sbp-fao conference
TRANSCRIPT
International Conference on Innovative Agricultural Financing
Promoting Agriculture Financing through
Islamic Banks
Challenges & Opportunities
Organized by: SBP & FAO
28 – 29 April 2015
Akram KhalidVice Chairman, SC FPCCI
Demand & Supply of Agriculture Credit
Perceived Demand Over 985 billion Rupees Increasing @ 14.6 percent annually
Disbursements – InstitutionalPublic Sector Banks = 5Private sector = 22* (Islamic* = 5)Foreign = 7Specialized = 4Microfinance = 10
389 billion Rupees (30-JUN-2014)Increasing @ 8.6 percent annually
Outreach 2.1 million borrowersagainst 8.3 million farm households
Agriculture Credit in total lending 5.7 percent
Disbursements - Non InstitutionalAarthi / middleman
61 percent approx
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
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
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 thefarmer 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 levelof farmer makes him indispensible
• Aarthi is his own boss so he can bend his rules according tocircumstances
• Aarthi normally does not require documentation, nor anysecurity. For new farmers, he might obtain post-dated cheques
• Aarthi extends support to farmer not only in farming but also inroutine daily life requirements. He extends support on occasionsof marriage, funeras, eid; even in buying clothing
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
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
Islamic Banking
Concept: (1) Welfare & (2) Share in Profit & Loss
• Risk averse in financing transactions
• LIBOR & KIBOR are used as benchmark for productpricing
• Murabaha is a major lending product
• Ijarah is a hybrid model of the operating & financelease
• Mudarabah & Musharika are considered by majorityof ulema to be real financing modes
• Bai Salam is said to be an approved form of Islamicfinancing for agriculture community
Islamic Financing ProductBai 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 specificguidelines 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
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
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
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 techniquesand value addition
• Banks will be comfortable to lend to thecorporate entities
• Government should develop legal framework forprotection of farmers’ rights
Establishing NBFIs
• Establishing NBFIs should have the potentialto compete with Aarthis
• SBP should make regulations for NBFIs to workon the pattern of Aarthis
• NBFIs should be allowed to seek deposits frompublic and loans from banks
• Any Aarthi or a group of Aarthis who can fulfillthe regulatory requirement may be allowedNBFI license
Thank you