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Informal banking: economic coercion

Pakistan is a country of contradictions. When we count the population for the purposes of allocation of seats in the assemblies and allocation of funds under the National Finance Commission [NFC] rural Pakistan comprises over 60 percent; whereas when we discuss tax collection and contribution in the economy it drops to less than 30 percent. In my view, in practical terms on account of undocumented economy with cash transactions resulting in huge currency in circulation all these estimates are intellectually and politically tainted. This ‘state-sponsored corruption’ in statistics will be dealt with in a separate article. This article deals with the issue of ‘Informal Banking’ in Pakistan and its role in food price hikes and the exploitation of small agriculturists. This is the subject we usually ignore for noble and ignoble reasons.

Size of Rural Economy

As per my estimates, the size of Pakistan economy [GDP] in the year 2019-2020 was not less than $ 400 billion. Out of that, the agriculture sector contributes not less than 40 percent even it is measured conservatively. This means that the size of agricultural economy is nowhere less than $ 160 billion. Currency in circulation (M2) in Pakistan is around $ 50 billion. It is a known fact that bulk of the cash economy relates to agriculture and allied fields. The recorded figure for GDP is around $ 300 billion which means that there is at least $ 100 billion unrecorded economy. This economy, a large junk of which relates to agriculture sector, is mostly cash based which is the cause of high cash in circulation.

Legacy of Money Lending in Agriculture Sector

The discussion in the following paragraphs does not relate to the estimation of the size of agriculture economy. The subject under discussion is the effect of present dynamics of agriculture economy contributing to high prices of agriculture produce for the consumers, extortion of agriculturists by the informal banking system, resultant deprivation of rural economy.

The most relevant economic rationale for the Two-Nation Theory was emancipation of Muslim farmers in Punjab, Bengal and Sind from the stranglehold of Hindu money lenders. It is on record that at the time of independence in 1947 almost 75% of landholdings of Muslim landlords [big or small] were pledged in the hands of Hindu money lenders. Sir Chottu Ram along with Mian Fazal Hussain struggled for the waiver of undue interest on such loans in Punjab. That led to respite for the Muslim landlords in Punjab. When 1946 Election were announced Indian National Congress came up with a programme of land reforms. The landlords in Punjab, Sindh and the then NWFP disliked Congress on account of the fear of land reforms so vehemently propagated by Congress. It was due to this reason Muslim League and the Unionist were able to uproot Congress from this area except KPK. This was the economic reason for the support of Pakistan movement by the landed gentry of Punjab and Sind. It is also on record that the Communist Party of India had acquiesced to the partition of India on the ground that such division will promote better distribution of land between farmers. The economic mismanagement by the Muslim agriculturists is therefore the cause behind some major political changes in Muslim dominated areas of North Western Sub-continent. This was not the case in Bengal therefore their political history prior to 1947 and afterwards is different. As far as this area is concerned, nothing has fundamentally changed for a long time.

Muslim ‘Banias’

The economic history from 1947 to 2021 has proved that the faulty premise which was the underlying reason of a decision in 1947 has failed in economic sense especially with reference to agricultural economy. As I will explain in the following paragraphs the Hindu money lenders were replaced by Muslims of the same ilk. Hindus were engaged in money lending for centuries. Their capital accumulated over time through the extortionist interest however their ‘capital’ was not accumulated through corruption. In Pakistan, the float of money now being used for money lending to agriculture has been arranged out of funds accumulated from corruption and bribery. In very simple words, corrupt people use their cash accumulated from bribes and other means of corruption in arranging ‘capital’ for informal banking. The capital in that banking system remains out of books from the time of lending to the receipt of ultimate return in the form of sale of agricultural commodities by the consumers. This informal banking is very organized. As per a study, there are 70,000 plus outlets in the country. In layman’s terms when we buy, say, onion at Rs 100 per kg, then in normal circumstances the price is composed of four elements: Rs 25 paid to growers, Rs 25 for incidental from farm to consumers, Rs 25 being the profit margin of the traders in between [not agriculturists] and Rs. 25 being the interest accumulated in one way or other for informal financing from the farm to market. These percentages may differ; however, in almost all the cases the commodity which should have been available at Rs. 50 is available at Rs. 100. Since agriculture produce are seasonal in nature therefore the interest cost becomes high for the reason of duration between lending and ultimate sale. In almost all the commodities there is ‘upfront forward purchase’ by money lenders especially from medium and small farmers. This means that in most of the commodities the time duration for ultimate sale is over 8 to 9 months. Commodities are most attractive for the reason that almost all the local trade from farm to market is undocumented.

