Value chain contract farmer financing: State Bank issues guidelines

Will help banks develop mutually beneficial relationship.

KARACHI: The State Bank of Pakistan (SBP) issued guidelines on value chain contract farmer financing on Wednesday.

According to a statement released by the SBP, the guidelines are aimed at encouraging banks to extend credit to small and marginalised farmers by leveraging on the strengths of inter-relationships that exist in the agriculture value chain.

These guidelines will serve as a basis for banks to develop mutually beneficial relationship between the banks, farmers and the value-chain agent.



Contract farming assumes an extensive number of arrangements along the value chain linking small-scale farmers to markets by either formal or informal contracts. Value chain contract farmer financing schemes are binding arrangements among banks and agricultural value chain actors, including producers, processors, aggregators and traders through which a farmer or a group of farmers ensures supply of agricultural products to individual firms.

It replaces the traditional collateral requirements with trade agreements by facilitating coordinated commercial relations between value chain actors.

The introduction of value chain contract farmer financing scheme will enable farmers to avail financing from banks backed by processor’s guarantee and in return buyers/processors may get assurance of getting required quantity and quality of agricultural produce.

The guidelines have introduced five instruments, including trader credit, input supplier credit, marketing company credit, lead firm credit and Arthi (or intermediary) besides identifying roles and responsibilities of stakeholders, financing mechanism, eligibility criteria, types of financing, loan limits, security and collateral, insurance and loan monitoring mechanism.

It is expected that the guidelines will benefit farmers in terms of enhanced productivity in variety of ways, such as availing quality input facilities, adopting new technologies, insurance coverage for crop/non-crop activities and most importantly assurance of buyer in advance. The processors, traders, exporters and Artis gains ensured supply of desired quantity of quality produce and bankers are at ease with assured loan settlement by the value chain agents.

Small farmers with up to five acre land holding constitute 65%, or 5.4 million, as opposed to 8.3 million farm households in the country. The SBP, in line with the government’s efforts to promote access to finance to small farmers, is working on a number of initiatives that include a credit guarantee scheme for small and marginalised farmers, crop and livestock insurance and warehouse receipt financing.

The SBP has also advised banks to use the guidelines for developing their own products for providing credit to contract farmers, particularly to those who lack collateral to offer to the bank.

Published in The Express Tribune, October 2^nd, 2014.

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