Agriculture credit understanding is important not just for improving a country’s balance of trade, but also for ensuring the security and health of its population. Apart from clean water, access to adequate food is the primary concern for most people on earth. This makes agriculture one of the largest and most significant industries in the world. That’s why it has become a global challenge to feed the expected 10 billion population of earth by 2050.
Agriculture Sector in Pakistan
With the growing population especially in low-income countries like Pakistan, there has been an increased demand for agricultural commodities in the last two decades 1 . The disruptions in the supply chain caused by conflicts and war have exposed agriculture and food security to this risk. On top of this, high inflation and climate change have made it even worse with millions of people at the risk of being pushed into poverty.
Agriculture Sector’s Share in Global GDP
Global GDP consists of three main economic sectors: industry, services and agriculture. When the pandemic hit the world, the share of industry and services in global GDP fell in 2020. However, the value added by agriculture in the global GDP kept increasing 2. This highlights the importance of the agriculture industry for the survival of people on the earth.
Agricultural Value Addition by Asian Countries
Since the production of agriculture largely depends on the land area and people living in that area, Asia, which has a large geographical size, has contributed the most in terms of value added to agriculture. The agriculture value added by the Asian countries accounts for more than 65% of the total value added by agriculture globally as shown in the below chart 3.
Agriculture Profile of Pakistan
It is interesting to note that Pakistan is one of the countries where the share of agriculture in GDP exceeds that of industry. The contribution of agriculture output to GDP of Pakistan is around 24% and employment of 37.4%Â 4whereas the share of industries in GDP is around 18.5% 5. The share of agriculture in total exports of the country is around 70%. Globally, Pakistan is the 15th largest agricultural producer in the world 6. In Asia, Pakistan is the 4th largest agriculture economy with respect to contribution to agriculture value added followed by other major contributors China, India, Indonesia.
Establishment of Special Investment Facilitation Council (SIFC)
With the size of its output, Pakistan is considered a significant sector in the country which affects food price inflation, employment, GDP, economic growth and food security. Major crops include cotton, wheat, maize, sugarcane, and rice. Keeping in view the significance of this industry, agriculture is the primary target area of the Special Investment Facilitation Council (SIFC), a newly-established authority to boost the economy and enable one-window operation for businesses interested in exploring the economic potential of Pakistan and investing in various sectors.
It is pertinent to mention here that the value added by a country’s agriculture industry is usually measured in terms of dollar which could be affected by the exchange rates in the respective country. Therefore, it is important to look at the tonnage of the commodities produced because lower exchange rates in the low-income countries do not show the large dollar values of the commodities produced in these countries. This is particularly true in South Asian and African countries which are middle or low-income countries.
One of the reasons for this is the lack of infrastructure in these countries. Absence of an enabling infrastructure makes it difficult to move the commodities to the market which in turn increases the cost of food supplies.
Agriculture Cooperation Between Pakistan and China
In order to capitalize on modern technology for value addition and enhanced productivity, Pakistan is taking measures at different fronts. One instance is the establishment of the agriculture cooperation between China and Pakistan under the China Pakistan Economic Corridor (CEPC)] which is aimed at capacity building, food processing, adoption of technology, among others 7.
The significance of this cooperation manifests due to the fact that China is a major player in the global as well as local market in terms of export and production of agricultural products. In Asia, China is the largest country in terms of value added by its agricultural produce while its trade value of farm products was around 330 US Billion dollars 8. So, the experience and technology of China can help Pakistan foster its agriculture industry which is the significant pillar of the economy.
Pakistan’s Arable Land
The global average for agriculture land is around 38% whereas the arable land is around 47% in case of Pakistan which is 9% higher than the global average. It is the 4th largest exporter of rice and 5th largest milk producing country. The total arable land is around 30.23 Million Hectares with the Punjab having the largest share (13.98) followed by Balochistan (6.69) whereas the Sindh and KP have 6.35 and 3.21 Million Hectares respectively 9.
Province Wise Breakdown of Culturable Waste in Pakistan
Talking about culturable waste, the uncultivated farm area which is fit for cultivation but was not cropped during the year under reference nor in the year before that, Balochistan, which has the second largest arable land is the highest in culturable waste. 3.79 Million Hectares is the culturable waste in Balochistan. Similar is the case with Sindh province. Sindh has the 3rd largest arable land but in terms of culturable waste, it is the second (1.61) after Balochistan.
However, if we look in terms of ratio, Punjab and Sindh are doing better than KP and Balochistan. KP and Baloshistan have almost half of their arable land in culturable waste. Punjab is doing better among all the provinces in terms of cultivation. Out of 13.9 Million Hectares arable land, it has only 1.45 Million Hectares in culturable waste.
The above numbers resonate with the agri-credit provided to borrowers of each province. The number of borrowers who have been disbursed during the fiscal year 2024 is the highest in Punjab followed by Sindh 10. On the other hand, Balochistan has the least number of disbursed borrowers (around 8 thousands) and amount disbursed (around 11.2 Million rupees).
Agriculture Credit of Pakistan
There is a dedicated department at State Bank of Pakistan (SBP), Agriculture Credit & Financial Inclusion Department (ACFID), to promote agriculture credit in Pakistan. Some of the stated goals of the agriculture credit department are:
- Assessment of the credit requirements of the farm and non-farm sector
- Review of prudential regulations for agriculture sector
- Collaboration with the federal and provincial governments, commercial and microfinance banks to promote agriculture finance. 11
As noted above, agriculture has 24% share in GDP of Pakistan however it share in credit by commercial banks is lower compared to other components of the GDP. The total credit provided by the commercial banks to the agriculture sector which includes forestry and fishing is 400.878 Billion rupees. On the other hand, the manufacturing and mining sectors which contribute only around 12% to GDP 12 have been provided 4.8 trillion rupees 13. The ratio of agriculture credit to total credit to the private sector is only 5.7 percent.
