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CHAPTER 1

INTRODUCTION

The agriculture sector has played a vital role in Pakistan’s economy since independence as it
contributes 18.9% to the GDP as of 2018 according to the Economic Survey of Pakistan. The
contribution of the agricultural sector to foreign exchange earnings is also significant. It
provides a stimulus for the growth of other important sectors. In Pakistan’s history, the
contribution of agriculture output to GDP was 60% in 1949 to 1950 which was reduced to 30%
in 1978 to 1979 and further reduced to 20% in 2006 to 2007. According to this 6th Population
and Housing Census of Pakistan 2017, Pakistan population is increasing at a 2.4 percent rate
per year (Economic Survey of Pakistan, 2018). This growing population is also putting upward
pressure on the demand for agricultural products.

Figure 1. Share of Agriculture Sector in GDP

30
AGRICULTURE SHARE TO GDP (%)

25

20

15

10

0
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
YEAR

Sources: Pakistan Bureau of Statistics

The agricultural sector has grown at an average rate of 4.1% per year since 2002- 2003 and has
experienced variations. In underdeveloped countries, the main contributor to economic growth
is the agricultural sector. Agriculture sector does not only provide fuel for the industrial sector,
but it also provides employment opportunities to a large proportion of the population since it
is considered as the main occupation for working population in Pakistan is (The Global
Economy 2017) 42.02% of the population of Pakistan is engaged directly in agriculture.
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Figure 2. Employment in Agriculture

Source: The Global Economy

Due to problems that exist in Pakistan such as smallholdings, a traditional method of farming,
poor irrigation facilities and misuse of modern farm technology agriculture output in Pakistan
remained low. Due to these problems, small farmers did not progress in the agricultural sector
and hence, this led to lower saving levels. Despite its immense significance, the agriculture
sector remained neglected by the government of Pakistan until recently and faced several
problems such as burdens of costly fertilizers, expensive seeds and lack of water availability.
An economy such as Pakistan who fed on agriculture should have regulated the prices of
fertilizers and seeds for the farmers of Pakistan which could be bought within the capacity of
the farmers.

The current government of Pakistan has taken various initiatives focusing on the agricultural
sector which includes crop diversification, efficient use of water and promoting high value
crops including biotechnology, reducing mark-up rates, agriculture credit enhancement,
subsidized prices of fertilizers and seeds and availability of electricity at cheaper rates This
enhancement increased the growth of the agriculture sector by 3.81 percent which was higher
than its target growth rate of 3.5% during 2017-2018 (Economic Survey of Pakistan, 2018).
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1.1 Importance of Institutional Credit

Small farmers, large farmers and non-farm population in the agricultural sector all suffer from
financial constraints. Whereas, credit plays a vital role in increasing agricultural productivity
by providing farmers with loans to purchase the required machinery and to carry out farm
operations Therefore, it is about time that credit agencies intervene so that small farmer can
improve their irrigation methods and farming techniques and transition from traditional to
modern technology. Since after the green revolution era there have been changes in crop
production methods and technological changes, the need for credit has increased for crop
production inputs and farm investment. The agricultural sector requires capital just like any
other business to carry out farm operations. Temporary availability of credit enables farmers
to purchase modern technologies, better-quality of seeds and fertilizers. Therefore, agricultural
credit can serve as an essential tool for modernization in agriculture. In the past few decades,
the need for agricultural credit has grown increasingly due to a rise in the use of fertilizers high-
yield seeds, mechanization and the rise in prices of agricultural raw material.

