Impact of Credit on Agriculture Production in Pakistan: A Review

Abstract

The agricultural sector holds a crucial position in Pakistan's economy, contributing 22.9% to the gross domestic product (GDP). This sector serves as a primary source of food, income, and employment, especially for the rural population, which constitutes the majority. Pakistan, ranked as the 5th most populous nation globally, has about 34.7% of its people residing in urban areas, while the rest live in rural regions, relying heavily on agriculture for sustenance. Various factors of production play pivotal roles in agriculture, and among them, credit emerges as a crucial input for enhancing crop production and augmenting the income of rural households. Access to credit is essential for implementing modern technologies and utilizing improved agricultural inputs, ultimately boosting productivity. Despite its significance, providing credit to smallholder farmers poses challenges for financial institutions. The inherent risk associated with agricultural production, including factors like seasonality, irregular cash flows, and the vulnerability to natural disasters and crop diseases, makes it a less attractive investment for financial institutions. Limited access to credit is primarily attributed to imperfect financial markets, where information asymmetry results in credit rationing. Many farmers, particularly those in remote areas, face difficulties in accessing credit institutes. Institutional factors such as corruption, regulatory quality, government effectiveness, political stability, and the rule of law further hinder farmers' ability to secure credit. Consequently, ensuring easy access to credit facilities for the farming community is imperative for addressing these challenges. For Pakistan and other developing nations, promoting agricultural productivity requires tackling these issues and facilitating seamless access to credit for farmers. By addressing the impediments in the financial system and enhancing institutional factors, nations can foster an environment where farmers can readily access credit, thereby improving productivity and ensuring food security.