Analyzing the Impact of Structural Change in Iranian Agricultural Credit System

Replacement of the traditional interest based credit system with an Islamic credit system was one of the fundamental changes in Iran since 1979. The Islamic credit system, offers the prospect of risk sharing between the borrower and the lender. Small farmers are likely to be risk averse and they are reluctant to go heavily into debt in order to finance investments in new technology and capital intensive methods of production which they perceive to be risky. Farmer's decision making behaviour with regard to risk under the Islamic and interest based credit systems are explored with the aid of a simple conceptual model. Analysis of attitudinal data suggests that the majority of small farmers prefer credit provided under the Islamic credit system. Farmers' preferences for taking out loans from an Islamic credit system were found to be related to a number of factors. Risk sharing and religious acceptability of the profit and loss sharing loans over the interest based loans were two significant reasons.