HBL Zarai Services will operate as a wholly owned subsidiary meant to increase capacity in the country’s vastly underserved agricultural sector.

A week after announcing their intentions to create a special subsidiary company focused on the agricultural sector, HBL’s Board of Directors has formally announced the incorporation of “HBL Zarai Services” in a notice sent to the Pakistan Stock Exchange (PSX).

Agri lending in Pakistan

The launch of the subsidiary would mark an important milestone for the country’s agricultural sector which has remained largely unserved by the formal banking sector. Agricultural financing in Pakistan has long been considered high-risk and has mostly been a collateral base. However, farmers with smaller land holdings have not been able to access formal banking channels because they do not have much to put up as collateral, and also because bank repayment timelines are rarely catered to crop cycles.

As a result, lending to farmers remains low. In 2022 for example, according to a PWC study, allocation of loans to priority segments, namely Small and Medium Enterprises (SME) and Agriculture, has been relatively low, accounting for less than 8% of the total loans. Specifically, SME loans constitute 4.2% of the portfolio, while Agriculture loans account for 3.6%. Moreover, these penetration levels have been witnessing a decline over the past several years. This declining trend highlights the need for attention and support to bolster lending in these crucial sectors to foster their growth and development.

What will HBL Zarai do?

During an event hosted by HBL last week for the launch of their 2022 Impact and Sustainability report, the bank’s CEO and President Muhammad Aurangzeb said the bank received permission from the SBP two weeks ago to establish a special subsidiary called “Zarai” (agriculture), which will help small and medium-sized farmers improve their agricultural output.

For a long time, the biggest problem had been that banks have not understood agriculture, crop cycles, and the needs of farmers. A subsidiary only focused on agriculture should help this process along and shed light on a vastly untapped n response to a question posed by Profit, Mr Aurangzeb agreed that there was a need for better understanding.

“We are going into this with a lot of clarity and detail about why we’re doing HBL Zarai. And we wall appreciate if other institutions also go towards this direction,” he said.

“As you’ve said, even HBL has been missing a trick up until this point. Why weren’t we in dairy and livestock farming? And by the way the repayment capacity is okay. There isn’t a higher risk of default or anything. It is about understanding better,” he added.

The initiative aims to offer farmers a variety of facilities and services, including storage space, farming equipment, crop production inputs, including seed and fertiliser, and agronomic advice, according to HBL president.

The subsidiary, however, will not stop HBL from lending to the agriculture sector. Instead, HBL Zarai will will supply the non-financial services, while the farm finance will be managed on the HBL balance sheet, according to the bank’s CEO.

The timing

The decision comes at a time when a realisation is starting to take hold in Pakistan that many unbanked sectors require attention.

Last year the agriculture sector saw a 27.5% growth in agri loans, after the agriculture lending financial institutions disbursed Rs 1.222 trillion on account of agricultural financing during the first nine months (July-March) of this fiscal year.

As explained by Mr Aurangzeb, the bank’s top priority is agricultural financing, which is why the portfolio in 2022 hit an all-time high of Rs50.6 billion. HBL has contributed over Rs4 billion – spread over a decade – to the social uplift of Pakistan. In 2022 alone, the bank contributed over Rs580 million.

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