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Accelerating Rural Growth in Pakistan Through Improved Finance

MANILA, PHILIPPINES (20 December 2002) - The Asian Development Bank (ADB) will help to accelerate rural growth in Pakistan through two loans totaling US$250 million approved today to address key constraints in rural finance.

The Rural Finance Sector Development Program (RFSDP) will assist the Government in ensuring that most rural households have access to affordable finance services. This will promote economic growth and greater private sector participation in the rural economy.

The rural sector accounts for about two thirds of Pakistan's population, including 35 million poor. Limited access to finance perpetuates poverty, depresses growth, and distorts income distribution.

The potential client base for rural finance is 9 million households. But while credit demand is estimated to be up to PRs260 billion per annum, the supply from formal financial institutions is only PRs 56 billion to about 800,000 rural households.

"Affordable financial services are not available to most of the rural enterprises, small and subsistence farmers and the landless," says Ashok Sharma, an ADB Senior Financial Economist. "Most small borrowers have no choice but to resort to short-term loans at high interest rates from informal sources such as landlords and suppliers."

Under the RFSDP, one program loan of US$225 million will be used to improve policies, carry out institutional restructuring and reforms, and introduce a new bank fund as well as new financial products, such as insurance plans.

The reforms will improve the standards of governance and service of the Zarai Taraqiati Bank Limited (ZTBL), the country's key rural finance institution, and reorganize its staff and corporate structure. The new bank fund, meanwhile, will encourage the emergence of private- or public-private microfinance institutions.

A project loan for US$25 million will strengthen key institutions to help them provide affordable financial services. It will support the restructuring of the ZTBL, and build the supervisory capacity of the State Bank of Pakistan.

"Under this program, Pakistan's piecemeal rural finance sources will be integrated into the mainstream financial sector," Mr. Sharma notes. "In the process, ZTBL's outreach will be increased by 180,000 clients, creating the equivalent of 80,000 full-time jobs by the end of 2005."

Both loans come from ADB's ordinary capital resources. The program loan has a 15-year term, including a grace period of three years. The project loan has a 24-year term, including a grace period of four years. Interest in both loans is determined in accordance with ADB's LIBOR-based lending facility.

The executing agency is the Ministry of Finance and the project is due to last three years.

More at adb.org/media

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