats operating within the continental shelf Small boats of Fibre Reinforced Plastic with Outboard engine (OFRP) and non-mechanized traditional boats (NTRB) are the most common coastal fishing units used by small-scale fishers of Sri Lanka Contributing to national GDP by 1.4% (year 2017), and representing the 53% of country’s total animal protein supply, the fisheries sector in Sri Lanka provides proof to the vital role of this sector plays in socio-economic development of the country (Ministry of Fisheries and Aquatic Resources Development, 2017) Fisheries are constantly associated with innumerable risks and uncertainties due to the hazardous environment in which fishers operate Fishing related risks and uncertainties affect fish harvest, fishers’ income, livelihoods and wellbeing These disadvantages compel many hundred thousands of fishers to confront crises of

subsistence, trapping them in a vicious cycle of poverty (Amarasinghe et al.,

2005) Furthermore, the changes in climate-related parameters like increasing temperature, rising sea level, flooding, storming plus other factors like salt water intrusion, droughts, floods and the changes in rainfall patterns cause extra pressure

on poor small-scale fishers in Sri Lanka (Athulathmudali et al., 2011) The coastal

erosion inflicted along the south-western coast by stormy waves affect directly the

southern small-scale fisheries in Sri Lanka (CCD, 1997), by narrowing beaches, reducing space available for craft landing and displacing people The fluctuations

in price, cost, discount rates, economic rent and fisher’s income are the main

economic consequences of climate changes (Sumaila et al., 2011) According to

recent evidence on the impacts of climatic changes in Sri Lanka, the coastal fishery production has been reduced by 4% during the period from January to September 2017 (MFARD, 2017) In addition, there are market risks due to fluctuations in supply and input prices, which also affect the earnings of fishers

(Sumailia et al., 2011) Due to the higher vulnerability associated with fisheries

dynamics, fishers are required to adopt strategies to cope with those risks and

uncertainties in order to continue their livelihood activities (Amarasinghe et al.,

2005 and Platteau et al.,1985) Here arises a demand for insurance to cope with a

risky environment Emergence of private insurance agencies providing insurance and credit for fishing related risks are unlikely due to informational issues Thus, various Informal insurance mechanisms; individual or group strategies, are adopted by fishers in the absence of an organized insurance market Borrowing credit is one such strategy adopted by fishers The poor, operating at the level of subsistence, often borrow from more affluent members of the community when they are confronted with an income shortfall (Abraham, 1985 and Amarasinghe, 1989) Fishers often need credit to finance activities related to fishing, processing and marketing, and new investment on fishing crafts and gears Besides obtaining credit for such purposes, they seek credit for meeting their day to day needs; consumption credit What is also important to note is the role played by credit in providing for fishing related risks, such as damage and loss of crafts and gear, thus performing an insurance function in addition to a credit function These informal credit sources, which include village moneylenders, private money lender, social capital sources (kin, friends, gear groups), community organizations (such as cooperatives), patrons, Fish merchant/ fish traders, etc have considerable influence on the rural credit market (Abraham, 1985; Amarasinghe &

Wanasinghe, 1993; Amarasinghe et al., 2005; Dorsey et al., 1989 and Platteau et

al., 1985) Among many other sources of informal credit, loans provided by fish

merchant/fish trader (Mudalali) are of special significance (Platteau & Abraham,

1987) On the part of the fishers, these loans are provided over the counter without the need for any collateral and are lent at ‘zero’ rate of interest The collateral is the borrower craft owner’s promise to hand over all his future fish catches to the lender fish merchant This marks the formation of credit-product market interlinkages In these interlinkage relations, by lending credit to fishers, the fish merchant guarantees himself a regular supply of fish while the borrower fisher insures his fishing equipment against damage and loss and also the risk of falling into distress (consumption credit) These interlinkage relations are popularly known as ‘Boat Tying’, meaning that the boat of the borrower fisher is ‘tied’ to the fish merchant These interlinkages are more common in fisheries sector (Platteau & Abraham, 1987 and Venkatesh, 2006)

1.1 Statement of problem

Fishing is a risky activity Changes in climatic parameters have exacerbated the already exiting fishing related risks, making high demands from fishers in coping with them; resilience and adaptation to changing situations In coping with fishing and climate-related risks, insurance and credit are of paramount importance

