http://worldcat.org/entity/work/id/6716626

The impact of farm credit in Pakistan

August 2001 The Agricultural Development Bank of Pakistan (ADBP), which provides most formal loans in Pakistan's rural areas, lends to largeholders far more than to smallholders, although the impact of credit is greater for the smallholders. Targeting credit to smallholders would make ADBP's credit scheme more cost-effective. To reach poor farmers and farmers without assets--in other words, to reduce poverty--stringent collateral requirements should be relaxed and outreach should be broadened. 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, Khandker and Faruqee 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 4 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 the 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 if small farmers were better targeted instead. This paper--a product of Rural Development, Development Research Group--is part of a larger effort in the group to understand the cost-effectiveness of alternative credit delivery systems and their impact on rural poverty. The authors may be contacted at [email protected] or rfaruqee@worldbank. org.

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