The Agriculture sector continues to play a major role in Pakistan’s economy. It is the second largest sector of the economy in terms of contribution to GDP. Agriculture also contributes to growth as a supplier of raw materials to industry as well as market for industrial products contributing substantially to Pakistan’s exports. Nearly 21 percent of total output (GDP) and half of total employment is generated by agriculture sector. Therefore, the development of this sector is imperative for economic development of Pakistan. However it is the fact that the productivity of agriculture commodities is very low.
In Pakistan, majority of the cultivators belong to the category of small farmers. In order to improve the productivity, developing countries must introduce or increase the use of inputs such as chemical fertilizers, new varieties of seeds facilities and ensure provision of quality inputs at fair prices. The introduction of new technologies tends to increase the demand for credit by farmers. The objective of the study is to explore the current role of financial institution in Agrarian economy of Pakistan. Data used in this paper will be time series data in the period of 2000 to 2012 annually.
Secondary data penetrating from 1980-2010 will be collected and analyzed using Statistical Package for Social Scientists (SPSS). To assess contribution of institutional credit in agricultural output VAR Model will be used. This study aims to quantify the relationship between the performance of financial institutions and growth of agriculture sector and tries to link relationship with policy variables thus to capture the picture as a whole. INTRODUCTION The Agriculture sector continues to play a major role in Pakistan’s economy. It is the second largest sector, Almost 65. percent of country’s population living in rural areas depends wholly or partially, on the earnings from agriculture sector. In the export earnings, direct as well as indirect share of agriculture is very high. Agriculture also contributes to growth as a supplier of raw materials to industry as well as market for industrial products contributing substantially to Pakistan’s exports. on the other, it is a large market for industrial products such as fertilizer, pesticides, tractors and agricultural implements. Nearly 21 percent of total
GDP and half of total employment is generated by agriculture sector. Therefore, the development of this sector is imperative for economic development of Pakistan. (GoP, 2012) However, it is the fact that the productivity of agriculture commodities is very low. In Pakistan, majority of the cultivators belong to the category of small or marginal farmers having land less than 12 acres. Out of total cultivated area 48. 56 percent is cultivated by these small landholders. In Pakistan 85. 69 percent of the total farms belong to category of small farms (GoP, 2000).
In order to improve the productivity, developing countries like Pakistan must introduce or modify the use of inputs such as chemical fertilizers, increased availability and use of improved varieties of seeds ensure provision of quality inputs at fair prices. The introduction of new technologies tends to increase the demand for credit by farmers. Therefore farming households should be provided credit at reduced interest rate so that investment per acre can be increased which is necessary to boost productivity.
In addition to this, it is also necessary to bring in transparency and simplify the existing cumbersome process of loan acquisition to make it assessable to a small farmers with lesser influence. Banks should provide sufficient amount of finance to small farmers to enable them withstand the adverse farming environment. It is the dire need of the day to enhance agriculture production to cope with the challenges of ever increasing demand for food and fiber. Farmers immediately need funds after the harvesting period for the next cropping season because of cash scarcity and non-payment of nearly harvested crop.
The modern agriculture is comprised of high-yielding varieties, fertilizers, and plant protection measures (PPM). Most of the modern inputs are purchased through cash or on credit, thus, more and more farm households depend upon credit markets. The efficient credit market provided an opportunity to the farmers in meeting consumption requirements and balanced input use, thus, resulting in betterment of the farmers. Federal et al (1990) The importance of Financial Institutions (FIs) cannot be overemphasized. FIs perform the vital function of intermediation between providers of investable unds (depositors, securities holders etc) and the users of such funds (namely businesses). No economy can progress unless its financial sector facilitates its business activity consistently, and in the case of a developing country like Pakistan, these FIs act as a necessary catalyst for economic growth as well. The State Bank of Pakistan, as the central bank of a developing country, has played two very critical roles with respect to the financial sector. Firstly it ensures soundness of banks and DFIs through prudential oversight with a view to maintain financial stability.
Secondly it pursues a developmental objective under which it facilitates financial markets developments and enhancement of access to finance. Banking sector plays a vital role in an economy as it facilitates in payment system, mobilizes savings, and allocates funds for the most productive uses. According to Jaffe & Levonian (2001) and Wachtel (2001), the role of banks is important as they allocate funds for the highest value use, limit the risks and costs, and generate economic activities.
Similarly, the study by Patrick (1967) and Porter (1967) find that an efficient financial system can intermediate savers and borrowers to mobilize high level of bidirectional causality between financial development and economic growth. In view of its significance in an economy, economic managers always endeavor to devise such policies which could help provide level-playing field for banks, thereby enabling them to operate on sound, efficient, and competitive footings.
The agricultural credit plays an important role in making farming sector more productive and resourceful in developing economies like Pakistan. The shortage of credit availability or capital constraint faced by the farmers is one of the major problems in the adoption of modern technologies and efficiency improvement in the agriculture sector. Agricultural credit disbursement to farmers in Pakistan declined from $3. 4 billion in 2007/08 to $3. 1 billion in 2010/11. Agricultural credit in Pakistan is 8 percent of Agri-GDP.
Therefore the production of various farm products has reached as low as 90 percent, if compared with the global benchmark. Sugarcane yield is 40 percent lower, wheat yield is 20 percent lower, non-basmati rice yield is 40 percent lower, cotton yield is 20 percent lower and milk yield per animal is 90 percent lower than global standards. The lack of resource constraints was not only the possibilities to realize opportunities for increase in productivity but also the ability to smooth consumption Habib (2012).
