LOOKING BEYOND THE TRADITIONAL AGRI CREDIT
Dec 13 - 19, 2010
Pakistan is assumed to be a predominantly agricultural economy. The economists and the policy makers have been endeavoring hard with little planning to shift the focus from an agro-based economy to an industrial economy. They have succeeded in increasing the share of industrial sector to the GDP from 12 to 19 per cent during the last 52 years - the period for which economic record is available. They have also succeeded in bringing down the share of agriculture sector from 46 percent to 21 percent during the same period. This is surprising on many accounts. The decrease in one sector should have been matched by the increase in the other allowing for import substitution and lesser dependence on export of food items. The gap created by the reduction in agriculture output has been filled by the services sector. Services sector's 53 percent contribution to GDP owes much to the banking and telecom sectors. No doubt, the success of telecom sector in Pakistan has been phenomenal but unlike India, we have not been able to reflect this success in the size of capital formation. Our real economy has suffered for the sake of services sector.
The so-called shift of focus has resulted in severe scarcity of food items followed by a high level of food-price inflation. Although we produce basic food items in quantities sufficient to feed the nation, our weak external sector economy demands that we export a major chunk of rice, vegetable and fruit outputs to keep the economy going. The shift of balance has also resulted in lesser credit availability to the agriculture sector due mainly to a narrow borrower base. The agriculture sector absorbs 45 per cent of the country's labor force and contributes around 21 percent to the GDP. Surprisingly its share in banks' credit portfolio, according the State Bank governor, is as meager as 4.9 percent. The major portion of the traditional farm credit is taken away by the influential large size holders who hardly spend this money on agro activities.
The 70 percent non-borrowing farmers are left unattended as they are unable to prove their credit-worthiness. This non-borrowing ensues not from their reluctance to borrow but from the denial of the relevant organizations to afford this opportunity to them. Those who benefit from farm credit schemes belong to the influential minority. They, as a group, are adept at doing their homework to qualify as the beneficiary of such schemes. The majority, being illiterate and less connected, always gets lost in the rigmarole of loaning procedures. They need to be helped out to make them a bona fide agricultural borrower. Without radically broadening the borrower base, we cannot expect the farm credit to expand to its potential.
SUPPLY OF AGRICULTURE CREDIT BY INSTITUTIONS (MILLION RS.)
YEAR ZTBL COMMERCIAL BANKS PUNJAB PROVINCE CO-OP BANK DOMESTIC PRIVATE BANKS TOTAL GROWTH % 2005-06 47,594 67,967 5,889 16,023 137,474 26.4 2006-07 56,473 80,393 7,988 23,976 168,830 22.8 2007-08 66.939 94,749 5,931 43,941 211,561 25.3 2008-09 75,139 110,666 5,579 41,626 233,101 10.1 2008-09 Jul-Mar 45,400 74,365 3,539 28,557 151,861 9.6 2009-10 Jul-Mar 48,987 85,177 3,530 28,641 166,345 9.5
The faltering growth of farm credit demands some rethinking. The systemic flaws that hamper the growth of farm credit have their roots in our considered reliance on commercial banks to extend and expand farm credit. Banks' psyche is to allocate credit on the basis of credit worthiness of prospective borrowers. By that standard, the majority of our poor farmers, being not credit worthy, can never qualify as beneficiary of farm credit schemes. State bank too has developed a psyche of measuring banks' credit allocation function with the help of numbers and figures. Setting and meeting of mandatory agro credit targets is the name of the game that ends in recording how much money was distributed among the farm community. Since recovery of banks' loaned money and the capacity of the borrower to make timely repayment occupies the centre place in all bank credit schemes, those really in need of money always end up as non-borrowers. To change this psyche may not be that easy, but if agriculture is to develop in this country, the traditional bank loaning system will have to be remodeled. Recently, the SBP governor announced that most of the loans allowed to flood-hit people have become non-performing. It shows that the loans were of a very short maturity with interest rate in close proximity of the going market rate. How can we expect a ravaged family of farmers to repay the loan so early? Unfortunately, we are still unable to differentiate between commercial loans and agricultural credit.
The basic fault in the agro credit mechanism is its reliance on commercial banking system which is essentially guided by profit maximization motive. Bangladesh's Grameen Bank, by working on the concept of microfinance, is known to have made great strides towards farm community uplift. Unfortunately, our microfinance industry has failed to achieve a matching success, most probably due to its failure to set its primary objective which should certainly be at variance with the basic commercial objective. The Nobel peace prize winner for 2006, Dr. Muhammad Yunus of Grameen Bank, in his lecture at the award ceremony, stunned many by making a simple proposition:
"Let us suppose an entrepreneur, having a single source of motivation (such as maximization of profit), has now two sources of motivation, which are mutually exclusive, but equally compelling: a) maximization of profit and b) doing good to people and the world..."
It is the idea of "doing good to people and the world" that can transform any business, taking place in any type of market, into a pursuit of sustained pleasure and a value-added activity par excellence. The value addition done for the sake of human betterment at large turns out to be the supreme of all value- additions. Microfinance, in essence, is investing in the poor and not doing business with them. The nascent microfinance industry of Pakistan needs to define the objective first. Does it want to do something good to the country's poor and struggling farm community or simply engage in the pursuit of profit maximization. We already have a good number of commercial banks strictly adhering to this earthly objective, then why to add a few more in the garb of microfinance banks.
Let us think over what Muhammad Yunus said at the prestigious world forum:
"I found it difficult to teach elegant theories of economics in the university classroom, in the backdrop of a terrible famine in Bangladesh. Suddenly, I felt the emptiness of those theories in the face of crushing hunger and poverty. I wanted to do something for people around me, even if it was just one human being, to get through another day with little more ease. That brought me face to face with poor people's struggle to find the tiniest amounts of money to support their effort to eke out a living."
These historic lines explode the myth of "credit worthiness", a paradoxical expression used by the banks to deny the needy a well-deserved monetary assistance. The loaning system of commercial banks that are in the market to earn profits is invariably based on this deceptive expression. On the contrary, the objectives of microfinance should be based on the simple assumption that one cannot be poor and credit worthy at the same time. The microfinance banks should not waste their efforts in identifying "credit worthy poor farmers" in the ranks and files of landless farm community. Rather they should start with the conviction that every single needy farmer, when helped with a tiny amount of cheap and easy credit, is capable of reforming into a changed person, prepared to return the amount in some form that may not be tangible. While identifying potential customers, they should look for "reform worthiness" instead of credit worthiness. The poor have the greatest urge and ability to change themselves. Invest in them for that change to take place.