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By Muhammad Bashir Chaudhry
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 sector.


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.

Bank Sponsors: 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 areas.

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 NBFI: 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.

Regulatory Authority: 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 following:

  • Sound loaning and proper risk management;

  • 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;

  • Supplementing government efforts for poverty alleviation by creating gainful employment opportunities;

  • 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 reproduced below:

1- Vision Statement of ADBP: 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 imports.

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 professionals.

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 SBP: 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 preposition.

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.