Each year the State Bank of Pakistan (SBP) announces record-breaking figures for agricultural credit. This paints a picture of solid financial support for the agricultural sector; also proclaimed as the backbone of the nation. In FY24, disbursements reached an unprecedented Rs2.216 trillion. This marks a 25 per cent increase year-on-year. On the surface, these numbers suggest a capital torrent flowing towards the farmlands, potentially empowering millions of farmers.

But does this river of cash truly irrigate the grassroots? For the vast majority of Pakistan’s farmers, this official narrative is a mirage. The reality on the ground is one of profound financial exclusion. The official figures, though massive, depict a structural failure in reaching the very people the objective of the policy is to serve: small-scale farmers.

This disconnect becomes apparent when we look past the total rupees and focus on the number of recipients. While trillions are supposedly disbursed to “farmers”, which we will classify soon, the number of borrowers has only “risen modestly” to 2.86 million. This is a trivial figure in a country with 11.7m private farms. The latest agricultural census reveals a stark demographic reality: small farms of 2.5 acres now constitute a staggering 60pc of all farmland in the country, as per the 7th Agricultural Census.

Even if we go with the classification of borrowers as depicted by the SBP, the formal credit system is simply not reaching this majority. A World Bank study quantifies this disparity. As per this study, only 4pc of the rural households receive 42pc of all agricultural loans. Conversely, small and landless farmers who make up 69pc of rural households receive a mere 23pc of the credit.

Regulatory loopholes allow banks to provide loans to multinational food processors with minimal farming footprints

The rules for “agricultural inancing” appear sound, explicitly excluding “loans to traders and intermediaries engaged in trading/processing of agriculture commodities”. This clause should, in theory, create a firewall to ensure credit reaches the farm gate.

However, there is a critical exemption that follows afterwards. The regulations permit financing to entities “engaged in farming activity as well as processing, packaging, and marketing”.

This “as well as” is the regulatory gateway through which the spirit of the law escapes. It allows a bank to provide a large, low-risk loan to a multinational food processor that also has a minimal farming footprint classifying it as “agricultural finance.” It is not illegal, but does it fulfill the purpose and deliver the intended impact? I doubt it.

This practice is also operationalised through Value Chain Financing (VCF), a SBP promoted model. VCF allows banks to lend to or through a large creditworthy “anchor company” like a sugar mill or a food processor. This mitigates the risk.

For instance, a multibillion-rupee financing facility to a major food processor for its potato supply chain can be counted towards a bank’s mandatory Agri-credit target. This is a simple risk-free approach to satisfy the agri-credit target, and eventually it will be highlighted as the uplifting branding lines for the agriculture sector.

The policy objective was to make financing easier for the small farmers, who are not facilitated by the system or who do not have many avenues for financing, not for the corporates that already have the financiers lined up.

Due to cumbersome procedures, impossible collateral requirements, and untimely disbursements, farmers are forced into the arms of the informal credit market. This is a world denominated by the arthi or local moneylender; a predatory but essential lifeline. The interest rates can exceed 75-120pc annually. Worst of all, the loans are often part of interlinked contracts. The farmer is forced to sell their harvest back to the lender at a suppressed price. This has also been described as a cycle of generational bondage.

The failure of the formal system directly fuels this exploitation. The solution is not to abandon the policy, but to realign it with its purpose. The focus must shift from celebrating the volume of disbursement to scrutinising its inclusivity.

First, the metrics of success must change. The primary key performance indicator should be based on the number of farmers that are able to access the financial services each year directly. The SBP should introduce a mandatory, ringfenced sub-target for the number of new-to-bank smallholder farmers financed annually. This would force banks to invest in genuine rural outreach.

Second, the regulatory gateway must be closed. The SBP should create a two-tiered reporting structure that clearly distinguishes between “primary production finance” for individual farmers and “agribusiness finance” for corporate value chains. The former should be the sole measure for meeting mandatory targets. The policy purpose should help small farmers access the financial sector directly rather than promote interdependence.

Finally, to make smallholder lending commercially viable, the government must proactively de-risk it by expanding and streamlining credit guarantee schemes that cover a significant portion of the principal on collateral-free loans.

The writer is a commercial analyst, and business graduate from LUMS.

Published in Dawn, The Business and Finance Weekly, November 3rd, 2025