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Banking for the rural poor.

The problem of small farmers in particular and that of other weaker sections in general development due to unrealistic policy in this part of continent should be viewed in the context that available resources are not been exploited in a judicious manner resulting unemployment and poverty of immense nature. Taking Asia alone, nearly 2.5 billion people accounting for little over two thirds of the total population of all developing countries live on about one-fourth of total land. Here more than 70 per cent of the world poor live of which rural alone constitute 80 per cent. The growth of population in Pakistan due to high rate of 3.10 per cent have reached over 120 million in 1993 from 84.25 million in 1981. Despite local variation, economic conditions of most of our regions bear broad similarity. It is, therefore necessary that our development strategies should have been focused on rural development with emphasis or raising the standard of living of the underprivileged sections of society. It is our common interest that various segments of our society should come together to exchange their experiences and evolve appropriate approach to the crucial problem of eradication of poverty through rural development.

Pakistan economy is predominantly rural based mainly depending on agrarian set up. Despite the massive efforts made for rural industrialisation in the past could not be succeeded mainly because of the absence of corporate culture. Thus Pakistan has been pursuing a policy of growth with a measure of social justice. Several measures both at the macro and micro levels-have been initiated to achieve these objectives. As a result, the structure of the economy is undergoing a change. However, non-linkage of programmes envisaged relating to rural development by various governments have proved a great set-back, repetition of which will not be tolerated further by the democratic people. Due to non-availability of achieved opportunities of life the out migration of population is taking place at massive scale. It is also because the bulk of whom is poor in terms of modern standards of living conditions. A notable feature of the agrarian scene in Pakistan is the predominance of small holdings. Small farmers, defined as those with land holdings according to Census, 1990 varying from 5 to 10 hectare constitute 81 to 93 per cent of the total number of farms in the country, though the area commanded by them varies from 43 to 64 per cent of total area. The concept of small farmers varies from country to country. As against Pakistan in India small farmer is one who owns land below 2 hectares (5 acres) and that average holding in Asia comes to over 1 hectare (2.5 acres). Thus high ceiling of holding fixed for small farmers in Pakistan is perhaps because of low productivity of crops and other farm enterprises. Along with the tenants, farmers and share-croppers, small farmers account for a very large proportion of the "weaker sections" in rural areas in Pakistan.

Thus, the need to increase agricultural production (in particular food grains) and incomes/employment opportunities for the rural population is urgent if the standard of living of the large mass of people is to be raised in a visible and satisfying manner. For the alleviation poverty, rapid development of farm and non-farm sectors is crucial. Initially it was believed that if the objective of overall growth is achieved in a sustainable way, the benefits of growth will automatically percolate to all sections of the society. However, given the initial pattern of distribution of income and wealth and also the peculiar characteristics of the economic and social structure, "Trickle down" theory in practice does not work. Hence, there is need for adopting a strategy of promoting accelerated growth at the macro level, while at the same time introducing several specific programmes of development for the selected target groups in the society among which the small farmers, and the landless are the most neglected in practical sense. Recognizing the importance of accelerating the pace of rural development the context of the national goal of eradication poverty, special attention has been given to channelise the flow of institutional credit to rural sector. Credit is an important input for bringing about development, though in itself, it is not sufficient to achieve the desired goal; credit need the full support of other inputs for it to be productive.

As the first step in Pakistan efforts, have been made to built up a credit delivery system to cater to the needs of the rural sector: With the social control on banks in 1972 and subsequent nationalisation in 1974, commercial banks had to assume a greater role in the rural sector, but due to cultural constraints and lack of managerial capability to bear high risks, they have failed in reaching to desirable expectation resulting in thinking for establishing another bank meant for the poor in rural sector.