(Amarasinghe & Jayasinghe, 2015 and Tang et al., 2017) In rural Sri Lanka, as in

the case of many developing countries in Asia, markets for insurance and credit are not adequately developed or imperfectly developed Private insurance providing insurance against fishing related risks does not exist because of informational issues Of course information can be collected at a high cost, but then the premiums will shoot up significantly making the insurance scheme unattractive In the absence of insurance, credit functions as an ‘insurance substitute’ (Migdal, 1974; Platteau, 1995 and Wolf, 1966) Yet, fishers’ access to institutional credit is quite limited due to their inability to provide collateral acceptable to lenders In fact, collaterals that they can easily provide, such as crafts and gear, are liable to damage and loss and thus, they are not acceptable to formal lenders Therefore, an array of informal lending schemes has emerged to cater the insurance and credit demands of fishers The rural credit market is represented by a diversity of such informal lending sources, which form an

imperfectly developed market Such markets can be called ‘segmented markets’ where segmentation is caused by lack of communication, lack of transportation facilities, lack of information, lack of integration and isolation In such segmented markets, transactions are confined to small groups, where personal trust among transactors remains quite high, which act as the collateral against lending (Basu,

1986 and Dorsey et al., 1989) The collateral problem is resolved through the

formation of market interlinkages; land-credit, credit-product, labor product, etc

In these interlinkage relations, imperfections in one market are resolved through its links to other markets For example, in the institution of tenancy, the landowner may provide loans to the tenant (credit market) and the collateral is the

‘crop share’ (product market) of the tenant If the tenant defaults loan repayment,

it will be deducted from his crop share A wide range of collaterals are acceptable against lending in the informal market Therefore, what happens in one market cannot be understood properly without a proper understanding of what is

happening in other markets with which this market is interlinked (Amarasinghe et

al., 2005; Dorsey et al., 1989 and Tang et al., 2017) As Lebbe (2015), notes,

when factors of production and credit market are interlinked, price determination

is influenced by those interlockers

Among the informal credit and insurance mechanisms, boat tying or product market interlinkages appeared to be quite pervasive in fishing communities in the south of Sri Lanka Fishers tend to turn to fish merchant to obtain loans although there are other sources, probably due to stringent loan conditions imposed by other lenders The exact details of borrowing from different sources of credit are yet to be studied However, merchants lend at zero rates of interest against the fisher borrowers promise (unwritten) to handover all his future catches, which is the collateral in this case When the borrower hands over the catches, the price paid to the fisher by the merchant is depended on the price the merchant receives from the next middleman in the chain- the wholesaler Naturally, this price is lower than the auction price which is considered as a ‘fair’ price (Alexander, 1982 and Fernando, 1985) It has also been observed that the price paid to borrower fishers by the lender merchant differ from individual to

credit-individual This means that differential ‘rates of interest’ (hidden) is charged from different borrowers, an issue which needs further investigation (Alexander, 1982; ICM, 2002 and Venkatesh, 2006)

It is quite evident that the difference in producer price is an indication of the 'cost

of market interlinkages' to the borrower craft owner According to a study

undertaken in Tangalle fishing village southern Sri Lanka (Amarasinghe et al.,

2005), the borrower craft owners enjoy weak bargaining power due to boat tying arrangements, such as, restricted freedom to make production decision, enjoy limited possibility for shifting debts (from one lender to the other), and fish merchants’ involvement as owner-manager over the fishers’ assets Other writers have also shown the positive side of fish merchants’ credit in a context of informational asymmetries and uncertainty (Bell and Sirnivasan, 1989 and Brawerman and Guasch, 1984 in Lebbe, 2015) Some have even noted the role played by the fish merchant as patrons, where boat-tying is characterized by forms

of patron-client relationships, in which case the goods and services exchanged between the agents are diffused and not-accountable (Alexander, 1982;

Amarasinghe, 1989 and Amarasinghe et al., 2005)

While interlinked markets were an important phenomenon in rural Sri Lanka in 1980’s which helped fishers to hedge against various risks and uncertainties inherent in their environment, such studies faded away in 1990’s and 2000’s until

to date Although the research interest in the subject has diminished

interlinked-markets are still a reality in fisheries (Amarasinghe et al., 2005) Consequently,

the question arises as to why they are still pervasive in contemporary small scale fisheries, which have come under heavy forces of modernization, marketization, integration, etc

In summary, there is a need for understanding the role of credit-product market interlinkages in coping with existing fishing and climate-related risks and for an investigation into the potential measures can be adopted in correcting inefficiencies in credit and insurance markets in fisheries to improve fishers’ resilience capacity against fishing and climate related risks and their wellbeing

4 What measures can be adopted to improve fishers’ “Resilience” capacity against fishing and climate-related risks, by correcting inefficiencies in credit and insurance markets?

