Farmers’ access to formal sector credit is highly constrained and they are mostly stuck with lenders from the informal sector who charge exorbitant interest rates. A key reason for constrained agri-lending is the use of farmers’ land as collateral by banks.
PAC has successfully piloted a business model for lending against crop (not land) as collateral for wheat farmers/sellers with the participation of Agility, SGS, PMEX, HBL for wheat crop in district Sheikhupura, Punjab, where HBL lent Rs. 4.8 million against 232 tons of wheat as collateral. PAC also replicated the same model for Basmati Paddy farmers in district Sheikhupura in November 2017 with Bank Islami, which also helped develop an Islamic banking model for the program. During the summer 2018 maize harvest, PAC conducted a comprehensive final pilot with MCB Bank as the conventional bank, Bank Islami as the Islamic bank, FINCA as the microfinance bank, Adamjee Insurance as the insurer, Islamabad Feeds as the warehouse operator and Agility Pakistan as the collateral manager.
The eco-system for electronic warehouse receipts-based agri-lending through the collateral management company (CMC) has been firmed up by these pilots. SECP, in collaboration with State Bank of Pakistan (SBP), Central Depository Company (CDC), Pakistan Mercantile Exchange (PMEX), Pakistan Agricultural Coalition (PAC) and other key stakeholders, developed Collateral Management (Establishment & Operations) Regulations in 2017 which will help expedite the formation of a CMC. A number of leading business groups in Pakistan have agreed to participate in the proposed CMC being developed by PAC.