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Sarhad J. Agric. Vol.24, No.4, 2008

IMPACT OF AGRICULTURAL CREDIT ON PRODUCTIVITY AND INCOME OF FARMERS IN MOUNTAINOUS AGRICULTURE IN NORTHERN : A CASE STUDY OF SELECTED VILLAGES IN DISTRICT CHITRAL

MIR KALAN SHAH*, HUMAYUN KHAN*, JEHANZEB** and ZALAKAT KHAN**

* Institute of Development Studies, NWFP Agricultural University Peshawar – Pakistan ** Department of Economics, University of Peshawar, Peshawar – Pakistan

ABSTRACT Finance is considered as the basic ingredient for each and every economic activity including agriculture. Especially in the economy where agriculture is subsistence this problem is very severe. Therefore the responsibility of the state is to support this sector. For this purpose the government extends institutional credit to those who can not afford to fully utilize the available technology. In our case the main source of institutional credit was Zari Taraqiati Bank Ltd (ZTBL). Aim of the present research was to study the impact of credit on farm productivity and income of the sample farmers in a backward District i.e. Chitral, of Northern Pakistan. For this purpose data were collected from both borrowers and non borrowers from selected villages in the district of Chitral during the year 2007. The findings show positive relationship between farm productivity and agricultural credit. Similar relationship was found with income of the sample farmers. This relationship could be attributed to the timely availability and application of the required inputs due to obtaining of the loan from ZTBL. However, complaint about the interest rate charged and the procedure for obtaining this credit ware also recorded. In the light of these findings it is recommended to review interest rate and further simplify the procedure for obtaining credit advanced by ZTBL. Key Words: Agricultural credit, Chitral, Farm productivity, Farm income

Citation: Shah, M.K., H. Khan, Jehanzeb and Z. Khan. 2008. Impact of agricultural credit on farm productivity and income of farmers in mountaneous agriculture in Northern Pakistan (A case study of selected villages in Chitral). Sarhad J. Agric. 24(4): 713-718.

INTRODUCTION Agriculture is the most important sector of the Pakistan’s economy. This sector provides employment to 44.8 % of the total labors force and contributes 22 % to Gross Domestic Product. About 70 % of total population of the country lives in the rural areas and agriculture is main source of their livelihood. This sector is also the largest source of foreign exchange earning. (Economic survey 2007) Due to its importance, the gives high priority to the development of this sector. Main purpose of agricultural policy is not only to increase the crop production in the country but also to increase export capacity of this sector.

Agricultural development requires timely and adequate supplies of essential farm inputs. Investment capacity of majority of our farmers is low as they are poor and they can not afford to meet increased demand for the purchase of improved seeds, recommended dose of fertilizer, hiring farm machinery etc; so lack of finance is one of the main reasons for low productivity in our agriculture. A number of studies show that farmers’ yields of various crops were higher for borrowers than non borrowers (Irfan and Nazi, 1999; Khan, 1981; Mukhtar, 1999; Qureshi and Shah, 1992; Gul and Khan, 1993; Idress and Ibrahim, 1993; Amir, 1999; Coleman and Brett, 1999; Anil and Bhumall, 2000; Rajagopalan, 2000; Arif, 2001; Rehman, 2003; Dawar, 2003). All these studies recommend that credit is one of the important inputs to meet the cash requirements of the farmers and play the role of a bridge leading from subsistence to cash economy and eventually to invisible surplus.

There are two types of credit advanced to the farmers in Pakistan i.e. institutional and non institutional. In early main sources of agriculture credit were relatives and friends, landlords, shopkeeper’s commission agents. It is reveled that 83.9 % loan was provided by informal sources (Akhtar, 1886). The credit was advanced on high interest rates on the condition that the borrower would sell their output to the lender. In this way the lender was benefited in two ways. One, by charging higher interest rate on these loans, and second, by purchasing the farmers’ output at comparatively lower prices. To avoid exploitation of poor farmers the government extended institutional credit facility through Commercial banks, Taqavi loans, cooperatives societies and Zari Mir Kalan Shah et al. Impact of agricultural credit on farm productivity and income… 714

Taraqiati Bank Ltd (ZTBL) 1. ZTBL is considered one of the most important institutional sources of credit for agriculture in Pakistan.