 To make an assessment of the functioning of the credit and insurance markets

in fisheries and their role in hedging against risks and uncertainties

 To find out the main reasons for the formation of credit-product market interlinkages and to analyze their role as risk insurance mechanisms

 To suggest measures to improve fishers’ “Resilience” against fishing and climate- related risks, by correcting inefficiencies in credit and insurance markets

CHAPTER 2 LITERATURE REVIEW

This chapter comprises of a critical review of literature, basically on existing knowledge and, theoretical and methodological evidence related to risks and uncertainties in small scale fisheries, the diverse coping mechanisms, with emphasis on the role of credit-product market interlinkages

2.1 Current status of small-scale fisheries

“Fisheries may serve as a “safety net” to landless poor or in the event of other livelihoods failing” (FAO, 2005) The ocean-related employment worldwide is estimated at over 350 million at year 2016, representing almost 10-12 percent of world population (FAO, 2016) Fisheries make an important contributing to world food security by accomplishing the 20% of the global protein requirement and fulfilling the micronutrient requirement of coastal community (FAO, 2014) The dependence on livelihood related to Small-scale fisheries (SSF) accounts as high as 50% of the world’s fishers, virtually all of them found in developing

countries (Berkes et al., 2001) Being one of the two major sectors; small-scale

fisheries and large-scale fisheries, in world capture fisheries, the multiple contribution of the small-scale fisheries for economic, social and cultural sectors

have to be addressed properly (Weeratunge et al., 2014).The social welfare

functions performed by the SSF such as; providing livelihoods, uplifting living standards of poor households etc., should be preserved in developing countries until the macroeconomic conditions like maximization of rent and redistributions

reach satisfactory levels (Béné et al., 2010) Despite the meagre income, the

long-standing poverty in small-scale fisheries is related to an array of institutional factors, including access to health, political influences, education, debt as well as financial capital (Béné and Friend, 2011) Along with increasing coastal population, high fishing pressure and declining fish resources, the small- scale fishers are grappling to keep up with fishing and maintain their livelihoods

socio-It will be unlikely to keep up the provision of livelihood and food security to income fishers in the future, unless the government addresses those problems with meaningful measures (Purcell and Pomeroy, 2015) The vast diversity of fishing gears used for exploitation of multiple fish stocks of innumerable number of fish

low-species make SSF a highly complex arena of fishing activity Distance between the governors and the fishing community and the inadequate availability of the

scientific information make SSF management an arduous task (Daw et al., 2009)

2.2 Small Scale Fisheries in Sri Lanka

Small-scale fisheries in Sri Lanka plays an important role by representing almost

50% of the livelihood bound with the fisheries sector (Gephart et al., 2017 and

Ministry of Fisheries and Aquatic Resources Development, 2017) Those scale fishing communities account for a considerable portion of 25% of the country’s population who are living in coastal areas in Sri Lanka (Athulathmudali

small-et al., 2011) At the major 148 marine fisheries Inspector Divisions in Sri Lanka

there are 188,690 marine fishing households comprising with the 827,480 marine fishing household Population At the year 2017 the total fishing and related livelihoods are reported as 2.7 Mn including 218,830 of marine fishers (Ministry

of Fisheries and Aquatic Resources Development, 2017)

Ribbon like settlement is native character of the Sri Lankan Fishing villages, which is characterized by houses that are located alongside the sea due to congestion Based on the productive activities, each village is keeping their

‘Village identity’ and each fishing village has its own landing site, which is also a measure to protect their fish resources under the open access nature of fishing

(Amarasinghe et al., 2005)

Marketing of catches in SSF in Sri Lanka is handled by the private sector while only 1%-2% is handled by the Ceylon Fisheries Cooperation (CFC) The main aims of CFC are to offer competition to the private sector (fish merchants) to ensure a fair price paid to the fisher producers and reduce consequences of the market, resulted due to the margins created by middlemen But “Being a government agency, it is difficult for CFC to compete with the private sector, as it cannot provide credit to fishers when they request, and adjust fish prices frequently as required by the market” (Ministry of Fisheries and Aquatic Resources Development, 2012 & Ministry of Fisheries and Aquatic Resources Development, 2017)

2.3 Risks and uncertainties / shocks and there impacts on the fisheries sector

The shocks are common in food production chain, which shocks such as unemployment and losses in income and assets are creating long-term impacts on people who are involving in the production, by trapping them in poverty (Cuny

and Hill, 1999 in Gephart et al., 2017)

