The Impact of Farm Credit in Pakistan
نویسندگان
چکیده
Both informal and formal loans matter in agriculture. However, formal lenders provide much more production loans than informal lenders, often at a cost (mostly loan default cost) higher than what they can recover. For example, the Agricultural Development Bank of Pakistan (ADBP), providing about 90 percent of formal loans in rural areas, incurs high loan default costs. Yet, like other governments, the Government of Pakistan supports the formal scheme on the grounds that lending to agriculture is a high risk activity because of covariate risk. As farm credit schemes are subsidized, policymakers must know if these schemes are worth supporting. Using a recent large household survey data from rural Pakistan, we have attempted to estimate the effectiveness of the ADBP as a credit delivery system. A two-stage method that takes into account endogeneity of borrowing is used to estimate credit impact. Results reveal that ADBP contributes to household welfare and that its impact is higher for small holders than for large holders, but large holders nevertheless receive the bulk of ADBP finance. The ADBP is, thus, not a cost-effective scheme in delivering rural finance. Its cost-effective can be improved by reducing its loan default cost and partially by targeting small holders in agriculture where credit yields better results. The authors are grateful to Robert Moffit, Mark Pitt and participants in a seminar in Islamabad for comments and suggestions on earlier drafts of the paper. They are also grateful to Annaya Basu, Tulika Narayan, and Hussain Samad for research and computer assistance. Views expressed in the paper are those of the authors, and do not reflect in any way views of the World Bank.
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