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LCA037

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FAYSAL BANK LIMITED – AGRICULTURE FINANCING STRATEGY
In early April 2015, Ali Raza, Head of Agri and Agri Small Medium Enterprises (SME) Division at Faysal Bank,
reflected on the accomplishments of his division: reaching a total loan portfolio of PKR 9.3 billion1 with non-
performing loans (NPLs) of 14.41% in 2014, as compared to a portfolio of PKR 4.637 billion2 with NPLs of

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18.90% in 2010. Now he had to plan for the future and chalk out a strategy that built on the experiences and
lessons gained over the last ten years.

In 2014, Faysal bank won a grant under a financial inclusion challenge fund to run a pilot project to test ideas for
transforming agri financing in Pakistan through use of intermediaries called service providers (SPs). These SPs
would undertake the following activities: a) selection and due diligence of farmers willing to avail financing; b)
arrangement of timely provision of quality agri inputs, mechanical support, supervision and guidance to the
farmers during the cultivation cycle; c) provision of money for various activities through bank financing under
the authorisation of the respective farmers; d) direct purchase or management of sale of farmers’ produce at
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favourable rates; and e) help in recovery of farmers’ dues against the agreed remuneration. Agreements had
already been signed with four SPs and the first pilot project with an SP involved working with seven farmers
which had resulted in 15-20% increase in production of the maize crop.

Ali Raza utilised a number of legal measures to control NPLs but several of these measures were no longer
effective due to the adverse ruling by the superior courts on the legality of the underlying legislation that formed
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the basis of these measures. Courts also issued stay orders that reduced the effectiveness of the related laws in
discouraging wilful defaults on loan payments. Moreover, agriculture financing was not considered a part of
mainstream banking in Pakistan and did not receive the support of decision making authority as it was still
considered to be high risk.

Ali Raza wondered what steps he could take to ensure that the systems and organisation that he had built for the
division would make agri financing a major part of Faysal bank’s activities, and simultaneously showcase how
the banking sector could help transform agriculture and lives of farmers in Pakistan.
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1
In 2015, the average exchange rate for the U.S Dollar to the Pakistani Rupee was 102.65. Source: State Bank of Pakistan,
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http://www.sbp.org.pk/ecodata/ibf_arch.xls, accessed December 2017.

2
In 2014, the average exchange rate for the U.S Dollar to the Pakistani Rupee was 100.95. Source: State Bank of Pakistan,
www.sbp.org.pk/ecodata/ibf_arch.xls, accessed December 2017.

This case was written by Arafat Safdar (LUMS BA LLB) and Dr Syed Zahoor Hassan at the Lahore University of Management Sciences to
serve as basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. This material
may not be quoted, photocopied or reproduced in any form without the prior written consent of the Lahore University of Management
Sciences.

© 2017 Suleman Dawood School of Business, Lahore University of Management Sciences

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 Faysal Bank Limited—Agriculture Financing Strategy LCA037

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AGRICULTURE IN PAKISTAN

In 2014, agriculture was one of the most important sectors of Pakistan’s economy engaging nearly 43.7% of the
labour force of the country3 and contributing aggregate 21% share in the GDP4. The agriculture sector also played
a vital role in the local industries since it contributed most of the raw material (for the fiscal year 2013-14, this
share was close to 80%5). The overall contribution of the agricultural sector to exports was close to 67%6.

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There were four main categories of farmers in Pakistan. There were those owning less than five acres of cultivable
land who were called the marginal farmers. There were those farmers who owned less than or equal to 12 acres
of land who were called small farmers. The medium-sized farmers were those who owned land-holdings greater
than 12 acres but less than or equal to 25 acres. Farmers who owned more than 25 acres of land were considered
large farmers7. All the farmers needed financing for their crops. They secured loans through financial institutions
as well as non-institutions to meet their working capital requirements, whereas marginal farmers and small
farmers only met a small fraction (16% and 42% respectively) of their financing needs through institutional

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means. (See Exhibit 1).

Farmers in Pakistan had to face a number of challenges before they could reap the fruits of their hard work. In
order to ensure a good yield, they had to use high-quality seeds. In addition, they had to bear the cost of fertilisers,
pesticides, insecticides, herbicides and bio-controls for their crops. In order to conduct all these activities, farmers
needed financing but raising financial resources was an uphill task for most of the farmers. The estimated credit
need for FY 2013-14 was close to PKR 750 billion8, whereas the total disbursements made in the agricultural
sector stood at nearly PKR 391.30 billion (Exhibit 2).
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In order to meet this challenge, the farmers adopted different approaches. Most of them sought out the historical
institution of Arthi9 (the middleman and commission agent) and requested short-term and long-term loans to meet
their financial needs. Some also turned to banks and availed loans in order to fulfil their requirements. Majority
of the farmers preferred to secure money through informal means rather than through the relatively modern
financial institutions. Many reasons could be cited for this behaviour of the farmers. The procedural difficulties
attached to the banking system, as opposed to the simple and informal methods used by the middlemen, was one
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possible explanation. Usually, when a farmer applied for a loan from a bank, a detailed interview of the applicant
was conducted in order to assess his background, particulars, circumstances, assets, liabilities and credit needs,
etc. Most of the farmers found documentation and other requirements for bank loans very cumbersome and
preferred the relatively informal and somewhat familiar institution of the middleman. Many farmers with
outstanding loans performed below their capacity because they were burdened by the obligations to their
financiers. They had to return the money they had borrowed from these institutions, not leaving enough resources
for meeting the needs of the next crop. If they had sufficient financial resources, the annual yield of their crops
would also have increased, as they would have used proper inputs to ensure the quality and quantity of their yield.
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This would also have enhanced the overall yield of crops throughout Pakistan (See Exhibit 3 for the area,
production and comparative yield statistics of important crops in Pakistan).

3
Government of Pakistan. 2013-14. “Agriculture.” Pakistan Economic Survey, chapter 2. Accessed December 2017.
http://finance.gov.pk/survey/chapters_14/02_Agriculture.pdf
4
Government of Pakistan. 2013-14. “Highlights Of Pakistan Economic Survey 2013-14.” Pakistan Economic Survey, chapter 14. Accessed
December 2017. http://finance.gov.pk/survey/chapters_14/Highlights_ES_201314.pdf
5
Estimate conveyed by Ali Raza.
6
Estimate conveyed by Ali Raza.
7
Who is the Arthi, A 2013 report by Pakistan Microfinance Network. State bank of Pakistan (SBP) classified farms into three categories based
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on landing holdings: Subsistence (up to 12.5 acres); Economic (above 12.5 to 50 acres), and Above Economic Units (above 50 acres). Punjab
and KPK have identical criteria, the holding size varied for each category was different for Sind and Balochistan. Accessed December 2017.
http://www.pmn.org.pk/assets/articles/5486c831c0a5177122cdff4efbff04ae.pdf
8
In 2013-2014, the average exchange rate for the U.S Dollar to the Pakistani Rupee was 102.86. Source: State Bank of Pakistan,
www.sbp.org.pk/ecodata/ibf_arch.xls, accessed December 2017.
9
“The informal credit market is active and vibrant in Pakistan, catering to the needs of farmers through a network of financiers referred to as
Arthis. In Punjab, the Arthi remains the largest source of informal credit for agriculture. Deeply embedded in the agriculture credit market,
the Arthi has refined his model to avoid adverse selection, control moral hazard, mitigate risk and make substantial profits in a market
deemed risky and unprofitable by the commercial bankers” (Who is the Arthi, A 2013 report by Pakistan Microfinance Network).