Fishermen generally confront two kinds of shocks, i aggregate shocks and ii idiosyncratic (individual) shocks The shocks such as dynamics in fish stock and distribution, weather and oceanic changes, and changes in climatic parameters, etc which affect all fishermen in a particular geographical area in a similar way are called aggregate shocks The shocks that cause income variability among individual fishers such as health hazards, uncertainties for access to the resources, operational hazards due to sudden collapse or damages on fishing gears and, variability in fishing resources are described as idiosyncratic shocks Although shocks of all types are clubbed together as ‘risks and uncertainties’, which arise from lack of knowledge of the state of nature When a shock can be predicted with a certain degree of probability, such shocks are categorized as ‘risks’, whereas when there is complete lack of knowledge of the incidence of a shock, it

is called as an uncertainty (Amarasinghe et al., 2005) In fact, the fisheries sector

shows sudden changes and diverse impacts, shocks related to the fisheries sector are inadequately distinguished The real situation in respect of shocks is less known as most of the studies focus on the long-term trends It is said that in Asia and Africa represent the highest magnitude of shocks on food production (Gephart

et al., 2017) Anyway the risk and uncertainties related to fisheries sector are

broadly can be categorized as a climatic-change related risks and other fishing related risks (non-climatic issues)

There are bunches of non-climatic risks (other fishing related risks) related with small- scale fisheries such as; loss of access, market fluctuations, resource fluctuations, political marginalization, poor governance, conflicts, illegal fishing

activities and open access pressure (Daw et al., 2009) Most predominant issues

associated with SSF in Sri Lanka such as; less awareness on conservation and

Figure 2 1: Impacts of Climate change on fisheries

Source: Daw et al., 2009

sustainable use of resources among fishers, coastal environmental degradation, dynamic nature of fishing gears, illegal fishing, destructive fishing, and overfishing on growth and recruitment stocks are making the situation more complex The lack of proper management practices with solid policy framework let those issues grow day by day (Arunashantha, 2015) The illegal fishing doing

by foreign vessels at Sri Lankan territorial waters is created extra pressure on local fishermen (Kohona, 2017) In other hand the non-fishing days due to health issues of the fishers and the other personal reason, damage and loss of crafts, and maintenance and repairing of those craft and gears are restraint the daily income

flow, arising the need of consumption credit to the fishers (Amarasinghe et al.,

2005)

Within past four decades, the global warming which is the one of the serious climatic-change incidence, has had a tremendous effect on world fisheries thereby

indicating the requirement to adopt appropriate strategies

(adaptations) to minimize the impact on the ecosystem and the human system, especially on the socio- economic conditions of the coastal

communities in tropical regions The changes in marine biota, response to the

ocean temperature rise in tropical regions can be identified by the indicators such

as dynamics in the growth, abundance, and distribution of the fish stock Those are further causing huge reshuffling of maximum catch potential of fisheries which ultimately lead to elevate the vulnerability of communities in coastal areas

(Cheung et al., 2013) Moreover, with the direct as well as indirect impacts of

rising sea levels and changes in the frequency and intensity of tropical storms create serious impacts on the coastal communities often displacing them Figure 2.1 shows the socio- ecological impact of changes in climatic parameters which are creating direct; via ecological impact and socio-economic impacts, and indirect effects on fishing activities, yield, effort, livelihoods and management Changes in yield, changes in species distribution, increase variability of catches, changes in seasonality of products are the main ecological impacts creating by the climatic-change parameters while influx of migrant fishers, increasing fuel costs, reducing health due to disease, reduce security and funds for adaptation are the main socio-economic impacts resulting by it Furthermore, the Figure 2.1 describing direct impacts of climatic change parameters such as damage infrastructure, damage gears, increase danger at sea, loss/gain of navigation

routes, flooding of fishing communities etc (Daw et al., 2009)

It has been observed in most of the countries, that fisheries management measures have been inadequate and improper Hence resulting low economic rents due to the application of unrealistic levels of effort towards open access equilibrium Impacts of climate changes will definitely worsen the situation by pushing down

resource rents (Sumaila et al., 2011) According to the recent records, the

scientifically observed changes in climatic factors in Sri Lanka can be identified as; i changes in temperature - gradually rising all over the country, ii changes in precipitation- changes in patterns and trend of annual averages, iii sea level rise

of 1-3 mm/year for Asian region, iv extreme events-increasing the frequency and intensity of floods, drought, landslides and strong winds (winds mainly during second inter- monsoonal season) These climate-induced changes have strongly affected all economic activities of the country (Ministry of Mahaweli Development and Environment, 2016)

According to the Daw et al (2009), “Non-climate issues and trends, for example

changes in markets, demographics, overexploitation and governance regimes, are likely to have a greater effect on fisheries in the short term than climate change” Anyway the long term or short term adaptive strategies on those issues are ensuring the fishers’ existence at the fisheries sector

