Suggestions on Agricultural Finance by State Bank of Pakistan

8/14/2019 Suggestions on Agricultural Finance by State Bank of Pakistan

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Mufti Ehsan Waquar Ahmad [email protected] Page 1

Suggestions on Islamic Agricultural Finance

Looking at the recent guidelines on agriculture finance published by the State Bank of

Pakistan is a good initiation agricultural development. Different modes of financing and its

implication have been suggested. But the main issue that bother financial institutions, isthe risk associated with agricultural sector. Let me be a little more precise, the non-

performance. As stated in the press also regarding the governor s speech it was stated that

He had also informed about the non-performing loans of agriculture sector that had

declined to 17 per cent in December 2008 from 20 per cent in December 2007 as a result

of improved overall recovery rate of 76 per cent in December 2008 from 71 per cent in

December 2007. Regretting the trend of uneven geographical distribution in agriculture

credit disbursements, the SBP governor urged commercial banks and other stakeholders to

work in close liaison to improve the agricultural credit outreach in the country.

Islamic Development Bank is also ready to finance up to 65 per cent of the total cost of

projects in textile, agriculture, energy, food, hosiery and garment sectors to foster economicdevelopment in Pakistan.

The concern and the dilemma when we talk about agriculture financing are the credit

recovery and its performance. With the evident experience of the public institution like

Agriculture Development Bank of Pakistan (ADBP) and that of similar nature, we should

device a concrete recovery mechanism in order to make the funds productive.

Consequently the promotion of agricultural economy will turn out to be more perpetual.

If the foreign support is provided with securitize credits, the outcome will insha Allah,

prove to lead towards a prosperous Pakistan. Some suggestions are documented below for

the purpose of idea generation. Although these are very fundamental suggestions but thesecan be helpful in devising agricultural schemes. If a workable mechanism is developed it

will assist the proposal effectively. International experiences of models used in Sudan and

Bangladesh (Grameen Bank) may also be useful.

GoP Guarantee

In order to securitize the credits, if GoP guarantee can be formulated, this step will prove

the serious intensions of the government. The recent concern and interest in promoting

agriculture sector will become more sincere. It can be initiated especially when the Islamic

Development Bank has shown its interest in promoting the sector also. As the State has

good control over the rural area with the collaboration of its agents and officialscontrolling the region. If the Government of Pakistan is sincere to support the new credit

line in this sector, an agriculturist who is interested in availing any financial facility can

approach the government and ask him to provide a guarantee in his favor to the financial

institutions. In order to assure the government some collaterals and securities can be

offered by the agriculturist to the government so the guarantee is issued against that

security. In case of non-performance and defaults, the state will have the powers for the


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recourse and exercising the security. The will have the right to adjust the loan aginst the

proceeds. This guarantee will also affect the pricing as the minimum default rate will

subsequently lower the cost of borrowing.

Insurance and Takaful premium will be more viable if such arrangements are made. This

will hopefully reduce the premium also thus again affecting the cost of borrowing to moveon a lower price.

Charity Fund

Islamic bank cannot charge penalties on defaults. Therefore they impose a charity clause.

The details are that defaulters are liable to pay a self imposed charity on occurrence of

defaults. The charity is collected by the banks and disposed of to charitable organizations.

If these funds are utilized to entertain the genuine defaulters who are not evading the

repayments, is another constructive utilization of the funds. Thus the funds will be

reinvested in the economy or more precisely the same sector that is mobilized to support

the agricultural development.

For this purpose, if the charity funds can form a pool like the pool formed under the

takaful arrangement, it will provide assistance to those who encounter bankruptcy because

of force majeure circumstances. The effected individuals can be compensated through the

fund thus repayment of this loan is arranged through that pool. But again the mechanism

and filter so devised should be transparent enough so that the deserving individuals can be

assisted only.

This fund can be expanded not only in agricultural financing but can serve the small and

medium enterprises, cottage industries and microfinance sector.

Disposal of the Commodity under Consideration

Another major issue is the disposal of the commodity purchased through Salam or Istisna

mode of finance. As Islamic banks deal is commodity not like conventional banks, this

problem can be resolved if the agricultural sector, financial institution and governmental

institution like PASSCO, TCP etc can work together to form a mechanism. Together the

three will participate in promoting the agriculture sector. A tri party collaboration will

mobilize the economy in a very effective manner. The public entities like PASSCO, TCP

etc can purchase these commodities initially purchased by the Islamic Financial

Institutions. As a result, the state can arrange its future purchase through this channel,

encouraging the banks to participate.

This will not only help in controlling the prices more efficiently, but also in subsidizing the

borrowing cost. Subsequently this will assist the whole economy and the basic necessities

can be provided at modest price to the public. It will also bar activities of black marketers.


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This arrangement can also help the Islamic financial institutions in managing their short

term liquidity issues. Those institutions falling short of funds can enter into a parallel

Salam/ Istisna at a discount rate. They will receive the funds immediately and on the other

hand institution with surplus fund will place their liquid assets to generate profit.

Even Salam transaction against machinery and other equipments will be easier and secure.Farmers can be paid in terms of usufruct of machinery and other equipments and crops

can be booked as the commodity. Similarly usufructs of tractor, other machinery and

equipments can be used as a mode of exchange. Again it will bring multi effect not only in

the agriculture but also in other industries within the economy.

New irrigation system and improvement of those already existing can be devised through

Istisna base financing on BOT basis. Global funds for rural development can be utilized to

form such schemes and develop new agricultural lands also.

Sukuk of such projects can be of great interest for the local and foreign investments.

Especially with the Islamic financing mode being the underlying instrument and the strongreligious factor to avoid riba involvement is expected to fly this scheme high.

A very vital objectivity; equitable justice in the distribution of wealth the backbone and

the essence of Islamic economy can emerge if theses institution and sector are able to

device any such mechanism.

These are my personal views and not necessarily my institution may have consensus with

them.

Mufti Ehsan W. Ahmad

[email protected]
mailto:[email protected]:[email protected]:[email protected]

Suggestions on Agricultural Finance by State Bank of Pakistan

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