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 Faysal Bank Limited – Agriculture Financing Strategy LCA037

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Agricultural Financing basically refers to the financial facilities allowed by the banks for the items eligible under
“Methodology Report for Estimation of Agricultural Credit” or any other items approved by the State Bank of
Pakistan (SBP) from time to time. Various types of agricultural financing were in practice in Pakistan (See
Exhibit 4). Historically, most of the banks had been reluctant in adopting Agricultural Financing as their core
business activity mainly because of the high ratio of non-performing loans (NPLs). According to a report
published by Pakistan Microfinance Network, the farmers usually maintained a very good relationship with the

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Arthis who were a major source of financing for them. On average, only 8% of the loans given by the Arthi were
non-performing. Still, this non-performance did not amount to default as Arthis offered flexibility in the
rescheduling of their loans. For the specialised banks in the public sector like ZTBL, net NPLs stood at 16.2% of
net loans in June 201210 as compared to the banking sector net NPL of 6.2%. Loaning money to the farmers for
the purpose of agricultural farming would result in losses for the banks because the borrowers would not pay back
their loans and the banks were helpless due to the non-implementation of the related laws.

Due to efforts of SBP, banks started to take interest in the agricultural sector and devised different schemes to

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attract customers from the farming sector. However, agricultural financing did not make much progress. Lack of
innovation and weak understanding of the dynamics of agricultural value chains on the part of the agricultural
bankers were the major reasons for this situation. Also, the policy executives at banks did not concern themselves
with the overall problems faced by the farmers and limited their role to financing only, and ignored the need to
address issues related to access to proper inputs and technical support, and the inefficient and exploitative nature
of agricultural markets that adversely affected farmer profitability.

HISTORY OF AGRICULTURAL FINANCING IN PAKISTAN

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As mentioned earlier, the banks used to refrain from issuing loans for agricultural purposes before 1973 because
most of the loans would end up as non-performing loans (NPLs). For want of easy documentation, the banks did
not conduct operations in agricultural financing for those who wanted easy documentation process and legal
remedies to be used against the defaulters. Things started to change after the promulgation of The Loans for
Agricultural Purposes Act in 1973 (later in 1986, its title was changed to The Loans for Agricultural, Commercial
and Industrial Purposes Act). This Act provided bankers with an easy mechanism to create security on agricultural
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lands of farmers and also an additional legal remedy to be employed in case of default. It simplified the procedure
for grant of loans and also ensured the reduction of cost for the creation of security and completion of the related
documentation, and also shortened the time involved in the loan process. Moreover, the agricultural land under
the charge could not be alienated before (and without) the repayment of the loan. Under this Act, banks were
empowered to recover the outstanding loans by applying to the collector and could now seek the amount in default
as an Arrear of Land Revenue.

After the promulgation of this Act, the State Bank of Pakistan directed banks to venture into the agricultural
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sector. Zarai Taraqiati Bank Limited (ZTBL), Cooperative Banks and 5-Big Banks (Allied Bank Limited, Habib
Bank Limited, MCB Bank Limited, National Bank of Pakistan and United Bank Limited) took initiative and
became the leading financial institutions to offer agricultural loan schemes. The total amount disbursed under the
head of agricultural loans rose to PKR 2.05 billion11 in 1977-78 from a paltry 0.31 billion12 rupees in 1972-73
(Exhibit 5).

Meanwhile, the banking sector underwent the nationalisation process initiated by the government of Mr Zulfikar
Ali Bhutto in 1974. The government could directly set the banking policies. Thus, with encouragement from the
government, the banks increased the allocation of money to be loaned for agricultural purposes. At the same time,
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many corrupt practices entered the banking sector because of the political influences. With the change in

10
Who is the Arthi, A 2013 report by Pakistan Microfinance Network. Accessed December 2017.
http://www.pmn.org.pk/assets/articles/5486c831c0a5177122cdff4efbff04ae.pdf
11
In 1977-1978, the average exchange rate for the U.S Dollar to the Pakistani Rupee was 09.90. Source: State Bank of Pakistan,
www.sbp.org.pk/ecodata/ibf_arch.xls, accessed December 2017.
12
In 1972-1973, the average exchange rate for the U.S Dollar to the Pakistani Rupee was 09.46. Source: State Bank of Pakistan,
www.sbp.org.pk/ecodata/ibf_arch.xls, accessed December 2017.
3

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 Faysal Bank Limited—Agriculture Financing Strategy LCA037

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government after the coup in 1977, from 1978 to 1989, banks once again became weary of the agricultural
financing sector and spent most of their time in the management of their NPLs from the earlier period.
Banks renewed their interest in agricultural financing after the huge cash inflow to Pakistan following 9/11. The
State Bank of Pakistan (SBP) directed the banks to enhance the financing activities in the agricultural sector.
Banks entered the market with an air of confidence and devised different schemes to lure customers. This plan

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worked and the participation of banks in the agricultural lending sector increased. Another notable development
was the entrance of the private domestic banks, and by 2006-07, the total amount disbursed for agricultural
purposes reached PKR 168.83 billion13. SBP also introduced a number of new facilitative rules and guidelines
which resulted in increased agriculture financing. In early 2015, there were also four Islamic banks in agriculture
financing, and during the fiscal year 2013-14, their share in agriculture-related disbursements was PKR 1.53
billion. Likewise, seven microfinance banks contributed PKR 22.8 billion in the agriculture disbursements during
the fiscal year 2013-14.

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Evolution of Legal Frameworks

Over the course of the years, the laws evolved to account for the hurdles faced by the banking sector. Legal
remedies were devised to deal with the non-performance of loans. The next major development was the
promulgation of Financial Institutions (Recovery of Finances) Ordinance 2001 that authorised banks to put the
mortgaged property of defaulters on sale with or without the intervention of the Court. It provided for the initiation
of criminal proceedings against the defaulters. In case someone issued a bogus check towards the repayment of a
loan, criminal proceedings could be instituted under the Section 489-F of Pakistan Penal Code 1860 (PPC). This
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provision was used by many bankers by taking post-dated cheques from borrowers to secure repayments. Hence,
bankers found a host of remedies for how to deal with defaulters (See Exhibit 6).

Role of the State Bank of Pakistan

After 2001, SBP encouraged the banks to establish and revamp their agricultural units. It also urged private
domestic banks to enter the market and start agricultural financing. In early 2015, there were 15 private domestic
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banks issuing agricultural loans. SBP took steps for the simplification and the standardisation of loan documents
so that agricultural farmers could easily avail loans. SBP also launched Farmers’ Financial Literacy and
Awareness Programmes on Agricultural Financing (FFLP) at the district level for local farmers and bankers. This
programme was designed with the intention of bringing farmers and bankers in the loop and making them aware
of their rights and duties. SBP also conducted Policy Adequacy Seminars and Internship programmes for students
at various Agricultural universities and colleges.

SBP engaged foreign bodies for capacity development and securing grants for domestic financial institutions. For
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example, SBP officials invited the domestic financial institutions to design innovative projects and thus, receive
grants from UK Aid for the realisation of their projects. SBP collaborated with the top financial institutions of
other countries to conduct training sessions and refresher courses for the agricultural bankers of Pakistan. It sent
agricultural bankers to BAAC-Thailand, Rabobank-Netherlands & APRACA-Indonesia for training programmes.
Once the contours of agricultural financing were defined, SBP introduced specialised agriculture-related schemes
like fast-track agricultural lending programs and credit guarantee scheme to increase the agricultural credit flow
to the underprivileged agricultural areas of the country.