When I was Chairman FBR, in a meeting with sugar brokers, the President from Faisalabad Chamber of Commerce and Industry said to me in an open hall that they will never register themselves with any authority as that will reveal their business which is all based on cash, hoarding and extortion and obviously informal banking. When the delegation left I was told by my officers that the group that came to see us comprised movers and shakers insofar as sugar prices in the country were concerned. Both sugar mill owners and agriculturists are small fry in front of them. All came is very expensive four wheelers from Faisalabad. My question is whether such brokers’ capital is their own or is informal deposit of corruption money. I have got empirical evidence that a major part of such float is borrowed funds. It is a very organized informal banking.

The best example of this system can be made if we study the sugar trade. The cultivation is made in April/ May whereas crushing completes in December. The sale is even throughout the year. The funds are tied up during that period. The interest cost for that period is built up in the prices. I can prove with facts and figures that except for few mills the prices of sugar in all cases include an interest cost of over 20%.

Extortion & Exploitation

The need for bridge financing in agriculture sector is a centuries old concept. Almost all the major events of economic history one way of other revolve around the equitable manner of this third factor of production that is ‘capital’. Karl Marx examined the subject from a different perspective whereas in his last sermon our Holy Prophet [peace be upon him] dealt with it in a civilized manner. He [peace be upon him] declared that all accrued interest on past transactions will be waived. He even said that if a loan has been made by his uncle Abbas it would be waived. The bottom-line is the role of financing in the economy specially that dealing with agriculture and basic food items. In the following paragraphs I will explain the manner in which the whole fabric of Pakistani society has been destroyed by uncontrolled availability of cash. If what I am saying is correct then it will transpire that the independence we got in 1947 has been lost in the hands of money lenders. The only difference is that now such money lenders belong to our own faith. The question is whether or not there is any chance of sustainable economic development where the rate of interest as per State Bank of Pakistan is 7% and the minimum charged by such lenders is over 25% in all the cases. The normal rate prevalent at present is 3% percent per month for unsecured financing of commodities. Criminal mafias are used to ensure recovery. A new Shylock has emerged with a Muslim name.

Abuse of Faith & Misinterpretation

Before I enter into further economic analysis of the subject I think that it is highly essential to identify the abuse of faith in this matter. In one case, I enquired from a big agriculturist about the difference between his price for cotton and the price in the market, the agriculturist informed me that his crop has already been purchased by an ‘Arthi’ who provided him funds for seed and fertilizer. The agreement between the Arthi is that the agriculturist will deduct the interest cost at the rate of 3% per month on the amount lent from the purchase price of cotton. The Arthi has got a fatwa from a renowned ‘Mufti’ that such backward working of interest and price does not constitute ‘Riba’ as it is form of trade and everybody has the right to decide the price. The money lent is advance for purchase not a loan. I am not interested in the validity or otherwise of that fatwa under Islamic jurisprudence, however, as an accountant and a student of economics and finance and the Holy Quran I have done extensive research on the matter of financial transactions in Holy Quran. My research has revealed that form cannot override the substance and forward buying at a price lower than the fair value after taking in account of cost of funds locked up in the intervening period is pure ‘Riba’ and there is no excuse to avoid religious restrictions, if any. Nevertheless, this is not the subject of this article. This short reference has only been given to dispel the impression that by abusing the form of the transaction there cannot be any transformation of ‘Riba’ into trade. In this respect, the error and abuse are so rampant that in such documents of lending the ultimate sale price is left blank in the original agreement so that such price is filled by deducting interest element during the intervening period. This is nothing but abuse. I have raised the question before the Honourable Supreme Court of Pakistan and the Governor State Bank of Pakistan (SBP) to immediately stop this informal banking. It is my firm view that SBP is not performing its duties and responsibilities if such an organized informal banking continues to exist. With reference to this issue it is stated that there cannot be any refuge in the name of religion on this matter. The Islamic Ideology Council should take up this issue and summon people engaged in finance to explain to them the real transaction. The religious aspect is not my subject; however, the aforesaid description has been made to inform the borrower and the lenders that there is no need to enter into these practices which are an act against humanity and society and also not allowed in faith.

