By Muhammad Bashir
June 17 - 23, 2002
The Governor of Sindh on 2nd April at Karachi,
speaking as Chief Guest at a seminar on 'Rice from sowing to export'
organized by the Rice Exporters Association of Pakistan (REAP),
suggested that an agriculture bank in private sector be established to
supplement government efforts for increasing farm production of all
major cash crops. The Governor said presently Rs40 billion are being
given to agriculture sector from the banking system, which remains
insufficient. Due to rising cost of inputs and the need to adopt modern
techniques, financial requirements of agriculture sector estimated up to
Rs100 billion, are not being fully met. Similarly, he said to avoid
losses to any segment of trade including growers, farm insurance system
be introduced like the cooperative societies. He stressed upon all the
stakeholders to realize that the survival depends on each other and no
single sector could benefit by out-maneuvering the others.
Role of ADBP and other banks in
Rural Areas: ADBP has been organized on country basis and has
about 50 regional and 350 branch offices, spread over in all provinces.
ADBP operates side by side the nationalized commercial banks and joint
venture DFI Pak-Saudi. These institutions are making substantial
contribution. However, one feels that these institutions are overwhelmed
by the scale and variety of the assistance required by the farming and
other communities in the rural areas and therefore some additional
institutions with more focused approach are also needed to supplement
the efforts. Moreover, as in certain areas ADBP has more or less
monopoly, its service quality is not the same that could have been
possible in the face of tough competition. Similarly, the commercial
banks are doing a lot there but small land-holding farmers are not
getting the desired services and support. The rural communities shall
continue benefiting the financial and other services, provided by the
ADBP as well as other institutions, hopefully services of better quality
and at competitive rates.
Why Agriculture Banks in the
Private Sector: The Sindh Governor has rightly pinpointed the
need for new Agriculture Bank(s) in the private sector. Agriculture, the
backbone of our economy, contributes up 25 % to our GDP as mentioned by
the Finance Minister while talking to the President of ADB, who was on a
visit to Pakistan recently. It may be mentioned that Agriculture is
included in the sectors for which ADB is offering US$1 billion loans to
Pakistan during year 2002. It was also said that growth in agriculture
was a very effective way to fight rural poverty. The farmers have toiled
hard to keep Pakistanis provided with all sort of food grains, fruits,
vegetables, oil seeds, animals for meat, dairy products, etc. and yet as
time passes overall the rural community has experienced decline in the
quality of life. Poverty and unemployment are widespread and are getting
worse. Urgent steps are needed to effect big improvement in real cash
income to the farmers and the rural population in general. Improving the
quality and variety of financial facilities coupled with technical
know-how to the rural community by establishing Agriculture Banks in the
private sector, may prove to be a big step for poverty reduction. In the
context of new agriculture banks in the private sector, this paper is an
attempt to list broad parameters / issues for consideration by the
prospective sponsors including the Agriculture Bodies, the processors of
agriculture produce, the farmer's community, the SBP and the government
authorities. In the process, the ideas hopefully will get refined and
adopted for setting up of the new agriculture banks in the private
PARAMETERS AND ISSUES
National or Provincial Basis:
A new agricultural bank in the private sector on national basis may take
more time to get organized and operational as compared to a provincial
bank. Also, the bank organized on provincial basis might attract more
participation by the stakeholders and the farming community, with more
harmony and cohesion among the prospective investors. Depending upon the
needs of different regions, these banks can set their policies
accordingly. In future, depending on opportunities these banks may
decide to also open up branches in other provinces.
Largely the Agriculture Chambers, the Gentlemen Farmers, agro
industrialists, and the farming community may sponsor the banks in
general; and they should hold the majority. The Provincial Governments
might join in with 10-20% ownership. It will be a good idea if ADBP
agrees to associate by contributing about 10% of equity. This may help
bring know-how to the new banks in a number of ways.