AGRI-FINANCING AT FAYSAL BANK

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Faysal Bank launched its agricultural financing facility in the year 2004-05 under the direction of SBP to fulfil
its commitment to initiate agri loans before June 2004. The bank was looking for someone to head its agricultural
division and approached Ali Raza to head the division. Ali Raza had previously worked for United Bank Limited
(UBL) for more than three decades and had led their loan collection task force. He was responsible for the
recovery of old advances up to the amount of PKR one million and had been instrumental in the recovery of a

13
In 2006-2007, the average exchange rate for the U.S Dollar to the Pakistani Rupee was 60.50. Source: State Bank of Pakistan,
www.sbp.org.pk/ecodata/ibf_arch.xls. Accessed December 2017.
4

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 Faysal Bank Limited – Agriculture Financing Strategy LCA037

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large number of bad agriculture loans. Being the son of a farmer, Ali Raza also understood the issues of farmers.
He had served as branch manager at Chishtian branch of UBL in Bahawalnagar district (a major agricultural area)
in 1980-84. At that time his credit officer would do the needed processing and he would only look at the risk
parameters and decide on the grant of a loan. He discussed with his credit officer the idea of focusing on one
village for offering loans to see what impact financing could bring to overall well-being. They decided to select
a few villages within easy reach where people were willing to seek loans. Loans were offered to about 70 farmers.

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Out of these 50 agreed to take a loan. Over the next three years almost all the farmers who had obtained loans
from the bank had paid back their loans and they did not need to seek any more loan. Ali Raza attributed this
success to the commitment of his agriculture credit officer who was also an MSc in agriculture and also took a
keen interest in providing guidance to the farmers. This experience convinced Ali Raza that it was possible to
create a major impact on the lives of small farmers through the provision of well-managed loans.

Ali Raza recalled his first interaction with the then President of Faisal Bank Ltd (FBL) and the Deputy Chief
Executive (DCE):

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I arrived for the interview in Karachi in May. The President told me that the bank had made a
commitment to SBP to start its agriculture financing operation before June 30, 2004, and they
wanted me to join as soon as possible and issue at least a few loans before this date. I told them
that if they are only interested in agriculture financing because of SBP then I am not interested
in this job. I would only be interested if they genuinely believed that agriculture financing
should be part of FBL’s portfolio. Moreover, if I were to take this position I would like to have
the freedom to do things the way I see fit. On this, the Deputy CEO intervened to say that they
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were genuinely interested in agriculture financing and suggested to the President to let me do
things my way. The President agreed to this and I decided to join FBL. On joining FBL on June
25, 2004, I quickly mobilised the existing staff, reviewed the pending loan applications and
disbursed four loans by June 30, 2004. This initial commitment of FBL management to
agriculture financing has continued to date14.

Ali Raza understood the intricacies of the agricultural sector as he himself was the son of a farmer. His interest in
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agricultural financing, however, was a result of his vast experience in the banking field. Ali Raza had done his
M.A in Economics and also had a law degree. Before switching to Faysal Bank, he served in UBL for more than
three decades. At UBL, he held various field positions and senior positions, including as Branch Manager of three
branches in an agricultural region, and as Desk In-charge Punjab Cotton Cell, Punjab Rice Cell, Textiles Advances
and the Recovery and Litigation Departments. He had also participated in the Credit Risk Policy and Procedures
formulation process and his last assignment at UBL was as Country Head Collections Task Force. See Exhibit 7
for more details of Ali Raza’s profile.
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Ali Raza wanted to work in the field as he saw a major opportunity with an estimated PKR 750 billion15 demand
for agricultural credit. He also convinced the management to allocate up to 10% of the total credit portfolio to
agricultural financing.

As Ali Raza focused on setting up the agri financing operations at FBL he had to deal with a number of issues.
There was a lack of a ‘credit culture’ among farmers. Farmers were also wary of the documentation and security
creation requirements, and the delays in the processing of loans. They often diverted credit money to other
activities besides agriculture and were also not very particular about repaying loans on the agreed time schedule.
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The Issue of Non-Performing Loans (NPLs)

It was the risk of incurring losses due to the non-performance of loans that led banks to shy away from doing
business with farmers. Banks failed to secure the repayment of loans, and as a result, suffered huge financial

14
Personal Interview with Ali Raza.
15
In 2004, the average exchange rate for the U.S Dollar to the Pakistani Rupee was 58.40. Source: State Bank of Pakistan,
www.sbp.org.pk/ecodata/ibf_arch.xls, accessed December 2017.
5

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 Faysal Bank Limited—Agriculture Financing Strategy LCA037

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losses. Hence, the major challenge for the agricultural division of Faysal Bank was to tackle the issue of NPLs.
Ali Raza decided to use the legal provisions against defaulters. He observed that most of the bankers were not
aware of their legal rights and obligations, whereas those who knew they were reluctant to exercise their legal
rights. Learning from his vast prior experience, Raza made full use of these legal provisions and successfully
recovered most of his loans. Faysal Bank implicated only those defaulters who fell in the category of wilful
default, whereas for those who underwent circumstantial default, Faysal Bank made concessions and even

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extended the deadlines for the repayment of loans16. The wilful defaulters attracted punitive proceedings for their
actions whereas the circumstantial defaulters received the needed relief.

Use of Legal Remedies

In addition to a good understanding of financial matters, Ali Raza also had a background in law. The most
successful tool provided by Ali Raza throughout his stay at Faysal Bank was the criminal remedy offered by post-
dated cheques. The law provided the bankers with a safeguard against such a practice. Ali Raza used the Section

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489-F of PPC (dishonestly issuing a cheque) to put such people behind bars. The people involved in such cases
were not only threatened but were also put behind bars in many instances. Some of them had also been declared
POs (proclaimed offenders). Initially, this approach worked very well because the courts were very strict in
dealing with such matters. However, the courts relaxed their stance with the passage of time. The defaulters made
full use of this laxity on the part of the courts and managed to get away in many cases. Hence, this legal remedy
lost its appeal for the bankers. Section 15 of the Recovery of Finances Ordinance 2001 (later on, this provision
was repealed by the Supreme Court of Pakistan in 2014) empowered banks to put the properties of defaulters on
sale without seeking a decree from the court. Ali Raza made full use of this provision and put many properties of
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defaulters on sale in this manner. Although he did not sell even a single property under this provision, it served
as a good deterrent. He used to advertise the properties to be sold by the bank in newspapers (both English and
Urdu). Then he would mail copies of the newspaper to defaulters so that the defaulters were left with no defence
in the court of law. Ali Raza kept himself abreast of the latest developments in the legal sphere. If one provision
was repealed, he would start looking for other provisions to manage the problems he was facing.

Experience with Specific Sectors of Agriculture

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Ali Raza started off by giving loans to those in the dairy business. This proved to be disastrous as those involved
in the business faced cash flow problems.

Pondering upon the reasons for his failure in the sector, Ali Raza reflected:

The dairy business is quite demanding as it takes almost five years to mature and then you can
expect to reap the benefits. I have seen some big groups in this business but only a few have
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been able to survive. Those with money can afford to fund working capital for these initial
years. I bet you can prosper if you can survive through the early years17.

Different models were adopted by the dairy farmers in Pakistan. Initially, animals were imported from abroad.
This scheme was questioned because the imported animals failed to adapt to the local conditions. After that,
another model of cross-breeding of animals was tried. Semen of some of the best species of cows were imported
from around the world and crossbred with the local breeds. This enhanced the survival rate but the milk production
was not up to expectation. Cross-breeding continued with a supply of quality semen through government extended
services, private operators or donor agencies. Large commercial farms continued to import foreign breeds,
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generally importing pregnant heifers in the months of February or March so that the new-born calves could adjust

16
Usually, there are two kinds of defaulters. Some defaulters are classified as wilful defaulters as they habitually default on their payments.
This attitude is usually nurtured by the mind-set of some members of the farming community towards such defaults. The banks fail to
effectively use the legal framework in order to contain such defaulters. The other category of defaulters is that of circumstantial defaulters.
They fail to pay back their loan because of a number of reasons. They might face crop losses due to some natural calamity. They might
have a low yield. Similarly, poor management skills on the part of the farmers can also cause financial losses, making farmers unable to
repay their loans. In Pakistan, fear of wilful default has made the banks wary of agricultural financing.
17
Personal Interview with Ali Raza.
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 Faysal Bank Limited – Agriculture Financing Strategy LCA037

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to the local environment during favourable weather conditions. This worked well but for only a few large dairy
farms.

