agricultural financing, state bank and economic growth of pakistan a case study of allied bank...

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Agricultural Financing, State Bank and Economic Growth

of Pakistan: A Case Study of Allied Bank Limited, Sargodha

Region

Irfan Khan1 (Corresponding Author)

M.Phil Scholar, Preston University Islamabad Campus

Campus No. 85, Street No.3, Sector H-8/1, Islamabad, Pakistan

E-mail: [email protected]

Pro Dr. Bashir Ahmed Khilji

Head of Department of Economics, Preston University Islamabad Campus


Rehana Tabassam

M.Phil Scholar, Preston University Islamabad Campus


Ghulam Murtaza

BS Agriculture, University College of Agriculture

University of Sargodha, Sargodha, Pakistan


Abstract

A growing and energetic agricultural financing with the commercial banks and State Bank of Pakistan

is very crucial for economic growth in Pakistan. The main objective of this research paper is to

examine the relationship among the agricultural financing, regulatory framework of State Bank and

Economic Growth of Pakistan. For this purpose data were collected from existing agriculture clients of

Allied Bank Limited2 Sargodha Region in March 2014. Results explain that agriculture financing and

regulatory framework of State Bank of Pakistan is much more significant and has a positive

relationship with the economic growth of Pakistan. This relationship could be certified by the timely

and required level availability of agricultural finance from Allied Bank Limited. In the light of these

consequences it is recommended to decrease the mark up rate, crop loan insurance to be the optional,

reset the capitalization mark up frequency and to simplify the process for obtaining the agriculture

finance. Multiple regression analysis has been carried out for empirical analysis.

Keywords: Agricultural Finance, Economic Growth, State Bank of Pakistan, Allied Bank Limited,

Sargodha Region.

1. Introduction

Bulks of farmers in Pakistan consists of subsistence land holdings and are unable to purchase high

quality seeds, sufficient fertilizers and better agrarian equipments due to shortage of finance. Lack of

finance is one of the major reasons for low per acre productivity. An increase in per acre production

solely depends upon the availability of finance and credit facilities available to the farmers (Shah et al,

2008).

_________________________

1Corresponding author is an Agricultural Credit Officer in Allied Bank Limited, Pakistan.

2Allied Bank Limited is the 2nd largest private commercial bank functioning in Pakistan since 1942. Allied Bank has demonstrated

extraordinary achievements, enjoying an extremely honorable reputation with more than 1000 branch network in all over the Pakistan.

Though a huge portion of agriculture cultivated fertile land shifted toward the industrialization,

agriculture sector is still the largest sector of Pakistan‟s economy. Agriculture sector offered the

opportunities to millions of people living in Pakistan to strive against poverty and hunger. Development

of agriculture has increased the economic growth in Pakistan and reduces poverty by creating job

mailto:[email protected]

mailto:[email protected]


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opportunities and providing necessary economic and social services to poor. Economic growth in

Pakistan cannot be realized without sustained and broad based agriculture development (Anwar, S.,

Fauzia, S. and Zakin, H., 2010).

Agriculture is the primary source of livelihood for 36.6 percent of the world‟s total workface and

comprises around 5.7 percent of the world gross domestic product. Pakistan is primarily a rural based

economy with 62 percent of its population living in rural areas, 21 percent share of gross domestic

product, 60 percent direct or indirect contribution in export of the country and 45 percent of employed

labor force. Development of agriculture has increased the economic growth in Pakistan and reduces

poverty by creating job opportunities and providing necessary economic and social services to poor.

The growth generated in gross domestic product from agriculture is four times more effective in

benefitting the poorest then growth generated outside the agriculture (SBP, 2014).

Time and time again State Bank of Pakistan used to announce his action plans for enhancement of

agricultural financing in the economy. To regulate the entire portfolio of commercial and specialized

banks different prudential regulations has been introduced by State Bank of Pakistan. Prudential

Regulations has been revised many time by the State Bank of Pakistan, urging for preparation of a

comprehensive agricultural finance policies and well organized trained professionals to promote

agricultural finance in the economy.

