Muhammad Shafique, 43, is an aged farmer who cultivates a piece of land measuring six acres. He lives with his wife and four children in a semi-cemented five-marla house. His village -- Kharak -- is located in tehsil Noshera Virkan which is at a distance of around 27 kilometres from Gujranwala city.

Wheat and rice are the main crops of this area. For many years, Shafique has used conventional farming methods to cultivate his land and does not have sufficient knowledge and familiarity about latest and modern cultivation techniques. This ignorance has affected the quality of his crop and resulted in less yield.

The worst part of the story is that in the absence of any formal agricultural financing facility he had to go for exploitative loans in the informal sector. This is the case with most small and subsistence level farmers who are always short of cash, especially close to the sowing season. Once they harvest a crop they settle loans and spend the remaining proceeds to meet different expenses. For fresh crop they have to again manage finances.

This situation creates a vacuum and brings the conventional middle-man (aarhti) in the picture. The aarhti provides finances to small farmers and also supplies agricultural inputs i.e. seeds, fertilizer, pesticide and herbicide etc to them as part of the loan amount paid in kind. So, what does the aarhtis get in return? They simply make an advance contract with farmers that they will sell them the crop at a pre-decided rate when the crop matures.

Obviously, the price decided is far less than that which is likely to be offered. Even if there is a sudden surge in price of the crop due to any reason, farmers will have to sell the produce at the price they had agreed upon with the aarhtis. It would be the aarhti who will benefit from the increased prices and the farmer will stay deprived.

Unlike the former banks, the aarhti does not ask for a guarantee or collateral from the loan applicant in order to process loans. The reason simply is that traditionally these aarhtis have become so strong and well-connected that they think they can recover the defaulted loan amounts by force and nobody would dare resist them.

Besides, they have made fortunes over the years through manipulation in demand and supply of farm products. This wealth enables them to garner support of police, local politicians and officials whenever a dispute arises.

Agricultural finance for small farmers is a big issue and should be resolved without delay, says Dr Tariq Bucha, President of Farmers Associates Pakistan (FAP). He tells TNS that aarhtis make profits at every stage. Even the fertilizer, seeds and pesticides they supply are sub-standard and over-priced. Once the crop is ready the aarhti takes hold of it and makes payment after weeks. Above all he deducts commission on the sale amount of the produce at the time of payment to the farmers, he concludes.

So the question here is that who will be willing to pay loans to farmer, especially the landless tenants. They till lands but ownership is someone else’s. The reluctance is also for the reason that the risks of crop wastage due to inclement weather and outdated farming techniques are quite high.

This issue has come into limelight recently as Federal Finance Minister Ishaq Dar has urged financial institutions to come up with innovative solutions to serve this sector. Apart from accommodating the landless farmers, he has urged the State Bank of Pakistan to enhance portfolio of agricultural solutions.

No doubt the solution lies in technological advancement and innovations, says Imran Dhilon, Programme Manager at Jinnah Welfare Society (JWS), a non-profit organisation present in Gujranwala and its surrounding areas. The organisation is working in the fields of livelihood provision, microfinance, agricultural loans and so on. It gets funds for FDP from Pakistan Poverty Alleviation Fund (PPAF) which channelises aid coming primarily from the World Bank and a few other international donors.

Imran tells TNS that after exhaustive brain-storming, they designed a programme which they named Farmer Develop Program (FDP). Under this programme, the farmers are identified and asked to form groups of around 10 people or so. There is a group leader for every group who is responsible for depositing regular collective installments of the loans which are in the range of Rs80,000 to Rs100,000. The loans are seasonal and have to be returned with minor interest on the maturity of crop.

All the group members are worried about the payment of loan. If one member defaults on the loan the whole group suffers and cannot secure another loan. This, Imran says, is called social collateral in development sector as social and peer pressures work more than any other collateral. This concept is adopted in different in parts of the world and has worked here as well, says Imran who feels highly encouraged by this development.

Muhammad Shafique (mentioned in the start) is a beneficiary of this loan scheme. He tells TNS his life has changed, he has cash in hand and is free to buy quality and approved inputs from wherever he wants to. JWS have introduced them to fertilizer, seed and pesticides companies who sell them their approved and quality products on discount.

Their profits have increased as they get discounts on inputs, the yield is better as these inputs are no more substandard and they get paid right there at the spot. There is a rice sheller, owned by Engro Foods, in the area which offers premium rate to these farmers as an encouragement and clears the dues instantly.

An additional feature of the scheme is the exposure the farmers get during the learning visits arranged by JWS to different farms and agricultural universities. Imran says the project evaluation results have shown that during the tenure of loan cycles, the farmers improved this knowledge and skills through a series of trainings i.e. crop analysis, awareness about varities of quality seeds, pesticides, fertilizer, laser leveling, soil and water testing, preparation of land and livestock management. The yield per acre has increased by 30 per cent to 40 per cent which is no small achievement. God forbid if a loan recipient dies all the outstanding amount against him is written off, says Imran.

He says they have made a humble attempt and succeeded. He hopes others in the private, development and government sectors will adopt this model with further improvement and innovation. He says another benefit of this project is that group members have developed strong bonds with each other. They are in a better position now to solve collective issues with mutual cooperation and consultation.

The group-based lending is an ideas which is recommended world over. The central bank of Pakistan also mentions in one of its reports that group lending is "one of the most successful approach, equally vigorous for micro, rural and agricultural financing where individuals have no collateral to offer or financial institution intends to share the burden of monitoring and recovery of loans at low cost with minimum risk of non-payments. Under group-based lending programmes, loans are made to individuals through a peer group. In this case, group members guarantee repayment of each other’s loans. Collateral is generally not used; peer pressure and collective responsibilities generated by the group take their place."