Due to the issues of survival and working capital requirement, the dairy business proved to be extremely
demanding. Although Faysal bank did not stop financing the dairy sector altogether, it did; however, decrease the
size of its exposure in this sub-sector.

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Another sector where FBL incurred much higher NPLs was poultry. In general, NPLs in the livestock sectors that
included poultry farms, dairy farms and cattle farms had almost three times the NPLs as compared to the
agriculture inputs and working capital related loans. Within livestock, dairy and cattle farms had the worst NPLs.
Exhibit 8 (A and B) provides details of the sector-wise position of agriculture financing from 2010 to 2014. Fish
farms, milk collection and seed processing sectors had the best NPLs. In general, loans to more innovative areas
proved to be more profitable, hence Ali Raza decided to focus more on new sectors and innovative ideas.

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Investments in Innovative Projects

As Ali Raza started his hunt for new ideas he carefully studied the market in Pakistan. After thoroughly observing
the market trends, he made up his mind to invest in tilapia farming. Tilapia was widely known as fish that was
easy to raise on a commercial scale. No investment had been made in tilapia farming and FBL was the first bank
to promote tilapia farming on a commercial scale. Soon, they became the tilapia specialists in the market.

They collaborated with a federal body and a US body SoyPak18 Pakistan to promote tilapia farming. Tilapia was
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a special fish in many respects whose feed varied greatly from the feed of other fish. Moreover, it had to be fed
in a very special way unlike other fish; it did not come to the surface to collect its feed nor did it eat from the
bottom of the pond. It relied on suspended feed only. Hence, the arrangement had to be made to invest money not
only on the feed but also on the delivery of the feed to the fish. People were trained for this purpose. Faysal Bank
contacted leading fisheries in the market and offered them tilapia related financing. FBL managed to gain the
attention of nearly a dozen fisheries in the market. The focus was on the major fisheries’ cluster around Ali Pur
Chatha in the districts of Gujranwala, Mandi Bahauddin, and Gujrat in Punjab. This was the first breakthrough
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for Ali Raza. He was convinced of the importance to invest in innovative projects. He also introduced sugar value
chain financing in collaboration with sugar mills. Through this, Faysal Bank enhanced its outreach in the rural
areas. This scheme was later replicated by other banks. He made further investments in greenhouse crop financing,
financing for floriculture and ornamental plants and cold chain financing initiatives.

Based on his experience in agriculture financing, Ali Raza identified three factors to be very important for making
lending decisions:
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I keep three things in my mind while devising my policy regarding investment in a certain
sector: untapped demand, the experience of the previous lending, and innovation19.

He focused his attention on the untapped demand in a sector. If there were few competitors in the market a little
effort could translate into higher returns. Then, he gave importance to the experience of his previous lending. His
experience of lending in the dairy and poultry sector had not been that good so he preferred to limit his exposure
to these sectors. However, Ali Raza’s experience of investment in tilapia farming had been very favourable. He
continued his hunt for novel ideas so that he could finance them and contribute to the sector in his own way.
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18
SoyPak Pakistan (Pvt.) Limited is a locally incorporated company. Its objective is to provide consultancy to local consumers of soymeal.
It has been marketing imported soybean meal from the US for consumption in local livestock, poultry and fishery sectors.
19
Personal Interview with Ali Raza.
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 Faysal Bank Limited—Agriculture Financing Strategy LCA037

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Development of Agri Finance Division at FBL

Ali Raza worked diligently to recruit the best staff. He took pride in the strong team he had developed:

I can claim that I have produced ‘better’ all-rounders. I can say it with certainty that the level
of training my team has undergone is unparalleled in Pakistan20.

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In order to select his team members, he deviated from the previous practice of hiring people with degrees in
agriculture. Instead, he hired people who had no background in agricultural studies but understood the art of
banking very well. After having formed his team, Ali Raza modelled his division on a highly centralised pattern.
People executing the policy in far-flung areas of the country reported directly to the head office. Ali Raza himself
supervised all the operations. The hierarchical structure of his division evolved over the years. In the year 2004,
agricultural financing started off with a business manager, a relationship manager, and the head of agriculture. In
2009, the relationship officers and team leaders made their way into the departmental hierarchy. The position of

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a cluster manager was created in 2012, but it was dissolved shortly afterwards. The latest addition to the
hierarchical structure of the Agricultural division of Faysal Bank was Unit Manager (added in 2014).

Ali Raza took the responsibility of showing the ropes to his team members by training them himself. The team
received training under the Learning and Development Programme of Faysal Bank. They also attended some
training programmes under the banner of NIBAF (National Institute of Banking & Finance). Ali Raza made every
effort to keep his team members fully updated and informed.
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The Agricultural division gradually started to expand throughout Pakistan. By the end of 2014, the Agricultural
division of Faysal Bank was running 47 branches in Punjab, seven in Sindh and three in Khyber Pakhtunkhwa.

Risk Management

Although agricultural financing had brought many successes to Faysal Bank, the practice of agricultural financing
involved a lot of risks as well. The biggest of all these was the possibility of incurring a loss to Faysal Bank’s
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overall financing activities.

There were two types of default risks faced by agricultural bankers – Circumstantial default and wilful default.
Farmers who had availed loans from the bank always faced the possibility of running into circumstantial default
due to the natural calamities which had been hitting the country for many years21. Most of the farmers were
adversely affected by floods from the year 2010 to 2014. Similarly, the bankers also suffered due to financial
mismanagement on the part of the farming community. The casual approach of the farmers towards their financial
obligations and lack of adequate follow-up by the agriculture credit officers further added to the bankers’ worries.
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The second grave risk borne by the agricultural bankers was that of wilful default. Such default was usually
nurtured by many factors, including the ineffective legal system and the traditional mind-set of farmers towards
defaults. Ali Raza estimated that roughly half the defaults were circumstantial, but a large portion of the latter
turned into wilful defaults once the farmers realised the weaknesses in the legal system towards enforcing
recoveries. Hence it was critical to prevent situations that could cause circumstantial defaults. Ali Raza felt that
the provision of loans to farmers without support to ensure better cultivation practices and systems for obtaining
a proper price for their produce made the situation worse by leading the farmers into unsustainable debts.
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The Agricultural Financing division of Faysal Bank took many measures to mitigate credit risks. They ensured
due diligence before the initiation of credit proposal. Special emphasis was laid on assessing the viability of the
proposed economic activity. They also made sure to undertake a proper risk analysis by Credit Risk Management
while making their decisions. Proper care was taken before the creation of lien and completion of credit

20
Personal Interview with Ali Raza.
21
According to a report published by National Disaster Management Authority, approximately 2.412 million acres of crop area was affected
due to floods in 2014. http://www.ndma.gov.pk/new/aboutus/flood_2014.pdf, accessed December 2017.
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 Faysal Bank Limited – Agriculture Financing Strategy LCA037

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documentation. FBL also arranged for the insurance coverage against relevant risks of all other financed assets
and maintained regular and close contact with the borrowers throughout the credit relationship.

