A mosaic of financial products has emerged out of the abundant flow of funds but the financial sector is hesitant to enter into the agri-based market.
Having reached the exhausting level after tapping areas such as consumer, auto, personal and house building loans, credit cards, the SMEs and corporate sector financing, - all urban-based financial products - the market is drying up for banks.
Overheating and subsequent chaos is imminent. Investment is growing too quickly and will exceed the market demand. Very soon they will be compelled to look for new sectors.
Whereas, banks are concentrating on products to facilitate the urban society, the field is wide open for the financial sector to enter into agri-based products and penetrate into rural areas. Modarabas can be trendsetters instead of price receiver by entering into the agri-based market.
Presently, the State Bank is keen on encouraging investors to develop the infrastructure. Road network, warehouses, transportation, hydroelectric works, telephone network, education of artisans are the components due for improvement. Economic recovery is dependent on industrial plan.
Masses will remain poor unless major improvement plan in the agriculture sector is carried out. Around 40 per cent of the population is living below the poverty line. Political independence without economic liberty is seldom safeguarded.
An industry employing one million people is capable of producing goods but there cannot be a market unless people have the purchasing power. Infrastructure change comes with the government planning through public sector borrowing.
There can be multiple projects for poverty alleviation. Portion of income from these projects can go to investors in revenue generation. Large banks having agriculture financing experience are more hooked up by corporate lending.
Agriculture bank in public sector is facing extra burden of infected portfolio and lack cash resources to come forward. An agri-based economy has multiple choices for investors and risk managers.
Crop, seeds farming, and project loans are few areas of interest. Tractors, bulldozers, combined harvesters, fertilizers, pesticides, modern systems of irrigation, tubewells, lift pumps and varied items of import are part of requirement.
Agriculture is offering choices to achieve self-sufficiency and also export potentials. Modarabas share 90 per cent of the profit by distributing among investors. They have undertaken activities of trade finance, leasing, stock market and various services. But investors, especially foreign, have shied away from investment in Modarabas and resource mobilization remains weak and costly.
In January, 2004, the Security and Exchange Commission of Pakistan (SECP) revised the prudential regulation to provide Modarabas an impetus and level-playing field in financial sector.
The capabilities of risk management, promoting corporate governance have been aimed at. The four segments revised are comprehensive set of definitions covering all activities, guidelines of risk management, operation activities and know your customer (KYC) to cover anti-money laundering issues.
The State Bank, earlier in January 2003, provided strategic guidelines for the promotion of Islamic banking. It allowed full-fledged Islamic bank in the private sector, setting up of subsidiaries by banks and stand alone branches in commercial banks. In the Gazette of Pakistan dated November 4, 2002, in terms of the Banking Companies Ordinance 2002 a new clause has now been inserted which reads:
"(aa) The carrying on of banking business strictly in conformity with the injunctions of Islam as laid down in the Holy Quran and Sunnah". Modarabas originate from the Islamic social system.
An interest free finance system has been an aspiration. It is a partnership, where one partner gives money to other for investing in commercial enterprises. Funds provision is the responsibility of "Rabbul Mal". Management and work is carried out by the other partner "Mudarib". Working with due diligence by Mudarib, the liability is limited to investment.
The government is committed to promote the Shariat mode of financing and financially strong Modaraba sector will lend a helping hand to the cause. Having set the house in order the Modarabas will be well poised to play proactive role as part of the financial sector by contributing in economic growth.
The research and development of new products have not been undertaken by Modarabas, may be due to low capital base and fragmentation of sector. Modarabas have an untapped market for taking agriculture sector in their fold as the financial sector is getting dried up of products.
One of the challenges for Modarabas is funding cost. If they rely on financial institutions they are at a disadvantage of competing with an advanced financial sector.
They can develop their borrowing through short-term and long-term certificates from the private sector which looks for investment markets. So far financial managers have concentrated in urban sector and the 60 per cent rural population has been ignored. Presently, the products offered by banks and the DFIs facilitate the norms of a city life.
Modarabas may take project financing in rural areas but the fear of not having experience and the establishment cost may be out-lived by reaching arrangements with the network of post offices and saving centres.
Post office branch can serve as a point of contact, maintenance of account and provide advantage to the KYC. It will create employment, education avenues for farmers, personal advisory services and the statistics for state. Advent of online banking network link, post office at agri-desk in the remote areas will not be very difficult.
The agri-product loans and their securitization can be divided into four categories:
A) Loan secured by crops
B) Loan secured by livestock
C) Loan secured by farm equipments
D) Consumer purpose loans - to farmers ranches.
Crops category belong to goods produced in farming operations or crops in their unmanufactured state; grains, cotton, wool. Such goods must be in the possession of debtor engaged in raising, grazing or other farming operations.
If goods are farm products, harvested and moved into storage or warehouses these become inventory. These must be in the possession of the farmer. If being sold then these are considered inventory. Standard has to be followed in inventory procedures.
Loans against inventory (raw material, work in process, finished goods) can be allocated. The inventory advances are usually converted to the receivable portion of line once goods are sold.
Then the receivable portion of line should be reduced accordingly. The borrowing base is adjusted up and down in accordance with the amount of inventory constantly in pipeline and the existing receivables category.
A maximum limit of Rs10 million per customer can be fixed as an upper limit for risk management. A higher limit to meet peak seasonal needs or before price increase for goods would be a prudent approach.
Loan disbursement through post office account will help in developing fund flow in post office channels. It may cover sectors of retail banking and personal banking.
The system can be started from adjacent cities - Lahore, Karachi, Peshawar and Quetta. Agency arrangement with the post office and saving centres link in rural areas may provide a public-private sector partnership. Insurance of these loans can be arranged which may provide incentives.
The Modaraba association may enter into an agreement with the postal authority's network for providing space with the shared cost and facilitate post office banking services with limited manpower.
It is in line with the present concept of central processing unit (CPU) banking in which branches are reduced to skeleton staff for offering only counter services and customer contact point.
Around 10 per cent of Rs8 billion paid-up capital of Modarabas comes to Rs800 million for initial investment. It will create sizeable goods and services market. The flow of funds will facilitate village improvement, education and the diversification of funds will add colour to the investment landscape. Building inroad for Modarabas in agri-sector will be a step forward to food for all.
