Money Matters

Financing the small farmer

By Majyd Aziz
Mon, 08, 16


Pakistan is an acclaimed agricultural country. It is gifted with the potential of having major cash crops such as rice, wheat, cotton, and sugar as well as a large variety of other agriculture products. Pakistan is also recognised for fruits and vegetables. Pakistan is one of the world's large milk producers because of a formidable population of buffaloes, cows, and goats, although the livestock sector is able to meet only 40 percent of the domestic milk demand. Despite these bounties, the agriculture growth has been very dismal for the last many years.

In 2015-16, agriculture registered a negative growth rate of 0.06 percent if official figures are accepted; however, experts estimate nearly 2 percent negative growth. At independence in 1947, agriculture sector contributed 60 percent to the country’s GDP, but gradually declined to 30 percent in late 1980s, while today agriculture’s contribution to the GDP remains about 20 percent.

The farm environment in Pakistan has been a victim of land fragmentation due to hereditary reasons or due to family feuds and splits. This has ensued into a threatening situation for the small farmers. Today, over 65 percent of the farms are less than five acres while 95 percent of the farms are below 12.50 acres in size. This has enhanced poverty in rural areas, negatively affected farm productivity, increased the cost of farming, impacted the influence of these small farmers, and reduced the avenues of institutional financial credit.

Furthermore, natural calamities such as floods, earthquakes, and drought have shattered many farming families and resulted in farm closures, high rural unemployment, and undesirable social issues. The small farmer is also a victim of land frauds, high interest rates of intermediaries known as ‘aarthis’, inferior seeds and other inputs, lack of modern agriculture implements and tractors, and unawareness of prudent and proper use of water and fertilisers.

These factors need to be addressed on an urgent basis and, so far, the government, the rural-based politicians, the financial institutions, as well as corporate sector have seldom taken the bull by its horns. It is time to undertake massive reforms to bring about a paradigm shift in the agriculture sector and support farmers through fundamental facilitation to reduce their cost of production, enable them to procure quality inputs, encourage mechanisation, and shield them from the stranglehold of the middlemen. The major inputs required by farmers constitute about 40 percent of the total cost of production. The farmers also need a stable market for distribution and selling of their products. There is also a need to directly link the farmers with large food service providers so there are continuous, round the year business dealings between them.

Every year, the State Bank of Pakistan directs the financial institutions to provide credit to the farmers. In 2015/16, the target was Rs600 billion. The banks managed to lend Rs598 billion to the agriculture community. Zarai Taraqiati Bank Ltd (ZTBL), whose clientele is exclusively the farming sector, had a target of Rs102 billion and was able to reach about 90 percent of this figure. The ZTBL provides small ticket loans of Rs200,000-300,000 to nearly one million farmers through its network of 438 branches spread all over Pakistan. Notwithstanding this achievement, the total demand-supply gap of agriculture credit is still a mammoth Rs400-450 billion. In short, the annual demand for agriculture credit is more than a trillion rupees.

The disturbing situation at the small farm required a revisit of the ZTBL lending policies. A new and feasible approach was must for sustainability of the farming sector, more specifically, the small farmer. Maintaining its history towards significant contribution towards the development of the agriculture sector on sustainable basis, ZTBL has pioneered the concept of providing financing facilities through service providers/crop production companies. This visionary idea, if pragmatically structured, accepted, and implemented, would revolutionise the agriculture sector, since its eventual success depends on small farmers being in the driver's seat. It is proposed that the Prime Minister should authorise a special fund of Rs10 billion at zero mark-up payable after five years for ZTBL who would lend this fund at a very low service charge to small farmers, enabling them to utilise the amount for procuring development farm equipment such as tractors, cultivators, drip-water irrigation, etc. It is imperative that a fast track disbursement is undertaken and this could be reasonably achieved through favourable low-cost financing as well as technical support.

This concept of serving the farming community through service providers/crop production companies envisages the development of an agriculture ecosystem consisting of a pool of technical expertise and technological resources. With the advent of drones, 3G, 4G, and telecom advancements, there is a huge potential for the agriculture sector. Food security and food crisis is being heatedly debated globally and has renewed interest in agriculture development from multilateral development agencies and policymakers. Moreover, with the growing youth bulge in rural areas, a holistic approach towards agriculture development would also result in demographic dividends for Pakistan.

Following are few of the envisaged objectives:

• Up-gradation in the country's overall agriculture practices by setting in motion agriculture best practices

• Forward integration of farming community towards modern agriculture techniques and technologies

• Mass scale expansion of latest agriculture technologies through creation of viable business opportunities for local vendors

• Establishment of farmer’s entrepreneur groups that would ultimately add to entrepreneurial competitiveness of farming community, thus enhancing their ability for greater market access in regional markets and enhanced export market potential and penetration

• Tangible reduction in farmers cost of production by adapting to efficient solutions and increased yields with focus on exportable produce production

• Gradual creation of free markets for agricultural economy through developed value added and value chain agriculture mechanism

The action plan is to initially target wheat, cotton, sugar, rice, citrus, and dairy/livestock. A spectrum of services is to be instituted to broad base the designated service providers and crop production companies. To begin with, there would be one such provider in each province. Two modules have been prepared to finance this scheme. These are Direct Approach Module and the Indirect Approach Module. Under the first module, large/corporate scale service providers/crop production companies having all requisite expertise, ranging from land/bed preparation to disposal of the crop/agriculture produce, would get finance from the bank through direct agreement between the bank and the service provider/crop production company. This module is adaptable for dairy and livestock as well as the major crops.

The service provider/crop production companies already in field and providing free extension services, having all the technical expertise and financial and management resources, would be extended supportive financing advantage. ZTBL will provide up to Rs25 million loans to service providers/crop production companies through a direct agreement between them. It would be secured through a registered mortgage of the properties of the borrower.

Under the Indirect Module, which in essence would be a tripartite agreement between the bank, the service providers, and the farmers, ZTBL would finance the service providers on behalf of the farmers, preferably a collective of 50-75 farmers as a group. The loan would be in the name of the individual farmers on commercial mark-up rates and properly securitised through agriculture passbook and mortgage of farmland. The farmer would assign this loan to the service provider who would undertake all phases of crop production starting from bed preparation up to the harvesting of the crop, utilising best agriculture practices. The latter would be the key player in marketing of the production on competitive rates and would indemnify the bank for making relevant payments to the farmer. The highlight of this module is that the service provider would guarantee the repayment of loan given to the farmer.

The rationale of this scheme is to raise the farmers to a higher plateau. The ambit of this initiative is not just financing but to enhance productivity, efficiency, and profits through a designed paradigm shift. Notwithstanding the paramount difficulties faced by farmers, the reasoning behind this approach is to utilise the expertise and knowledge of progressive farmers by inculcating into them the imperatives of educating the small farmers to shed their obsolete modes of farming and learn the prudent way of using pesticides, water, fertilisers, seeds, and time-saving, labour-saving, input-saving equipment.

Agriculture in Pakistan needs to be encouraged on a war-footing basis. Precious years have been lost in reaching universally accepted yields per acre and productivity. At the same time, small farmers must get themselves out of the shackles of the ‘aarthis’. Moreover, with farmers in a perpetual bind, it is crucial that there is put in motion a motivating plan that is workable and, more importantly, encouraging for the small farmer. This, in essence, is the vision of this new financing product. Samuel Johnson, the English author, rightly said that, “Agriculture not only gives riches to a nation, but the only riches she can call her own”.

The writer is former president, KCCI