New Initiatives – Use of Intermediaries

Ali Raza understood the problems faced by the farmers. He had seen farmers land in trouble because of the

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inability to manage their crops properly. The farmers suffered because of not obtaining good quality and yield
from their crops, and also due to the inability to obtain a fair price from the market. There were significant
fluctuations in the prices of most agricultural produce, not only within a year but also across different years. These
farmers would further be troubled because of the pressing demand from banks to pay back the loans they had
taken. Since he understood all these problems, Ali Raza decided to devise a mechanism to reduce the hardships
faced by the already beleaguered farmers and gain their confidence. The initiative launched by Faysal Bank in
this regard was the use of intermediaries to not only lower the cost of processing loans by the bank but also to
help farmers achieve higher profits by obtaining better yields and fairer prices. This initiative was designed to

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provide farmers with technical assistance in addition to the financial assistance so that they could reap benefits
not only for themselves but also for the banks.

According to Ali Raza:

We believe that service providers should provide agronomy consultancy services for the
customers. They should also arrange for supplying the inputs along with the financial support
and needed mechanical equipment, and also arrange for the marketability of the crop and
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facilitate the recovery of the loan money22.

There was competitive bidding for a project titled ‘Financial Inclusion Challenge Fund (FICF)’ under the banner
of UK Aid in order to enhance the participation of the financial institutions in the agricultural sector in Pakistan.
FBL participated in this challenge and tabled the idea of service providers (SPs). See Exhibit 9 for the main
extracts of the proposal submitted by FBL for FICF. It was approved by SBP and Faysal Bank was granted
approximately PKR 6 million in a grant from UK Aid to launch a pilot project. Exhibit 10 provides details of a
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proposal submitted by one such SP. An initial project was launched for an increase in the yield of the maize crop.
However, the first selected service provider could not arrange all the needed support from the farmers. Ali Raza
wanted the project to succeed. He met with different people and asked them to participate in this new venture but
no one was interested. Finally, he managed to convince one of his client farmers to take on the role of the service
provider. A group of six or seven farmers was constituted and the project was re-launched in July 2014. The
project showed promise as an increase of 15-20% was observed in the yield of maize crop for these farmers.

During its operations, Faysal Bank noticed another problem faced by the farmers. Storage facilities were scant
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and the farmers had a problem storing their crops. Most of the time, crops were wasted for lack of storage facilities.
In order to deal with this problem, Faysal Bank introduced a programme titled FFSAP (Financial Facility for the
Storage of Agricultural Products) under which they issued concessional loans at 8% for three to seven years. This
money was meant to facilitate the construction of facilities such as cold storage, godowns and silos.

Ali Raza explained this mechanism:

We intend to facilitate the value chain through the construction of these warehouses. What we
want to do, through the Warehouse Receipt Mechanism, is to store the crops brought by the
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farmers. Then we shall issue loans against these crops. Once the conditions are suitable, the
farmer will sell the crop and return our loan23.

22
Personal interview with Ali Raza.
23
Personal interview with Ali Raza.
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 Faysal Bank Limited—Agriculture Financing Strategy LCA037

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Ali Raza advocated strong participation of the intermediaries in agricultural financing and continued looking for
efficient service providers. Reflecting on the criteria adopted for the selection of intermediaries, he listed down
the following points:

• Track record of their farming practices and achievements.

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• Their acceptance of the underlying idea and willingness to enter into contractual arrangements.

• Their financial and managerial capacity to undertake the project.

• Their general reputation and acceptability among the local farming community.

• Their credit and conduct history with the financial institutions.

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By the end of 2014, Ali Raza was able to enter into agreements with four service providers. These were Pedaver
(Pvt.) Ltd, Ruralasia, Hassan Agri Service and GreenRock Agri Corp. (Pvt.) Ltd. Exhibit 10 shows the main
features of the proposal submitted by GreenRock Agri Corp. (Pvt.) to FBL for becoming a service provider that
promised an increased yield for the wheat crop resulting in an additional profit of PKR 12,000/acre to the farmers.
By the end of 2014, a pilot project involving giving financing to seven farmers was accomplished through Hassan
Agri Services. This first of its kind experience for Faysal Bank resulted in 15%-20% increase in output of maize
cultivated by these farmers in 2014 in Vehari district.
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ACKNOWLEDGEMENTS

The agricultural division of Faysal Bank soon came to be acknowledged for its performance by regulatory bodies.
It achieved the position of the third largest commercial bank in Pakistan in terms of outstanding agricultural assets
during the short span of one decade. Moreover, the performance of Faysal Bank was also recognised by State
Bank of Pakistan as it achieved and surpassed the business targets allocated by SBP for eight out of 10 years. SBP
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also invited officials from the Agricultural division of Faysal Bank to impart training to their counterparts working
in other banks of Pakistan through the platforms of SBP, IBP (The Institute of Bankers Pakistan) and NIBAF
(National Institute of Banking and Finance). SBP also engaged Faysal Bank as a leading participant in its future
initiatives and financial schemes like Financing Facility for Storage of Agriculture Produce (FFSAP), refinance
facility for the revival of flood-affected areas, and Credit Guarantee Scheme (CGS), to name a few. Because of
its experience in the field of fisheries farming, Faysal Bank had been selected by SBP as one of the three
banks for the implementation phase of the development of aquaculture and inland fisheries value chain finance
model in Pakistan. In fact, SBP presented Faysal Bank as the model agricultural bank. Due to its unique position
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in the market, Faysal Bank also represented the banking industry as a member of various SBP committees and
working groups, etc. It also became an active member of the agricultural sub-committee of Pakistan Banks’
Association (PBA).

FUTURE CHALLENGES

As Ali Raza contemplated the next set of initiatives, a major adjustment in the overall structure of Faysal Bank
was also underway that posed yet more challenges.

Ali Raza summed up these challenges as:

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The Bank’s Board of Directors has decided to transform Faysal Bank completely into an Islamic
Bank. We had started preparatory work and were in the process of identifying and evaluating
the corresponding Islamic financing products for conversion of the existing business. What we
were sure about at that stage was that our future plan and strategy would continue to introduce
innovative and diversified products to ensure value addition and financial inclusion of the
farming community.

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 Faysal Bank Limited – Agriculture Financing Strategy LCA037

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Another major challenge was the use of legal remedies in order to mitigate the proportion of defaults, particularly
the wilful defaults. Over the years, the overall attitude of the courts regarding banking laws had changed. Many
legal provisions had been repealed and several more were under review by the courts in Pakistan. The increasing
inefficiency of the law was likely to have dire ramifications for the banking sector. Moreover, several decrees
issued by the courts remained unexecuted for long periods due to poor enforcement mechanisms.

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Some of Ali Raza’s associates had left Faysal Bank and moved to the agricultural divisions of other banks. He
was happy at this because according to him, this would lead to a positive change in the overall sector of
agricultural financing.

CONCLUSION

According to Ashraf Mahmood Wathra, Governor SBP:

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Though improvements are visible, there is still a lot of work that needs to be done as the recent
high growth curve of agriculture disbursements has not served all geographic and economic
segments proportionally24.

As Ali Raza reflected on his experience of the last 10 years of setting up and establishing the agriculture finance
division at FBL, he decided on the next steps to ensure continued success in future so that his desire to see
improvements in the conditions of the mainstream farmer could materialise. Over the years, he had not only
established an organisation and a team with deep knowledge and commitment to the agri sector but also
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experimented with many new ideas of making agri financing effective and efficient. New initiatives like the use
of intermediary service providers offered the opportunity to take a bigger role in the agri value chain. Ali Raza
had to decide how to leverage the learnings of the initial pilot project to develop a long-term sustainable model
for agri financing that could be scaled up in such a way that it not only provided good profits for FBL but also
had a positive impact on the lives of the farmers who were the backbone of Pakistan’s economy and bulk of the
population.
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24
Banks asked to increase agri-credit reach, The News, February 22, 2014. Report on the remarks of Governor SBP at the mid-term review
meeting of the Agricultural Credit Advisory Committee (ACAC) held on February 21, 2014.
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 Faysal Bank Limited—Agriculture Financing Strategy LCA037

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Exhibit 1: Outstanding Debts of Households from Institutional and Non-Institutional
Sources

Types of Farmers Institutional Loan Non-institutional loan Total

(PKR million) (PKR million) (PKR million)

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Marginalised Farmers 29.1 152.6 181.7
Small Farmers 75.9 106.3 182.2
Middle-Sized Farmers 70.1 53.4 123.5
Large Farmers 91.6 62.4 154.0

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Source: Who is the Arthi, Pakistan Microfinance Network.