International institutions such as the World Bank,
ADB, KfW, US AID, and IFC may also be approached for equity
participation in addition to the technical grants and credit lines for
financing agriculture as well as non-farm development projects in rural
Sponsors' Steering Group:
Some one has to take the leadership role for initiating the process for
the setting up of the bank, to get SBP reaction to the idea, to seek and
organize support from the farmers, to tentatively agree on names of
seven sponsoring directors and the chief executive, etc. This will
require lot of effort and possibly some expenditure as well. Like-minded
people can join hands, mull over the idea and if satisfied, can set the
things rolling. The provincial governments may consider the idea and
bring together the potential interested groups in a meeting. This will
provide the initial momentum. From then onwards, the Steering Group may
pursue matters and keep others posted of the progress.
Head Office Location:
The sponsoring group and the Provincial government may consider and
agree if the head office of the bank shall be at the Provincial
Headquarter or an other city that is more centrally located in the
agricultural area. Each location will have its special pros and cons and
the decision should be reached in the best interest of the people.
Agriculture Bank or Agriculture
& Rural Development Bank: Agriculture finance will be
restricted and it is apprehended that a large segment of population may
possibly be neglected. Due to this the objective of alleviation of rural
poverty may not be achieved fully. In case the scope of the bank
services is extended to rural development activities, it will be
covering major part of the rural population and will be a big step
towards poverty reduction.
Status as a Bank or an
The new agriculture banks might be Scheduled Banks licensed by the State
Bank of Pakistan; although these, in addition to all banking services,
will be providing specialized services to the rural communities on the
pattern of the ADBP. These banks will mobilize savings from the rural
community and this relationship will be conducive in extending other
services for promotion of agriculture. The SBP is well placed to nurture
and regulate these banks. These banks may not be classified as NBFIs for
regulation by the SECP.
The State Bank of Pakistan is the license-issuing authority to the new
banks. It will be beneficial if these banks are regulated by the SBP. In
USA there is a separate regulator for such institutions known as The
Farm Credit Administration (FCA or Agency). FCA, an independent agency
in the executive branch of the U.S. Government, is responsible for the
regulation and examination of the banks, associations, and related
entities that collectively comprise what is known as the Farm Credit
System. Initially created by an Executive order of the President in
1933` FCA now derives its powers and authorities from the Farm Credit
Act of 1971, as amended. FCA's mission is to promote a safe and sound,
competitive Farm Credit System. It is hoped that the regulators in
Pakistan may already be benefiting from FCA experience in the field.
Initial Paid up Capital:
These banks must meet SBP criteria of minimum Rs 500 million at the
time of opening up, and to raise it Rs 1000 million within three years.
Although, certain banks right away decide to start with paid up capital
of Rs 1000 million. Higher capital will give more flexibility to the
banks to raise more deposits and to offer more services. This will also
enable them to mobilize credit lines and technical grants from
institutions such as the World Bank, ADB and others.
Support from the Government:
ADB and possibly other institutions, while extending support for
projects in agriculture sector, prescribe certain conditions to be met.
These conditions may pertain resolution of social issues such as the
bonded-labour, legal aspects of Haris (Farmers) in debt bonding, etc.
The government may consider resolving these issues at the earliest so
that these new banks do not face similar conditions when these
approaching the international institutions for grant and loan funds. The
Government may also consider channeling part of the Poverty Reduction
Funds through these banks. PRGF funds may also be used to finance in the
rural areas efforts for institution building as well as community
development, in association with these banks.
Objectives of the Banks:
These are all private banks and unless they make profits these will
be not able to continue in operation for long. So they shall be
increasing value to the interest of all the shareholders. Through
provision of banking services particularly to the agriculture and rural
areas, they shall add to the economic well being of the rural
population. Main features of the operational strategy may include the
Sound loaning and proper risk
Mobilization of deposits
particularly from the rural areas;
Provision of efficient and
timely services to the customers;
Improving production and
productivity particularly in rural areas;
efforts for poverty alleviation by creating gainful employment
Training of its customers in
addition to its own personnel; and
Good corporate neighbour
particularly to the rural communities.
