In the recent episode of hyperinflation and the galloping commodity prices, a market player that has constantly been attacked for profiteering and manipulation is the arhti. It is, of course, a repeat of the chorus from all such episodes in the past. Once prices stabilise somewhat, business as usual will return.

Also forgotten will be the fact that that the farmers are the most excluded lot when it comes to formal credit. The total stock of private sector credit at the end of 2020-21 was Rs7.63 trillion. Out of this, a mere Rs 292.3 billion was the share of agriculture.

In the first month of the current fiscal year, the flow of credit to agriculture declined by Rs8.8bn or almost seven times the decline in the corresponding month of last year. This is despite the fact that banks are given targets by the State Bank and noncompliance invites penalties.

Paying penalties is, however, deemed by the banks as less costly than the hassles of compliance in an area that gives them little comfort. Commercial banks are used to lending to a profligate government to live happily ever after.

The National Rural Support Programme’s Sugarcane Production Enhancement Project aims to link the small farmer, microfinance institutions and the processor in a high-impact value chain

This is where the arhti comes in. The field is left open to him and he exploits it to the fullest. He performs a useful function. For the farmer, it’s a Hobson’s choice. The arhti is there when he needs cash for inputs. He facilitates the movement of output from the farm to the commodity market at prices that favour him rather than the farmer. In times of crop failures and personal needs such as births, deaths and marriages, he is like the next-door neighbour. He charges a lot more than is his due when the going is good. The interest can be as high as 70-80 per cent, and roll-overs are easily granted.

Lending is in money, but the servicing is usually in kind. Both sides avoid using the word interest. In short, arhti caters to the needs of production, development and consumption. The last-mentioned is a no-go for bank lending.

An International Growth Centre (IGC) study in 2013 prescribed the creation of an intermediary that functions like the arhti, but without its exploitative and speculative characteristics. “To create a win-win, where farmers and banks both benefit, a model involving an ‘intermediary’ that incorporates the arhti’s strategies needs to be tested.

The ‘intermediary’ would connect the bank to the clients and play the role that the arthi plays, with value-added services (such as access to latest farming techniques, modern farm equipment and inputs that can help increase yield and productivity).

The intermediary, like the arthi, would help manage the bank’s risk by a) identifying the right client b) correctly assessing his credit needs c) ensuring that loan proceeds are used for the intended purpose d) controlling the farmer’s cash flows by managing his crop’s sale proceeds.

The intermediary’s value-added service relating to farm efficiency and productivity would further reduce the credit risk. Insurance against catastrophic risks (such as floods or pest attacks) would need to be built into the model as these tend to be the only systemic threat.

Could the intermediary be the microfinance banks? These have been in the field for quite some time, but their footprint in the rural economy remains limited. To a certain extent, they act like commercial banks and, to that extent, are disabled to adapt to the arhti’s function. In the first quarter of the current fiscal year, they disbursed 15.4pc of their annual target, even less than 19.3pc by commercial banks.

The inspiration for the IGC study came from a project undertaken by the National Rural Support Programme (NRSP) in 2001, called the Sugarcane Production Enhancement Project (SPEP). It aimed to link the small farmer, microfinance institutions and the processor in a high-impact value chain with high financial and social returns.

Some 1,800 small farmers were organised and extended loans ranging from Rs7,000-10,000 per acre to buy inputs. To improve yield per acre, an institutional mechanism was created to provide modern advisory services.

The soil was tested to set up a benchmark and the farmer was obliged to follow the guidance of the advisory services. An agreement was signed between the sugar mill and NRSP to buy all output with prompt cash payment.

This experiment’s success can be judged by the fact that the registered farmers had doubled by the end of the third year. The project was able to reach 3,666 smallholder farmers. Per acre yield increased and the contribution of small farmers to the overall sugarcane supply of the mill reached 11.5pc.

The small farmer benefitted from high incomes because of improved yields and the sugar mill from getting high-quality yields which lead them to plan for expansion of their factory.

Most importantly, this collaboration benefited small farmers because investments were made in developing infrastructure irrigation, and technical guidance regarding seed and farm equipment. The social impact has been assessed by a third party evaluation and found to be highest amongst all NRSP microfinance investments. The SPEP project is now operational in 44 union councils of Rahim Yar khan with registered smallholder farmers.

Today, 15pc of sugar mill supply (after extending the production capacity of sugar mills) is provided by communities organised by NRSP. They are now able to obtain a yield of around 32 tonnes of sugarcane per acre. The experiment demonstrated that the generational bondage between the small farmer and the shop arhti can be broken.

The writer is a senior political economist and president of the Council of Social Sciences, Pakistan

Published in Dawn, The Business and Finance Weekly, December 13th, 2021