Major portion of the agriculture, around 399 billion out of around 400 billion, advances goes to crop and animal production and related service activities whereas only around 1% of the total agriculture credit is advanced to fishing and aqua-culture. The share of agriculture in fruits including tropical, citrus and stone fruits is only around 2.6 billion.
The amount of bank deposits by the agriculture sector (crops and animal production etc) is 212 billion rupees whereas the deposits by the manufacturing sector is 1.6 trillion rupees 14.
Non-performing Loans in Agriculture Sector
The lower share of agriculture credit in total advances extended by the bank is not without valid reasons. The commercial banks seem to be reluctant in financing the agricultural sector for a number of reasons. One of the reasons is the lack of proper documentation in this sector which makes it difficult for the banks to perfect their security.
Another reason is the high number of non-performing loans (NPLs) in agricultural advances. The ratio of NPLs in the agriculture sector is 12.2 percent which is higher than that of the corporate sector as of June-24. The NPLs in the corporate sector is 8.9 percent. The ratio of NLPs in the SME segment is even higher than the agriculture sector, 16.4 percent 15.
The agriculture- related loans in the microfinance banks (MFBs) also share the same story. The microfinance banks extend heavy advances to the agriculture and livestock sector compared to other sectors. However, the NPL is higher in MFBs too as is the case for commercial banks. The NPL ratio for agriculture and livestock is 14.20 and 10.07 percent respectively which is higher than those of other sectors.
Target for Banks
To promote the credit to the agriculture sector, SBP sets targets each year for commercial banks including microfinance banks. These targets are set keeping in view the number of factors including the size of operations of the banks. For most of the banks, these targets have been increased or at least kept constant for 2023-2024.
However, it is interesting to see that the only commercial bank for which the target has been reduced from 2023 to 2024 is Zarai Taraqiati Bank Limited (Z.T.B.L) the bank which has been established for the very purpose of providing financial services for the agriculture sector. The target for agriculture credit in 2023 was 124 billion rupees which has been reduced to 115 billion rupees 16. Despite reduction in the yearly target, it has still failed to achieve this target. The target achieved by Z.T.B.L in 2023 and 2024 was 60.8 and 69.1 respectively. The same has been observed in other government entities except for the Bank of Punjab.
We can observe from the above table that Sindh Bank Ltd. is the lowest in terms of achieving the target for both 2023 and 2024 among its peer banks except for The First Woman Bank Ltd. which has achieved only 2.2 and 2.6 targets in 2023 and 2024 respectively. Among government banks, The Bank of Punjab is the only bank to achieve its agri-credit target.
In the microfinance banking industry, NRSP Microfinance Bank Ltd which largely operates in rural areas, is the only bank with the target reduced from 2023 to 2024. The targets for NRSP were 40 and 30 billion in 2023 and 2024 respectively.
The above numbers show the state of the agriculture sector when it comes to providing credit. This is why the chief challenge faced by the agriculture sector is excluding formal funding sources i.e., commercial banks.
Electronic Warehousing Receipt (EWR) Scheme
Keeping in view these challenges, SBP has introduced the electronic warehousing receipt (EWR) scheme with the aim of facilitating all the stakeholders in the value chain including farmers, traders and processors. Under the said scheme, the commodities are stored in accredited warehouses and these stored commodities serve as adequate collateral to avail financing from the banks. The EWR financing is supposed to benefit all the stakeholders; banks, farmers and storage facility managers.
Due to unavailability of adequate storage facilities, farmers are compelled to sell their produce at a lower price. With the EWR, farmers would be able to store the produce in these warehouses and get loans/financing from the bank against keeping the stored commodities as collateral. The first EWR was issued in Hafizabad, Punjab against paddy and rice 17.
SBP Credit for Agriculture Sector
If we look at the statement of affairs of SBP, a similar trend is observed. Out of 1.29 trillion (925.758 billion for conventional and 374.171 billion for Islamic financial institutions) credit provided by SBP for the agriculture sector, only 6.11 billion (4.1 billion to conventional and 1.9 for Islamic financial institutions) as of June-2024.
At aggregate level, this makes up around 0.00474%. This means that 4,740 out of every 1 million of total credit is allocated to agriculture 18.The major chunk of the credit provided by SBP to financial institutions for purposes other than monetary policy goes to the export and industry sector.
Conclusion
Money does to business as blood does to the body. To develop and sustain the agriculture sector, it is important that this sector is financially included and has access to funding sources like other industries. This is especially true for small farmers who are largely excluded from the credit facilities provided by the banks. This makes them sell the output of their hard work at cheaper prices.
Another reason for having credit lines with the bank is adoption of technology. The technology does not come cheap. One has to arrange funding to expand its agribusiness and deploy modern technologies. For this, they can take financing from the banks.
The above data also shows the inefficiency of allocation of resources. The sector which contributes more has less access to credit and the sectors which are less in terms of their contribution to GDP have more access to credit and funding lines from the banks.
Another takeaway is the situation of state-owned banks. These banks are far behind from private commercial banks in terms of achieving their targets. It is needed to bring transformation in these entities and make governance more efficient so that these entities work as vehicles for providing credit to the neglected agriculture sector.
Sources
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