The flaws of coercive sustainability

The new federal agricultural financing scheme, Zarkhez-e, is being touted by the authorities as a major government-backed intervention aimed at expanding collateral-free credit to small, subsistence farmers. However, many bankers insist that it risks becoming a repeat of the yellow cab scheme from the 1990s as it imposes “directed lending” on commercial banks in a weak legal and recovery environment.

“It is a model that has repeatedly failed in Pakistan and sits uneasily with market principles the country has committed to adhere to under the IMF [International Monetary Fund] programme,” argued the head of retail banking at a mid-sized bank who requested anonymity.

Zarkhez-e, also branded as Asaan Digital Zarai Qarza, aimed at expanding collateral-free agricultural lending for smallholders and tenants across the country, was launched by the State Bank (SBP) in October last year. Introduced under the National Subsistence Farmers Support Initiative, the project seeks to provide clean loans of up to Rs1 million to a landowner farmer and up to Rs500,000 to a tenant for a period of one year at competitive market rates.

The scheme provides an end-to-end digital lending solution, allowing subsistence farmers and tenants to apply for agriculture loans through a centralised online portal. Following verification and agronomic assessment through the Land Information Management System, applications are forwarded to the applicant’s chosen commercial bank or microfinance bank for approval and disbursement, improving transparency and efficiency.

Banks cannot substitute relationship-based rural finance with unsecure, portal-driven credit mandates and expect similar repayment behaviour

A key feature of the scheme is that at least 75 per cent of financing is disbursed in kind, ensuring the provision of quality agricultural inputs such as seeds, fertilisers, pesticides and diesel through accredited agri-merchants on boarded by banks. The remaining 25pc is disbursed in cash to meet other operational farming expenses.

At the heart of the bankers’ concern is coercion. “Each bank has been given a target by the SBP according to its balance-sheet size to be met within the given timelines. This is not organic credit expansion driven by risk-return considerations; it is verbal and administrative pressure applied by a regulator whose role is supervisory, not credit allocation,” the chief financial officer (CFO) of a big bank maintained, requesting anonymity.

“Nowhere in mature banking systems are private banks compelled to undertake collateral-free lending under regulatory nudges masked as policy reform,” he asked.

Bankers say the scheme’s defining feature — uncollateralised or unsecured lending backed by a 10pc first-loss government guarantee — may sound reassuring, but it is insufficient in Pakistan’s scenario. “Recovery laws remain compromised, enforcement is weak and judicial processes for recovery are notoriously slow. The first-loss cover barely scratches the surface of the credit risk banks face when defaults occur, and legal recourse stretches into years — sometimes decades. Losses beyond that threshold will still sit squarely on banks’ balance sheets,” the retail banker asserted.

Supporters of the scheme argue that risk assessment and collateral decisions are left to lenders themselves. In practice, this autonomy is largely illusory. Once targets are imposed and progress is monitored through an industry-wide digital portal, discretion narrows sharply. “Credit appraisal without enforceable security in a weak recovery ecosystem is not prudent banking — it is policy-driven exposure,” another senior banker who looks after credit risk assessment at his bank contends.

Besides, the proponents of the scheme insist, to mitigate credit risk, all farmers availing loans under the scheme will be covered by group life insurance, equivalent to the loan amount disbursed and outstanding. In the event of a borrower’s death, loan recovery will be effected through insurance.

In addition, crop loan insurance will be mandatory for five major crops, providing protection against yield losses. “That the banks’ money is protected or not is not the real issue here. The bigger question is: should the SBP act on behalf of the government and force banks to lend to a sector where it does not want to or doesn’t have the expertise to?” the CFO wondered. “It’s more about the principles upon which the market economy is founded.”

Some say the IMF is unlikely to view the scheme favourably as it blurs the line between regulation and fiscal policy. Directed credit programmes, especially those carrying explicit or implicit state backing, distort resource allocation, weaken credit discipline and eventually migrate onto the public balance sheet.

“Pakistan’s own history offers ample evidence of how such initiatives morph into liabilities,” another senior banker contended.

Bankers say comparisons with informal lenders further expose the flaws in the “directed agricultural lending” scheme. “Arhtis lend without collateral because they possess local knowledge, enjoy social leverage and possess monitoring capacity that banks lack. Replicating outcomes without replicating incentives and enforcement is wishful thinking. Banks cannot substitute the relationship-based rural finance with portal-driven unsecured credit mandates and expect similar repayment behaviour,” the CFO emphasised.

The political economy surrounding the scheme is worrying. “Agriculture credit has long been vulnerable to political intervention, loan rescheduling pressures and informal signals to go easy on recoveries. Once lending is perceived as state-directed rather than commercially driven, repayment discipline weakens further. What begins as ‘financial inclusion’ quickly degenerates into entitlement,” he added.

Bankers contend that if agricultural finance is to be sustainable, it must be market-based and profitable, not treated as a form of corporate social responsibility. “Banks will lend more when the environment allows them to recover price risk and earn returns,” the retail banking head observed.

Zarkhez-e, in its current form, risks repeating a familiar mistake: using banks as instruments of policy rather than intermediaries of capital. At a time when Pakistan needs credit to support growth, forcing losses through directed lending may achieve the opposite — further shrinking risk appetite and weakening the financial system. True, sustainable reform lies not in coercion, but in creating conditions where lending to farmers makes commercial sense.

Published in Dawn, The Business and Finance Weekly, January 5th, 2026

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