Expanding Rural Finance in Pakistan for Inclusive Growth

The financial needs of Pakistan’s rural economy are evolving rapidly due to both the mechanization of agriculture and the diversification of rural livelihoods. Innovations such as mechanized sowing, laser land leveling, and modern harvesting equipment have raised input costs, making timely access to finance critical. Simultaneously, non-farm rural enterprises such as dairy production, transport services, food processing, and rural retail are expanding, increasing the demand for working capital and investment credit. Yet, limited access to affordable and inclusive financial services continues to constrain economic growth in rural areas.

Around 62% of Pakistan’s population relies on rural economic activities for their livelihoods (Pakistan Economic Survey 2023–24). However, only a small fraction of rural households and farmers have access to formal credit. Most depend on informal moneylenders, who charge exorbitant interest rates, trapping them in cycles of debt. This lack of access not only hampers productivity but also weakens resilience to climate shocks, inflationary pressures, and market volatility.

Agriculture alone contributes 23.5% to the national GDP and employs 37.4% of the labor force (State Bank of Pakistan, 2023). Disruptions in this sector, whether due to floods, droughts, or policy inconsistencies, directly impact food security, inflation, and rural welfare. Expanding rural financial services through microfinance, mobile banking, agri-credit schemes, and fintech solutions can empower farmers, small entrepreneurs, and rural women. These services must be tailored to the seasonal nature of agriculture, mitigate risk through crop insurance, and promote value chain financing.

For Pakistan to achieve inclusive and sustainable rural development, it must prioritize financial inclusion. Strengthening rural financial infrastructure, promoting public-private financial initiatives, and incentivizing digital financial adoption are essential to mobilize rural capital, enhance productivity, and stimulate economic growth in underserved regions.

The Role and Importance of Rural Finance in Pakistan’s Development

Rural finance plays a foundational role in enabling economic resilience, productivity, and inclusive growth across Pakistan’s rural landscape. According to the World Bank (2004), rural finance encompasses a broad spectrum of financial services including credit, savings, insurance, and payment systems delivered sustainably to rural individuals, households, and enterprises. Within this broader framework, agricultural finance specifically supports farming activities such as the purchase of seeds, fertilizers, machinery, irrigation services, and post-harvest processing. In Pakistan, where rural areas account for over 60% of the population and agriculture employs more than 37% of the workforce, rural finance is indispensable for economic and social development.

Most smallholder farmers and rural entrepreneurs face cash flow constraints and lack sufficient savings to fund productivity-enhancing investments. Therefore, access to affordable and timely credit becomes critical for sustaining livelihoods and improving living standards. Borrowing enables farmers to procure high-quality inputs, adopt mechanized technologies, and expand cultivated areas, directly boosting agricultural output. Simultaneously, rural credit supports small business development by financing inventory, equipment, and labor costs, thereby generating employment and fostering entrepreneurship.

A value-chain approach to rural finance is mapping economic activities from production to marketing may ensure that financial services are aligned with sector-specific needs and promote value addition at each link. This model not only increases profitability for rural producers but also supports integration into wider markets and enhances food system efficiency.

Furthermore, credit access contributes to household resilience by smoothing consumption, covering healthcare expenses, supporting children’s education, and protecting against shocks such as crop failure or natural disasters. However, despite 68% of Pakistan’s workforce being involved in agriculture (UNDP, 2023), formal rural credit penetration remains low due to structural barriers, collateral requirements, and lack of tailored financial products.

Expanding and Strengthening Rural Credit Systems in Pakistan

Rural credit plays a critical role in enhancing agricultural productivity, supporting non-farm rural enterprises, and reducing poverty in Pakistan. Despite multiple public and private sector efforts, access to credit for rural populations, especially smallholder farmers, remains limited and unevenly distributed.

Formal credit institutions dominate rural financing in Pakistan, yet their reach is constrained. The Zarai Taraqiati Bank Limited (ZTBL), the country’s largest specialized agriculture bank, accounts for about 35% of total agricultural credit disbursement. Commercial banks, particularly the National Bank of Pakistan (NBP), HBL, and UBL, collectively contribute around 49%, while microfinance banks such as Khushhali Bank and NRSP Microfinance add 12%. The now largely dormant Federal Bank for Cooperatives represents the remaining 4% (SBP, 2023).

However, formal sources still fall short of meeting total demand. Over 90% of small farmers rely on informal lenders, primarily due to lack of land ownership documents, high collateral demands, and bureaucratic barriers. Friends, relatives, shopkeepers, and landlords constitute 91% of this informal credit, while professional moneylenders though only 2.12% charge exorbitant interest rates of 50–100% annually (PBS, 2023).

To address these issues, the State Bank of Pakistan (SBP) has undertaken several policy initiatives. Banks are mandated to allocate at least 20% of their lending to agriculture. Revolving credit schemes allow farmers to draw funds over three years without reapplying. Innovations like Islamic agri-finance, crop loan insurance schemes, and branchless mobile banking platforms such as JazzCash and Easypaisa have expanded outreach. Despite these efforts, total agri-credit disbursement of PKR 1.8 trillion in 2023 meets only 45–50% of actual demand (SBP Annual Report, 2023).

Major challenges persist. Only 2 million of Pakistan’s 6.6 million farmers access formal loans. Regional disparities are starting Punjab receives 80% of loans, while Sindh, KP, and Balochistan remain underserved. Manual land record systems in Sindh and Balochistan cause delays. High default rates and politically motivated loan waivers deter banks from lending to smallholders.

Still, there are success stories. Khushhali Microfinance Bank disbursed over PKR 50 billion in 2023, with a focus on women-led agribusinesses. Kiva’s global crowdfunding model facilitated over $10 million in microloans to Pakistani farmers. BISP’s integration of credit with social safety nets also shows potential for inclusive financing.

To strengthen rural credit systems, Pakistan must prioritize digitizing land records, expanding mobile banking, and reducing interest rates for small farmers. Financial literacy programs and targeted public-private partnerships can also foster sustainable credit access. With coordinated action and innovation, rural finance can become a cornerstone of inclusive economic growth.

Conclusion

Expanding rural finance in Pakistan is not merely a financial reform, it is a strategic imperative for achieving inclusive and sustainable development. With over 60% of the population depending on rural livelihoods and agriculture contributing significantly to GDP and employment, the need for accessible, affordable, and tailored financial services has never been greater. Mechanization and rural enterprise diversification have transformed traditional financial needs, requiring modern credit solutions that go beyond seasonal lending.

Despite recent policy advances and innovations such as mobile banking and Islamic agri-finance, formal credit remains inaccessible to most smallholders and rural entrepreneurs. Informal lenders still dominate the landscape, often charging exploitative rates that entrench rural poverty and hinder investment. Regional disparities and weak land titling systems further marginalize provinces like Sindh, Balochistan, and KP.

To bridge the gap, Pakistan must expand digital financial infrastructure, simplify credit processes, and integrate risk-reducing tools like crop insurance. Public-private partnerships, financial literacy, and inclusion of women and youth in credit ecosystems are essential to broaden outreach and impact. Ultimately, strengthening rural credit systems will boost agricultural productivity, empower rural enterprises, and build resilience against economic and environmental shocks laying the foundation for a more equitable, prosperous, and food-secure Pakistan.

References: State Bank of Pakistan; Pakistan Economic Survey; World Bank; UNDP; FAO

Please note that the views expressed in this article are of the author and do not necessarily reflect the views or policies of any organization.

The writer is affiliated with the Institute of Agricultural and Resource Economics, University of Agriculture, Faisalabad, Pakistan.

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