Formal and informal credit markets for agricultural development in developing countries

Formal and informal credit markets for agricultural development in developing countries — The example of Pakistan

Manig, Winfried

Abstract One of the most important factors for increasing agricultural productivity and production in order to maintain growing populations in developing countries is the utilization of modern technology. For financing the use of agricultural technology, governments establish legally organized credit institutions which frequently offer subsidized credits. Such credits are made available under the existing societal modes of distribution, which leads to the domination of scarce resources by the elite in the rural regions, and, thus, to restriction in the access to credit for the rural sub-classes. Should small farmers or tenants, etc. wish to benefit from the advantages of modern agricultural technology, they have to depend on the informal credit market as a means of financing. By taking Pakistan as an example, the importance of the informal credit market for financing the use of modern technology from the period of the ‘Green Revolution’ until the present can be shown. This informal credit market has contributed to keep tendencies towards social polarization in the agricultural sector within limits, since an informal credit system that was not efficient would have made it difficult for small farmers to use the productivity potentials of modern agricultural technology and would have caused social differences to expand. The informal credit market should be reinforced as a political measure for reducing tendencies towards social polarization. This should occur at least until the formal credit institutions actually assume their intended function for all rural groups.