Over the period of time State Bank of Pakistan used to introduce different schemes for agricultural

financing including Revolving Credit Scheme, Live Stock Financing, Fisheries Financing, Horticulture

Financing, Poultry Financing, Islamic Financing for agriculture and many more. Farmer‟s financial

literacy programs have been arranged by the commercial banks under the outline of National Institute

of Banking and Finance (NIBAF) for better understanding of these schemes.

Role of State Bank of Pakistan for the expansion of agricultural portfolio is very exceptional in

Pakistan. The arrangements for organizational structure of agricultural financing in State Bank,

specialized banks commercial banks, microfinance banks and rural support programs etc are some

landmarks in this journey. Introduction of innovative lending methodologies and delivery channels,

repayment capacity of the borrowers, comprehensive agriculture finance policy, standardized

documentation, proper utilization of loan, and time based criteria for classification of agriculture loans

in Prudential Regulations are high colored steps of State Bank of Pakistan for the growth of agricultural

financing in Pakistan (SBP, 2014)

Agriculture credit disbursement of Rs. 231.0 billion during July to March 2012-13 is increased by 17

percent as compared to Rs. 197.4 billion over the same period last year. Out of which Rs. 5.4 billion by

Punjab provincial cooperative bank limited (PPCBL), Rs.38.0 billion by Zarai Taraqiati Bank Limited

(ZTBL), Rs. 51.0 billion by domestic private banks, Rs. 13.0 billion by microfinance banks (MFBs)

and Rs. 123.7 billion is disbursed by commercial banks (Pakistan Economic Survey,2013-14).

The interconnection of agricultural financing and regulatory framework of State Bank with economic

growth is moderately strong in case of Pakistan. Allied Bank Limited processed short, medium and

long term finances to the farmers. Short term finances are given for inputs, raising, processing and

marketing of crops. Medium term finances are provided for the purpose of farm equipment, leveling of

land and setting up of agro based industries. Long term loans are provided for the purchase of farm

machinery, installation of tube wells, construction of warehouses etc. Allied Bank Limited has

disbursed short term and long term loans to facilities all categories of farmers.

1.1 Scholar‟s View about the Paper

An improvement in per acre productivity in agriculture sector is based on the use of sufficient quantity

of fertilizers, pesticide and other essential agro based equipment. Financial assistance in agriculture

sector plays a vital role in overall growth of the economy (Zuberi, 1989). Due to 1972 banking reforms,

flow of agricultural finance has increased and these reforms belongs to subsistence land holding

farmers of Pakistan. Private commercial banks were urged to advance the agricultural finance rather

than against personal guarantee (Qureshi and Shah, 1992). Agricultural loan has significant determinant

of many household outcomes and has a significant effect on the welfare of poor farmers in Bangladesh

(Pitt and Khandker, 1998). Financial development leads to develop the quantity, quality, and efficiency

of financial intermediary services. Financial development is a process for long run economic growth in


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an economy (Abu-Badar and Abu-Qarn, 2008). Agricultural finance considered the main source of

development in low income countries. It some extent enable the farmers to use advance technology in

their farming process (Shahidur and Rashidur, 2011).

1.2 Objectives of the study

The foremost purpose of this paper is to find out effects of agricultural financing and State Bank on

economic growth of Pakistan. The study plan has formulated to provide some empirical evidences of

increase in income of the farmers and highlight some difficulties faced by the farmers in obtaining

agriculture finance from the Allied Bank. To make allied bank limited more responsive to need of the

economy and for more rapid and sustainable economic growth. Create some awareness about the

strategies of State Bank of Pakistan regarding agricultural financing among the farmers and suggest

some strategy measures in the light of study findings.

1.3 Significance of the study

The study will very much significant in a variety of ways as it will promote agricultural investment and

adoption of latest technology to encourage economic growth in Pakistan. The study will prove helpful

to reduce poverty among the farmers by providing agricultural finance, high quality seed, sufficient

fertilizer, and other necessary machinery. The study will play significant role in increasing the tax

revenue of the government. The government of Pakistan used this tax revenue to bring structural

changes so indirectly this study will assist to increase in GDP of Pakistan.