2.4 Fishers’ response to risks and uncertainties: Role of Insurance and Credit

2.4.1 Fisheries Insurance

The increasing complexity of risk and uncertainties in the SSF sector demand the application of appropriate risk management methods, in order to cope with them effectively (Sethi, 2010) According to the Tompkins and Adger (2004) and Smit (2000), insurance schemes act as one of the adaptive measures against risk related

to fishing Moreover, they have argued that the private insurance of capital equipment, adjustments in insurance markets like interlinkages and insurance underwriting act as appropriate adaptations for the increased risks associated with fishing The insurance system is “an arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium” (Oxford Dictionary, 2018) Insurance mechanisms are necessary instruments for fishers to cope with the economic variability in fisheries (Sethi, 2010) Availability and ability to access insurances are quitecrucial in providing SSF with effective

insurance (Van Anrooy et al., 2009)

The insurance market in Sri Lanka is of two kinds; Formal insurance and Informal insurances Formal insurance consists of private agencies providing insurance charging a premium and it only caters to idiosyncratic shocks due to the inability

to make it available for aggregate or collective shocks However, an insurance scheme cannot function when all fishermen make claims together, which is however unlikely unless all fishers are affected by a natural disaster Formal insurance generally suffers from two incentive problems; the moral hazard problem (where the insuree has an incentive not to prevent incidences which give

rise to claims) and adverse selection (due to lack of information, the insurance agent may offer insurance to dishonest clients) For example, when an accident takes place far away at sea, it will be quite costly to investigate into such kind of incidence by the insurer Agents of Informal Insurance consist of informal lenders who are always willing to accept various collaterals, and personal trust too plays

an important role as a kind of collateral According to the study done by Amarasinghe (2005) at Southern Sri Lanka, he has showed the commonly found informal insurance systems in rural fisheries as in Table 2.1 Those strategies can

be broadly categorized into two categories, as strategies adapted before (ex-ante) and after (ex-post) a risk or shock has taken place Strategies can also be divided into individual and group strategies The self-insurance systems such as accumulation of assets and activity diversification can be identified as individual ex-ante strategies while reducing consumption and migration can be identified as individual ex-post strategies There are two categories of the ex-ante group strategies as asymmetric insurance and symmetric insurance

Table 2.1:Commonly found informal insurance mechanisms in fishing communities

Informal Insurance Mechanisms

iv Other rural institutional forms

Ex-post i Reducing consumption

ii Migration

i Mutual Insurance (symmetric Insurance)

ii “Credit”

Source: Amarasinghe and Jayasinghe, 2015 and Amarasinghe, 2005

When there is variation of the terms and conditions applicable for different members of the insurance system, it is call as asymmetric insurance system while the insurance system which equally enforcing terms and conditions on all the

members is call as symmetric insurance system The patron-client relation is an example for the asymmetric ex-ante group strategies The co-operation, guilds and other rural institutional forms are categorized under the symmetric ex-ante group strategies Except the above described the mutual insurance and credit are

categorized under the ex-post group strategies (Amarasinghe et al., 2005;

Lemarch and & Legg 1972 and Scott, 1976)

2.4.2 Credit

“Credit is a contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future, generally with interest” (Investopedia, 2018) Both in capture fisheries and aquaculture, in developing countries, credit can be identified as a serious issue (Palfreman and Insull, 1994) Even though, large-scale fishers are fortunate with their own finance

as well as the available commercial bank loans, the small-scale fishers are always suffering from incapability to access credit to meet their diverse needs (FAO, 1995) Formal lender demands valuable collateral such as land, durable assets, in order to reduce the default risk The poor access of small-scale fishers to credit can be attributed to the fact that the assets they possess (crafts and gear) are not acceptable to many lenders as suitable collateral, because they are liable to damage and loss Thus formal credit sources are always reluctant to provide credit

to small-scale fishers due to the above and also due to poor recovery, previous worst experiences or non-fulfillment of loan conditions The monopoly power of money lenders, lack of market in loans, inability of fishers to provide proper collateral against credit, are the common factors that are used as justifications, by most of the donor agencies and governments of the developing countries for the weak establishment of the formal credit institutions for the fish folk (Palfreman and Insull, 1994) Therefore, the informal credit market is becoming popular among fishers According to a study carried out in Orissa of India by Venkatesh, (2006) market expansion from regional to nation and even towards the international level, has encouraged the technical advance of crafts and gears to exploit new fishing grounds by creating more pressure on poor small-scale fishers The increasing effort on fishing ground has created rapid fluctuation of catch

availability for small-scale fishers which has forced them to depend on the village level traders and money lenders Moreover, with the numerous risk and uncertainties bound with the fisheries credit has become an insurance substitute in

a context of inadequately developed insurance markets (Amarasinghe and Jayasinghe, 2015)

