Banks Need to Come Up with Innovative Agricultural Finance Models in Pakistan

By Mazhar Mehmood Jatoi

Financial institutions face opportunities as well as challenges in providing financial services to the agricultural sector. The agriculture sector lacks financing in Pakistan, specifically after the crises of sugarcane and cotton crops in the last fiscal year, with wheat not selling as much as expected either.

Ultimately, farmers are going to face the challenge of access to financial services in the coming fiscal year, as they have limited access to appropriate financial services for their farming needs and household expenses.

Banks Need to Innovate to Provide Financial Access to Farmers

In this scenario, there are a lot of opportunities for banks to expand financial services to small and medium scale farmers through innovative financing, risk mitigation, and distribution models, as the previous models were not as successful.

They can provide financial access to small landholders and digitize their distribution channels to provide low-cost financial services to their customers.

Innovation in this context can be defined as new models that are not widely used yet, an adaptation of existing models in Pakistan’s context and downscaling models for small landholders.

These innovative models could mobilize additional resources for agriculture through the financial institutions/banks that finance agricultural SMEs and farmers.

These models also show the need to forge partnerships between various private sector actors along agricultural supply chains, as well as between private and public sector institutions.

Agricultural investment, particularly for small and medium enterprises (SMEs), is also known by the business and financial sectors as a profitable growth for business. Agricultural enterprise finance offers banks and financial institutions a major growth opportunity for the following reasons.

G-20 report reveals that global food demand is likely to grow 50 percent by 2030, led by emerging middle classes in urbanizing populations. Rapid sector expansion through strong buyers with profitable value chains will drive product procurement from SMEs.

Secondly, financing allows farmers to invest in new technologies and access better inputs, thus increasing yields significantly and contributing to food security and better incomes.

Thus, access to finance will help farmers move from the subsistence/semi-commercial level to become commercial farmers. Third, agricultural lending provides the opportunity to diversify larger portfolios. Lastly, innovative financing, risk mitigation, and distribution models hold some promise that the risks and costs of agricultural SME lending can be managed.

Three Innovative Finance Models for Agri-Loans

The innovative financing models are divided according to their repayment source or collateral into three categories: farmer, movable collateral, and buyer.

The first model is in which financial institutions targeting the farmer or groups of farmers, collateral generally involves cash flow analysis by banks in order to underwrite anticipated earnings, overall savings, and/or group guarantees.

Second financing model using by financial institutions is movable assets as collateral often include leased equipment or harvested commodities in warehouses.

The third financing model that relies on buyers as the repayment source is based upon an overall value chain analysis in which strong business relationships persist between farmers and buyers, and formal or informal contracts provide security to lenders.

Similarly, innovative distributions model including mobile banking, branchless banking, and mobile payment and recovery systems help support the innovative financing models.

As banks provide low-cost financial services to the rural agricultural sector, they connect with their clientele through a transaction history, learn about their needs, and develop relationships all of which are essential to build and maintain a profitable loan portfolio. This model may also reduce banks’ transaction costs through efficient loan disbursement and repayment systems, also provide access to customers that previously was out of reach.

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