Lending in Agriculture Project

In recent decades, Pakistan’s gains in agricultural productivity have stagnated, leading to a considerable problem for the country’s development overall, since agriculture accounts for over 19% of the nation’s GDP and employs around 40% of its labor force. Globally, most interventions in agriculture have focused narrowly on a single dimension of treatment, either technology, credit, mechanisation, or information.

Few interventions have attempted to target broadly the array of problems faced by smallholders. The teams from Princeton, Yale, CERP, and HBL’s Development Finance Group (DFG) examined Pakistan’s agricultural sector in detail and identified three major problems: (i) production inefficiencies; (ii) inadequate access to markets; and (iii) lack of financing. The analysis showed that these three problems were interlinked. Farms produce low yields of inferior quality, and farmers must navigate a maze of extractive selling institutions to earn a meager profit. With insufficient income or wealth to invest in improving their operations and a limited understanding of how to access formal credit, farmers rely on exorbitantly priced financing from local middlemen. Although agricultural loans are available from all commercial banks, access is difficult, and loan utilisation is fraught with inefficiencies. Farmers are thus unable to escape a cycle of poor production and inefficient sales. Therefore, it is extremely difficult for farmers to improve their crop yield, increase profits, and achieve socio-economic progress without a broad-based intervention.

Solution

To break this negative cycle, HBL launched an innovative financial solution in late 2019, based on an integrated approach towards the entire agricultural value chain. To resolve production inefficiencies, HBL agreed to connect participant farmers with suppliers of high-quality inputs (e.g., seeds, fertilisers, pesticides) and the latest mechanisation services, thus creating a network of partner organisations. Further, HBL provided an in-house team of expert agronomists to advise growers on the best agricultural practices and oversee their implementation throughout the crop cycles. To combat extractive selling institutions, HBL also connected farmers to local, bulk buyers, who could offer market-competitive prices and provide payment within a stipulated time frame, ensuring that farmers earned profits. All of this was done under the ambit of HBL’s Development Finance model, in which the bank facilitates the provision of products and services through select third-party suppliers, rather than simply lending cash to the farmer. The arrangement aims to improve net cash flows for farmers and spare them from additional transaction costs that are commonly charged by traditional agricultural market intermediaries called arthis.

Additionally, Princeton University and CERP together led surveys of farmers and collected data at the plot level. Moreover, the team also pioneered the use of satellite imagery at this scale in Pakistan. Satellite remote sensing is used to provide real-time crop health monitoring and tailored guidance on how to improve farm productivity. This data was used to assess the impact of the project on the farmers and Pakistan’s agricultural sector in general.

Unsecured Lending & Financial Inclusion

Suboptimal production and inefficient selling are pervasive issues throughout Pakistan’s agriculture sector, regardless of the size of farmer landholding. Farmers who own fewer than seven acres, which are most of Pakistan’s farmers, are naturally more susceptible to detrimental effects of supply-side shocks. HBL’s program has been unique in its effort to help these small-scale farmers through unsecured lending. Even tenant farmers, who are traditionally excluded from financial markets due to their lack of collateral, have been included in the program. HBL’s midscale interventions have focused on small-scale farmers with average ownership of three acres per farmer, including some farmers who own as little as one acre of land.

Through this approach, HBL has not only impacted the profitability and productivity of the often-neglected small-scale farmers, but it has also progressed in its aim of achieving greater financial inclusion in Pakistan. Moreover, involving an increasing number of farmers (with most of them based in rural areas) in formal credit markets greatly improves the scale of financial opportunities available to them. Similarly, it also decreases their dependence on extractive and inefficient selling institutions.