Investigating the Role of Formal Credit in Promoting Rural-Regional Transformation in Pakistan: Suggestions and Way Forward

Abedullah Anjum and Shujaat Farooq
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Abedullah Anjum: Pakistan Institute of Development Economics, Islamabad
Shujaat Farooq: Pakistan Institute of Development Economics, Islamabad

No 2024:45-2, PIDE Policy View Point from Pakistan Institute of Development Economics

Abstract: The policy brief aims to investigate the role of formal credit in enhancing rural regional transformation. We employed panel data at the district level at three points in time and used a fixed effect model. Despite considerable horizontal and vertical expansion in the formal credit market, a large number of small farmers dont have access to formal credit because of multiple reasons. Our empirical results reveal that credit has a positive and significant impact on rural transformation (both RT1 and RT2). It is further established that the correlation between credit and rural transformation is strengthening as we move towards higher stages of rural transformation particularly in the case of RT2. The small magnitude of credit coefficient in case of RT1, indicates a large potential exists that can be exploited by giving wider access to small farmers to formal credit. The majority of these small farmers rely on informal credit which is expansive and thus farmers fail to realize its benefits. Without ensuring the inclusiveness of small farmers in the formal credit market, introducing financial literacy initiatives by policymakers, and strengthening microfinance institutions, it is difficult to achieve the desired objectives (i.e. high productivity, poverty alleviation, and rural transformation) of credit disbursement.

Pages: 10 pages
Date: 2024
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