From the very beginning of the decade of 1970s all economic policies and development plans have been found duly focussing on the development of the rural economy.

In this regard there has been continuous flow of subsidies, concessions and exemptions to the rural sector especially in the context of land revenue, income tax, support prices for agriculture products, institutional credit, etc. However despite supportive approach of the government to the rural sector and presence of favourable geo- physical and climatic conditions except the recent drought in Sindh and Baluchistan, the desired rate of growth has not been achieved. In other words, the contribution from the rural sector to GDP remains stagnant at 24 per cent, a level below expectations, resultantly poverty continues to grow in rural areas.

The country’s present status regarding its rural economy and seeing it in perspective of indecisive issues at the WTO’s Cancun moot regarding withdrawal of enormous subsidies being enjoyed by agriculture sector of economically developed countries, a very gloomy future can be sensed for the economy of the country like pakistan. Its industry and exports both being mostly agro - based will be adversely impacted. As such Pakistan need to redefine the strategy to develop its rural economy. There is need to achieve a broad based growth of agriculture for alleviating poverty, enhancing agriculture contribution to total GDP, generating employment opportunities, ensuring food security and a sustainable domestic market for industry and services.

During the first two decades after independence inaccessibility to institutional credit has been the main impeding factor for farmers to get better yield from their farms. However from mid seventies and onward all the state-owned banks, the Agriculture Development Bank, cooperative banks embarked on financing the agriculture sector in a big way with quite a number of credit schemes both for farming and non-farming activities. That also failed to boost up rural economy to the desired level, due to the absence of promotional role of banks and financial institutions in this regard.

Introduction of the “supervised agriculture credit” scheme in early eighties was a step in the right direction, but due to the failure of banks to implement the same in letter and spirit, it remained ineffective in improving the growth rate of the agriculture sector. The idea behind the scheme was promotional and provision of funds. The scheme had presupposed intensive involvement of agriculture credit officers in socio-economic life of the villages with a problem solving approach.

The promotional role under ‘group approach’ of Grameen Bank of Bangladesh for farm credit and extension of credit for developing micro enterprises both of males and females in rural areas combined with community development work have brought astonishing results in accelerating pace of growth of the rural economy. As a result this programme is being replicated with success in number of countries of Asia, Africa and Latin America.

The writer during her study tour to Nepal and Bangladesh in mid-90’s had the chance to interview bankers, field workers, top officers of ministries of local and women development.

The impression gathered from the tour was that success of their programme is the result of sincere and deep down involvement of field officers of the banks as well as ministry of local development in case of Nepal, for socioeconomic welfare of the entire community/village. The field officers in both the countries were imparted comprehensive training for the purpose and were made to live in targeted villages for quite a long time (not less than six months) compulsorily in order to get familiar with life pattern, peculiar problems, culture and traditions of the village as a whole, but also of each and every family.

Thus all inmates of the village are motivated to get involved in community development work side by side income generating activity under the group approach. In Nepal female field officers themselves specially under their ‘production credit for rural women programme’ (PCRW) assist in forming viable groups of women desirous of seeking loans from financial institutions.

The loans are automatically monitored by the group itself, as the disbursement of second time loan or subsequent loans is subject to having no default in the group. Accordingly group pressure compels proper utilization of funds and regular repayment of loans. Above all problem solving approach is always there among group members, as the rate of recovery was found as high as 90 per cent.

Here the question arises as to what should be the optimal rural finance policy mix to be followed by the country’s financial institutions and the State Bank of Pakistan being a regulatory authority in the current situation as the new approach to financing market development ( where institutions respond to market driven credit demand) is gradually replacing the traditional directed credit for agriculture. As such, the State Bank of Pakistan (SBP) must closely monitor delivery of rural credit by each financial institution to ensure that it flows to rural areas faced with difficult economic and financial environments.

Apart from commercial banks and the Zaraee Tariqqiati Bank Ltd (ZTBL),the introduction of micro-finance banks, both in public and private sector, has impacted rural economy favourably.

However for sustained and accelerated growth of the rural sector, it is essential that financial institutions introduce innovative savings and credit products/instruments for the farmers and those involved in agro-based industrial and non-farming pursuits.Recent introduction of revolving agriculture credit scheme by the SBP will further improve the accessibility of institutional credit to farmers as frequent costly and time consuming documentation on each renewal of the credit limit had always prevented poor farmers from seeking institutional credit.

It is suggested that on the pattern of the Pakistan export guarantee scheme the SBP must sponsor crop-financing guarantee arrangements for farmers. This may be done on premium payment basis and also by imposing a reasonable initial charge. This will not only enable small farmers to borrow from financial institutions, but also motivate financial institutions to move to agriculture sector to meet market driven credit demand.

Until now emphasis has been on financing farming activities, whereas non- farming avenues of business in rural areas, despite their potentials and importance for the economy, were not given due weightage.

Even financing for farming as already stated above has been a ritual, devoid of concern for end-results. There is no concept of counselling, guidance and proper monitoring, resultantly funds borrowed were mostly misused or wasted and desired benefits neither went to the cultivator nor economy as a whole.

Agriculture credit, is proposed to be made available as a package for farming and non-farming activities. The package must comprise both development finance and working capital needs of agro-based industries. Wherever desired, proper counselling and guidance must precede disbursement of credit. In this regard all the participating financial institutions can jointly set up advisory cells for a cluster of ten villages to be manned by existing teams of agriculture credit officers (ACOs) with each institution. In order to ensure effectiveness of these cells, training and development programmes on continuous basis are must to update the skills of ACOs.

Further in order to boost up rural economy and for eradicating poverty, all the commercial banks, micro-finance banks and ZTBL in particular must come forward to finance social sector development projects, specially relating to education and health undertaken by credible NGOs and community-based organizations.

It is a fact that sustainability of economic growth rate of a country depends on the strength of its social sector.