If Pakistan’s agriculture is to thrive, farmers need banks. But the banks need farmers too

Over a year ago, HBL announced the launch of a new subsidiary by the name of HBL Zarai. This was a new, wholly owned company which would not be a financial institution. When the State Bank of Pakistan gave its approval at the beginning of 2024, it marked the first time the SBP was granting permission to a bank to set up a fully owned subsidiary that was involved in a non-financial business.

But the announcement had come in response to a growing need. A need that was not specific to any one bank. It was a sector-wide problem that had persisted for many years. 

Agricultural financing in Pakistan has long been considered high-risk and has mostly been collateral based. The issue has been that Pakistani banks have never really cared enough to try and understand agriculture. Think of it this way. Banks have branches in large cities. Over here, the business they get is for industries and other businesses that are more understood in urban centres. Meanwhile, there are very few bank branches in rural areas.

When a farmer walks into one of these rural branch offices looking for financing, they find there is very little leeway for what they can get. The bank might offer, for example, a loan that requires returning in 45 days. But this does not suit the farmer because his crop cannot be grown, harvested, and sold in the market in less than say 90 days. A loan under such conditions makes little sense for farmers. Adding on to this misery banks have often looked at farming and agriculture as a risky business. How will the bank collect its interest if a flood hits the crops or the weather means the yield is low? As a result of this most borrowing was based on skewed collateral. All of this combined to mean that farmers, in particular smaller landowners, 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.