The State Bank of Pakistan (SBP) has approved Habib Bank Limited (HBL) for the establishment of a wholly owned subsidiary HBL Zarai Services Limited, according to a bank’s notice to the Pakistan Stock Exchange (PSX) on Friday.
The decision to establish ‘HBL Zarai Services Limited’ was made by the bank in July of this year, to foster and support the agriculture sector in Pakistan.
According to a report by Profit, the launch of the subsidiary would mark an important milestone for the country’s agricultural sector which has remained largely unserved by the formal banking sector.
In July, at the launching of their “2022 Impact and Sustainability” report, HBL’s CEO and President Muhammad Aurangzeb said the bank received permission from the SBP to establish a special subsidiary called “Zarai” (agriculture), which will help small and medium-sized farmers improve their agricultural output.
Agricultural financing in Pakistan has long been considered high-risk and has mostly been a collateral base. However, farmers with smaller land holdings have not been able to access formal banking channels because they do not have much to put up as collateral, and also because bank repayment timelines are rarely catered to crop cycles.
As a result, lending to farmers remains low. In 2022 for example, according to a PWC study, allocation of loans to priority segments, namely Small and Medium Enterprises (SME) and Agriculture, has been relatively low, accounting for less than 8% of the total loans. Specifically, SME loans constitute 4.2% of the portfolio, while Agriculture loans account for 3.6%.
Moreover, these penetration levels have been witnessing a decline over the past several years. This declining trend highlights the need for attention and support to bolster lending in these crucial sectors to foster their growth and development.
