Reaching Small Farmers Through Innovative Finance In Pakistan
Pakistan’s economy is largely agrarian. While Pakistan employs 45% of its labor force in agriculture, the contribution of agriculture to GDP is only 21%. This is because major crops such as sugar cane are produced by small subsistence farmers with low yield (20 tons per acre) as compared to 37 to 40 tons by large growers. Low yields are associated with a vicious cycle of “generational bondage relationship” between the small farmer and the shop keeper (the Aarti) who charges very high interest rates (@120% APR), and insists on financing in kind either through low quality input supplies or forces the farmer to make distress sales of crops at low prices. Access to timely institutional finance and correct advisory can break this vicious cycle.
In 2001, NRSP (National Rural Support Program) designed a research project to address the issues of access to finance and advisory services to small sugar cane farmers. The basic idea was to create an “out of box” microfinance model that threads together the small farmer, the MFI and the processor into a high impact value chain with high financial and social returns. The project “Sugarcane Production Enhancement Project” (the SPEP) focused on small poor farmers with a maximum land holding of around three acres, as well as share croppers and farmers who generally rent agriculture land from large land lords.Photo Credit: Erkan Kalenderli
In this model, 1800 small farmers were organized by NRSP and each one provided a loan ranging from PKR 7,000/- to PKR 10,000/- per acre for input purchase. A separate institutional mechanism was set up to provide modern advisory services to enhance the per acre yield. Soil was tested to set up a bench mark. The farmer was only allowed to use the loan once the advisory services recommended what to do next. At the same time, the sugar mill signed an agreement with NRSP to buy back all the product of the small farmers and pay cash as soon as the farmer brings his product to the mill. The mill was also obliged to deduct the loan and the service charge at source.
In first year 350 small holder farmers (sugarcane growers) were registered by the sugar mill where as 1,470 additional small holder farmers were registered by 2002. The demonstration effect of the pilot soon led to need to scale up the scope of research from 1,800 to 3,500 by adding another nearby 10 union councils. By end of year 3 the project was able to reach 3,666 small holder farmers. 68% of enrolled farmers were able to increase per acre yield of sugarcane production from 19 tons to 27 tons per acre, whereas 32% were producing more than 31tons per acre. The contribution of small growers to overall sugarcane supply of JDW reached to 11.5%.
The result was a “win win for all”.
The small farmer benefitted from high incomes because of improved yields; the sugar mill from getting high quality yields which lead them to plan for expansion of their factory; the NRSP MFI by getting recovery of their loans at source which reduced their PAR to less than 1% and zero recovery staff. Most importantly this tri partite collaboration benefited small farmer because investments were made in developing infrastructure irrigation, and technical guidance regarding seed and farm equipment.
The social impact has been assessed by a third party evaluation and found to be highest amongst all NRSP MF investments. The SPEP project is now operational in 44 union councils of Rahim Yar khan with registered small holder farmers.
Over nineteen thousand small holder farmers accessed agricultural loans from NRSP in FY 2012 (up to June) where as others with financial needs (loan requirement of more than PKR 100,000) have been linked with a commercial bank.
Today, 15% of sugar mill supply (after extending production capacity of sugar mill) is provided by community organizations those organized by NRSP, who are now able to obtain a yield of around 32 tons of sugar cane per acre than impacting growth of income by 80%.
The project’s success also opened a venue of receiving social investment of private company called “JDW Sugar Mill” under their CSR program including free eye camps with the facility of cataract surgeries, as well as establishing vocational institutions.
NRSP’s impact financing model can be a breakthrough in microfinance lending especially in the agriculture sector. The model can be adapted in any developing economy and in diverse cropping patterns like cotton, rice, even livestock etc. All it needs is a tri partite collaboration between the processor, the MFI and the small and poor farmers. The returns are significant for all and perhaps this model can be one option to break the generational bondage between the small farmer and the shop keeper which continues to be in place in many developing economies.
--- The author is the executive director for the National Rural Support Program in Pakistan.
Rashid, I am wondering if you can share the business case for the MFI - is it charging market rates, and if so or not, what kind of profitability returns are they seeing? And, do you have any insight on farmer referrals to banks for larger loans, and how those loans are performing? Thanks so much.