Oct 26 - Nov 01, 2009

Financial services for rural population are not widespread and very small portion of rural population avails financial intermediations by financial institutions despite that 67 percent of country's population lives in rural areas. According to an estimate by the central bank, only 14 percent of rural population is banked while only 2 percent of the poor has access to microfinance.

Poverty in the country cannot be located to a specific location, however, since poverty ratio is high in rural areas it can be said that majority of target markets of microfinance remains deprived of financial assistances, which are a condition to improve the standard of lives and eradicate poverty. Estimation of the central bank of one bank for 20,000 people needs to accommodate rising numbers of bank branches.

Agriculture contributes over 20 percent in GDP, employs around 41 percent of total labour force and directly and indirectly provides inputs to various manufacturing industries. In spite of this repeated fact, growth of agriculture sector is very slowly improving. Financial supports can multiply the outputs from the sector. Limited access to financial services in rural economy is attributable to traditional and dogmatic specificities of agriculture sector, which are in practice since centuries. While rural population is uninformed about the revolutionary capacity of financials services, financial institutions also do not find commercial benefits in expanding services to or opening branches in rural areas.

According to statistics of quarter ended June 2009, share of agriculture in net advances stood at 4.7 percent, amounting Rs150.5 billion in contrast to 4.9 percent in the previous quarter. Zarai Taraqiati Bank is a specialized bank that had Rs75.92 billion advances and Rs6.28 billion deposits by yearend. It has 158 branches across the country. Very small numbers of people living in the rural areas have bank accounts.

The State bank's measures to promote financial inclusion in the country are reflection of the regulator's strategic inclination towards including rural unbanked population. Recent measures introduced by the central bank to expedite financial inclusion range from tax holidays and flexible regulations to microfinance banks, branchless banking, to promotion of small enterprises financing, Islamic banking, and credit schemes for agriculture financing.

Rs4 billion-tractor scheme will perhaps prove a good step towards mechanization of agriculture sector. Recently, government avowed to subsidize buying of tractors during the two-year scheme. Total 20,000 tractors would be subsidized and farmers would have Rs200,000 concession on original price that is subject to financing by Zarai Tariqiati Bank.

Majority of farmers take loans from informal sources like friends, family, input suppliers, and arties. They also obtain instruments for harvesting and cultivation and for other agriculture implementations on rents. Periodical rental payments are additional costs that diminish profitability. Bank loans can free farmers of the obligations of selling produce to dealers and arties from whom they acquire loans for purchasing of seeds, fertilizers, and other inputs. Removal of unnecessary intermediary channels can make the produce available in the market in normal prices. It can also increase interaction of farmers with open market, which is important for their education as well. Selling (forced) to market middlemen is compulsion for farmers too since they have no storage facility to retain their crops and seeds and protect them from inclement weathers. For purchasing of seeds at the start of sowing season, they need substantial money. Two options are available at that time; retain certain volume of crop (e.g. rice) as seed for next season or sell and consume it.

Living on subsistence can characterize majority of farmers labouring around the rural parts of the country. Most of them could not afford to establish independent storage facilities because of monetary strains.

A survey conducted to find out the reasons of lower usage of bank loans by rural population found that from people side interest based financing was a hurdle in utilization of financial assistances. People are reluctant to take loans because of the margins charged (interest) on them are in violation of Islamic injunctions or against Shariah. Therefore, Shariah-compliant financing can be a booster to financial inclusion.

Branch network of Islamic banks are growing and since end of last fiscal year, they had 528 branches. Deposits of Islamic banks are also increasing rapidly. For example, they grew by 15.5 percent by the yearend. However, the share of advances in assets mix dropped 44.8 percent. State bank has formulated guidelines to facilitate Islamic financial institutions make financial products in accordance with the needs of farming community.

Low coverage area of financial services is another key obstacle. Islamic banks can explore the rural market far better than conventional financial institutions because of its services befitting general beliefs of rural populations. However, Islamic banks focus on expanding branch network in cities and suburbs.

Mobile banking can be an alternative mode to reach unbanked population of rural areas and central bank is keen to developing financial inclusion. It has licensed six banks for this purpose. This could prove a step to envelope unbanked financial transactions of especially rural economy.

Banks can play a role as driving agent of economic growth if they expand their outreach in rural areas of the country with financial innovations. Specifically, lending to farming communities would improve the efficiency of agriculture sector and its contribution in economy. Increasing share of agriculture financing in assets compositions, relaxing conditions of financing, and restraining profiteering can increase base of borrowers and thus decrease numbers of unbanked. There is a need of more specialized banks providing financial intermediation to agriculture community. Opening of more branches would strengthen funding structure of banks through deposits mobilization and the additional liquidity can be led to productive use of the rural economy.