ISSN 2330-717X

Pakistan Offers Investment Opportunities In Warehousing And Logistics – OpEd

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The agriculture sector is the prime mover of Pakistan’s economy. It contributes 20% share to country’s total GDP, employs 42% of labor force and provides livelihood to 66% of the population. Pakistan has lately joined club of wheat exporting country. The country is among the top five cotton producing countries and a major exporter of rice.

Nearly 65% of country’s export proceeds come from cotton textiles and clothing export. This is despite that in Pakistan yields of many crops are below the regional average. The country enjoys the potential to double production of major crops without increasing area under cultivation. It only needs to improve crop management and contain huge post-harvest losses.

Absence of modern warehouses results in huge post-harvest losses which range from 15% to 20 percent for food cereals and touch 40% for vegetables and fruits. If one takes the example of just one crop, wheat with annual production now exceeding 25 million tons, it is valued around Rs7.5 trillion rupees. The country has nearly 5 million tons wheat storage facilities. Rest of the output is kept in open that results in up to 25% of total produce going stale before reaching the market. The colossal post-harvest losses on one hand deprive the farmers of modest return and on the other hand does not allow the country to export the surplus and earn much needed foreign exchange. Pakistan produces superb quality fruits, but nearly 40% of total output is lost due to the lack of refrigerated storage and transportation facilities.

The prevailing situation demands that the government to offer specific incentives for the construction of modern grain storage silos and chain of refrigerated storage and transportation facilities. State Bank of Pakistan (SBP) embarked upon Warehouse Receipt Financing Program more than 3 years ago but little success has been achieved, mainly because of the absence of warehousing facilities. If there are no warehouse facilities/collateral management companies, warehouse receipts just can’t be issued. When there are no warehouse receipts, how can farmers get loan against such a document? As stated above, production of 25 million tons wheat alone, valued around Rs7.5 trillion, offers enormous opportunities to build grain storage silos and insurance of the produce kept in these silos.

The indicative target for lending to farmers for the ongoing financial year has been fixed by SBP at around one trillion rupees. If one looks at this amount in isolation it may look substantial, but when one compares it with lending to manufacturing sector the amount looks paltry. Despite the best efforts by the central bank the increase has not been as desired or required. According to some financial sector analysts, lending to farmers is still passbook-based certifying land ownership.

The experts go to the extent of saying that the key beneficiaries of lending to farmers remain big landlords. Small farmers are still forced to borrow from Arthi (middlemen).

The informal lenders not only charge very high interest rate but farmers are bound to sell their produce to them. In such a scenario the real beneficiaries are the middlemen and small farmers are the net losers. This is the reason central bank embarked upon Warehouse Receipt Financing program (WRF). The key issue is that WRF is post-harvest financing, whereas the farmers need bulk of the financing during harvesting season for purchasing seed, fertilizer and pesticide. The farmers also need money for purchasing implements i.e. tube wells and tractors and drip irrigation system.

For the successful implementation of WRF, presence of modern warehouses (grain storage silos) is a must. The SBP offers soft-term loans for the construction of warehouses. However, private sector response has been lackluster. Some banking sector experts say that the central bank as well as commercial banks has not been able to create awareness about the important role to be played by the collateral management companies, which is certainly very different from managing warehouse.

The prevailing situation offers enormous opportunities to Islamic banks also for offering pre-harvest and post-harvest loans as well as financing for the purchase of agriculture implements and construction of warehouses. Discussions with Shariah Scholars indicate they are already working on different models. However, those responsible for offering loans to farmers are still a little shy. As such the share of Islamic banks in lending to farmers is miniscule when compared with the lending by the conventional banks. Some analysts say that conventional banks have been able to mitigate the risk of lending to farmers through credit insurance.

However, Takaful operators are yet to come up with a comparable and Shariah compliant solution. Therefore, it may be said that lending to farmers offers enormous opportunities to warehousing and collateral management companies, commercial banks, insurance companies and Takaful operators. Quicker results can be achieved if all the stakeholders join their hands.

In the corporate world some of the players are always looking for something new and their job becomes much easier when they are able to convert ‘a pain into an opportunity’. Farmers need funds because lending against passbook just can’t meet requirement of all the farmers. Conventional banks are too contended with investing in Treasury Bills and Pakistan investment Bonds. As against these, Islamic banks are suffering from surplus liquidity issue. This offers an opportunity to Islamic banks, particularly the fraternity of Shariah Scholars to come up with an alternative delivery model. Their job becomes much easier if they could find a Nazeer (precedence).

A Nazeer has been created by Pakistan Mercantile Exchange (PMEX) by achieving some milestones that include, listing of deliverable contract of Red Chilli, Wheat and Paddy Rice (which are Shariah compliant), making certified quality produce available for trade at its designated warehouses, trading of these contracts at its technology driven trading platform and ultimate delivery of the produce to buyers. PMEX went even one step ahead by facilitating lending against warehouse receipts.


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Shabbir H. Kazmi

Shabbir H. Kazmi

Shabbir H. Kazmi is an economic analyst from Pakistan. He has been writing for local and foreign publications for about quarter of a century. He maintains the blog ‘Geo Politics in South Asia and MENA’. He can be contacted at [email protected]

2 thoughts on “Pakistan Offers Investment Opportunities In Warehousing And Logistics – OpEd

  • Shabbir H. Kazmi
    May 1, 2018 at 4:36 am
    Permalink

    One of my readers Muhammad Irfan has pointed out that value to 25 million tons wheat is Rs750 billion not Rs7.5 trillion. Thanks Irfan for pointing out a typographical mistake.

    Reply
    • May 3, 2018 at 4:42 am
      Permalink

      Thanks Shabbir sb for considering my point.
      Kind regards,
      Muhammad Irfan Kasana

      Reply

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