ZTBL advances, short, medium and long term loans to the growers. Short term loans are given for raising, processing, and marketing of crops. Medium loans are provided for the purchase of farm implements, leveling of land and setting up of agro based industries. Long term loans are provided for the purchase of farm machinery, installation of tube wells, construction of warehouses, etc. ZTBL has disbursed short term, medium term and long term loan facilities to all the categories of farmers. The volume of short term loan increased from Rs.2498.37 million to Rs. 51635.53 million, medium from Rs.1184.90 million to Rs.1373.82 million. In contrast to this long term loan decreased from Rs.4535.12 million to Rs. 3222.87 million during the period 1990/91 to 2006-2007. The same pattern was found in NWFP where during the same period the short and medium term loan increased from Rs.2331.01 million to Rs.3381.32 million and Rs.177.14 million to Rs.279.12 million respectively. The same trend of declining was observed in the long term loan for NWFP where this loan decreased from Rs.215.94million to Rs.129.52 million. The purpose wise loan was highest for fertilizer followed by pesticides. The amount of loan increased from Rs.1060.5 million and Rs.699 million to Rs.24628.8million and Rs.9748.9 millions from 1990-91 to 2006-2007 respectively. In NWFP highest credit was advanced for the purchase of fertilizer followed by dairy farming. The lowest amount of credit was advanced for fisheries in Pakistan as well as in NWFP (Agricultural Statistics of Pakistan, 2008). Like other parts of the country ZTBL also advances loan to the farmers in district Chitral 2. This research is an effort in this direction to study the effect of the institutional credit advanced by ZTBL) in a remote district of NWFP i.e. Chitral. For this purpose the following objectives have been designed.

Objectives of the Study i. To study the impact of agricultural credit on farm productivity and income of farmers in the research area. ii. To examine the constraints faced by farmers in obtaining agricultural credit. iii. To suggest policy measures in the light of the study findings.

MATERIALS AND METHODS ZTBL provides different types of loans to the farmers throughout . Farmers who had obtained credit from ZTBL in Tehsil Torkhow, District Chitral of the NWFP was universe of this study. Area wise District Chitral is the largest District in NWFP. There are many villages in this district where the ZTBL has advanced agriculture credit. List of all those villages was obtained from the ZTBL offices in Chitral. Form this list three villages namely Khot, Rich and Shagram were purposively selected where the number of borrowers was large.

The second stage was to select the sample size. For this purpose a list of borrowers in each village was obtained from the concerned ZTBL office. A total of 56 respondents (60 %) of the borrowers of ZTBL were selected by simple random sampling method from the list obtained. The sample was proportionately distributed among the three selected villages as per below formula. In order to measure the effect of ZTBL credit on agriculture an equal number of non-borrowers (56 respondents) were also taken from the same villages. In this way 112 respondents (56 each from borrowers and non-borrowers) were sleeted3.

ni = (N i/N)*n

th Where n i is the sample in ith village, N i is the population of beneficiary households in i village, n is sample size and N is the total population of borrowers in all sample villages. The distribution of total and sample households is given in Table I.

1 Zari Taraqiati Bank Ltd ( ZTBL) was established in 1961 by merger of Agricultural Development Finance Corporation (ADFC) and the Agricultural Bank of Pakistan (ABP). In 2002, the Agricultural Development Bank converted in to public company and renamed as Zari Taraqiati Bank Ltd. 2 Chitral is situated on the Northern –most boarder of Pakistan, having a common boundary with Afghanistan on the North and West, with the northern area of Pakistan on the East and with Dir and Swat districts towards South. Agriculture is the mainstay of the people. The total cultivated area of the district is 18132.18 hectors which is 18.78 percent of the total reported area. The main crops are , , , , millet and subsidiary crops are fruits, potatoes, tobacco and fodder crops. The main livestock bred in the district include cattle, sheep and goat. 3 Data were collected in the summer during the year 2007.

