Abdul Rauf
Pakistan’s struggle with agricultural credit is often misdiagnosed. Policy debates frame the issue as one of high interest rates, moral concerns about “usury,” or a question of financial inclusion. Yet none of these explanations address why formal finance consistently fails to replace the entrenched system, or why the informal arthi network persists. The real issue lies in institutional fit: agriculture is inherently seasonal and uncertain, with prices determined at harvest and shocks that are often systemic rather than borrower-specific. The crucial question is not whether credit is expensive, but whether banks are even the right intermediaries for this sector.
The arthi model endures not because farmers are backward or irrational, but because it aligns with the operational realities of farming. Aarthis provide liquidity without formal collateral, tolerate repayment variability, and allow stress to roll across seasons. Banks, by contrast, are designed for predictable cash flows, enforceable security, and rule-based collections. When agriculture defies these assumptions, banks tighten lending, demand collateral, shorten tenors, and harden collections—reproducing the very exclusion that policy seeks to eliminate. Targets, subsidies, guarantees, or concessional liquidity cannot fix this structural mismatch.
Yet the arthi is also flawed. He combines lending with crop purchasing, creating a bilateral monopoly at harvest. While farmers gain liquidity, they pay through suppressed prices and limited rewards for quality, trapping them in low productivity. In effect, Pakistan’s agricultural finance is caught between two poor fits: banks exclude, while aarthis include then extract.
The solution lies not in tweaking banks or moralizing against aarthis, but in creating new operating intermediaries. These intermediaries must align finance with the crop cycle, expand exposure with the season, and settle transactions without embedding pricing power. They must provide proximity and observability, generating reliable data through repeated interactions rather than control. Price discovery must remain competitive, and volatility must be tolerated, recognizing that defaults often reflect shocks rather than negligence.
Policy should focus on enabling contract forms and market structures that function in a seasonal, uncertain economy, rather than forcing banks into an unsuitable role. The arthi will only be displaced when alternatives can provide liquidity, tolerance for volatility, and operational support without monopolizing price or exploiting dependence. Until then, Pakistan will continue misreading the problem as a pricing dispute, recycling interventions that treat agricultural finance as a banking issue instead of the structural, market design challenge it truly is.
Reframing agricultural credit in Pakistan in this way reveals a hard truth: it is not a question of cheaper loans, but of designing intermediaries and contracts that match the realities of farming—an institutional, not financial, problem.