The objectives of the rural finance provided by the banks are to bring about meaningful improvement in the economic status of the rural poor, good repayment to banks and increasing savings potential for further growth. In developing countries of which Pakistan is no exception majority of the population depends upon agriculture and rural activities by and large. There are few borrowers of the rural areas who can make the best use of the credit and derive benefits out of it. Small farmers and weaker sections by virtue of their low level of literacy, pressing consumption needs and poor access of the various services (including extension supply of quality assets and inputs) and lack of marketing skills are at various disadvantages in the matter of utilising the credit properly. Often they have temptation to sell the assets when it proves uneconomic or to misutilise the credit due to lack urge for development. In short their motivational levels are also low. In such scenario, if only credit is given (precedent of which exist) to this type of borrowers, then they remained away from the efficient use of the credit and its recycling. Experience have proved that such finance, mostly becomes unsuccessful and thereby burdens the economy (being unproductive) and affects the financial soundness of the banks (due to defaults in repayments). It is these reasons, that the rural finance is regarded as complicated and risky and therefore have demanding public sectors to come out at rescue. Everybody agrees that by giving credit alone one cannot bring about improvement in the economic status of the borrowers, because according to them for success of the credit there has to be proper infrastructure and human resource development, backward and forward linkages and marketing should not be a problem. But providing of these facilities, services and assistance is the job of somebody else. Planning that lead social and economic aspects simultaneously in fact is the need of the time. This type of approach is bad to result in the credit being risky to the borrowers and in turn, the risks are passed on to the banks. Risks of the clients are the risk of the financing agency. In view of these facts, improvement of the productive capabilities of the "Weaker Sections" is an important objective of economic policy in Pakistan. It is due to this significance the present government belonging to Pakistan Peoples Party (PPP) has kept it in its party manifesto that a new Kissan Bank to develop productive capabilities of weaker sections through providing timely credit to increase the investment tempo will be set up. There is need to provide small farmers and rural artisans not only finance but also inputs, technical advice and services such as storage, transportation, processing and marketing. There is also need to assist small farmers to diverting their operations by adopting supplementary activities specially in the field of animal husbandry, poultry, inland-fisheries and cottage industry development. Further, there is need to evolve an "area approach" for financing agriculture and a group guarantee system of securing the advances granted to farmers without mortgageable assets. The "area approach" involves the selection of an area comprising a cluster of villages and the extension of credits to all viable and potentially viable farmers in that area. While making the credit available, bank endeavour to ensure that along with credit, other important pre-requisites for development and increase in productivity are also made available. The viable preposition for this bank need to be to keep the provision for purchase of land on the pattern of BACC of Thailand specially for the near landless owning land below subsistence level. This step if taken will help in consolidation of holding. A variant of the "area approach" is the village. Thus selected villages come under intensive financing and end use of credit is continuously supervised. The sanctioning of loans on the basis of tangible collateral has been considered as a severe constraint on the flow of credit to the small farmers. To overcome this there is need to start Group Guarantee Scheme under this scheme loans are advanced to individuals forming a group of 3 to 5 person or more with the loan to each person guaranteed by all the other loanees of the group. This scheme if started in its true spirit then it will be of tremendous help in providing credit to the small and marginal farmers and rural artisans. Apart from making it possible to loan to persons who do not have any security to offer, it also reduces the cost of lending as the loanee is saved transaction cost involved in preparation of Passbook and that of stamp duty, etc. that would have to be increased if mortgages were insisted upon. For reaching the poor for which different models are proposed (i) The Bank may directly contact the poor family and provide its services. Here the requirement will be to device a low cost mechanism to deliver services; (ii) The Bank may organise poor families into homogeneous groups or forge links with existing self help groups (SHGs) with the aim of harnessing the group's cohesiveness, and pressure for the socio-economic development of member-families in matter of which ADBP has already made any venture. This approach helps better participation of the poor in planning, implementing and evaluating the programmes. The servicing costs are reduced; and (iii) In the context of anti-poverty programmes initiated by Governments, the Bank may reach the poor either through the Government agencies or the NGOs/SHGs or both. Since the programmes promoted by the Government Agencies are usually sectoral, the Bank should appropriately incorporate these programmes into the integrated service package to be provided by them to the poor.

