The Impact of Farm Credit in Pakistan

This document serves to provide econometric evidence on the impact of farm credit on household welfare and the role of the state-owned agricultural development bank in Pakistan. Using a recent large household survey data from rural Pakistan, the authors attempt to estimate the effectiveness of the Agricultural Development Bank of Pakistan (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;
• Its impact is higher for small holders than for large holders;
• Large holders nevertheless receive the bulk of ADBP finance.

Overall the authors conclude that the ADBP is not cost-effective in delivering rural finance. However, they suggest that cost-effectiveness can be improved by:

• Reducing loan default cost;
• Targeting small holders in agriculture where credit yields better results;
• Relaxing stringent collateral requirements;
• Extending the outreach so that formal lenders, such as ADBP, can reach the poor and the asset-less.

Finally the authors suggest that there is little doubt that credit channelled in the right direction can have significant anti-poverty effects, and that broadening the outreach of formal lending institutions constitutes a step in the right direction.