Need for Bridge Financing

There is no dispute that with the constant fragmentation of landholding the economic power of the small- and medium-sized farmers has substantially reduced. Furthermore, the cash investment in seed, fertilizer and labour is to be made much earlier than actual recovery. There is a need to bridge that financing gap. As there is no culture of savings in the agriculture communities especially Muslims, therefore, the timing of actual investment and recovery necessarily requires such bridge financing. This has been going on for centuries and will always continue in some form or another. The purpose of this article is to identify a solution for such an equitable financing system in the agriculture sector and crush the cartels of informal banking that funnel proceeds of crime and corruption to finance this need. Unless it is done there can be no sustainable improvement in agricultural productivity or reduction in the prices of food items. This is the most ignored subject in our economy. There are certain technological developments that are improving the system, however a lot is to be done. The present movement in India by farmers is the other side of the picture. Whatever is happening there will also happen in Pakistan. We will have to get rid of subsidies for crops by prescribing minimum prices however a system would have to be instituted to fulfil the needs of financing the agriculturist. Those who oppose this are actually the ‘informal bankers’ that charge 36% against 7 or 8 percent prescribed by SBP. This is the future of Pakistan and steps will be required to be undertaken to correct the system. This Jewish mindset in the guise of our sacred religion is to be exposed.

Present State of Affairs

In the years 2019-2020 and 2020-2021, despite COVID-19, there will be reasonable recovery in the urban and industrial economy of Pakistan. This growth will be seriously hampered by almost negative growth in agriculture sector. This will give rise to poverty in the rural economy and increase in food prices. It is my view that measures such as increase in procurement prices and subsidies on fertilizers, seed and electricity will provide a temporary support. The real issue is that agricultural economy is not being studied properly. The urban intellectuals who have never lived a single day in any rural area believe that Pakistan’s agriculture economy is controlled by 100 or more feudal families and such families are exploiting the country from all angles. This theory was correct until the 1970s. It is an almost an half a century old story. Now due to fragmentation of land and many other causes from economic viewpoint the rural economy is not controlled by big landlords. In fact, this economy is being exploited by the flooding of unscrupulous money used for money lending. This is the new kind of feudalism that has emerged in the past fifty years. In fact in order to achieve reasonable return there is a dire need of consolidation of landholding for economically sustainable farming. In my view, there is a need for immediate correction in the rural economy and old measures and slogans like increase in support prices and subsidies are to be totally abolished. There is a need for subsidy to the agricultural sector however that subsidy should reach to the farmer. In the following paragraphs some pertinent solutions are offered:


1. Agricultural Credit: One of the most neglected sectors in Pakistan is ‘subsidized’ agricultural credit to the medium and small scale farmers. The economy run by commercial banks and the IMF-trained persons cannot understand the need for bridge finance in agriculture sector. For them the net result should be a bottom-line ‘accounting profit’ in the financial statement. Being an accountant in my view in the sense of development economics this is a farce. Income of Zarai Taraqiati Bank Limited [ZTBL] is not necessary. The measure of success is the availability of cheap credit. The result should be availability of low-cost credit on a timely basis and increased overall agricultural productivity in this sector. It is therefore suggested that ZTBL should necessarily be provided an allocation of Rs 500 billion per annum for loans at 2 to 3 percent per annum to medium and small scale farmers. The differential in the cost is to be borne by the Federal Government. In fact under the State Bank of Pakistan Act it is the mandate of SBP to undertake this function which is totally being ignored. All the commercial banks should be required to allocate at least 20 percent of their advances to agriculture sector with an interest rate of 5 % per annum and the difference between the lending rate of 2 to 3% percent are to be borne by the government. All subsidies to agricultural by way of reduced price for fertilizers, seed and electricity are to be gradually withdrawn. This should be the price for commercial banking operations with low tax rate.

2. Market Committee: The farcical structures of Market Committees governed by civil bureaucracy should be immediately abolished. All these market committees should be replaced by ‘Economic Committee’ in the relevant Tehsils represented by elected persons from various segments of society. Their role should be the identification of credit need and dissemination of prevailing prices of commodities on national level. With the advent of technology each and every Tehsil of the country is connected therefore the information about availability of commodities in the markets and their prices can be relayed nationwide so that there is up-to-date information of supply and demand and prices. It is almost certain that if this is done it will not be possible to sell potato at Rs. 100 per kg in cities if there is public information that in say Okara market the same is available in wholesale at the rate of Rs. 50 per kg. This is the use of technology for productive purposes. At present, this technology is being used to manage exploitation and hoarding.