In Pakistan during the last three decades specially after the banking reform and nationalisation of major Commercial banks rural banking witnessed tremendous growth both in the number of credit outlets and their coverage in area and also the amount disbursed. Prior to nationalisation, the main source for rural credit in Pakistan was Cooperatives and ADBP both for production as well as investment for development purposes. However, they could only meet the requirement of a very small portion. The fact is that all attempts to reach the poor specially of small farmers and the landless must be based on understanding of the historical processes in every context in which the roots of poverty are deep seated. Directing remedial measures only at symptoms of poverty will not eliminate poverty unless the remedies attack simultaneously its root causes. One basic problem confronting small farmers and the landless is the lack of productive assets, particularly land. Thus the rural poor small and marginal farmers, landless labourers, derive little or no benefit from the land based delivery of credit, unless this is designed to meet these interests.

For these farmers, farming alone could provide a decent living, but it will more likely continue to be supplemented by incomes from other sources as they push for higher standard of living. Among the characteristics peculiar to small farmers are (i) a high proportion of land devoted to food crops; (ii) a low proportion of output marketed (a higher proportion retained for human consumption); (iii) a more diverse crop portfolio, (iv) greater aversion to risk; (v) a greater scarcity of land and capital resources and (vi) more abundant family labour other than large farmers. The other reasons why priority needs to be given to small farmers in respect of advancement of credit are:-

1) Small farmers are the largest body of farming community. Are more unproductive due to scarcity of land and dearth of capital to develop it further;

2) They lack access to financial resources to adopt the modern agricultural techniques required for increasing agriculture production;

3) That with the help of credit, diffusion and adoption of appropriate technology among small peasants can become possible;

4) That they cannot get credit economically from private sources;

5) The fact is that the capital required for adopting innovative farm techniques relied on approach technology.

Agricultural credit thus comes to be regarded as an essential input in the modern technology packages. There is need to set up on independent rural bank or subsidiary of ADBP, that help to bridge the credit gaps, help develop the activities of the weaker sections of the rural society, take banking services to the door steps of the rural household, including the habit of saving. The preamble of this Bank thus be: 'To developing the rural economy by providing credit facilities for the purpose of development of agriculture, trade, commerce, industry, on small scale and other productive activities in rural areas, particularly to the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs and for matter concerned there-with and incidental thereto' If government is serious in setting up such bank as an independent entity then like cooperatives this rural bank also needs to be set up on provincial basis with apex bank at Federal level as subsidiary of State Bank of Pakistan on the pattern of Federal Bank for Cooperatives. This apex bank will serve as umbrella institution providing funds, technical assistance and arranging human resource development (HRD). Another possibility is to establish a Kissan Regional Bank on the pattern of Regional Development Corporation of Pakistan for taking care of the interest of weaker sections of society for areas where economic disparity perpetuate severely. However, as a fullfledge bank on the basis of public-private partnership basis as that of other bank in private sector, there is less possibilities of its establishment in agrarian sector specially meant for weaker sections as it will not be in a position to compete on being offering higher rate of mark up for mobilizing local resource and cheap credit bearing rate on advancement with high rate of risk. However, ADBP on being the development Bank devoted primarily to stimulating the private sector of the rural economy specially the laggard sector. Agriculture requiring diffusion of improved devices based on efficient technologies and high tech to modernize it. Investment lies at the heart of economic development. A development is designed to supply all essential ingredients of effective investment. A development Bank in fact is intended to speed up economic development by making capital for all neglected enterprises farm and technical advice available to private sector of the economy of which there is still dire need. The experience gained in introducing Supervised Agricultural Credit Programme (SACP), strategic move to Rural Credit for the poor and Agribusiness is of rich and emence. All this help in developing competition among specialised banks and finance institutions.


There are many inadequacies within the Banking system, in so far as their ability to work with the poor is concerned, which have greatly hampered them. They are oriented to business with non-poor sections of the community whether urban or rural. The understanding of the problems faced by the poor and the ways and means of solving them and empathy for the poor are low. As a consequence their commitment to the cause of serving the poor and motivation for the jobs are lukewarm. Thus the traditional management techniques and system which are vogue in Banks do not match well with the requirements of the proposed Kissan Banking aspects of which have to be kept in view before making any venture.
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Author:Khan, Rao Abdul Rauf
Publication:Economic Review
Date:Nov 1, 1993
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