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Agriculture is considered the backbone of Pakistan’s economy. It contributes to almost 20% of Pakistan’s GDP, employs almost 42% of the labor force and directly accounts for almost 20% of Pakistan’s exports, according to the latest economy survey of Pakistan. Despite all that, it is one of the most un-tapped market for financial service providers. Farmers have long tales of woes and misery. The operating environment for a farmer is challenging, the linkages in the agriculture finance value chain are missing or frail or too rigid, the financial products are unsuited to farmers’ needs and banks have failed to come up with a viable model to financially include this large segment of active economic agents. Unattended, they revert to arhtis (the middle men) who are buyers of their produce, suppliers of their inputs and, when needed, lenders of last resort

Pakistan’s rural population was reported at 63% of the total population in 2019, according to the World Bank collection of development indicators. Majority of them are not connected to formal banking network due to multiple reasons. Formal checking account ownership is lower in rural areas than in urban areas. Penetration of formal banking accounts in Pakistan is critically low. Just over 21% of Pakistanis have bank accounts, including the Microfinance Bank accounts, branchless banking accounts and formal checking accounts offered by the commercial banks. of the total accounts,39 million accounts belong to branchless banking.

Over the decades, we have witnessed that Pakistan’s formal banking sector has failed to meet the credit demand of small farm holders that has hindered the progress of the sector consequently. In the first nine months of FY 20, agriculture credit disbursement had reached at PKR 912 billion against the aggregated demand and yearly target of PKR 1,518 billion and 1,350 billion respectively, that is just 11% of the total advances of the domestic banking sector for the sector that is contributing 20% to Pakistan’s GDP.

Financing this low income, high risk, lousy organized rural sector -subject to environmental factors-that are hard to predict and control has always been a colossal challenge for the financial service providers. Thanks to technological innovations and digital financial services, that have made it feasible for lending institutions to serve the agriculture sector in rural economy. New solutions have created less expensive opportunities for gathering, analyzing and processing information. To determine the credit worthiness of a farmer, multiple variables can be banked upon, ranging from documented income and expenses relating to agricultural activity to historical yields in the region to a farmer’s historical yields for the crop to be financed to price charts of the crop over the past 5 years.

Digital Financial Services (DFS) are playing an instrumental role in financial inclusion of farmers in developing countries. From Ghana to Kenya to Columbia to Rwanda to Zimbabwe to Senegal, DFS have opened new avenues of growth. M -Shwari, Apollo Agriculture, Bancamia, Tula are one of the many Non-Banking Financial Companies (NBFCs) offering new and customized digital financial products to their farmers and leveraging the use of technology to address the chronic financial challenges faced by farmers. Though, in Pakistan, total lending of NBFCs stands at 1.81% of the total domestic lending ,while In India, credit provided by NBFCs makes up 26% of overall credit.

Digital Financial Services (DFS) provide a gateway to bank the unbanked agriculture segment. Pakistan is no exception in this regard. Since the introduction of Branchless Banking regulations in 2008 by the State Bank of Pakistan, mobile banking has helped to bring millions of un-banked and low-income people into formal banking network at substantially reduced cost. As of June 2020, Pakistan is reported to have 167 million cellular subscribers, that is equivalent to 79% of the country’s population. High percentage of mobile phones penetration and increased network connectivity ensure that the DFS are readily accessible. These numbers provide a huge opportunity at hand.

The Agriculture Department of the Government of Punjab has attempted to capitalize on this opportunity. The department, in an effort to leverage the scale of technology, joined hands with a Mobile Network Operator (MNO), having Branchless banking operations to digitize the disbursement of fertilizer subsidy payments to the registered farmers. It was a time and cost-efficient solution and a much-needed step in the right direction. The department, in collaboration with Punjab Land Records Authority (PLRA), launched an E-Credit schemed titled “Empowerment of Kissan Through Financial and Digital Inclusion” in 2016 to promote the financial inclusion of farmers. It aimed to promote financial inclusion of farmers through ease and swift credit disbursements. As of now, a credit amounting to Rs. 61.99 Billion has been disbursed by the participating financial institutions under the E-Credit Scheme. This significantly reduced the credit disbursement time from 30 to 3 days and eliminates the role of patwari and agents but the department has faced challenges in upscaling the volume.

Times are changing. In 2019, State Bank of Pakistan issued regulation related to Electronic Money institutions (EMI) to streamline their working. Electronic Money Institutions (EMI), somewhat similar in principle to non-bank finance companies, provide an opportunity to fill this big void by designing financial products targeting specific value chain to meet the credit needs of small farm holders. Stakeholders involved in agriculture value chain have started designing, experimenting, and implementing the best suited digital financial products for agriculture sector. A local agriculture inputs providing company has partnered with an EMI to design an initial go-to-market product to improve Sugarcane farmers’ access to quality inputs (fertilizer, pesticides) by offering them credit at a substantially reduced cost to purchase inputs. Besides, agronomic advice will also be offered through SMS, automated voice calls and field staff. Unlike the banks, this go-to-market product will offer cost effective, swift and customized solution to farmers. This is a much-needed intervention to upscale the size of agriculture credit and has great promise for showing a direction to the financers of the agriculture sector.

All is however not well. EMIs are subject to many limitations, for example, non-integration to payment systems, inability of offering checking accounts, smaller monthly and daily withdrawal limits etc. ,that inhibit their ability to design the best suited financial products for their customers.

Agriculture is the foundation of Pakistan’s economy and it is the engine of growth. We did miss the opportunity of financing agriculture through conventional banking. Jury is out whether regulators, financial sector and innovators would be able to come together for leveraging the technological advances to realize the full potential of the agriculture sector in Pakistan. And whether we would see the positive multiplier effect on economy, GDP, employment and economic development of Pakistan!

Osama Farooq

Mr Osama Farooq, a business graduate by education, spends most of his time with farmers in the field and is a practitioner who finds ways to innovate to better serve the agriculture sector