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

Abstract

Asymmetric information about the farmers is known to limit their access to the rural credit markets. In this study we investigate whether access to better crop market through 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 find no evidence that the contract farmers have better access to credit in the credit market.