In Pakistan, there are two sources of credit: informal and formal. Informal credit includes
commission agents, friends, relatives, landlords, employers, traders, and any private money
lenders. However, informal credit is neither reliable nor adequate for the needs of the farmers.
The formal credit sources are financial institutions like Zarai Taraqyati bank limited, Punjab
Cooperative Bank of Pakistan, commercial banks and cooperatives. It is an important source
of credit to agricultural farmers in Pakistan since it provides short term, medium term and long
term loans for farm and non-farm activities. In 1961 agriculture developed Bank of Pakistan
was established to cater to the needs of people involved in agricultural activities. Under the
instructions of Pakistan’s government agricultural development bank introduced special loan
schemes, supervised the agricultural credit system and extended 5 loan windows. These loan
windows provided credit for development, credit for production, credit for cottage industry,
credit for Agri-business, off-farm income generating loans. The bank's policy for giving
concessions on agricultural loans proved to be successful and it allowed farmers to buy modern
farm inputs and machinery. Since then Bank of agriculture development was the main source
of credit for farmers but over the years many commercial banks have also extended their loans
for agricultural purposes. Agricultural credit can be provided to small farmers in the form of
subsidies on the prices of seeds, fertilizers, pesticides, technologies, tractors, and harvesters.
Hence, these facilities can not only improve the agriculture sector but can also add to the GDP
of Pakistan.
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Over the years farming has become complicated and requires proper planning to yield output.
Agriculture no longer serves as a mode of life as it has transitioned into commercial farming.
This transition requires credit. Although there has been an increase in the agricultural loans,
the credit only is available to a few rural farmers and formal sources prefer to provide credit to
only a small proportion of farmers.

Figure 3. Total Credit Disbursed

800,000.00

700,000.00

600,000.00
Million rupees

500,000.00

400,000.00

300,000.00

200,000.00

100,000.00

0.00
1986198819901992199419961998200020022004200620082010201220142016
Year

Source: Economic Survey of Pakistan

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CHAPTER 2

LITERATURE REVIEW

Chandio et al. (2018) studied the impact of agriculture credit on wheat productivity of small
farmers in Sindh, Pakistan. For this study, cross-sectional data were collected from 18 different
villages of 3 districts of Shikarpur, Sukkur and Shaheed Benazirabad in 2016. Primary data
was collected from 180 wheat growing farmers. The data was analyzed by Cobb Douglas
production function and instrumental variables technique. The study used the production of
wheat as a dependent variable whereas prices of agriculture inputs, land preparation, fertilizers,
plant protection, irrigation, labor, and credit were used as independent variables. The results
showed that agricultural credit had a positive and significant impact on crop productivity.
Moreover, short-term loans had a stronger impact on wheat productivity than long term loans.

In another research Chandio et al. (2016) explored the affects of formal credit on agricultural
output in Pakistan. The study used secondary data from 1996 to 2015 which was collected from
the Economic Survey of Pakistan. The stationarity of data was analyzed through the
Augmented Dickey-Fuller test. Johansen cointegration method was applied to test for the
existence of a long-term relationship between formal credit and agricultural output whereas the
method of OLS was used to estimate the effect institutional credit on agricultural output. The
results showed that the impact of credit was positive as well as significant. It was suggested to
make the process of provision of credit to farmers easy and flexible through financial
institutions. Furthermore, the government of Pakistan should pay more attention to small
farmers by launching credit schemes on low-interest rates.

Hussain et al. (2015) investigated the impact of institutional credit on agricultural production
in Pakistan. For the analysis time series data from 1973-2010 of Pakistan was used which was
collected from international financial statistics (IFS). Agricultural GDP was used as the
dependent variable whereas labor force, agriculture credit, number of tractors and total
cultivated land were used as independent variables. To check the stationarity of the data, the
augmented Dickey-Fuller test and Phillips person tests were used. Johansens cointegration
method was also used to check the long run results. The short term results were analyzed
through an error correlation model. The results showed that institution credit plays a crucial
role in the advancement of the agricultural sector and improves the quality of life for small
farmers. The empirical analysis showed the significance of institutional credit. The trend of
agriculture credit has increased over the years and has a positive impact on agricultural GDP.
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Whereas, labor force and cultivated land did not have a significant impact on agricultural
production.

Ahmed et al. (2013) explored the impact of improved seeds on small farmers productivity
income and livelihood in Bara locality Sudan. The data of 60 households were randomly
selected through a field survey in 2011 cropping seasons. Multi-stage random sample technique
was used to collect the data. The data was analyzed through a linear programming model,
partial crop budgeting, descriptive analysis, dominance and marginal and sensitivity analysis.
The results showed that small farmers can benefit from improved varieties of seeds and crop
productivity tends to increase with improved quality of seeds.

