Demand for institutional credit and determinants of credit constraints of farm households in Pakistan: Implications for sustainable rural development

Agricultural credit is an important tool that can improve farm production, ensure food security, increase household income, and ultimately catalyse rural development. This study examined the factors affecting the credit constraints on farm households in Punjab, Pakistan. A questionnaire was administered, and 519 farm households were recruited from five randomly selected districts of Punjab province. The data were analyzed using a two-step methodology. In the first step, direct elicitation was used to identify the credit constraints of farm households. In the second step, the Probit model was employed to analyze the factors that affect the likelihood of farm households facing credit constraints. The results showed that household head education, farm size, and farm capital had significant negative effects on the presence of credit constraints. The dependency ratio and household consumption expenditures had significant positive effects on farm households' likelihood of being credit constrained. These findings may help to mitigate the removal of farm household credit constraints and improve access to institutional credit, as well as reducing food insecurity and income inequality. The Central Bank of Pakistan should strictly monitor the lending procedures of commercial banks and introduce relaxed policies for new applicants and small landholders. Driving down the interest rate for agricultural businesses and offering loans for improved farm technologies at subsidized rates could be another important policy option. Awareness sessions about lending and repayment procedures should be conducted at the village level.