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Table I. Sample respondents in the study area Village Borrowers Sample households (non- Total Total No. of Sample Borrowers) households households Khot 30 18 18 36 Rech 28 17 17 34 Shagram 35 21 21 42 Total 93 56 56 112

The data was analyzed with the help of t-test using SPSS computer soft wear. Simple data analysis including frequency distribution, cross-tabulation, mean, %ages and averages were also calculated. In order to see the difference between sample borrowers and non borrowers’ performance paired sample test as given in Walpole (1982) was also used.

(X1-X2) –d0 t = 2 2 (S 1 /n1) + (S 2/n 2)

Where, x1 = mean value for borrowers x2 = mean value for non-borrowers d0 = mean of the difference between paired observation n1 and n 2 = sample size of borrowers and non-borrowers, respectively 2 s1 = sub sample variance

RESULTS AND DISCUSSION Socio Economic Characteristics of the Sample Farmers Before going into detail results it is important to give a bird eye view about the socio economic characteristics of sample respondents. In this regards the data about the main features including age, literacy status, and occupational distribution, tenural status, size of holdings, family size, sources of credit for farming practices, and sources of income of the respondents are presented in Table II. The socio economic characteristics give a gloomy picture of the project area. With the exception of the literacy status which is very above the national level the rest of the indicators confirm the poor socio economic status of the study area.

Table II. Socio economic characteristics of the sample farmers S. No. Description %age distribution 30 to 39 62.40 Age Group (years) 40 to 50 30.60 50 and above 07.00 Family Size Average Persons/HH 6.64 Literacy Status i) Literate 92.00 ii). Illiterate 08.00 Occupational Distribution i). Farming 30.00 ii.) Both farm and off farm 70.00 i). Owner 75.00 Tenural Status ii). Owner-cum-tenant) 25.00 iii). Pure tenant 00.00 Main Source of Income i). Farm 30.00 ii). Both farm and off farm 70.00 Farm Size (Acres) Average 1.05

By looking into the average farm size one can observe that farmers are below subsistence level. Therefore they must supplement their income from non farm sources. Moreover due to mono crop farming system it is not possible for farmers to purely rely on farming for lively hood. Those who have reported solely dependence on farming are usually supported by their friends and relatives and other co villagers.

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Types of Loan Obtained by Sample Respondents As mentioned earlier that ZTBL provides loans to the farmers on short, medium and long term basis. As evident from Table III that majority of the farmers have obtained loan for short term. In terms of %age it was 57.4 %. The medium term loan accounted for 37.5 % and long term loan was only 7.1%. It seems that major share of the loan had gone for production purpose. The reason for this type of response is due the fact in this area more than 97 % of the farmers have subsistence holdings and very poor economic background. They require production credit for short/medium term to run the farm business. However, it is worth mentioning here that those having large had obtained long term credit for development purposes. Our findings are similar to the findings of Amir (1999), Arif (2001), and Redhman (2003), who report that majority of farmers in NWFP are subsistence farmers having small land holdings and they need production credit.

Table III. Term-wise loan obtained by sample respondents Village Short term Medium term Long term Khot 7 10 1 Rech 5 11 1 Shagram 9 10 2 Total 21 31 4 %age 37.5 55.4 7.1 Source: Survey

Amount of Loan Obtained by Sample Respondents The data in Table IV shows that majority (35.72 %) of the respondents obtained credit in the range of Rs. 40,001-50,000 and 33.92 % obtained loan in the range of Rs. 50,001-80,000. Other 14.28 %, 10.72 % and 5.36 % borrowers have obtained loan to the tune of Rs.800,001-100,000, Rs.40,000 and more than Rs.1,00,000 respectively. The findings show that most of the borrowers have obtained loan less than Rs. 80,000. By looking at the data on the amount obtained by the borrowers it seems that majority of the respondents have small landholders who need small amount of loan mainly for production purposes.