Exhibit 2: Agricultural Credit in Pakistan

Outstanding Agri Credit as of 30.06.2014 PKR 290.35 billion (5.7% of Total Credit)
Estimated Credit Needs 2013-14 PKR 750.00 billion
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Disbursement Target for 2013-14 PKR 380.00 billion
Disbursements 2013-14 PKR 391.30 billion (52% of Credit Needs)
Estimated Credit Needs 2014-15 Farm Sector: PKR 756.00 billion
Non-Farm Sector: PKR 190.00 billion
Total: PKR 946.00 billion
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Disbursement Target for 2014-15 PKR 500.00 billion

(53% of Credit Needs)
Total No. of Farmers’ Households 8,264,480*
No. of Farmers’ Households availing Agri Credit as 2.15 million (26% of the total farming community)
on 30.06.2014
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*Source: Agricultural Census 2010, Pakistan Bureau of Statistics-Government of Pakistan. Accessed

December 2017.
http://www.pbs.gov.pk/sites/default/files/aco/publications/agricultural_census2010/Tables%20%28Pakist
an%20-%20In%20Acres%29.pdf
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 Faysal Bank Limited – Agriculture Financing Strategy LCA037

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Exhibit 3: Area, Production and Yields of Important Crops

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Source: Pakistan Bureau of Statistics. Accessed December 2017.

http://www.pbs.gov.pk/sites/default/files//tables/Table%201%20area_production_crops.pdf
No
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 Faysal Bank Limited—Agriculture Financing Strategy LCA037

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Exhibit 4: Types of Financing

By Sector Farm Credit

a. Production Financing
b. Development Financing

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Non-Farm Credit
a. Livestock, Poultry, Fisheries and Forestry Financing etc.
By Security a. Secured Financing
b. Clean Financing
By Nature a. Funded Facilities
b. Non-Funded Facilities

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By Tenure a. Short-Term Facilities
b. Medium-Term Facilities
c. Long-Term Facilities
By Funding Sources a. From Bank’s Own Sources
b. Under Refinance Scheme of SBP
By Pricing a. On Fixed Rate Basis
b. On Floating Rate Basis
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Modes of Disbursements a. In Cash
b. In Kind

Source: Company Documents.

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Exhibit 5: Agriculture Finance Disbursements in Formal Sector 1973-2014

Share in Disbursement (Percentage)

Total
ZTBL Co-operatives 5-Big Taqavi 14-Private 7-Micro 3-
Disbursement
Banks Loans Domestic Finance Islamic
(Amount in
Banks Banks Banks
Billions)
No

1972-73 0.31 55.05 13.68 28.01 3.26 - - -

1973-74 1.08 38.28 29.25 26.38 6.09 - - -
1977-78 2.05 21.01 15.58 62.97 0.44 - - -
1982-83 2.31 36.58 20.45 42.92 0.05 - - -
2001-02 52.45 55.50 10.06 33.34 - 1.10 - -
2003-04 73.56 40.69 10.42 45.19 - 3.70 - -
2006-07 168.83 33.45 4.73 47.61 - 14.21 - -
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2011-12 293.85 22.48 2.90 49.78 - 20.72 4.12 -

2013-14 391.35 19.91 2.25 49.95 - 21.67 5.82 0.39

Source: Pakistan Economic Survey.

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 Faysal Bank Limited – Agriculture Financing Strategy LCA037

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Exhibit 6: Remedial Provisions Available to the Bankers

Legal Provisions Salient Features

The Loans for Agricultural 1. This Act had an over-riding effect.
Purposes Act, 1973

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2. The endorsement made by the lending bank in the Pass Book and its
authentication by the Revenue Officer would create a charge in favour
of the bank.
3. The landowner would be debarred from alienating the land till
repayment of loans secured against charged land.
4. Any alienation of land bearing the bank’s charge would be void.
5. If the landowner failed to repay the finance, the bank could apply to the

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collector for recovery of outstanding finance as arrears of Land Revenue.
The Financial Institutions 1. Mortgaged Property could be sold by the banks with or without the
(Recovery of Finances) intervention of the Court after obtaining decrees.
Ordinance, 2001 2. In case of difficulty, the help of the Banking Court could be sought for
taking possession of the mortgaged properties subjected to sale by the
banks.
3. Initiation of criminal proceedings was also guaranteed in the Ordinance.
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Section 489-F of PPC The dishonest issuing of a check towards re-payment of a loan or
fulfilment of an obligation was punishable with imprisonment which
may extend to three years, or with fine, or both.
Section 176 of the Contract Outright sale of pledged goods was allowed under this section
Act, 1872
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Source: Company Documents.

Exhibit 7: Brief Profile of Ali Raza

Ali Raza did his M.A in Economics. He also holds an LL.B degree besides being a DAIBP (Diploma Associate
Institute of Bankers Pakistan). With his Diploma in Banking Laws (DBL), he had been a visiting faculty member
at (Punjab) University Law College too. He joined Faysal Bank Limited in the year 2004 as head of its Agri &
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Agri SME Division with a vast and diversified banking experience spanning over four decades. Before joining
Faysal Bank, he served at UBL for more than three decades, where he held various field and senior positions,
including as Branch Manager of three branches in an agro-based area. Other positions he held later included those
of being the Desk In-charge at Punjab Cotton Cell, Punjab Rice Cell, Textiles Advances and the Recovery and
Litigation Departments while posted at UBL’s Provincial Headquarters in Lahore. He was the first Head of the
Pioneer Regional Credit Administration Department of UBL, and in this capacity managed a large corporate
portfolio for five years. He participated in the credit risk policy and procedures formulation process, and his last
assignment at UBL was as Country Head Collections Task Force. He has been an active member of various
committees and groups constituted by State Bank of Pakistan on agriculture-related regulatory and policy issues
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and was also a member of the agricultural sub-committee of Pakistan Banks Association.

Source: Ali Raza at FBL.

15

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 Faysal Bank Limited—Agriculture Financing Strategy LCA037

Exhibit 8 (A): Position of Agri Finance as of:

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31.12.2010 31.12.2011 31.12.2012

Outstanding NPL Outstanding NPL Outstanding NPL

NPL % NPL %
Purpose % to O/s Sectoral % to Sectoral
Amount O/s NPL Sectoral Amount % to Total of Total Amount O/s NPL of Total
Total % of Total NPL % of Total % of
(M) (M) % of NPL (M) Portfolio O/S (M) (M) O/S
Portfolio NPL (M) NPL Portfolio NPL
No
Agri Inputs/ Working Capital 3138.7 67.69% 497.2 15.84% 10.72% 3572.8 67.22% 501.9 14.05% 9.44% 4568.698 64.52% 644.128 14.10% 9.10%

Live Stock 1165.7 25.14% 318.8 27.35% 6.88% 1143.5 21.51% 327.2 28.62% 6.16% 1443.507 20.38% 476.323 33.00% 6.73%

a- Poultry Farm 773.1 16.67% 164.5 784.963 14.77% 146.0 18.61% 146.0 18.61% 2.75% 1012.644 14.30% 254.907 25.17% 3.60%