The study will realize the importance of agricultural finance and regulatory framework of State Bank of

Pakistan for enhancing the economic growth in the economy. The study will significant at national

level as a medium platform to create some awareness regarding the agricultural finance policies,

strategies, schemes and future action plans of Allied Bank Limited under the supreme shadow of

regulatory frame work of State Bank of Pakistan. This study will be good addition the theory of

production and create new dimensions in the area.

2. Review of Literature

Hussain and Ishaq (1997) determined the association among the aggregate agricultural productivity and

poverty in case of Pakistan. The use of sufficient fertilizers was recommended for playing significant

role in increasing agriculture productivity in Pakistan. Ordinary Least Squares (OLS) has been

employed for the estimation in this study. It was concluded that increase in agricultural productivity

decrease poverty in Pakistan but not at that rate at which population is increasing.

Fiaschi and Lavezzi (2005) recognized the main factors of growth instability of a country. A study was

planned to search the effective growth volatility with some structural changes in the size of economy.

Nonparametric methodologies testing technology have been used in the study. Result explains that

growth volatility has inverse relationship to total GDP in presence of economic integration in the

world. It was concluded that growth volatility negatively related to the share of agriculture on GDP.

Awokuse (2009) attempted to fill the gap by reexamining the interconnection among the agriculture

and economic growth in an economy. This model was infecting the extension of neoclassical growth

model who consider the agriculture sector as a main source to economic growth. Autoregressive

distributed lag error correction modeling approach has been used to examine the relationship among

the included variables. It was concluded that agriculture and economic growth both have strong

relationship and that agriculture is an engine of economic growth.

Ghosh and Chakravrty (2009) studied regarding trade liberalization and volatility changes in

agricultural (producer) prices in India. ARCH and the GARCH and their modified model have been

used in the study. Result showed that trade liberalization have positive effects on food security and

food management. It was concluded that in case of prices the trade liberalization period has seen an

increase in volatility of production in the case of cotton and groundnut even the other food grain crops

became more stable.

Anthony (2010) studied the impacts of agricultural finance on economic growth in Nigeria. He

specified a functional and operational shape and recognized a fundamental relationship among the GDP

and agriculture variables. Least square estimation techniques have been used in the study. It was

concluded that agriculture variables have significant impact on economic growth and growth of export

as well.

Hye et al (2010) found the role of agro based product prices and government expenditure while


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evaluating the performance of agriculture in case of Pakistan. Autoregressive distributed lag model

(ARDL) and generalized least square (GLS) has been employed in the research. It was concluded that

government expenditures occurred in long run on agriculture and agricultural prices are statistically

significant while evaluating agriculture performance.

Ayaz and Hussain (2012) attempted to emphasize the level of production efficiency of agriculture

sector in district Faisalabad. The importance of rural financial market in improving the productivity of

agriculture sector recognized in the study. Stochastic frontier analysis (SFA) technique has been used to

answer the research questions. It was concluded that farming experience, education, easily availability

of agricultural finance to farmers has significant effects on farmer‟s technical efficiency.

Safdar, Maqsood and Sami (2012) tried to view the nature of volatility of agriculture in Pakistan and to

find out the frequency of volatility against the production and employment in agriculture sector with

economic growth. To find out the relationship auto regressive heteroscadesticity (ARCH), augmented

dickey fuller for unit root and co integration test has been employed. Finding reveals the positive

relationships of employment and agriculture productivity with economic growth. It was recommended

that agricultural volatility can be directed through sustained economic growth.

3. Research Methodology

To examine the relationship among the agricultural financing, State Bank and economic growth of

Pakistan questionnaire survey technique has been used in this paper. Questionnaire of the research was

divided into two parts. Part was related to the individual profile including their age, gender, material

status, education level, and income level. The other part was linked to the questions relevant to the

included variables.

Allied Bank limited provides different agricultural finance to the farmers throughout the Sargodha

region. Existing farmers who were availing agricultural finance facilities from the Allied Bank in

Sargodha region was the sample of the study. There are 43 agricultural designated branches of allied

bank limited in the Sargodha region which have advanced the agricultural financing to more than 500

farmers. From which more than 70 percent farmers includes in subsistence category of land holding.

Twenty seven percent includes in economic category of land holding and only three percent belongs to

above economic category of land holding. Fifty percent clients from each category were selected using

random sampling technique.