Saleem and Jan (2011) analyzed the impact of agricultural credit on agricultural productivity.
Secondary data was collected from 1990 -2008 from the statistical office for crop production
in Dera Ismail Khan and the data was analyzed using SPSS. The contribution of agricultural
credit was evaluated using the linear regression model. Agricultural GDP was used as the
dependent variable whereas credit for seeds, tube wells, tractors and credit for other agricultural
purposes were used as independent variables. The results showed strong multicollinearity
among the independent variables and concluded that a 1 percent increase in institution credit
for seeds, fertilizers, and pesticides increased the agricultural GDP by 1.5%. Whereas the
remaining independent variables of agricultural credit for tube wells, tractors, and credit for
other purposes had no substantial impact on GDP.

Ayaz et al. (2011) inspected the causes of inefficiency in the agriculture sector in the district
of Faisalabad. The cross-sectional data of 300 farmers for the year 2009 was collected through
detailed questionnaires. Envelopment analysis technique was used to analyze the data and Tobit
regression analysis was used on farm specific variables. Efficiency scores were used as the
dependent variable whereas operational land holding, farm experience, education level of the
farmer, number of family members, herd size, a dummy of credit used for farm, number of
cultivation practices and number of sprays for plant protection were used as independent
variables. The results showed that farming experience, access to farm credit, education, herd
size and the number of cultivation practices had a positive and significant impact on the
efficiency of the farmer.

Ahmad (2011) investigated the role of institutional credit to the agricultural sector in Pakistan.
The time-series data of financial years 1972-2008 was taken from the Ministry of Finance
Division, Statistical Year Book of Pakistan, Agriculture Statistics of Pakistan and World Bank.
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Agricultural output was used as the dependent variable whereas cropped land, labor force,
credit, water availability and a dummy variable for bad years were used as the independent
variables. Correlogram was used to check the stationarity of the data whereas from modern
techniques Augmented Dicky Fuller test (ADF) and Phillips Perron test (PP) were used to
analyze the data. The results showed that the credit had a positive impact on agricultural output
and the coefficient of cropped land was highly significant.

Sial, Awan, and Waqas (2010) investigated the role played by institutional credit on
agricultural production. For this study time series data from 1972-2008 was collected. The data
was collected from the different publication of Government of Pakistan and credit institutions
including ZTBL. Cobb Douglas production function was estimated using OLS and variables
were converted to per cultivated hectare. Agriculture production was used as the dependent
variable whereas credit, water availability, cropping intensity, and the agricultural labor force
were used as independent variables. The results showed that all the independent variables had
an impact on agricultural output. After applying the estimation techniques it was found that a
1% increase in institutional credit increased agricultural production by 16%.

Das, Senapati, and John (2009) examined the direct and indirect impact of agricultural credit
on agriculture production in India. The data of 20 major states of India was included from the
year 2001-2006. The data was collected from the central statistical organization, ministry of
the statistics and programme implementation, Government of India. Per capita of agricultural
output was used as the dependent variable whereas per capita total number of agriculture credit,
total agriculture area, deviation from normal rain, per capita agriculture direct credit, per capital
agriculture indirect credit, per capita of direct credit per one lakh population and per capita
indirect credit per one lakh pollution were used as independent variables. Dynamic panel data
analysis and Alleno-bond regression was used. The results showed that there was a positive
and significant impact on the agricultural output of institutional credit.

Iqbal, Ahmad, and Abbas (2003) analyzed the main factors contributing to agriculture
production in Pakistan The data was collected from government and ZTBL/ADBP records of
financial years 1971 – 2002. Agriculture GDP was used as the dependent variable whereas
water availability, labor force, cropped area, and agricultural credit were used as independent
variables. In order to analyze the data, the Cobb Douglas production function was used. The
results showed strong multicollinearity between independent variables. The relationship
between agriculture GDP and institutional credit was significant and positive.
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OBJECTIVE
To examine the role of institutional credit on agricultural production in Pakistan.

PROBLEM STATEMENT
What is the impact of institutional credit on agricultural output in Pakistan?