I- Broiler 360.3 7.77% 81.6 351.587 6.61% 54.9 15.63% 54.9 15.63% 1.03% 607.414 8.58% 127.258 20.95% 1.80%
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II- Layer 59.2 1.28% 21.6 37.493 0.71% 7.5 20.23% 7.5 20.23% 0.14% 60.159 0.85% 8.166 13.57% 0.12%

III- Breeder/ Hatchery 42.0 0.91% 33.4 46.845 0.88% 42.4 90.55% 42.4 90.55% 0.80% 35.849 0.51% 19.480 54.34% 0.28%

IV- Feed Unit 198.9 4.29% 0.000 158.460 2.98% 0.0 0.00% 0.0 0.00% 0.00% 153.410 2.17% 0.000 0.00% 0.00%

V- Equipment/
190.578 3.59% 41.1 21.57% 41.1 21.57% 0.77% 155.812 2.20% 100.004 64.18% 1.41%
Machinery 112.5 2.43% 27.7

b- Dairy Farm 251.7 5.43% 116.2 255.386 4.80% 122.1 47.81% 122.1 47.81% 2.30% 317.446 4.48% 173.124 54.54% 2.44%
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c- Cattle Farm 140.9 3.04% 38.1 103.158 1.94% 59.0 57.28% 59.0 57.28% 1.11% 113.417 1.60% 48.292 42.58% 0.68%

Milk Collection Unit 18.5 0.40% 0.5 2.72% 0.01% 2.7 0.05% 0.4 16.42% 0.01% 6.171 0.09% 0.364 5.90% 0.01%

Butter & Cheese Unit 0.7 0.02% 0.0 0.00% 0.00% 2.4 0.05% 0.0 0.00% 0.00% 2.328 0.03% 0.000 0.00% 0.00%

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Fish Farm 19.0 0.41% 1.9 10.31% 0.04% 28.7 0.54% 1.4 5.05% 0.03% 31.430 0.44% 0.997 3.17% 0.01%
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Tractor/ Farm Machinery/ Agri
Implements/ Water Course/ 160.3 3.02% 30.4 19.00% 0.57% 135.719 1.92% 18.339 13.51% 0.26%
Land Levelling 141.4 3.05% 38.3 27.11% 0.83%

Tube Wells 1.5 0.03% 0.101 6.61% 0.00% 0.0 0.00% 0.0 0.00% 0.00% 1.994 0.03% 0.000 0.00% 0.00%

Cold Storage / Godowns 74.479 1.61% 14.806 19.88% 0.32% 310.6 5.84% 13.7 4.42% 0.26% 605.413 8.55% 26.578 4.39% 0.38%

Seed Processing Unit 76.750 1.66% 4.718 6.15% 0.10% 93.7 1.76% 4.2 4.56% 0.08% 286.300 4.04% 3.698 1.29% 0.05%
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Grand Total 4637.095 100% 876.5 18.90% 18.90% 5315.0 100% 879.6 16.55% 16.55% 7081.561 100% 1170.427 16.53% 16.53%

Source: Company Documents.

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 Faysal Bank Limited – Agriculture Financing Strategy LCA037

Exhibit 8 (B): Position of Agri Finance as of:

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31.12.2013 31.12.2014

Outstanding NPL Outstanding NPL NPL %

% of of Total
Purpose
% to Total O/s NPL Sectoral % of Total % to Total O/s NPL Sectoral % of O/S
Amount (M) Amount (M)
Portfolio (M) NPL NPL Portfolio (M) NPL

Agri Inputs/ Working Capital 5002.422 65.73% 707.979 14.15% 9.30% 6483.438 69.71% 940.000 14.50% 10.11%
No
Live Stock 1521.967 20.00% 595.878 39.15% 7.83% 1798.732 19.34% 296.000 16.46% 3.18%

a- Poultry Farm 1127.011 14.81% 360.366 31.98% 4.73% 1291.942 13.89% 218.000 16.87% 2.34%

I- Broiler 582.064 7.65% 81.785 14.05% 1.07% 533.351 5.73% 82.000 15.37% 0.88%

II- Layer 142.383 1.87% 17.497 12.29% 0.23% 184.867 1.99% 15.000 8.11% 0.16%
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Breeder/
107.876 1.42% 57.624 53.42% 0.76% 265.613 2.86% 73.000 27.48% 0.78%
III- Hatchery

IV- Feed Unit 55.673 0.73% 55.451 99.60% 0.73% 89.246 0.96% 7.000 7.84% 0.08%

Equipment/
239.015 3.14% 148.010 61.92% 1.94% 218.865 2.35% 41.000 18.73% 0.44%
V- Machinery

b- Dairy Farm 252.002 3.31% 121.870 48.36% 1.60% 332.548 3.58% 45.000 13.53% 0.48%
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c- Cattle Farm 142.954 1.88% 113.642 79.50% 1.49% 174.242 1.87% 33.000 18.94% 0.35%

Milk Collection Unit 67.580 0.89% 2.894 4.28% 0.04% 82.871 0.89% 3.000 3.62% 0.03%

Butter &Cheese Unit 0.754 0.01% 0.000 0.00% 0.00% 1.062 0.01% 0.000 0.00% 0.00%

Permissions@hbsp.harvard.edu or 617.783.7860
Fish Farm 25.910 0.34% 0.194 0.75% 0.00% 23.374 0.25% 3.000 12.83% 0.03%
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Tractor/ Farm Machinery/ Agri
157.711 2.07% 27.717 17.57% 0.36% 150.868 1.62% 24.000 15.91% 0.26%
Implements/ Water Course/ Land Levelling

Tube Wells 1.221 0.02% 0.000 0.00% 0.00%

Cold Storage / Godowns 526.650 6.92% 77.398 14.70% 1.02% 499.353 5.37% 67.000 13.42% 0.72%

Seed Processing Unit 306.784 4.03% 7.941 2.59% 0.10% 260.301 2.80% 7.000 2.69% 0.08%
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Grand Total 7611.000 100% 1420.000 18.66% 18.66% 9300.000 100% 1340.000 14.41% 14.41%

Source: Company Documents.

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 Faysal Bank Limited—Agriculture Financing Strategy LCA037

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Exhibit 9: Extracts from Proposal for Financial Inclusion Challenge (p1 of 3)
The Potential for Transformation (Destructive Creation) of Agri Financing:

The proposal has the potential for the creation of following impacts:

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➢ Reduction and eventual elimination of the role of Arthi (agricultural middleman).
➢ Enhanced due diligence of the farmers resulting in improvement of the quality of lending and recovery
position of the banks’ financing.
➢ Significant reduction in time involved in the loan process
➢ Reduction in cost involved in the loaning and monitoring process resulting in the availability of more
time with the agri field force for fresh marketing and management of their agriculture portfolio.
➢ Increase in per acre yield and better price for agricultural produce.
➢ Introduction of online (paperless) Loan Origination System (LOS) resulting in swift approvals, doing

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away with the delays previously taking place in the loaning process.

Potential for Financial Inclusion of Small Farmers:

The proposal was especially aimed at financial inclusion of small farmers. The enhanced due diligence with the
help of Service Providers (SPs) or otherwise, and better cash flows at the disposal of the farmers would help
increase our services towards small and landless farmers. As a result, we planned to extend our financial help to
the poor segment of the farming community under SBP’s (group based) Financing Scheme for Small Farmers. A
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large number of farmers hitherto not facilitated were expected to benefit from this proposal.