Amarasinghe et al (2005), identified certain unique aims of lending money in the

informal credit market; i earning a regular income by lending money at profitable rates of interest; ii lending money with the view to claiming ownership of collateral, or iii Lending money as a means of hedging against risks and uncertainties prevailing in other markets- craft owners providing credit to his crew workers or merchants providing credit to craft owners, fall into this category According to Basu (1986), rural credit market is one of the malfunctioning markets with the extreme levels of contract violations The lenders always tend to lend their money to persons who are well known and under control of them to ensure repayment Aiming at minimizing default, money lenders always tend to lend money on personal trust, mostly with regular customers Therefore, the credit market can be identified as a more ‘fragmented market’; small pockets of lender + borrowers’ groups The monopolistic situation within the fragments results in high variation in interest rates even within the same region Even though the credit market is imperfect, with the absence of the contract- adherence norms,

it is not recounted that there are plenty of defaults resulting (Amarasinghe et al.,

fish until the borrower fishers repay the full amount of money Hence demand for money lenders’ credit has decreased At a later stage, especially after 1990, it has been found that fishers have gradually become bonded to fish merchant for their inability to repay debts It has also been observed that fish merchant tends to

“make the best of a bad investment’’ by taking over boats whenever they can, at the situation of less assurance on fishers’ capability to repay the loans by future catches Hence those boat owners are bound to supply the fish only to the lender fish merchant call as boat tying arrangement which is good example for the credit –product market interlinkages (Vankatesh, 2006 and Platteau & Abraham, 1987) The term of interlinkages underlines the multi-standard essence of the interconnections in small face-to-face communities, thus in interlocked market; two parties are involved as stronger and weaker The same situation can be identified in the agrarian economy in Sri Lanka as described by the Lebbe (2015),

“Prices of goods and services, in general, in the competitive markets are determined by the market forces but, prices of factors of production in agrarian economy are interlinked, thus reward of land, labor and credit also are determined

by the interlockers”

At the process of trading of goods and services in interlocked markets, the dominant or stronger party is exploiting the weaker party by controlling the price, even eschewing the social and state laws (Lebbe, 2015) But, according studies carried out in Tangalle fishing village of southern Sri Lanka, relationships between merchants-lenders and owner borrowers were also characterized by patron-client type of ties, due to the diffuse nature of goods and services exchanged between agents and the fact that they were continued over an

indeterminate period of time (Amarasinghe et al., 2005)

The present study is an attempt at further moving along this discourse, to understand the pervasiveness of interlinked deals and their role in coping with fishing and climate- related shocks, with a view to suggest means of correcting inefficiencies in the insurance and credit market in small-scale fisheries, aiming at improving the resilience capacity of small-scale fishers against fishing and climate-related risks and uncertainties

CHAPTER 3 METHODOLOGY

This chapter dispenses the detail explanation on methodological approach applied

in the study

3.1 Study Area

The study was conducted in two fishing villages in the Matara district of Southern

Sri Lanka Two fishing villages; Gandara and Kottegoda, (Figure 3.1)

representative of Southern small-scale fishing villages, were selected based on the convenience (close to the affiliated institution) and cost-effectiveness

The study villages are situated in the coastal area between Nilwella and Midigama, within the 55 km of Southern coastal belt The Matara district, where the study villages are located, belongs to the low country-wet zone, and almost

Figure 3 1:Study area

Source: Google Map -

https://www.google.lk/maps/@5.9507342,80.635114,14.75z?hl=en

21

85% of the annual rainfall is received from the South-West monsoons Climatic condition is almost similar to the general climatic conditions in the country, with 26.7o C of average annual temperature prevailing in the area (District Secretariat-Matara, 2012)

Gandara is a fishing village located in Southern province, about 110 far away from the capital Colombo The area is having a tropical climate with an average annual temperature of 26.8 0C and average annual rainfall of 1954 mm The village is one of the nine Fisheries Inspector (FI) divisions in Matara; Kapparatota, Weligama, Mirissa, Matara, Dewinuwara, Gandara- West, Gandara,

Kottegoda, Dikwella, which administratively belongs to the Gandara FI division

Among these, the highest fishing population of 5,637 with 2,040 active fishermen

is found in Dondra FI division and the lowest fishing population of 2880 with 1,680 active fishermen is found in a Matara FI division Gandara is with a fishing population of about 4150 and 1451 of active fishermen It is an urbanized area which is thickly populated and land is scared for an alternative livelihood such as agriculture The other employment opportunities outside fisheries are also limited

as Gandra is not industrial area The Dondra fishing harbor is situated in bit proximity to Gandra fishing village, providing anchorage facilities to more than

350 multiday crafts, which also provide livelihood opportunities for Gandara fishers during off seasons, where they work as crew laborers in multiday crafts (Amarasinghe and Jayasinghe, 2015)