Vision and Mission of the
Banks: For this purpose the sponsors may first review the
Vision and Mission Statements of ADBP, the premier agriculture bank of
Pakistan, and then prepare their own vision and mission statements
reflecting their philosophy and commitments. ADBP statements are
1- Vision Statement of
Being the largest financial institution for giving credit to the farming
community in Pakistan, the ADBP is to achieve self-sufficiency in food
through increased agriculture productivity. This is to be achieved by
improving the quality of credit throughout Pakistan under Supervised
credit scheme. Poverty Reduction is to be achieved through identifying
poor living below poverty line and giving them micro credit loans to
generate household income without collateral.
2- ADBP Mission Statement:
a) To Develop
agriculture sector of the country so that it plays its role in the turn
round of the economy.
b) To develop
water resources so as to bring more land under cultivation.
c) To increase
yield per acre of cotton, wheat and rice.
d) To develop
orchards, live stock fisheries and poultry to bring a correlation
between protein food and the population growth.
e) To grow tea,
canola, sunflower and palm oil seeds for substitution of high value
Scope of Services of New Banks:
These banks may not initially start with all the services now offered by
the ADBP. However, they may benefit from ADBP experience and devise
their operation plans accordingly. Moreover, they will determine
essential areas not yet fully covered by the ADBP operations and go for
that as well. The banks shall also benefit from the following advice,
reportedly from the Sindh Governor to the different participant of the
Seminar referred above:
The millers to modernize their
processing units and adopt new techniques;
The growers to improve the per
acre yield which is presently amongst the lowest in the world.
The exporters to adopt rapidly
changing methods of marketing and presentation.
The rice scientists to evolve
rice varieties and rice technologies, which are in accordance with
the latest developments like water shortages, delay in water
arrivals, demand of better grain quality in international market and
less susceptibility to pest attack.
Use of agriculture machinery
to be promoted and cheaper versions of these machines may be
developed for adoption.
The rice growers to take up
agriculture as business, adopt scientific methods of cultivation,
harvesting and post-harvesting the growers, he said should
concentrate on increasing yield per acre and invest in the land so
that they can earn more.
Philosophy on Recruitment and
Training: These banks may not make their mark and achieve
their objectives unless they adopt Merit, Experience and Commitment as
the main criteria for recruitment at all levels. The officers and staff,
once recruitment, shall have to be trained and retained through offering
competitive salary and other package. The top graduates of the
Agriculture Universities are their best bet. Initially, they shall have
to hire outside training institutes for training of their personnel but
in due course they will establish a specialized institute of their own
for specialized training in agriculture and rural development fields.
They shall also have to train their customers.
Sustainability of the Banks:
One would wish that these banks stood on their own feet without any
subsidy or support from any quarters. In the market economy, there is
little scope for such help, but for agriculture and rural areas there
are some considerations in the whole world. Therefore, if the emphasis
is to help the rural / farming communities for development of
agriculture and for alleviation of rural poverty, some sort of subsidy
and support must be considered. One-way could be exemption from the
payment of income tax. Moreover, the banks must be adequately
capitalized and managed well by teams of experienced and committed
Islamic Character and
Operations: Like all commercial banks operating in Pakistan,
these banks shall also follow SBP instructions in the mobilization of
deposits and the provision of loans and advances.
Refinance availability from
These banks will need lot of resources for financing large number of
agri-based and other projects in the rural areas. The SBP may extend
refinance facilities to these institutions so that these banks do not
feel handicapped for want of financial resources. The SBP has also to
reconsider the margin it allows to the banks in case of Refinance Lines.
The margin allowed to the lender banks normally at 1.5% to 2.0 % is very
small. It does not adequately cover the credit risk borne by the lender
banks. Full recovery of principal and mark-up is rather difficult in
Pakistan, nowadays in many countries of the world as well. Mostly, due
to bad loans the Refinance Lines are not lucrative business for the
lending banks. The SBP might review and make it an attractive
Conclusion: At the
instance of the international financial institutions, the government has
been considering withdrawal of subsidies from inputs used in
agriculture. The farmers are also not very happy the way their produce
is procured, price offered for such produce and the delays in payments.
Their grievances need to be redressed. Moreover, in the present day
conditions when food security is gaining more importance, it is but
essential that the agriculture sector, with such large contribution
towards our economy and exports, is offered more opportunities and
facilities for increasing production and productivity. This will not
only contribute to the welfare of the rural population but the whole
country shall benefit.