1) Agriculture credit has been an important part of rural development in Pakistan since the 1950s as a way to improve rural economies. 2) Studies have shown that well-functioning rural credit markets can significantly impact poverty reduction by increasing production through better use of inputs and helping smooth consumption. 3) Rural credit institutions play an important role in poverty reduction by connecting rural factor markets like credit, land, and labor markets. Credit is essential for combining resources to boost production, growth, and development.

1. Rural Credit Perspective
Lecture 15
Agriculture creditispartand parcel of all agriculture activitiestoimprovethe rural sector of Pakistan
since the 1950s. The agriculture creditprovisionwasincludedasbasiccomponenttoimprove rural
economiesinPakistan(Zubeiri,1989; Malik,et.al.,1991).
There are many studieswhich reflectedthatthe linkagesof agriculture creditto welfare enhancingand
povertyreductioninPakistan(Qureshi,etal.,1996; Malik,1999; Malikand Nazli,1999).
These studieshighlightedthat well-functioningof rural creditmarkethas significantimpactonpoverty
reduction. Thiswill notonlyincrease the productionby judicious use of inputs.Resultantly,thiswillhelp
to improve andmore efficientconsumptionsmoothing. The rural creditmarketefficiencytoreduce
povertycan be enhancedbyremovingthese bottlenecks;byreducinginstitutional hightransactioncosts
bothexplicitandimplicit,the needforbetterflow of information,arationalizationof the existing
collateral requirementsforinstitutional credit,anda amplification of the loanapplicationprocedure.
Povertyreductionisbasicallylinkedtohow rural factor marketsfunction.Rural incomesand
employmentlevel forpovertyreductionisdeterminedbythese factormarketfunctioning. Credit
(workingcapital) isextremelyimportanttocombine all the rural factormarkets.It providesthe
opportunitytocombine all the resourcesforbetterproduction,growth and development.Inthis
perspective creditisnecessaryconditionforthe well-functioningof the otherrural factormarkets.
Rural CreditInstitutions
The rural financial marketinPakistanis comprisedof twocomponents,i.e.,the formal andinformal.
The formal component included;The Zarai Tarqaiti BankLimited(ZTBL),CommercialBanks,the Federal
Banksfor Cooperatives(FBC) andotherfinancial institutionsengagedinrural lending. The informal
sourcescomposedof commissionagents,inputdealers,professional moneylendersandlandlords.The
informal sectorextends loansinthe formcash and kindforbothconsumptionandproduction.Thiswas
the basic reasonof the dominance of informal sectorinrural creditmarketinPakistan.
Thisis evidentfromthe Rural CreditSurvey1996 only22 percentof rural householdsborrowedfrom
formal sources.Borrowingfrominformal sourcesiscomparativelyeasyintermsof access, procedures
and collateral requirements.Thistranslatesintolow transactioncosts. Furthermore,unlikeinstitutional
credit;where the range of purposesforwhichcreditisavailable islimitednon-institutional creditis
available forconsumption, social ceremoniesandothernon- productivepurposes(Himayatullah,1995).
The Formal CreditMarket
Before the partitioninstitutional creditinrural areaswasmainlyprovidedas“Taccavi” loansby the
governmentandasco-operative creditbythe co-operative societies. AgriculturalDevelopmentFinance
CorporationandAgricultural Bankwere establishedin1950s to withobjective reduce the burdenon
informal sources.These weremergedtoformthe Agriculture DevelopmentBankof Pakistan(ADBP) in
1961. ZTBL emergedasthe largestinstitutional source thatismandatedtoextendlongtermcreditto

2. farmersand co-operativesocieties.Commercial Bankswere the secondmajorsource of lending.
Commercial Banksprovidedmark-upfree loanstosmall farmersandpoorhouseholdsfrom1979 to
1987. Thiswas highlycriticizedandabusedbecausethe mainbeneficiarieswerethe landlordsinstead
of small farmhouseholds.The political poweralwaysplayedadominantrole inrural creditmarket.
Volume anddisbursementof the agriculture creditisincreasingconsiderablydaybydaybutstill there is
room of improvement.
Informal CreditMarket
The main sourcesinInformal creditmarketare;friendsandrelatives, professionalmoneylenders,
landowners,commissionagentsandmerchantsandfactories. The proportionof lendingamong these
resources hasbeenchangingovertime butwithoutdisturbingthe overallshare of informal sourcesin
the creditmarket. It was depictedbythe resultsof the Rural CreditSurvey1996 that 78 percentof total
creditwas disbursedbynon-institutionallendingsources.Inthe absence of well-functioningformal
creditmarket,the informal sourcesplayedkeyroletoprovide creditrural populationof Pakistan.
Informal sectorisverycrucial in the situationwhenaccesstorural creditis difficult.These informal
sourcesare more importantthanformal sources. Accordingtothe Rural CreditSurvey,1985 friendsand
relativesconstitutedthe largestsource of non-institutional credit.Thisbehaviorwasalsoconfirmedby
the PakistanRural HouseholdSurvey(2001) that the informal loansfromfriendsandrelatives ercentfor
more recenttimes.The predominance of the informal sectorincreditmarketbecause of unconditional
and diversityof purpose forwhichthissectorlend.Informal sourcesnotonlyprovide creditfornon-
farm activitiesbutalsoforconsumptionpurposes. The Rural Financial MarketStudy1996 indicatedthat
56 percentof informal loanswere usedforconsumptionpurposes. Onthe otherhandformal lending
sourceslendmainlytoagriculture sectorwithemphasisonthe croppingsector.
Interaction withother Rural Factor Markets
The land ismostacceptable collateral forthe lendinginstitutionsinthe Pakistan.Rural laborandland
marketare interconnectedwithcreditmarket. Butthe landdistributioninPakistanisof skewednature.
Thisfact is alsoprovidingthe opportunitytolarge farmerstodistortsmall farmersanddominate the
creditmarket.Thisrequiredmuchattentionforthe well-functioningof the creditmarket.Creditalsohas
bothdirectand indirectlinkageswiththe rural labormarket.The productivityof landcanbe enhanced
by usingbetterqualityfarminputssuchasfertilizersandseedsbycombiningefficientfarmlabor.
JehangirandSampath(1999) foundthat fertilizeruse hadasignificantandpositiveimpactonthe use of
permanenthiredfarmlabor.Fertilizeruse canbe enhancedthroughthe provisionof credittosmall
farmers.Thiswouldinturnhave positive bearingonthe use of farmlabor.Variousstudiesindicate the
welfare impactof farmcrediton productivityandfarmerwelfare (Qureshi,et.al.,1996, Malik,1999,
Malikand Nazli,1999). The income inequalitymitigating effectof employmentinthe rural non-farm
sectorof PakistanwasestablishedbyAdams(1993) andErcelawn(1984). Accessto creditfornon-farm
purposesthrougha well-functioningcreditmarketwill helpprivateemploymentandmitigatepoverty
and inequality.