The agriculture sector contributes 19.2 per cent to GDP and provides the raw material for textile and other agro-based industries. The textile industry accounts for 60pc of the country’s export. Agriculture employed roughly 38.5pc of the workforce in 2020-21, while more than 65-70pc of people relied on it for a living.

The target amount of formal credit was ­fixed at Rs1.5 trillion for 2020-21, but only 63.6pc was disbursed during the ­fiscal year. In Pakistan, the informal credit market is strong enough to cater to small farmers’ demand through a network of fi­nanciers known as “arthis”.

To better understand the role of the arthi in the agricultural supply chain, this article attempts to examine the arthi system by mapping the network and linkages, understanding its operations and fi­nancing mechanisms such as interest rates, costs, and risk management techniques. This will help to understand why formal institutions have failed to replace the role of arthi in the agricultural supply chain. It may also help fi­nancial institutions to improve their economic model to minimise credit risk so that they can penetrate the farming credit market more efficiently to capture a significant share.

Arthi is a commission agent who facilitates buying or selling agricultural produce, including livestock, collects payments if required, and pays it to the seller. Arthi also receives a commission or a fi­xed percentage of the transaction value by way of remuneration. Usually, arthi operate in grains, fruits and vegetable markets where different players in the supply chain of each food commodity interact.

Arthi charge four to fi­ve times the rate of interest than formal institutions but they also provide credit on flexible terms that the formal sector does not

There are two primary sources of agricultural credit: informal and formal. Informal sources usually include commission agents (also called arthi), input suppliers, village shopkeepers, friends and relatives. Among these, arthi play the most dominant role and have a significant share in informal credit disbursement.

Our survey reveals that registered arthi have long-term relationships with many farmers. Many admitted that their relationship with farmers had entered the second generation. In some cases, both arthi and farmers invite each other into family gatherings and marriages, indicating that the relationship extends beyond professional to personal lives.

Our discussions with farmers and arthi lead us to conclude that services offered by arthi are not uniform but depend on the type of market, its structure, and farmer’s demand. Our investigation of food supply chains reveals that arthi provides two significant services to the farmer.

First, he gives cash/inputs on credit at the time of sowing and second, he acts as the agent of sale for the farmer to dispose of his produce. The poor ­financial situation of the farmer, long distances from organised markets and lack of understanding of post-harvest crop management practices are among the many factors that play a vital role in farmers’ decision-making process whether to sell the produce at the farm gate or bring it to the mandi to sell it through the arthi.

Selling at the farm gate is preferred by many farmers due to the shortage of labour, high cost of transportation and high commission expenses. All products that enter the mandi are immediately auctioned to avoid the risk of price fluctuation and payments are made the same day to the farmer.

Arthi provides credit or inputs to meet the liquidity gap that farmers face. Agricultural credit is considered one of the strategic resources of crops and plays a vital role in improving agricultural productivity. This implies that arthi indirectly contributes to improving farm productivity. Higher productivity raises the standard of living among rural communities. Hence, arthi plays a significant role in the process of rural development.

But the interest rates charged by the arthi show that he makes money by lending to small and medium farmers. The literature reveals that operational cost is less than 2.5pc of the total lending volume and interest rates range between 62-80pc. This implies a signifi­cant pro­fit margin exists for the arthi, 5-7pc higher than the formal lending sources.

In addition to earning from lending operations, arthi makes a 2-4pc commission depending on crop type and terms and conditions with the client.

But despite the high interest charged by the arthi, it is essential to investigate the reasons that force farmers to secure credit from non-formal over formal resources.

The availability of informal credit on flexible terms without stringent conditions or collateral requirements is no less than a blessing for poor farmers. No financial institution from the formal sector offers unsecured credit to farmers in Pakistan.

This is one of the reasons why farmers prefer to avail credit facilities from informal sources even if they must pay a high-interest rate in terms of commission on their products or in some other form.

The general perception and literature depict arthi as an exploiter in the food supply chain who abuses his power for personal gain at all costs. However, the reality is not so bad. Without any doubt, arthi charges four to fi­ve times the rate of interest than the formal institutions, but he also provides a service that the formal credit sector does not.

Moreover, perceptions about arthi among farmers are mixed. Some farmers claim that arthi are helping hands in difficult times. Still, others demonstrate that they charge a very high-interest rate while acknowledging the ­financial support extended during the crisis.

Dr Abida Naurin is a research associate and Dr Abedullah is the chief of research at the Pakistan Institute of Development of Economics

Published in Dawn, The Business and Finance Weekly, September 5th, 2022