Questionnaires were distributed by implementing non probability convenient sampling technique to

collect the data. After collection of data SPSS, E-VIEWs and convenient sampling technique were

used to analyze the data pertaining to each variable.

Total 194 questionnaires were distributed among the farmers and 161 questionnaires were responded

back to author. Whole questionnaires were filled by male farmers. Average age of the participants was

45 to 55 years and whole the participants were married. Sample was taken by simple random sample

technique.

4. Empirical Analysis

To study the relationship among the agricultural financing, state bank (Independent Variables) with

economic growth of Pakistan (Dependent Variable), multiple regression analysis have been used in this

research paper. Ayaz, S., & Hussain, Z., (2011) while analyzing the impact of institutional credit on

production efficiency of farming sector have employed following model and find the best fitted:

Yi = f (X1, X2, X3, …, Xn)

This model also matches with this study. The derived econometric model may be written as:

Y= β0 + β1A.F +β2S.B+e …… (1)

Where Y is the dependent variable i.e. economic growth of Pakistan. A.F is the agricultural financing;

S.B is the State Bank (independent variables). Bo, B1, and B2 are the parameters of the derived

econometric model.

Below mentioned table no. 3 gives the values of coefficients. By putting the values derived from that

table above econometric model may be re written as

Y= 252+ 0.721A.F +0.636S.B+e …… (2)

Table No 1: Model Summary


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Model R Square Adjusted R

Square

Std. Error of the

Estimate

Durbin- Watson

1 0.732 0.322 0.872 1.632

a. Forecaster: (Constant), Agricultural Financing, State Bank

b. Dependent Variable: Economic Growth of Pakistan

Table No. 2: ANOVA

Model Sum of Squares df Mean Square F Sig.

1 Regression

Residual

23.121

114.390

2

162

14.26

0.596

29.350 0.000a

Total 137.514 164

a. Forecaster: (Constant), Agricultural Financing, State Bank

b. Dependent Variable: Economic Growth of Pakistan

Table No. 3: Coefficients

Model

Unstandardized

Coefficients

…………….

B Std. Error

Standardized

Coefficients

……………

Beta t

Sig.

1

(Constant)

Agricultural

Finance

State Bank

-0.145

0.925

0.614

0.530

0.145

0.009

0.721

0.636

-0.217

3.687

1.314

0.421

0.000

0.042

a. Dependent Variable: Economic Growth of Pakistan

5. Results and Discussions

Table No. 1 give details the entire outline or summary of the outcome. The value of R square (R2)

which is 0.732 clarify the variations in the dependent variable i.e. Economic Growth of Pakistan due to

advancement of agricultural financing and supporting and regulatory role of state bank of Pakistan. At

the same time Durbin Watson value which is 1.632 shows the existence of positive autocorrelation

between the variables included in the mode. The outcome of Table No. 2 shows the significance level at

0.000 i.e. less than 0.05 which shows the effective impact of agricultural financing and regulatory

frame work of state bank of Pakistan on economic growth of Pakistan.

Table No. 3 having the value of B1 0.721. It demonstrates that 72 percent variations exists in the

dependent variable (Economic Growth of Pakistan) due to growth of agricultural financing and

similarly the value of β2 which is 0.636, shows that 63 percent variations exists in the economic growth

of Pakistan because of state bank of Pakistan at 0.042 level of significant.

6. Suggestions/Recommendations

Summarizing the entire discussion the research concluded that growing agricultural financing and

attentive regulatory frame work of State Bank of Pakistan has strong positive relationship with

economic growth of Pakistan. Majority of farmers while responding the questionnaires complained

regarding the high mark up rate, extra burden of crop loan insurance, untimed availability of finance

and very long documentation procedure for obtaining the agricultural finance from Allied Bank

Limited.

Another important suggestion received from the farmers regarding the mark up recovery frequency

which is 30th

June and 30th

December may be replaced with 30th

April and 31th

October (half yearly)

each year. This will match the harvesting of major crops in Sargodha region. In this way more people

will be benefited from the agricultural financing advanced by the Allied Bank Limited.

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agricultural financing, state bank and economic growth of pakistan a case study of allied bank...

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