All the TV channels authorized by PEMRA should be required to spend 30 minutes for relaying price information of various commodities in markets. The present department of price controls be immediately abolished and replaced by a representative committee. The Principal of boys’ college in the Tehsil should invariably be the Chairman of the Committee.

3. Special Agricultural Account: Commercial banking in the agriculture sector is not flourishing. No substantial improvement is expected in the near future. The speed of growth is very slow. I personally do not agree that there will be a big leap due to technology and digitalization. In my view, the answer lies in ‘special accounts’ for agriculture credit, including agricultural credit cards. Let me explain the rationale. The bank accounts in the country are linked to the central system of a scheduled bank. Now after the FATF and other KYC requirements opening and maintaining accounts with the scheduled bank is subject to numerous compliance requirements. Ordinary medium and small scale farmers cannot do so. It is therefore suggested that ‘special bank account’ for agricultural sector be introduced without direct access to the central banking systems. These accounts are to be used to deposit cash and make payments for agricultural inputs. Payments under these accounts are routed through a scheduled bank. This agri-banking system will gradually replace the cash system in the economy. In line with the same there should be agri-credit/debit card allowing withdrawal from such accounts. In simple word, easy and efficient banking for agricultural classes.

4. Activation of SBP against informal banking: Under the SBP regulations the central bank is mandated to curb any kind of informal banking. It is a known and acceptable fact that SBP has done little or nothing to stop the prevalence and growth of informal banking. The following steps are immediately required:

a. A law to declare any transaction where direct or indirect means are used to extract interest at a rate 3% above the bank rate as invalid. This includes the so-called ‘forward purchase transaction’ with inbuilt interest of 3% per cent per month. All existing interest accumulation to be waived. Forward purchases in agricultural commodities be strictly regulated;

b. A public campaign to publicize that any lending above a prescribed rate will be treated as a crime;

c. All bearer securities including a Rs. 5,000 note to be withdrawn to demonstrate use of settling such transactions through banks.

5. Abolish Land Revenue & Provincial Board of Revenue and Agriculture Departments to be reorganized: Since I have served as Sindh’s Minister for Finance & Revenue for three months in 2013 therefore I can say with conviction that both these departments are the source of exploitation and corruption. They should be immediately restructured. Board of Revenue is effectively a land record department. Its role is to be limited to that. There should not be any role of Board of Revenue in collection of revenue. This is the job of Sindh or Punjab Revenue Board. Though a drastic approach, land revenue is to be abolished. It is more a source of corruption and exploitation then income for the state. This is the legacy of kings and colonial rulers. Republics do not prescribe these kinds of levies. With Agriculture income tax and consumption tax there is no need and rationale for land revenue. Similarly, agriculture department’s role is to be limited to technical support. A new department by the name of ‘Agriculture Economic Support’ be established to serve as a link between Federal and Provincial Government for equitable distribution of credit. The present collection of land revenue throughout the country in comparison is almost a joke and a demonstration of the fact that nothing unfortunately changed on August 14, 1947. We are still ruled by ‘Collectors’ and ‘Deputy Commissioners’ their extortionist ‘Patrwaris’. There was a time when land revenue collected was sufficient to run the state. Now with reference to income and expenditure of state this is nothing more but source of corruption.

It is my concerned view that if the aforesaid measures are not adopted in very near future then there will be further deterioration in our rural economy. The worst effect for it will be further poverty in rural areas leading to migration towards already over-populated urban centres. It will be completely wrong to judge the economy of the province of Punjab by looking at the shining roads of the Mall, Gulberg or Defence in its capital, Lahore. The localities such as those on the Bund Road and other represent the real state of affairs of the rural economy. Same is the case in Sindh and KPK. These measures are the only solution to bridge the rural/urban divide and ensure sustainable economic development. Pakistani farmers are to be freed from new breed of ‘Muslim Shylocks’.

Syed Shabbar Zaidi, "Informal banking: economic coercion," Business Recorder. 2021-02-18.
Keywords: Economics , Economic growth , Economic activities , Economic coercion , Pakistan-Economy , India , Pakistan , FBR , PEMRA

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