1. International Conference on
Innovative Agricultural Financing
Promoting Agriculture Financing through
Islamic Banks
Challenges & Opportunities
Organized by: SBP & FAO
28 – 29 April 2015
Akram Khalid
Vice Chairman, SC FPCCI
2. Demand & Supply of Agriculture Credit
Perceived Demand Over 985 billion Rupees
Increasing @ 14.6 percent annually
Disbursements – Institutional
Public Sector Banks = 5
Private sector = 22* (Islamic* = 5)
Foreign = 7
Specialized = 4
Microfinance = 10
389 billion Rupees (30-JUN-2014)
Increasing @ 8.6 percent annually
Outreach 2.1 million borrowers
against 8.3 million farm households
Agriculture Credit in total lending 5.7 percent
Disbursements - Non Institutional
Aarthi / middleman
61 percent approx
3. Basic Comparison – Bank vs Aarthi
• Institutional lending : 39 percent
• Aarthi & Middleman : 61 percent
Interest / Mark-up
• Institutional lending: Up to 30 percent
• Aarthi / Middleman: Up to 80 percent
Security / Documentation
• Institutional lending: All legal documentation
+ collaterals
• Aarthi / Middleman: PDCs in rare cases
4. Basic Comparison – Bank vs Aarthi
Agriculture credit appetite: Rs. 985 billion
DESCRIPTION INSTITUTIONAL NON-INSTITUTIONAL
Cost to farmer Up to 30 percent Up to 80 percent
Security Complete documentation plus
collaterals
Negligible documentation.
No security. In rare cases
PDCs are required
Processing time 3 to 10 days Immediate (mostly)
Default Percentage is negligible compared to banks. Aarthis normally
do not initiate legal proceedings for recovery. They might
extend more support to ensure that farmer does not
collapse
Minimum Farm Size 12.5 Acre 1 acre
5. What makes Aarthis Successful?
Aarthis charge exorbitantly high rates of interest yet farmers prefer
to borrow from Aarthis instead of institutions. Why?
• Aarthi is an integral part of the rural society; he is available to the
farmer 24 hours just like a family member
• Aarthi takes immediate decision when a farmer approaches him
• While Aarthi’s decisions are motivated by profit, the comfort level
of farmer makes him indispensible
• Aarthi is his own boss so he can bend his rules according to
circumstances
• Aarthi normally does not require documentation, nor any
security. For new farmers, he might obtain post-dated cheques
• Aarthi extends support to farmer not only in farming but also in
routine daily life requirements. He extends support on occasions
of marriage, funeras, eid; even in buying clothing
6. How Aarthi Operate?
• Aarthi operates from the commodity market; banks do not
• Aarthi is integral part of the wholesale markets system; banks are
not
• Distributors find it convenient to supply inputs on credit to the
farmer at his farm; banks cannot get involved in such deals
• Aarthi is involved in functions such as picking of crop (large
farmers), storage, transportation, auction process, rate
determination; banks have no role in these processes
• Aarthi and farmer might know each other for generations; banks
do not have such a connection
• If there is a default, Aarthi would not let him die. He will extend
more support to help him repay the loan
7. Punjab Government’s Initiative
Bill passed in the Punjab Assembly Prohibition of
Private SectorMoney Lending Act 2007”
Now private money lending has become a non-
bailable offence with 10 years of imprisonment
and Rs. 500,000 fine
Some bankers are of the view that it will affect the
Aarthis business
But it is yet to be seen. If it does, it will adversely
affect the farming community as well
8. Islamic Banking
Concept: (1) Welfare & (2) Share in Profit & Loss
• Risk averse in financing transactions
• LIBOR & KIBOR are used as benchmark for product
pricing
• Murabaha is a major lending product
• Ijarah is a hybrid model of the operating & finance
lease
• Mudarabah & Musharika are considered by majority
of ulema to be real financing modes
• Bai Salam is said to be an approved form of Islamic
financing for agriculture community
9. Islamic Financing Product
Bai Salam / Bai Salaf means “to give in custody”. It is said
to be an approved form of Islamic financing for
agriculture community
• This product is said to be in line with the specific
guidelines of the Holy Prophet (pbuh)
• It is a sale transaction
• Seller undertakes to supply some specific goods to the
buyer at a future date
• Advance price fully paid on spot
• It is not Loan but a forward sale contract
• Seller and buyer can agree on any price at their free
will
• Price in Salam can be lower than the spot sale price
10. Conclusion/Recommendations
• Agriculture sector is vital for Pakistan’s economy. Its
growth will ensure:
– National Food security
– Provision of raw material for our major industry (textile). Half
of our foreign exchange is coming from textile exports
• Agriculture sector needs innovation and modernization for
growth & development
• Innovation and modernization need investment and
financing
• Despite progress, our agriculture has not been able to
become competitive in the international markets and
attractive for investors & financial institutions
11. Conclusion / Recommendations
• We need out of box solutions to create win-
win situation for farmers, investors and banks
• Herewith are two proposals:
1. We need to move towards corporatization
with a touch of cooperative model
2. We need to establish NBFIs to work on the
pattern of Aarthis
12. Corporatization
• Small farmer is living hand to mouth for centuries
• Rural youth is not willing to continue with the
profession
• Banks do not find it attractive to finance to the
farmers especially the smaller farmers
• Private sector investment can help establishing
cooperative models, modern farming techniques
and value addition
• Banks will be comfortable to lend to the
corporate entities
• Government should develop legal framework for
protection of farmers’ rights
13. Establishing NBFIs
• Establishing NBFIs should have the potential
to compete with Aarthis
• SBP should make regulations for NBFIs to work
on the pattern of Aarthis
• NBFIs should be allowed to seek deposits from
public and loans from banks
• Any Aarthi or a group of Aarthis who can fulfill
the regulatory requirement may be allowed
NBFI license