Structure of the Proposed Project Including Partner Institution & their Commitment to the Project:

We entered into an agreement with M/S Pedaver (Pvt.) Limited – a corporate body incorporated on 21.01.2013.
The company entered into a large-scale crop production through its Pedaver division. They possessed a sufficient
knowledge base, proven experience in cultivation and agronomic consultancy, maintained a full mechanical fleet
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and financial resources to accomplish their part of the agreement as Service Providers (SP). The SP undertook
the following major activities:

➢ Selection of farmers willing to avail financing under the arrangement with FBL, and help them complete
banking documentation formalities
➢ Arrange timely provision of quality agriculture inputs and mechanical support, provide supervision and
guidance to the farmers throughout the crop cycle on reasonable rates and charges to be reimbursed
through the bank financing under authorisation of the respective farmers.
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➢ Directly purchase or manage the sale of the farmers’ produce at favourable rates and help the bank in
the recovery of dues against the agreed remuneration.
Note: We intend to add more SPs in this arrangement in due course.
➢ Every branch in the agro-based areas of Sindh, Punjab and KPK has been designated as an agri branch
and staffed with at least one independent agri Marketing Officer.
➢ A regular training programme was launched to ensure improving` the professional skills of the field
force on regular basis.
➢ Online loan approval system launched.
➢ Enhancement in existing financing scheme was planned.
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Market Research

➢ Based on the banks’ historical experience of agri lending in Pakistan for the last four decades, the
following reasons can be identified underlying the banks’ lukewarm outlook towards agricultural
financing:

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 Faysal Bank Limited—Agriculture Financing Strategy LCA037

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Exhibit 9: Extracts from Proposal for Financial Inclusion Challenge (p2 of 3)
1. Low profitability caused by:

➢ Higher lending and recovery cost

➢ Regulatory provisioning requirement and ultimate write-offs

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2. Non-Performing Loans (NPLs) are primarily caused by:

➢ Low productivity and farmers’ lower incomes resulting from the inequitable marketing system
➢ Wilful defaults nurtured by the ineffective implementation of recovery laws etc.

3. Lack of professional and technological capacity of the banks

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The following are a few reasons dissuading small and landless farmers from availing institutional credit:

➢ Tedious documentation process and land title issues

➢ Non-availability of landed collaterals
➢ Lengthy turnaround time

This proposal presented a mechanism/model which aimed to address all the above-stated impediments in the way
of extension of credit to small and medium-sized farmers. We hope to achieve the objective of extending our
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outreach to an additional 1,000 farmers, and bring about a qualitative improvement in productivity and also in the
portfolio within the current year.

Identification & Mitigation of Critical Risks

Critical Risks Mitigates

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1. Inhibition towards acceptance of • Awareness of this new concept among farming community
new concept by the farmers through farmers’ gatherings and advertisement etc. directly
and with the help of SPs will popularise the concept.

2. Lack of ability and involvement of • The service provider will be equally incentivised as it will
SP bring in reasonable profits on the sale of their inputs,
technical expertise and supervision, besides rent for the
machinery and implements hired by the farmers. SP’s help
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in recovery of financed amount on the due dates will also

entitle them to a financial remuneration.
3. Overcharging by SPs • Bank staff will vigilantly and regularly monitor the quality
and pricings of the materials and services charged by SP.

4. Diversion of funds financed by the • A double check on the end use of funds by the SP and bank
bank staff will ensure use of the funds for the purpose they will
be lent.
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 Faysal Bank Limited—Agriculture Financing Strategy LCA037

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Exhibit 9: Extracts from Proposal for Financial Inclusion Challenge (p3 of 3)
Financial Proposal along with FICF Financing Requirements (Financial Sustainability and Plan for
Leveraging FICIF Funds to Private Investment):

FBL plans to incur the following costs to pursue its business proposal/strategy aimed at financial inclusion of the

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farming community:-

(PKR In millions)

FICF Financial
Estimated
Cost Components Requirements (Calculated
Cost
at 70% of the cost)

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Preliminary expenses involved in the selection of, meetings and
discussions with, capacity building of, and execution of the legal 0.200 0.140
agreement with SP
Cost of a new vehicle dedicated to marketing and regular monitoring of
2.200 1.540
the financing operations and effecting recovery
Marketing material (flyers, banners, hoardings & media campaigns etc.) 2.000 1.400
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Cost of 50 multifunction scanners (HP-1212NE) for online credit
1.600 1.120
proposal initiation
Farmers' capacity building programme 1.000 0.700
Staff’s capacity building and training 1.000 0.700
Miscellaneous 0.500 0.350
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Grand Total 8.500 5.950

Conclusions

The proposal envisaged the creation of a win-win situation for all three parties as follows:

1. Reduction and eventual elimination of the role of Arthi.

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2. Timely availability of quality inputs and supervision of highly qualified and experienced SPs to guide the
farmers throughout the crop cycle and resulting in significant per-acre productivity, thereby improving their
revenues and the resultant repayment capacity.
3. Ensuring timely and regular supply of the agri inputs on reasonable market rates and disposal of their agri
produce at best possible price
4. The Service Providers will be incentivised, as it will bring them reasonable profits on the sale of their inputs,
technical expertise and supervision, and the rent for the machinery and implements hired by the farmers.
5. The Service Providers, besides providing assistance to potential farmers, will also assist the bank in
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marketing, disbursement, end use, and recovery of financing.

6. Reduction in the bank’s intermediation cost and drastically cutting down the loan approval time.
7. Financial inclusion of small and landless farmers will help in the alleviation of poverty, and growth in the
country’s economy.
8. Positively influence the banks’ outlook to get into the area of agriculture financing willingly in a big way.

Source: Company Documents.

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 Faysal Bank Limited—Agriculture Financing Strategy LCA037

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Exhibit10: Salient Features of a proposal for Service Provider (SP) by GreenRock:
Micro-Credit with Agri-Extension

Introduction GreenRock Agri Corp Pvt. Ltd is a SECP registered company. It intends to act as a
service provider for FBL.

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Pilot Projects Timeline: It would pilot the project starting this Rabi season targeting potato and wheat
crops, i.e., commencing October-November 2014.
Services Offered Farmer Loans: SP would assist the farmers in completing the formalities for applying
for a loan. The bank would ensure speedy approval of loans. No cash would be given to
the farmers, rather the items would be given in kind through a rotating account.
Rotating Account: a portion of the approved loan amount would be deposited.

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Farm Inputs: to be distributed to the farmers in kind, against the approved loan, along
with their rates, to the bank for approval. The loan may also be used for conducting
scientific testing procedures, as approved by the bank. Arrangements would be made for
the availability of agricultural machinery for farmers.
Farm Inputs To be distributed to the farmers in kind, against the approved loan, along with their rates,
to the bank for approval. The loan may also be used against conducting scientific testing
procedures, as approved by the bank. Arrangements would be made for the availability
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of agricultural machinery for farmers. Agricultural experts would be engaged to provide
technical assistance.
Post-Harvest The SP will assist the farmer in selling the produce at optimal rates.
Service
Crop Insurance Crop insurance would be mandatory and picked up by the farmer upfront from the loan
amount given.
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Loan Repayments Once the harvest is sold, the SP will apply the sale proceeds in the following priority
order:
• For full and final repayment of the bank's dues including principal, mark-up, fees and
any other charges. The bank dues will include the SP's service charges, which the bank
will collect and return to SP.
• Payment of balance amount to the farmer.
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Penalty due to SP's The SP will indemnify the farmer for all losses sustained by the farmer on account of
mistakes SP's negligence.
Expected Benefit The goal of the project is to raise the average wheat yield from the existing 28
to Farmers maunds*/acre to 34 maunds/acre in the first year, and 38 maunds per acre in the second
year. An increase of 10 maunds/acre would lead to increased revenue of PKR 12,000 per
acre.
1 maund = 40 kilograms (approx.)

Source: GreenRock Proposal for Service Provider.

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