Banks to get tax break ‘bribe’ to loan more to farmers, low-cost housing

Labourers harvest marigold flowers in a field on the outskirts of Peshawar on December 15, 2018. The government wants farmers to get more loans. Photo: AFP

The Pakistani government will offer commercial and microfinance banks tax benefits on income they earn from one of its priority areas, reveals a policy document on the National Financial Inclusion Strategy for the next five years.

Financial institutions will be charged 20% in tax instead of the higher current rate of 34% if they give loans to encourage growth in these priority sectors: agriculture (small farmers), small-and-medium enterprises, and low-cost housing.

Commercial banks have been severely criticized for heavily investing in government securities instead of offering loans to the private sector, which helps an economy grow. When it comes to agriculture, SME and housing finance in Pakistan, the situation is even worse.

Read about the five-year plan here: Government unveils five-year plan for Pakistan’s economic growth

For example, agricultural loans are only 5% of the total loans given to the private sector while advances to SMEs are around 7%. On the other hand, housing finance is nearly non-existent.

To achieve sustainable and inclusive economic growth, access to finance is considered critical, the government says. For its five-year term, the government has set a target of Rs1800 billion in agriculture loans. The government plans to include loans to 700,000 SMEs to ensure the sector constitutes 17% of total credit to the private sector.

Access to finance is a prerequisite for the equitable distribution of economic opportunities, poverty reduction and achieving financial stability, the finance ministry said in the document released on Wednesday. However, in the case of Pakistan, the level of financial inclusion was one of the lowest in the world, it said.

Since banks don’t find agricultural and SME financing profitable, they put their money in risk-free government securities to make easy profits, which is why 60% of their total advances were parked in government securities at one point. Given the banks’ reluctance towards these important sectors, the government has come up with tax breaks to make it attractive for them to give loans to small farmers, businesses and people who want to build homes.

Article source: https://www.samaa.tv/news/2018/12/banks-to-get-tax-break-bribe-to-loan-more-to-farmers-low-cost-housing/