Creating Social Impact Using Supply Chain Finance – A Case Study of Unlocking Access to Low Cost Fertilizer in Pakistan’s Agri Value Chain

Feb 14, 2017
Tags :
  • Financial Inclusion,
  • Financial Services,
  • SME,
  • Innovative supply chain financing presents an unprecedented opportunity to disrupt traditional SME banking credit models, and, improve the livelihoods of millions of people in emerging markets. Innovation in supply chain financing is primarily driven by combining a key value proposition for the anchor corporate with a technology-enabled ecosystem.

    With a mandate to create social impact through commercially viable investments, Karandaaz Pakistan uses structured supply chain finance solutions as one part of its strategy to invest in risk sharing structures that in addition to earning a return on capital, also generate direct development impact on employment and revenue generation.

    In November 2016 Karandaaz Pakistan together with its partner Financial Institution i.e. Meezan Bank Limited piloted a seasonal inventory financing program for the distributors (urea dealers) of a leading fertilizer manufacturing and marketing company. As on December 31, 2016, the program closed at approximately USD 10 million and had funded 74 Small and Medium Enterprises (SME) dealers- a significant number of which had formerly been excluded from formal credit markets due to lack of visibility on SME cash flows and limited availability of collateral. The pilot was structured under a specialized Shariah compliant financing structure, supported through real-time transfer of asset (i.e. urea) risk and commodity (urea) ownership, between the three stakeholders i.e. fertilizer company (corporate), financial institution (FI) and urea (SME) dealer- as illustrated in Figure 1 below:

    Figure 1: Engagement of Stakeholders


    Defining the Opportunity

    The agriculture sector in Pakistan, for the first time in 15 years, registered negative growth (-0.19%) in the outgoing fiscal year 2015-2016 with an overall decline in crop growth by 6.25%.

    As a result, the government in the budget for fiscal year 2016/17 undertook supporting measures through introduction of a Kissan (farmer) package, a major component of which was a reduction in fertilizer prices through subsidy to end consumers (see Table 1).

    Table 1: Subsidy to End Consumers


    Furthermore, increased competition from imports due to a fall in global fertilizer prices, combined with increase in local fertilizer production led to a 27% decline in fertilizer prices from PKR 1,790/50 kg bag to PKR 1,310/50 kg bag.

    Small farmer access to the low priced urea however was restricted by fertilizer company policy that only allows sale of urea against cash or bank guarantee. The corporate policy, effectively bottlenecked the SME dealer(s) ability to purchase urea, due to non-availability of cash (working capital) and/or collateral for issuance of a bank guarantee. Small and medium size dealer(s) that principally service small farmers were therefore not in a position to benefit or disseminate the benefit of the significantly lower urea input prices.

    In order to unlock access to subsidized urea, a Dealer Finance Program was structured and piloted to provide seasonal working capital finance facility to small and medium dealers for peak season urea procurement i.e., November-January. The finance facility was rolled out in key agriculture belt in Pakistan including Hyderabad, Dharki, Multan, Gujranwala and Faisalabad.

    Value Creation and Sustainable Impact Investment

    Our framework for creating market based scalable impact investments includes value creation on three basic levels: enterprise level, investment level, and social level. The program was designed to deliver on all three value criterion metrics, as summarized in Figure 2 below:

    Figure 2: Value Creation Metrics


    Opportunity Going Ahead

    Enabling access for un-banked SME (s), especially in the agriculture segment of Pakistan, is both an urgent need and a unique business opportunity for creating long term value in the financial sector. The purpose of the above case study was to outline how supply chain finance can be used to increase outreach to non-traditional SMEs. The business case of investing in supply chain oriented financial structures is briefly outlined below:

    • Scalability

    Domestic local urea production capacity is around 7 million MT p.a.- i.e. 140 million 50 kg bags, and estimated urea off-take for CY 2016 is roughly 5.6 million1 tons i.e. 112 million bags. At an average price of PKR 1,300/bag, it implies industry wide sales to dealers of roughly PKR 145.6 billion- which in the absence of a dealer inventory financing product to-date, remains largely un-tapped by the formal financial system.

    • Cross-Sell

    There is a significant potential to deepen engagement with the agri value chain underserved segment through cross-sell of financial products to the SME borrowers. These include, but are not limited to insurance, savings products, mobile wallets, wealth management solutions, and long term capex financing for e.g., warehouse financing for dealers.

    • Deepening Engagement Down The Agri-Value Chain

    Combining SME dealer finance with direct digital lending products for fertilizer purchase to the end retail farmer is another untapped ecosystem for commercial banks. Credit providers catering to the niche market include informal credit providers and microfinance banks, which build in pricing yields of 30%2, versus, an average sector ROA of 162%.

    • Portfolio Diversification

    In the past it has been seen that economic cycles can disrupt the best planned portfolio investments. Portfolio diversification across value chains and furthermore across borrowers, is one of the best ways to maintain portfolio predictability and improve risk return predictability, especially when combined with greater economic equity across society. Fertilizer sector is largely seen as a defensive sector, and, therefore with less pro-cyclicality risk. Supply chain finance, therefore, offers an opportunity to create economic value and social impact- which is the only way for economies to sustainably grow.

    • Equitable Sustainable Economic Growth

    Closed loop supply chain financing structures not only increase the mobility of capital flows within the economy, they also contribute to creating more equitable economic growth across all segments of society.


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    Non-profit company registered under Section 42 of the Companies Act, 2017