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The impact of farm credit in Pakistan

  • Khandker, Shahidur R.
  • Faruqee, Rashidur R.

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.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2653.

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Date of creation: 01 Aug 2001
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Handle: RePEc:wbk:wbrwps:2653
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  1. Aleem, Irfan, 1990. "Imperfect Information, Screening, and the Costs of Informal Lending: A Study of a Rural Credit Market in Pakistan," World Bank Economic Review, World Bank Group, vol. 4(3), pages 329-49, September.
  2. Sohail J. Malik & Mohammad Mushtaq & Manzoor A. Gill, 1991. "The Role of Institutional Credit in the Agricultural Development of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 30(4), pages 1039-1048.
  3. Feder, Gershon & Lau, Lawrence J. & Lin, Justin Y. & Xiaopeng Luo, 1991. "Credit's effect on productivity in Chinese agriculture : a microeconomic model of disequilibrium," Policy Research Working Paper Series 571, The World Bank.
  4. Yaron, J., 1992. "Successful Rural Finance Institutions," World Bank - Discussion Papers 150, World Bank.
  5. Hoff, Karla & Stiglitz, Joseph E, 1990. "Imperfect Information and Rural Credit Markets--Puzzles and Policy Perspectives," World Bank Economic Review, World Bank Group, vol. 4(3), pages 235-50, September.
  6. Mark M. Pitt & Shahidur R. Khandker, 1998. "The Impact of Group-Based Credit Programs on Poor Households in Bangladesh: Does the Gender of Participants Matter?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 958-996, October.
  7. Binswanger, Hans & Khandker, Shahidur, 1992. "The impact of formal finance on the rural economy of India," Policy Research Working Paper Series 949, The World Bank.
  8. Udry, Christopher, 1990. "Credit Markets in Northern Nigeria: Credit as Insurance in a Rural Economy," World Bank Economic Review, World Bank Group, vol. 4(3), pages 251-69, September.
  9. Habib A. Zuberi, 1989. "Production Function, Institutional Credit and Agricultural Development in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 28(1), pages 43-56.
  10. Carter, Michael R., 1988. "Equilibrium credit rationing of small farm agriculture," Journal of Development Economics, Elsevier, vol. 28(1), pages 83-103, February.
  11. Pitt, M.M. & Khandker, S.R., 1996. "Household and Intrahousehold Impact of the Grameen Bank and Similar Targeted Credit Programs in Bangladesh," World Bank - Discussion Papers 320, World Bank.
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