Table IV. Amount of loan obtained by sample respondents Loan amount Khot Rech Shagram Total (Rs.) No. % No. % No. % No. % Upto 40000 2 11.11 2 11.76 2 9.52 6 10.72 40001-50000 3 16.66 9 52.54 8 38.09 20 35.72 50001-80000 9 50.00 3 17.64 7 33.33 19 33.92 80001-100000 3 16.66 2 11.76 3 14.28 8 14.28 > 100000 1 5.55 1 5.86 1 4.76 3 5.36 Total 18 100 17 100 21 100 50 100

Impact of Credit on Cropping Pattern of Sample Respondents In order to see effect of credit on cultivated area t-test was applied to the data in Table V on crops, vegetables and fruits were calculated. The results show that only area under crops showed significant result while the area under vegetables and fruits shows non-significant results. It may be due to the fact that most of the farmers have obtained loan for short purposes and they have used for agriculture inputs mainly for crops.

Table V. Impact of credit on cropping pattern of sample respondents Particulars Total area %age Borrowers Non Borrowers [t-ratio] Mean Mean Crop 482.4 71.66 4.80 3.80 2.85* Vegetables 89.8 13.34 0.91 0.69 0.642 Fruits 101 15.09 1.03 0.76 0.1.81 Total 673.4 - - - -

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Impact of Credit on Crop Yield Table VI examines the impact of credit on crop yield of borrowers. Data show that there was significant increase in yield of maize, wheat, and apple. The results confirm proper utilization of loans for the purpose obtained for. It seems that borrowers have utilized the loan for the development of land and for crops, vegetables and fruits production.

Table VI. Impact of Credit on Crop Yield Crop Yield (Monds) Mean Borrowers Non Borrowers [t-ratio] Wheat 35.90 28.12 2.89 * Maize 30.70 24.98 4.40 * Potato 37.52 30.21 2.99 * Apple 35.78 25.32 4.21 *

Impact on Income of the Sample Respondents Table VII shows a significant increase in the income level of the borrowers which may be due to increase in the yield of wheat, maize, vegetables and fruits. This increase in their income may be due to the fact that the borrowers purchase inputs in time and used the recommended inputs for their crops.

Table VII. Income Level of Sample Respondents Name of Village Income Rs/month [t-ratio] Borrowers Non Borrowers Khot 19665 13655 2.90 Rech 20445 14755 3.05 Shagram 14780 10630 2.85 Total 18485 12378 3.15

Farmers’ Perceptions about Obtaining of Credit One of the objectives of the research was to inquire about perceptions of the borrowers in obtaining credit from ZTBL. Despite of the effectiveness of the credit almost all the borrowers complained about the interest rate charged on these loans. Being subsistence farmers they were of the view that the interest rate is too high for them. Moreover, majority of them were not happy with procedure for obtaining agricultural credit. One reason could be that majority of the farmers had low level of education and they were unable to understand and to fill in the loan application forms for themselves. For this purpose they had to get help either of the bank stop or some other educated person. The respondents also complained about the bank’s staff behaviors.

CONCLUSION AND RECOMMENDATIONS Summarizing the whole discussion the findings confirm the positive impact of agricultural credit disbursed in the area mainly by the ZTBL. As majority of the borrowers were small farmers loin share of loan went to short or medium term loan. An important finding of the research was that the loan was properly utilized by the sample borrowers. Due to which the borrower in the area enjoyed edge over the non borrowers in terms of area, crop yield, and income. The borrowers allocated more land to all types of crops and fruits compared with the non borrowers. Similar was the case in terms of crops yield. As a result of these the borrowers’ income was significantly increased. This was statistically confirmed by applying the t-test to the collected data. However, it is worth mentioning here that majority of the sample respondents complained about the interest rate charged on these loans and the procedure for obtaining credit from ZTBL. For further effectiveness of the institutional loan it is important to; i) the interest rate charged on institutional credit should be reduced up to the extent that the farming community is willing to utilized it, ii) Procedure of advancing loan should be made simple, so that more farmers can be benefited from it and iii) in time availability of credit should be ensured for timely purchase of the required inputs. In this way more and more farmers will be benefited from the fruit of the credit advanced by ZTBL to the farmers.

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