Asian Development Bank experts have pointed out a major constraint for agribusiness in SME development, saying that it did not have access to formal sector debt and equity finance.
According to report, agribusiness, in particular SMEs, remains underserved. The financing gap for small entrepreneurs is significant: only 5 percent of some 250,000 micro enterprises with less than 5 percent employees receive funding from formal financial institutions. This is a sizeable underserved market.
Many entrepreneur surveys confirm that lack of access and the cost of bank financing are significant barriers to expansion. Banks need to move from collateral-based lending to agribusiness to long-term, cash-flow-based loans. While many banks regard the SME sector as a growth market with considerable potential, most institutions still view agribusiness as a risky sub-sector with a history of high loan default.
This perception was largely created because agricultural borrowers defaulted on input loans from inefficiently operated public sector banks.
Financial sector lending to agribusiness needs to be promoted by focusing on (i) improving agribusiness SME creditworthiness, thereby reducing the perceived level of risk faced by financial institutions in lending to agribusiness; and (ii) enhancing the capacity of financial institutions to identify agribusiness lending opportunities, and to appraise and supervise agribusiness loans based on viable business plans and cash-flow projections, rather than collateral-based lending.
The SME is providing support to financial institutions to improve their capacity to establish effective lending processes to select and serve creditworthy SMEs, and is supporting the establishment of a partial credit guarantee facility to help leverage greater financial resources for SMEs. It is also improving the SME policy environment. These interventions complement the specialised assistance needed for agribusiness SMEs to access financing.
While markets provide economic opportunities, commercial agriculture and agribusiness development in Pakistan are constrained by poor infrastructure (energy, transport, and storage); sector institutions and policies, and governance practices; as well as access to modern technology and to financial and business development services. No single project can address all these constraints.
Through an ambitious public investment programme, the government of Pakistan is committed to rapidly developing major infrastructure to support broad-based economic growth. In addition, in part with ADB support, the government wishes to improve governance, accelerate private sector development and decentralisation, and improve the performance of the financial sector. The project will complement these initiatives through a set of carefully targeted interventions specific to the needs and constraints of the agribusiness sub sector.
According to report, the constraints facing agribusiness are present throughout the product value chain from input supply to processing and exports, leading to low productivity and value added. The constraints must be addressed with a comprehensive and systemic approach to remove production, market, and institutional failures and rigidities that impede the development of the sector, and promote demand-driven development with maximum participation of the private sector, including farmers.
World agricultural product markets are demanding increasingly higher product quality, and unless Pakistan's agribusiness products conform to these standards, the agribusiness sub sector will not be able to enter, let alone compete in, world markets under a WTO regime, including imports.
The following key constraints, identified during the project preparatory technical assistance, must be removed: (i) market failures, including limited availability of business development services to small entrepreneurs to support business activities and to start new enterprises, limited access to finance, and limited capacity for farmer group formation for agribusiness or agro-enterprise purposes to develop economies of scale, and continuity of supply to ensure strong market penetration; (ii) institutional constraints, including weak public-private partnerships, weak institutional capacity, poor co-ordination between government agencies, and an absence of demand-driven agricultural research and extension; and (iii) the lack of a guiding national policy and long-term strategy aimed at developing a dynamic and competitive agribusiness. The constraints have a national impact because the government decision-making process and facilitation capacity in agribusiness is limited and not cohesive; and the private sector is not dynamic, competitive, or internationally compliant.
The lack of a vibrant small and medium enterprise (SME) sub sector for agribusiness is largely a result of market failure. Technical, managerial, marketing, financial, and legal advisory services to agribusiness by the private sector are almost non existent.
The systemic constraints to sector development, including low levels of technical and managerial capacity, low product quality and market penetration, limited access to market information, and virtually no access to finance from formal financial sector institutions, could be resolved through improved access to BDS to improve the creditworthiness of agribusiness enterprises. The limited existing services are primarily in the public sector. They have not performed well because of weak management and staff capacity, and inadequate financing.
Agribusiness research and extension services have been largely unresponsive to the needs of private sector agribusiness enterprises. The demand from farmer organisations for currently inaccessible BDS services is significant.
Other developing countries have effectively improved the provision of BDS by establishing time-bound, cost-sharing grant schemes that provide funding for enterprises to access BDS, and for BDS providers to develop and upgrade the type of service that they provide to agribusiness clients. The ADB-financed Small and Medium Enterprise Sector Development Programme seeks to expand accessibility to BDS through the Business Support Fund, which provides matching grants to enterprises for BDS support in areas such as technology development, marketing, business planning, and training. Provision of such support to agribusiness enterprises is also needed, report concluded.