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Finance minister launches 2nd Challenge Round of Financial Innovation Challenge Fund

Karachi, March 06, 2014 (PPI-OT): Federal Minster for Finance, Revenue, Statistics, Economic Affairs and Privatization 6th March 2014 (10.30 am), Serena Hotel, Islamabad

His Excellency the UK’s High Commissioner, Mr. Philip Barton,
Governor (A) SBP, Mr. Ashraf Mahmood Wathra,
Head of DFID Pakistan, Mr. Richard Montgomery,
Distinguished speakers, guests, ladies and gentlemen,

Assalamo alaikum and good morning!

It gives me great pleasure to be part of this ceremony to launch the 2nd Challenge Round of Financial Innovation Challenge Fund on “promoting innovative agricultural and rural financing in Pakistan” under the UKAid-sponsored “Pakistan Financial Inclusion Programme” being implemented by the State Bank of Pakistan.

Let me say that the strong ties between the governments and people of the UK and Pakistan are deeply rooted, and manifest in close cooperation on diplomatic, trade, finance and development issues. The partnership between DFID and SBP in promoting financial inclusion to reduce poverty in Pakistan has further strengthened the bond between the two countries.

I would like to congratulate both the State Bank and the UK’s Government through DFID Pakistan for achievement of this important milestone. This, I believe, will go a long way in promoting inclusive economic growth through provision of demand-driven innovative financial services for the low-income and unbanked population particularly our agricultural households and rural entrepreneurs.

Ladies and Gentlemen!

Globally, agriculture sector has gained renewed significance due to food security and climate change emerging as the key challenges facing the world. As such, it has, once again, become the central focus of the global development agenda.

In order to sustain the expanding demand for food and agricultural commodities of a growing world population and reduction in per capita cultivated land, agribusiness must expand both geographically and in terms of productivity to generate increasing outputs. This would require increasing resources and investments to reduce the level of uncertainty and volatility in the sector.

In case of Pakistan, the significance of the agriculture sector is even greater. It is one of the major sectors of Pakistan’s economy and contributes 21 percent to the GDP. It employs around 45 percent of the total labour force. Around, 68 percent of our rural population is dependent on agriculture sector for their livelihoods. Agriculture plays a strategic and vital role in ensuring food security, generating economic growth, and reducing poverty and inequality.

Agriculture also raises productive capacity of the economy through its backward and forward linkages with the industries and increases potential for growth through its impact on the services sector. For instance, it contributes a major portion of our foreign exchange earnings through exports of raw products including rice and cotton processed and semi-processed products such as cotton yarn, cloth, carpets and leather products. Hence, agriculture is essential for sustainable improvements in our internal and external balances.

Ladies and Gentlemen!

I believe, these challenges and opportunities must increase the interest of agriculture players and investors to scale up existing systems and experiment new “disruptive” technologies and solutions.

Now turning to the importance of agriculture finance in the agenda of the Government, it was the PML government in the 1990s which initiated the banking sector reforms in Pakistan. Since then, Pakistan’s banking industry has witnessed a major transformation. Supported by market oriented policies, the banking industry has witnessed a number of positives such as an accelerated broadening, deepening and diversification of banking services.

However, owing to a late start, Pakistan has relatively lower levels of financial access compared to other countries at similar levels of economic development. I am told that the banks’s financing to the agriculture sector has recently picked up as the banks disbursed Rs. 336 billion to the farming community against the indicative target of Rs. 315 billion.

The current year’s target has now been revised upward to Rs. 380 billion from the provisional target of Rs.360 billion. However, currently, the credit to agriculture sector and related activities is still low as it accounts for 7% of the loan portfolio of commercial banks which is nowhere near the agriculture’s percentage share in GDP. Similarly, the current agriculture credit outreach at around 2.4 million farmers as against total 8.3 million farm households in the country is also very low.

The picture becomes even more bleak in case of small farmers where agri. credit outreach is limited to only 23% of 5.3 million small farm households. This is due to the fact that outreach of banks is currently limited in rural areas and also due to outdated modes of financing through collaterals such as title documents etc. which excludes the non-farm activities and landless farmers.

This also means that the non-crop sector which contributes more than 50 percent of agricultural GDP remains neglected in terms of its financing needs. Similarly, the financing should be directed towards medium and long term investments in both farm and non-farm sub-sectors.

The non performing loans (NPLs) of the banking industry in agriculture financing stand high at 12.5 percent. This is far less for those commercial banks who have better understanding of the sector. These banks have developed better follow up, techniques. Other banks have to study their models to improve their NPLs.

Ladies and Gentlemen!

In Pakistan, rural and agriculture finance market is characterized by low landholding and productivity, making it unfeasible for financial institutions to fund agriculture and create economies of scale through conventional financing practices. In addition, banks lack understanding of agricultural sector and market infrastructure.

Moreover, lack of enabling systems and legal environment renders collateral value questionable due to manual system of land record in most of the provinces resulting in lower credibility of land titles. Similarly, the agriculture marketing, processing and services sector is characterized by non-transparent value chains, powerful traders, fragmented farmers (price takers). Further, on demand side, low financial literacy and lack of understanding of banking requirements leaves farmers outside the net of financial system. The above issues require a holistic approach for development of agricultural sector and finance in Pakistan.

Ladies and Gentlemen!

The rural areas of Pakistan hold a significant untapped potential of creating a vibrant market segment. With development of demand-responsive products and cost effective delivery channels, the financial institutions can create a profitable niche by exploiting the un-served rural segment to drive growth in assets and enhance portfolio diversification.

Ladies and Gentlemen!

Globally, innovations in value chain financing have largely been driven by increasing integration and formalization of relationships among the different value chain players . Although value chain financing innovations are still in their infancy in Pakistan and require continued streamlining and enhancements for further refinement. I hope that the value chain development would ultimately lead to globalization of agricultural food chains beyond national borders leading to vertical integration and linkup with international clients through such means as fair trade movement etc.

I would like to thank once again the UK Government for its support to Pakistan’s Financial Inclusion Programme enabling us to rollout the challenge fund on the most important subject of promoting innovative agricultural and rural finance in Pakistan.

In conclusion, I would like to reiterate that there is a clear need and scope for innovative banking products and services to develop resilience, risk mitigants and exploit the long-term potential of rural and agriculture financing in Pakistan.

The financial institutions in partnerships with various agricultural and rural eco-system providers must now join hands to develop and pilot structured products by packaging business development services, credit, savings and insurance products which would allow entrepreneurs to run profitable businesses and improve asset quality of banks. With this, I now formally open the 2nd Challenge Round of Financial Innovation Challenge Fund for invitation of proposals aimed at promoting innovative approaches in agricultural finance to expand the access and usage of financial system to the farming community.

Thank you.

For more information, contact:
Syed Wasimuddin
Chief Spokesman
State Bank of Pakistan (SBP)
Tel: +9221 3921 2562
Fax: +9221 3921 2563
Email: syed.wasimuddin@sbp.org.pk

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