According to the craft registered in mid of year 2014, the major coastal crafts in operation in the area were, OFRP-99, NTRB-81, NBSB-5, and MTRB-3 Recent information collected from fisheries officers revealed that the MTRBs are going out of practice which are gradually being replaced by OFRP boats Beachseine crafts (NBSBs) are few and they are found only in areas where beach seining is

practiced (areas where they have ‘padu’; smooth bottomed areas) Currently there

are no NBSB operating in the Gandara area Thus, the OFRP and NTRB (Oruwa) are the most commonly found coastal crafts in this study area The OFRP boats are the Fibre Reinforced Plastic crafts of 17-23 feet and with an outboard motor

Notes: Fibre Reinforced Plastic craft with Outboard Motor– OFRP, Motorized Traditional Boats

NTRB are non-mechanized traditional crafts, known as ‘Oruwa’ in Sri Lanka Currently 105 OFRP boats and 65 NTRB are in operation in Gandara area

Kottegoda is a small-scale fishing village, situated about 6km away from the Dikwella town and 15 Km towards the south of Matara The area is having a tropical climate with an average annual temperature of 28 0C and average annual rainfall of 1651mm The highest and lowest rainfalls are received in November and February respectively The average temperature variation during the year is about 1.6 0C

Almost all the villagers are engaged in fisheries-related livelihoods Most of the women in this area are engaged in making dried fish and Maldives fish The fish catch is highest in the period of August to November and lowest during April to March As same as Gandara, the OFRP and NTRB (Oruwa) are the most commonly found coastal crafts in this study village as well Currently 110 OFRP crafts and 16 NTRB are operating in the Kottegoda fishing village (Census of

Population and Housing, 2012 and Lakpura travels, 2018)

3.2 Data Collection

3.2.1 Collection of Primary Data

3.2.1.1 Key Informant Discussions

Key Informant Discussions were carried out with the Fisheries community leaders, fisheries cooperative leaders and Civil Society Organization leaders in Gandara and Kottegoda, basically through the non-structured face-to-face interviews Market visits were made at both villages and the fish merchants and fishers present at the market were informally interviewed, in order to identify the functioning of the market and mechanisms of price determination at each village Group of women with 5 (five) participants who are wives of the small-scale fishers from each village also were interviewed using non-structured face to face interviews Fisheries Inspectors at each village were also interviewed over the phone to save time

3.2.1.2 Focus Group Discussions

Two Focus Group Discussions (Appendix 1) were conducted at each village prior

to the questionnaire survey Twenty-five (25) coastal craft owners were selected purposively, with the help of community leaders and fisheries officials, representing both OFRP and NTRB owners who were ‘tied’ and ‘not-tied’ to fish merchants (in respect of boat-tying) representing the young and old Thus, a total number of 50 (fifty) participants were engaged in the FGDs For some selected activities participant were grouped into 5 (five), with 5 (five) members in each group The discussions were conducted in local language (Sinhala) and Semi-structured interviews and Participatory Rural Appraisal (PRA) tools such as Pair-Wise Ranking and Preference Scoring were used to evoke the required information

The subjects for discussions included,

- Diverse fisheries and climate related risks and uncertainties

- Strategies adopted by fishers to cope with fisheries and climate related risks and uncertainties

- Functioning of the credit and product markets and other insurance systems (Specially: Terms & Conditions applied for and pros and cons of each financial sources)

- Main reasons for the formation of credit-product market interlinkages

3.2.1.3 Questionnaire Survey

The questionnaire survey was conducted after the completion of FGDs, with a sample of 103 small-scale craft owners (58 from Gandara and 45 from the Kottegoda) A sample representing roughly about 1/3 of the population of small scale craft owners in the study areas were selected by using stratified convenience sampling method, the strata representing the two craft owner categories; OFRP and NTRB (see Table 3.1)

The semi structured questionnaire (Appendix 2) (containing both open-ended and closed-ended questions) was built based on the findings and information disclosed

through the FGDs and was pre-tested before the survey

Table 3 1: The sample of craft owners for the study

Villages (Small-scale Strata

craft types)#

Total number of craft owners

Sample size Description

of market interlinkages and, fishers’ suggestions for improving their access to credit and insurance

3.2.2 Collection of secondary data

The secondary data were collected from,

a) Unpublished Reports and Records available at regional fisheries officers

b) Published National Records; Reports from Ministry of Fisheries and Aquatic Resources, Reports of the Department of Census and Statistics, Annual Reports and other publications of the Central Bank of Sri Lanka, Published research work and relevant literature in journal articles, reports, books etc.,

c) State laws and Acts which related to the fisheries sector in Sri Lanka

3.3 Data Analysis

3.3.1 Data obtained from Focus Group Discussion (FGDs)

Information obtained from Focus Group Discussions were analyzed with the aid

of Participatory Rural Appraisal Tools including Pair-Wise Ranking and Preference Scoring

