The Impact of Farm Credit in Pakistan
Both formal, and informal loans matter in agriculture. But formal lenders provide much more in production lending, than do informal lenders, often at a higher cost than what they can recover. The Agricultural Development Bank of Pakistan (ADBP), for example, providing about 90 percent of formal loan...
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| Format: | Policy Research Working Paper |
| Language: | en_US |
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World Bank, Washington, DC
2014
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| Online Access: | http://hdl.handle.net/10986/18200 |
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okr-10986-182002021-04-23T14:03:43Z The Impact of Farm Credit in Pakistan Khandker, Shahidur R. Faruqee, Rashidur R. Agricultural development Rural credit Farm capital Creditworthiness Credit-based livelihood programs Risk management Loan defaults Subsidized credits Covariate risks Cost-effectiveness Landless laborers Subsistence farming Collateral access to credit accounting ADB agricultural credit agricultural output agricultural production agriculture asymmetric information benefit analysis borrowing commercial banks consumption increases costs of borrowing credit cost credit demand credit institutions credit market credit markets credit programs credit rationing credit risk credit schemes credit transactions deposit accounts deposits diminishing returns econometric evidence econometric models elasticity entrepreneurship expenditures farm credit financial institutions fish Food Policy Research GDP government intervention gross value income inflation interest income interest rate interest rates labor productivity loan defaults moral hazard net profit net value net worth nominal interest rate opportunity cost producers production costs production increases productivity real rate of interest repayment return on equity rural credit savings transaction costs wealth working capital Both formal, and informal loans matter in agriculture. But formal lenders provide much more in production lending, than do informal lenders, often at a higher cost than what they can recover. The Agricultural Development Bank of Pakistan (ADBP), for example, providing about 90 percent of formal loans in rural areas, incurs high costs on loan defaults. Like other governments, the Government of Pakistan subsidized the formal scheme on the grounds that lending to agriculture is a high-risk activity, because of covariate risk. Because farm credit schemes are subsidized, policymakers must know if these schemes are worth supporting. Using recent data from a large household survey from rural Pakistan, the authors estimate the cost-effectiveness of the ADBP loans. To estimate credit's impact, they use a two-stage method, which takes into account the endogeneity of borrowing. Clearly, formal lenders are biased toward larger farmers with collateral. Large landowners, who tend to represent only four percent of rural households, get 42 percent of formal loans. Landless, and subsistence farmers, who represent more than 69 percent of rural households, receive only 23 percent of formal loans. ADBP loans improve household welfare but, although large farmers receive most of ADBP finance, the impact of credit is greater for small farmers than for large farmers. Large landowners use formal loans unproductively. Because the ADBP scheme is subsidized, it is not cost-effective for delivering rural credit. It would be more cost-effective is small farmers were better targeted instead. 2014-05-08T19:38:29Z 2014-05-08T19:38:29Z 2001-08 http://hdl.handle.net/10986/18200 en_US Policy Research Working Paper;No. 2653 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank, Washington, DC Publications & Research :: Policy Research Working Paper South Asia Pakistan |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
en_US |
| topic |
Agricultural development Rural credit Farm capital Creditworthiness Credit-based livelihood programs Risk management Loan defaults Subsidized credits Covariate risks Cost-effectiveness Landless laborers Subsistence farming Collateral access to credit accounting ADB agricultural credit agricultural output agricultural production agriculture asymmetric information benefit analysis borrowing commercial banks consumption increases costs of borrowing credit cost credit demand credit institutions credit market credit markets credit programs credit rationing credit risk credit schemes credit transactions deposit accounts deposits diminishing returns econometric evidence econometric models elasticity entrepreneurship expenditures farm credit financial institutions fish Food Policy Research GDP government intervention gross value income inflation interest income interest rate interest rates labor productivity loan defaults moral hazard net profit net value net worth nominal interest rate opportunity cost producers production costs production increases productivity real rate of interest repayment return on equity rural credit savings transaction costs wealth working capital |
| spellingShingle |
Agricultural development Rural credit Farm capital Creditworthiness Credit-based livelihood programs Risk management Loan defaults Subsidized credits Covariate risks Cost-effectiveness Landless laborers Subsistence farming Collateral access to credit accounting ADB agricultural credit agricultural output agricultural production agriculture asymmetric information benefit analysis borrowing commercial banks consumption increases costs of borrowing credit cost credit demand credit institutions credit market credit markets credit programs credit rationing credit risk credit schemes credit transactions deposit accounts deposits diminishing returns econometric evidence econometric models elasticity entrepreneurship expenditures farm credit financial institutions fish Food Policy Research GDP government intervention gross value income inflation interest income interest rate interest rates labor productivity loan defaults moral hazard net profit net value net worth nominal interest rate opportunity cost producers production costs production increases productivity real rate of interest repayment return on equity rural credit savings transaction costs wealth working capital Khandker, Shahidur R. Faruqee, Rashidur R. The Impact of Farm Credit in Pakistan |
| geographic_facet |
South Asia Pakistan |
| relation |
Policy Research Working Paper;No. 2653 |
| description |
Both formal, and informal loans matter in agriculture. But formal lenders provide much more in production lending, than do informal lenders, often at a higher cost than what they can recover. The Agricultural Development Bank of Pakistan (ADBP), for example, providing about 90 percent of formal loans in rural areas, incurs high costs on loan defaults. Like other governments, the Government of Pakistan subsidized the formal scheme on the grounds that lending to agriculture is a high-risk activity, because of covariate risk. Because farm credit schemes are subsidized, policymakers must know if these schemes are worth supporting. Using recent data from a large household survey from rural Pakistan, the authors estimate the cost-effectiveness of the ADBP loans. To estimate credit's impact, they use a two-stage method, which takes into account the endogeneity of borrowing. Clearly, formal lenders are biased toward larger farmers with collateral. Large landowners, who tend to represent only four percent of rural households, get 42 percent of formal loans. Landless, and subsistence farmers, who represent more than 69 percent of rural households, receive only 23 percent of formal loans. ADBP loans improve household welfare but, although large farmers receive most of ADBP finance, the impact of credit is greater for small farmers than for large farmers. Large landowners use formal loans unproductively. Because the ADBP scheme is subsidized, it is not cost-effective for delivering rural credit. It would be more cost-effective is small farmers were better targeted instead. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Khandker, Shahidur R. Faruqee, Rashidur R. |
| author_facet |
Khandker, Shahidur R. Faruqee, Rashidur R. |
| author_sort |
Khandker, Shahidur R. |
| title |
The Impact of Farm Credit in Pakistan |
| title_short |
The Impact of Farm Credit in Pakistan |
| title_full |
The Impact of Farm Credit in Pakistan |
| title_fullStr |
The Impact of Farm Credit in Pakistan |
| title_full_unstemmed |
The Impact of Farm Credit in Pakistan |
| title_sort |
impact of farm credit in pakistan |
| publisher |
World Bank, Washington, DC |
| publishDate |
2014 |
| url |
http://hdl.handle.net/10986/18200 |
| _version_ |
1764440017817567232 |