Agriculture has not received the right priority. Of many hindrances against its progress, the shortage of finance is one of the main bottlenecks. The prices of all the inputs such as diesel, fertilizer, pesticides and seeds have been increased many times during the last few years. The farmers do not have sufficient funds to meet their farms’ and family needs.

On the other hand, prices of agricultural produce are moving much slower pace as compared to prices of the inputs. In such a situation, the finance sector needs to provide more credit to rural folk. The village people are in fact, under-served with credit.

In Pakistan, the rural credit market is categorized into formal and informal providers of credits. The supply of finance by the formal sector is inadequate for the needs of the farmers, especially the small landholders and the landless. The informal providers have a major share in the supply of credit to the farmers with subsistence holding and to the landless peasants. These include professional money lenders, commission agents, friends and relatives.

In the 1970s, the commercial banks were given mandatory agricultural credit targets. With the passage of time, the credit needs of farmers have increased manifold due to soaring prices of inputs. As a consequences, the credit targets of commercial banks were also raised annually.

To achieve these targets and to save themselves from penalty, some banks became very aggressive in extending credit. Lack of prudential lending led to debts and defaults.

The designated banks focused on landlords in order to disburse big loans to them and to earn a handsome amount of mark-up from them. The small land-holders, the landless and women who have a considerable share in agro-economic activities, were not considered economical for financing.

The uneducated rural people are also inclined to avail money at high interest rates ranging from 50-120 per cent per annum from the informal sources because there is rapid disbursement and they are familiar with these lenders and are known to them. As a consequences, a major share of their earnings are drained out by the professional lenders at the end of the crop season.

These informal and professional money lenders have deep influence in the limited market they operate. In many cases, some farmers are compelled to sell their land and also other valuable assets to repay the principal amount and interest.

The State Bank of Pakistan’s Agricultural Credit Advisory Committee (ACAC) has estimated Rs130 billion for disbursement of credits to the farmers during the current fiscal year (2005-06). But the banks focus on big loans. The small land holders are forced to pay 20 per cent mark-up to the microfinance banks.