3.3.2 Analysis of data obtained from the questionnaire survey

The data from questionnaire survey were analyzed by using descriptive and inferential statistical tools

3.3.2.1 Use of Descriptive statistics

Data on demographic and socio economic characteristics of the respondents and other data collected on diverse variables from the questionnaire survey were analyzed using descriptive statistics and the results are presented in tabular and graphical forms

3.3.2.2 Inferential statistics

A Stepwise Multiple Regression Model was built by using SPSS software, to identify the impact of an array of independent variables on the dependent variable, which is the ‘Indicative Cost of Market Interlinkage (ICMIs)’ Generally, the regression aimed at finding out the factors that influence the ICMIs The model is explained under ‘Theoretical Underpinnings’ in section 3.3.3 below

Three main climate-change scenarios were taken into account, based on the intensity of change; 10%, 20% and 30% increase in the intensity of climate-change parameters from the present status, to analyze the implications of climate change on the ICMIs

3.3.3 Theoretical Underpinnings

3.3.3.1 Market Interlinkages:

The theoretical concepts that are used in this study include those related to the broader area of market imperfections and their relations to the formation of interlinkages among diverse markets More specifically the study deals with interlinkage relations between credit and product markets as at Amarasinghe

(1989) and Amarasinghe et al., (2005) with few modifications, describing as

follows

In credit-product market interlinkages a fish merchant shall lend money to a needy borrower fisher against the latter’s promise to handover all his future catches to the lender merchant, which acts as the collateral against borrowing No interest is

charged in these loans (zero rate of interest) The price is determined by the merchant according to the wholesale price, as informed by the merchant The borrower fisher (boat owner) thus is said to be “tied” to the lender merchant because he does not enjoy the freedom of selling his fish catch through any other channel of marketing, among which auctioning is accepted as the ‘best channel of marketing’ because the auction price is considered as the ‘fair and just price’ These relations are explained in Formula 3.1

P1- P2 can also be called an ‘underpayment’ (extent of price under-reporting) carried out by the merchant While some past studies have reported that P2 does

not vary among borrower fishers (Amarasinghe et al., 2005), more recent field

observations revealed the opposite

The estimation of lender merchant’s profits is given in Formula 3.2

Thus, the merchant’s profit (Π) is,

According to formula 3.2 the merchant can resort to three means of increasing his profits

i Increasing the quantity of fish handled

ii Reducing marketing costs

iii Under-reporting wholesale price (P2)

Where, P1 = Auction Price prevailing in day X (fair price)

P2 = Price paid by the merchant to the producer on day X

P2 might also include a marketing commission charged by the merchant

Thus in increasing their profit margins, the merchants could resort to expanding the clientele of tied-boat owners, reducing the unit cost of marketing by increasing their scale of operation and under-paying the producers It is quite obvious that there are limits to which lender merchants could under-pay fishers Some have even argued (Amarasinghe, 1989) that the tying arrangements could also develop into Patron-Client Type of relations, which are characterized by much stronger bonds than pure financial transactions

3.3.3.2 Patron-Client Relations

Patron-client relations are characterized by dyadic ties involving agents belonging

to two different strata, who differ among other things, by their ability to withstand income shortfalls The patron bears the entire risk of the client falling into distress, and therefore, insurance is not symmetric Although these are unwritten contracts, participating agents have a clear understanding about their obligations and returns For example, when fishing is low, the patron (usually an owner of fishing assets) who with his stronger asset base is able to smooth consumption (self-insurance), while he extends patronage services to his client-crew members

to smooth their consumption For the patrons, the crew-clientele formed an assured supply of dependable labor under the condition of risky labor markets Amarasinghe (1989), reported similar type of relations between lender fish merchants and borrower fishers, from his studies in Southern Sri Lanka In such cases, goods and services exchanged will be diffused and non-accountable This makes the understanding of the interlinkage relations more complicated and complex

3.3.3.3 Indicative Cost of Market Interlinkage (ICMIs)

Assuming variable P2, then (P1-P2) can be called the marketing margin of the merchant, or the ‘Cost of Market Interlinkage’ (CMI) The higher this margin, the higher would be the profits enjoyed by the lender merchant and the lower would

be the net returns to the producer from this marketing transaction Therefore, factors that influence ICMI; Indicative Cost of Market Interlinkage, were assumed

to reveal the role that market interlinkages play in coping with risks and uncertainties related to fisheries and climate change

Hence, a regression analysis was carried out with ICMIs as the dependent variable and 8 (eight) independent variables, which was expected to reveal the type and extent of diverse factors influencing the indicative cost of market interlinkages (ICMI) with implications for improving the market for fisheries credit in the small scale fisheries sector (see also Chandio, 2017)