The Role of Formal and Informal Credit in Agriculture Sector: A Case Study of District Faisalabad, Pakistan

Khadija Akram,Muhammad Munawar Hayat,Muhammad Amjed Iqbal

doi:10.52223/jei0301214

Khadija Akram, Muhammad Munawar Hayat + Show 1 more

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https://doi.org/10.52223/jei0301214

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Abstract

The study aims to examine the role of formal and informal credit in the agriculture sector. The agriculture sector is considered the backbone of the economy of Pakistan. Credit is used as the most important source to enhance the productivity of the agriculture sector. Primary data were collected after choosing a sample of respondents of formal and informal credit users from district Faisalabad. It was observed from the literature that the disbursement of credit to farmers has a more important and effective role in agricultural output. So to check this impact the study in hand was carried out. The study also includes an exploration of the role of formal and informal credit on the productivity and profitability of farmers. The data were collected from 100 formal credit borrowers and 50 informal credit borrowers from district Faisalabad. Primary data were collected randomly through a well-designed questionnaire from farmers. Multiple regression analysis was used for the estimation of the results. This method was used to estimate the role of formal and informal credit in the agriculture sector. The results showed that annual income increased after getting the loan. The focus of the study was to investigate the role of formal and informal credit in the agriculture sector. The result showed that informal credit was more convenient in terms of timely availability of loans, less distance to travel, less time delay, and no specific securities. In this way, this study concluded that formal and informal credit has a significant impact on agricultural productivity, and the trend of agriculture credit has been gradually increased has a positive impact on income.

Highlights

This study concluded that formal and informal credit has a significant impact on agricultural productivity, and the trend of agriculture credit has been gradually increased has a positive impact on income
The coefficient value expresses that one unit increase in demand for formal credit would result in 40554 unit increases in income
The coefficient value expresses that one unit increase in demand for informal credit would result in 125701 unit increases in income

Summary

Introduction

To fulfil the credit requirements of small farmers for improvement in agricultural productivity both institutional and non-institutional sources are available in a developing economy (Chisasa and Makina, 2012). There is a positive impact of institutional financing on agricultural production (Qureshi et al, 1992) There are both formal and informal sources of credit for farmers in the agricultural system of Pakistan. Formal and informal credit markets in rural areas are playing an important role in developing countries such as Pakistan. The role of agricultural credit is very important for farmers to purchase inputs for timely usage in the field to get a high yield. In the case of formal and informal credit, farmers want to get a loan for all kinds of inputs which consist of seeds, machinery, urea, spray, and other purposes of life. The current study is aimed to observe the effect of formal and informal loans on the productivity and profitability of agriculture and to suggest the policy recommendation

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