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


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 partnered with Meezan Bank Limited  to pilot 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 these SME dealers were previously excluded from formal credit markets due to lack of large cash flows and limited collateral. The pilot had a specialized Shariah compliant financing structure which was 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

In the last fiscal year 2015 – 2016, the agricultural sector in Pakistan registered negative growth        (-0.19%) for the first time in 15 years with an overall decline of 6.25% in crop growth.  Due to this, the government undertook supporting measures in the budget for fiscal year 2016/17 with the introduction of Kissan (farmer) package. A major component of this package was the subsidy being provided to end consumers which brought about a reduction in fertilizer prices (see Table 1).

Furthermore, increased competition from imports due to a fall in global fertilizer prices, combined with an 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.

To deal with this issue, a Dealer Finance Program was initiated to provide seasonal working capital finance facility to small and medium dealers for peak season urea procurement i.e., November-January. This facility was introduced in Pakistan’s key agricultural belt 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

Empowering un-banked SME (s), especially in the agriculture segment of Pakistan is a unique business opportunity and essential for the creation of long term value in the financial sector. The above case study’s main purpose 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 agricultural value chain’s underserved segment through cross-selling 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 provides another untapped opportunity for commercial banks to capitalize on. 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

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. This is essential because it has been witnessed in the past that economic cycles can disrupt even the best planned portfolio investments. The 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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