- Commercial banks continue to lend reluctantly to agriculture, preferring urban industries, trade and consumer credit
The government never gets tired of saying “Agriculture is the backbone of Pakistan’s economy”. Despite this central role, farmersv— particularly smallholders who constitute the majority — struggle to access formal credit. Commercial banks, which dominate the financial sector, continue to lend reluctantly to the agriculture sector, preferring instead to finance urban industries, trade, and consumer credit. This chronic under-lending is not a result of neglect alone but stems from structural, financial, and institutional constraints. Understanding these barriers is essential if Pakistan aims to boost farm productivity and achieve food security.
Perceived High Risk
The most cited reason commercial banks shy away from agriculture is the perception of high risk. Farming is inherently vulnerable to weather fluctuations, floods/ water shortages, pest attacks, and market price volatility. In Pakistan, where climate change has intensified floods and droughts, banks see farming as an unpredictable business with an uncertain cash flow. Unlike manufacturing or services, farmers cannot guarantee steady income streams, which makes bankers cautious about lending.
Moreover, crop failures are also common. When a farmer defaults, it is often due to circumstances beyond their control. Unlike urban borrowers with diversified income sources, small farmers depend almost entirely on seasonal harvests. This cyclical and uncertain repayment capacity discourages banks from extending loans at scale.
Weak Collateral
Banks typically require collateral before sanctioning loans, but most small farmers do not possess clear land titles or sufficient assets. Land in rural Pakistan is often fragmented, undocumented, or disputed due to outdated land records. Without a clear title, farmers cannot mortgage their holdings. In many cases, sharecroppers or tenants cultivate land without owning it, leaving them entirely excluded from formal credit systems.
Even when farmers have land, the valuation is often low and does not match the loan requirement. As a result, banks hesitate to extend credit beyond very small amounts, which are inadequate for modern mechanized farming. Instead, farmers turn to informal lenders or middlemen, who exploit them with exorbitant interest rates.
High Transaction Cost
From the perspective of commercial banks, agricultural lending is expensive. Farmers are dispersed across remote villages, which increases the cost of loan processing, monitoring, and recovery. Branch staff must travel long distances to evaluate borrowers, often for small-ticket loans that generate limited profit. Compared to a single large corporate loan disbursed in a city, lending to hundreds of farmers in rural areas demands more administrative effort for less financial return.
This imbalance in transaction cost and profitability discourages commercial banks from prioritizing agriculture. Instead, they prefer urban-based industries and consumer finance products—such as car loans, mortgages, and personal loans—that involve higher amounts and lower monitoring costs.
Limited Expertise in Agricultural Finance
Agricultural lending requires specialized knowledge of crop cycles, input costs, irrigation patterns, and commodity markets. Unfortunately, most commercial banks in Pakistan lack trained staff who can accurately assess the viability of farm loans. Bankers are more comfortable evaluating balance sheets of factories or trade businesses than analyzing whether a cotton farmer’s projected yield can cover a loan installment.
The absence of agricultural credit expertise leads banks to adopt overly conservative approaches, rejecting applications or restricting loans to safer clients, usually larger landlords or corporate farms. Consequently, small and medium farmers, who need credit the most, remain excluded.
Legal Enforcement Challenges
Recovery of agricultural loans has historically been weak in Pakistan. Farmers, when faced with crop failures, often delay or default on payments. Banks also find it socially and politically sensitive to enforce loan recoveries in rural areas, especially against small farmers who may be protected by local elites. Legal enforcement is cumbersome and time-consuming, with weak dispute resolution mechanisms.
This culture of weak recovery discourages banks further. In contrast, urban borrowers have clearer asset bases—property, vehicles, businesses—that can be seized in case of default. In rural settings, repossession of land or equipment is far more complicated, both legally and socially.
Informal Credit and Middlemen
Another factor limiting banks’ role is the entrenched system of informal lending by middlemen, traders, and commission agents (Aarhtis). These actors provide quick, collateral-free loans tied to crop sales, creating a cycle of dependency. Farmers, often desperate for immediate cash to buy seeds and fertilizers, prefer this informal credit despite higher costs. This entrenched parallel system discourages farmers from approaching banks and equally reduces banks’ incentive to penetrate rural credit markets.
Regulatory and Policy Constraints
Although the State Bank of Pakistan (SBP) sets annual agricultural credit targets, banks often meet them partially by creative accounting, such as reclassifying loans to agro-processing firms as agricultural finance. The lack of strict monitoring and enforcement allows banks to underperform without significant penalties. Additionally, government subsidy schemes and crop insurance programs remain weak, failing to reduce the risks banks face.
Instead of being incentivized to lend to small farmers, banks often fulfill their targets through lending to large, influential landlords or corporate agribusinesses, which defeats the purpose of inclusive agricultural finance.
Preference for Low-Risk, High-Yield Lending
Ultimately, the reluctance of banks boils down to profitability. Lending to urban corporations, trading firms, or consumers offers higher returns with lower risk. Agriculture, by contrast, offers smaller, riskier loans, with high costs and poor recovery rates. In an environment where banks are profit-driven, agriculture remains unattractive unless backed by strong government guarantees or subsidy mechanisms.
The Way Forward
Addressing this imbalance requires structural reforms. First, land record digitization is essential to enable farmers to use land as reliable collateral. Second, strengthening crop insurance schemes could help reduce risk perception. Third, mobile and branchless banking can lower transaction costs, allowing banks to reach rural clients more efficiently. Fourth, specialized agricultural credit staff must be trained to evaluate and monitor farm loans effectively. Finally, regulatory frameworks should push banks beyond symbolic lending targets and ensure that credit reaches smallholders, not just big landlords.
Without access to affordable credit, Pakistan’s farmers will remain trapped in low productivity cycles, unable to invest in modern technology or withstand climate shocks. If commercial banks continue to shy away, the country risks undermining its food security and economic stability. Strengthening agricultural finance is not just about supporting farmers; it is about safeguarding Pakistan’s future.