Contract Farming, Loan Repayment Ability and Access to Credit of Small Farmers in Pakistan

Abstract

While small farmers need credit to produce high value commercial crops, asymmetric information about the farmers, among other factors, often limits their access to the rural credit markets. In this study we investigate whether access to better crop market, in the form of a written contract with agro-processing companies for sale of produce, could improve farmers' ability to repay their loans. We also see if the contract farmers have better access to credit in the credit market. Using instrumental variable approach, we find that contract farmers pay back their loan more quickly as compared to non-contract farmers. However, we do not find evidence that the contract farmers have better access to credit in the credit market.