HYPOTHESIS FORMULATION
The null and alternative hypothesis of this research study is:

H0: There is no relationship between institutional credit, water availability, fertilizer take-off,
seeds, cropped land and agricultural output.
H1: There is a relationship between institutional credit, water availability, fertilizer take-off,
seeds , cropped land and agricultural output.
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RATIONALE
The agriculture sector plays a crucial role in the economic growth of Pakistan since Pakistan is
an Agro-based economy and provides fuel to the industrial sector and serves as a major source
of employment to approximately 40% of the population. Hence, improvements in the
agricultural sector should be the utmost priority. In order to facilitate the farmers, institutional
credit should be provided to enable farmers to buy modern farm technologies and improved
varieties of seeds and fertilizers which can be done by providing flexible loans to the farmers.
Credit plays an indirect role in enhancing agricultural growth since it provides the means for
farmers to improve their farming methods. The purpose of this study is to evaluate the impact
of institutional credit on agricultural output. Additionally, the variables of water availability,
fertilizer take off, cropped land and improved seeds have also been included in the study.
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THEORETICAL FRAMEWORK

Dependent Variable Independent Variables

Institutional Credit (Million RS)

Water Availability
(Million Acre Feet)

Agricultural Output Fertilizer off-take

(% of GDP) (000 nutrient tonnes)

Cropped Area
(Million Hectares)

Improved Seed Distribution

(000 tonnes)
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CHAPTER 3

METHODOLOGY

Data Type

For this study time- series data is collected to analyze the impact of credit of agricultural
output.

Data Source

For all the variables the data has been collected from the Economic Survey of Pakistan
(2017-2018).

Time Frame

Secondary data for the time period 1991-2018 has been collected.

Variables

Dependent Variable:

• Agriculture GDP

This refers to the share of the agricultural sector to the total GDP of Pakistan. This includes the
output of all the sectors including crops, forestry, hunting, fishing, and livestock production
(World Bank).

Independent Variables:

• Institutional Credit

This is refers to the loans provided to farmers for agricultural purposes through financial
institutions. (Sarwar et al, 1985)

• Water Availability

This refers to the water available for agriculture sector for irrigation purposes. (Ahmad, 2011).

• Fertilizer off-take

This refers to the consumption of fertilizers by farmers. This is an important source of

nutrients for crops and helps to boost the yields. (Chandio, 2016)
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• Cropped Area

The land under crop plantation annually is considered as cropped land.

• Improved Seed Distribution

Agricultural production relies largely on the distribution of improved varieties of seeds for
crop yields. (Ahmad, 2011)
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CONCLUSION

This study shows that institutional credit has a positive and significant impact on agricultural
output when used indirectly. There is no direct impact of credit on agricultural output, but since
it helps to buy inputs for the agriculture sector such as fertilizer, seeds and machinery, it has an
indirect role which impacts positively on agricultural productivity. The disbursement of
institution credit has been increased over the years. There has been a shift from credit used for
tube wells and tractors to credit being used to buy seeds and fertilizers. Availability of
irrigation water, cropland, improved varieties of seeds also contributes to the agricultural GDP.

Commercial banks and other financial institutions should extend the agricultural credit to a
large number of farmers especially the small farmers. These institutions should be required to
provide loans to farmers in case of crop failure. A crop insurance scheme should also be
launched to ensure the lands of farmers against drought, hailstorm, pest attacks, thunderstorms,
and other natural hazards. Additionally, the agriculture credit card scheme should be launched
with substantial credit limits based on the productivity of farmers while their lands can be used
as collateral.
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References:

