Ease of credit access plays a critical role in agriculture progress in developing countries as it helps to procure quality seeds and fertilizers.
It also ensures the adoption of emerging technologies in the face of rising inflation, with Fintech solutions offering a better chance at more tailored financial services like crop insurance and financial advisory.
Formal banking institutions set strict loan thresholds while most farmers are marginal and sub-marginal, so they avoid the formal channels given their lack of collateral and complicated credit procedures. Commercial banks on the other find these investments risky given the inherently uncertain nature of agriculture.
According to the 2022 State Bank Annual Report, banks distributed Rs. 1.4 trillion in agriculture credit during the fiscal year 2021-2022 (FY22), against the target of Rs. 1.7 trillion.
In the non-farm sector, borrowings increased by 37 percent for small farms. This increase was primarily attributed to the rise in feed & wages of the poultry and livestock industry while the farm production and development loans actually decreased by 3.9 percent and 9.5 percent respectively.
Lending to large landholders declined by 20 percent as these farmers avoided credit with rising interest rates and preferred utilizing previous savings. The government is targeting Rs. 1.8 trillion in agriculture credit and microfinance during FY23 and the banks have distributed Rs. 1.2 trillion in nine months (July-March) of FY23, achieving 67 percent of their target.
According to the 2019 Asian Development Bank Report, 73.7 percent of farmers relied on informal sources for credit. The informal sources often exploit the farmers, pay lower prices, and hamper the socio-economic development of communities for generations.
Informal credit sources can range from friends and relatives to traders and commission agents. These channels not only provide better and quick services, but farmers also get a surety of financing for the next crop while the same level of trust is non-existent when it comes to institutional loans. 90 percent of farmers own less than five acres of land, and they cannot possibly leave their future in limbo over banks.
These commission agents also exercise social capital assisting farmers during a sudden need for money in case of a wedding or death along with political influence. Although farmers know that their future produce is locked to be sold to their creditors regardless of how low they price their crop, they are in a vicious cycle and have no one to turn to.
“Institutional investments can’t even meet 10 percent of the actual market size of agriculture financing in Pakistan,” said Humayun Dar, Head of Financial Services at Ricult which is Pakistan’s first Agritech startup and is working towards democratizing lending to the farming community.
He pointed out that Pakistan’s agriculture market is worth $7 billion and all the vacuum has been filled by the unregulated informal credit that is exploitative in nature. He explained that Ricult provides Pakistan’s first credit scoring model particularly designed for agriculture that enables banking institutions to mitigate risks.
“We also provide real-time data from satellites on crop status to banks through one dashboard so that they can analyze their portfolio in one glance” added Dar. Ensuring compliance and recovery has been another major challenge for commercial banks in providing agriculture credit for which they used to need people on the ground meeting farmers routinely, but all banks could not build on that model.
These emerging financial technologies can fundamentally change the way credit is requested and approved. Through a much-needed collaboration between banks, fintechs, and telcos with their vast reach, farmers can request these loans remotely through a simplified application process and can establish their credit histories.
The lack of financial literacy also keeps the farmers from understanding the intricacies of lending procedures, interest rates, and repayment schedules. According to World Bank Findex data, only 21 percent of Pakistan’s adult population had a bank account. The government must utilize its extensive resources to raise awareness, ensure comprehensive outreach and broaden credit access for financial inclusion.
Fintech solutions also have a better chance at other more tailored financial services like crop insurance and financial advisory. These companies can better design and target their services for farmers by utilizing the real-time data gathered through satellite imagery and weather forecasts.
Broken agri-value chains have also contributed to the financial exploitation of farmers with unfair pricing, delayed payments, and the absence of necessary infrastructure. It brings additional uncertainty to a sector that is already under threat from extreme weather events and water shortages.
It deprives farmers of predictable income streams that otherwise could’ve helped a lot when farmers request commercial banks for credit. Promoting market infrastructure and strengthening value chains can go a long way in instilling confidence among lenders and making credit more accessible to farmers.
The government also tried low-interest loans through Kisaan Card Initiative, but the program lacked adequate coverage & transparency required to provide confidence and value to the farming community. It is going to take a lot of trust-building for farmers to detach themselves from the informal credit channels.
“Being in business since 2015, we have seen the ecosystem evolve in front of our eyes” commented Dar. He maintained that it is not easier to fix a sector that’s been neglected for so long, but he is hopeful that the industry will look a lot better five years from now.