Pakistan Institute of Development Economics



Some Issues in Institutional Finance for Agricultural Development: A Cross-National Review of Evidence

Credit is essential for agricultural development. The circumstantial evidence is clear: where agriculture has grown rapidly, there has been expansion of institutional credit. More directly, although farmers as producers have a high preference to hold their savings in physical productive assets on their own farms, they must also rely on external funds at various points in time. This arises generally from the lack of simultaneity between the realisation of income and the act of expenditure. To cite a few illustrations: A field-crop farmer harvests once or twice a year, while consumption is continuous. For a dairy farmer, the interval between the realisation of income and operating expenditure is shorter and income is more or less continuous, provided there are two milk animals and ready access to marketing facilities. But, there is a lumpy investment in the animals. For a tree-crop farmer, there is a vast gap between the time when expenditure is incurred and income is generated. There is also a problem of indivisibility of fixed capital (e.g., construction of wells, pumpsets, farm implements, bullocks, soil and moisture improvement works, tractors, etc.). There is also’a life cycle-induced need for finance.

John W.Mellor