• Saleem, M.S., & Jan, A.F. (2011). The Impact of Agricultural Credit on Agricultural
Productivity in Dera Ismail Khan (District) Khyber Pakhtonkhawa Pakistan. European
Journal of Business and Management,2 (3).
• Das, A., Senapati, M., & John, J. (2009). Impact of Agricultural Credit on Agriculture
Production: An Empirical Analysis in India. Reserve Bank of India Occasional Papers,
30(2).
• Hussain, A., Ali, M., Bilal, M., & Nawaz, I. (2015). Impact of Insitutional Credit on
Agriculture Production in Pakistan: A Time Series Analysis. World Applied Sciences
Journal, 33(7), 1118-1124.
• Ayaz, S., Anwar, S., Sial, H.M., & Hussain, Z. (2011). Role of Agricultural Credit on
Production Efficiency of Farming Sector in Pakistan- A Data Envelopment Analysis.
Pakistan Journal of Life and Social Sciences,9(1), 38-44.
• Ahmed, B. E. E., Maroud, E.M., Elkhidir, E. E., & Mahmoud, E. T. (2013). Impact of
Improved Seeds on Small Farmers’ Productivity, Income and Livelihood in Bara
Locality of North Kordofan State, Sudan. American International Journal of
Contemporary Research, 3(11).
• Iqbal, M., Ahmad, M., & Abbas, K. (2003). The Impact of Institutional Credit on
Agricultural Production in Pakistan. The Pakistan Development Review,42(4), 469-485.
• Ahmad, N. (2011). Impact of Institutional Credit on Agricultural Output: A Case Study
of Pakistan. Theoretical and Applied Economics, 16(10), 99-120.
• Chandio, A.A., Jiang, Y., Wei, F., & Guangshun, X.(2018). Effects of agricultural
credit on wheat productivity of small farms in Sindh, Pakistan. Agricultural Finance
Review, 78(5), 592-610.
• Chandio, A.A., Yuansheng, J., Sahito, M. G. J., & Larik, A. S. (2016). Impact of formal
credit on agricultural output: Evidence from Pakistan. African Journal of Business
Management, 10(8), 162-168.
• Sial, H. M, Awan, S. M., & Waqas, M. (2011). Role of Institutional Credit on
Agricultural Production: A Time Series Analysis of Pakistan. International Journal of
Economics and Finance, 3(2).

• Ministry of Finance Division (2018). Economic Survey of Pakistan, Federal Bureau of

Statistics, Finance Division, Islamabad.
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APPENDIX
Water Cropped Fertilizer Improved
Agriculture Output Credit Disbursed Wvailability Area Offtake Seed
t
(% of GDP) (rs.million) (million (million (000 Distribution
acre feet) hectares) N/T) (000 tons)
1991 25.8 14,221.00 119.62 21.82 1892.88 83.27
1992 26.3 13,821.00 122.05 21.72 1883.92 65.93
1993 24.4 15,440.00 124.7 22.44 2147.61 63.93
1994 24.6 15,386.00 128.01 21.87 2146.77 63.27
1995 24.9 21,965.00 129.65 22.14 2183.06 76.87
1996 26.1 19,102.00 130 22.59 2515 145.1
1997 25.7 19,515.00 85 22.73 2413 137.67
1998 25.9 32,974.00 132.05 23.04 2646.05 130.5
1999 25.6 42,847.00 132 23.06 2583.38 167.38
2000 25.9 39,688.00 133.78 22.74 2833.42 194.3
2001 24.9 44,789.82 134.77 22.04 2693.96 193.8
2002 24.1 52,314.49 134.63 22.12 2583.86 191.57
2003 24 58,915.27 134.48 21.85 3019.76 172.07
2004 22.9 73,445.86 134.78 22.94 3222 178.77
2005 22.4 108,732.91 135.68 22.78 3694.04 218.12
2006 22.5 137,474.40 137.38 23.13 3804.19 226.07
2007 21.9 168,830.46 137.8 23.56 3672 218.6
2008 21.3 211,560.66 138 23.85 3581.22 264.67
2009 21.8 233,101.31 131.51 24.12 3711.33 314.63
2010 21.2 248,120.48 133.7 23.87 4360.49 312.63
2011 21.7 263,022.40 137.16 22.72 3932.8 331.02
2012 21.6 293,849.88 135.86 22.5 3861 346.38
2013 21.4 336,246.52 137.51 22.56 3621.2 327.08
2014 21.1 391,352.98 138.71 22.16 4089 389.23
2015 20.71 515,874.78 138.59 23.27 4316 306.94
2016 19.84 598,286.84 133 23.17 3699.3 473.15
2017 19.22 704,488.20 132.7 23.17 5040.1 308.09
2018 18.86 972,605.75 133.4 23.17 4763.4 398.73
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