BANKS’ NON-INTEREST IN FINANCING PAKISTAN’S AGRICULTURE

Mudaraba

Pakistan is an agrarian economy that state-owned banks like Zarai Taraqiati Bank and National Bank of Pakistan support by way of offering financing for equipment and inputs.

However, private banks in the country have shown to be less interested in the agriculture sector. Islamic banks and modarabas have also only been marginally exposed to the sector.

It is not that Islamic banks are uninterested in financing agriculture but rather it is due to the fact that somehow banking products (both Islamic and conventional) are not suited to the agriculture sector.

For example, Burj Bank, one of the five full-fledged Islamic banks in Pakistan, started an aggressive marketing campaign for various agriculture financing products it brought to the market a couple of years ago, but it was not successful. Subsequently, its product offering for the agriculture sector gradually shrank.

Given this void, a need has been felt for some time to set up a non-bank Islamic financial institution that should specialise in offering a comprehensive range of financial services to the stakeholders in agriculture.

The Express Tribune has learnt from reliable sources that a new Islamic financial institution is in the process of formation to provide Shariah-compliant micro and agriculture financing to rural communities with the ultimate objective to reduce financial exclusion amongst economically active segments of the agriculture sector.

“The new institution will improve liquidity in the agriculture sector by providing affordable financing to the small and medium-sized farms and related enterprises,” said a top executive of the new institution on condition of anonymity.

The modaraba sector in Pakistan provides an excellent example of the strength of Islamic financial regulation. In fact, Pakistan is the only country in the world with such a regulatory framework for modaraba businesses.

There are 24 existing modarabas in the country but none of them is involved in agriculture financing. It is widely believed that modarabas can be further developed into Islamic financial institutions that may serve as a stepping stone towards developing a new model of Islamic investment banking.

Although the modaraba sector is very tightly regulated, there have in the past been a few scams involving some unregistered and unregulated businesses that gave a bad name to this thriving sector within the domain of non-bank financial institutions. Consequently, the Securities and Exchange Commission of Pakistan (SECP) is looking into introducing a new set of guidelines for modarabas to safeguard best interests of all the stakeholders.

The new modaraba will attempt to offer input financing (short-term) and equipment financing (medium-term) to targeted individuals and businesses for a period of four months to 36 months respectively. As Islamic banking institutions are heavily investing in Shariah-compliant government securities, with marginal financing offered to individuals and businesses, the modaraba form of business provides an excellent example of the relevance of Islamic finance to the real economy.

“We are so excited about this development that we shall certainly consider providing equity capital to the proposed modaraba,” a top executive of an Islamic bank remarked.

The modaraba sector may be a more effective model for provision of small and medium-sized financing as compared to microfinance banks that target the lowest segment of the society any way. “There are five segments of society which must be targeted for socio-economic development: the poorest, the unemployed, those in need of finance for their otherwise running businesses, the rich, and, finally, the corporate,” commented Akhuwat Chief Executive Officer Amjad Saqib (Akhuwat is a nationwide charity specialising in small interest-free loans).

The new agriculture sector modaraba attempts to target those farmers and SMEs in the agriculture sector, which are in need of financing. Access to financing to such entities is bound to improve efficiency of the economic activity in the segment, giving a helping hand to the economy.

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