The formal agricultural credit institution in Pakistan comprised of Zarai Taraqiati Bank Limited (ZTBL) formerly known as Agricultural Development Bank (ADBP), commercial Banks, Federal bank for cooperatives and also some non-government organizations (NGOs). The institutional agricultural credit was positively affecting the agriculture productivity in Pakistan. A study regarding efficiency of agricultural credit in Pakistan was conducted by Sial and Carter (1996) highlighted that the individuals who obtained average size loans produced 48 percent more output than the non-borrowers.
Zuberi (1989) investigated that the impact of institutional credit comes through financing of seed and fertilizer. Whereas Qureshi and Shah (1992) analyzed that formal loans positively affect agricultural output through financing of capital investment. The authors found that financing capital investment is more beneficial than that of financing of seed and fertilizers. State Bank of Pakistan, in line with government’s declared priority for agriculture sector has been endeavoring for the past so many decades to ensure flow of sufficient, timely and cost effective funds to agriculture sector.
While substantial progress has been made in this respect, there is still ample room for further improvement. With the expansion in the size of the agriculture sector, the financing needs of the sector are also increasing and there are significant opportunities for banks to deploy their funds in such remunerative avenues. If we look back in the history of agriculture finance in Pakistan regional rural banks were created to meet the credit requirements of only weaker sections and small entrepreneurs.
Banks came to the rescue the rural population as a ‘Massiah’ and gave them a new sense of dignity later named as Zarai Taraqiati Bank Limited (ZTBL) formerly known as Agricultural Development Bank (ADBP) was established to extend subsidized rural credit to the rural farmers. A lot had been done by the banks for the above classes of people residing in rural areas. rural indebtedness had taken deep roots in the country. It constituted a serious economic, social and political problem. Over the years both the outreach and financial performance of the bank has not remained satisfactory and is currently undergoing a restructuring process.
Existing legislation in Pakistan allows formation of farmer cooperatives which can buy inputs, sell produce and obtain credit for member farmers. Pakistani farmers can benefit from this model by ensuring lending to cooperatives from commercial banks, and the provision of crop insurance. Role of the banks and other financial institutions in agricultural growth in rural area by providing credits should be more adequate, transparent and must be monitored by Public Accounts Committee of Pakistan for the flawless provision of credit to farmers.
Hence, prevent the national resources from miss use by people of political influence who have no interest in agricultural growth. This study aims to quantify the relationship between the performance of financial institutions especially the banksand growth of agriculture sector and tries to link relationship with policy variables thus to capture the picture as a whole. Objectives: * To explore the current role of banking sector in Agrarian economy of Pakistan * To highlight the financial problems faced by the agriculture sector in Pakistan * To suggest policy guideliness
LITERATURE REVIEW INTERNATIONAL STUDIES Kar and Pentecost (2000) used five alternative proxies for financial development and Granger causality tests applied the cointegration and vector error correction methodology (VECM). The empirical results showed that the direction of causality between financial development and economic growth in Turkey is sensitive to the choice of proxy used for financial development. Alvarez et al. , (2007) examined the role of financial markets and institutions on the economical growth of a developing country.
The IRS (interest rate spread) was used as the main tool to examine the relation between growth of financial markets and the economy of Chile and Taiwan between 1988 and 2007. The research method that has been chosen for this research was OLS regression. It provided some evidence that there is a significant relationship between interst rate spread and economical growth. Medyawati & Yunanto (2011) described role of banking in agriculture sector to analyze the influence of banking sector development, on agriculture sector and economic growth in Indonesia.
They also examined the relationships between banking development and economic growth by using VAR, a time-series econometric model. The research revealed empirical evidence that banking development, agriculture sector and industrial sector affects the economic growth although the percentage of the contribution were relatively small. Benson (2012) examined the impact of institutional support and macroeconomic policy on the growth performance of the agricultural sector in Nigeria. Data on relevant variables were collected from the Central Bank of Nigeria Statistical Bulletin, 1970-2008.
The data series were examined for unit roots and cointegration. A model variables such as the volume of credit to the agricultural sector, interest rate spread, dummy for institutional reforms, deficit financing, were estimated using a cointegrating regression method. The Fully Modified Ordinary Least Squares option was used in our regression. The results indicate that the volume of credit to the agricultural sector, deficit financing income (GDP) and institutional reform (Dum) were positively and significantly accounted for innovations in agricultural output for the period studied.
The interest rate spread has a negative relationship with agricultural output growth but not significant. The study recommends liberalized interest rate policy and enhanced institutional support to the agricultural sector. NATIONAL STUDIES Asghar and Chughtai (2012) The objective of his study was to depict the impact of credit on the production of wheat crop. He conducted Survey and random sampling technique to select the sample borrowers. He collected data was interpreted through “Cobb Douglas Production Function” by using statistical software (SPSS 16. ). The results showed that credit has positive and significant impact on wheat production. The values of R2 and F-statistics are found significant which represented that all selected variables are highly significant. The study not only shares the importance of credit to perform any agriculture activity but also helpful for economists and policy makers for designing agri financing policies. Wasif et al. ,(2004) Credit is an important instrument in enabling farmers to acquire commands over the use of working capital, fixed capital and consumption goods.
According to regression results for all considered equations, agriculture credit contributed positively and significantly in agricultural income. The estimated elasticity was 0. 36. Despite constant increasing trend in disbursement in nominal term, the loans were not expanded in qualitative term. So, this is a challenging issue for the policy maker to develop measures to improve efficiency of agricultural credit system by providing it to the needy farmers. Bashir et al. , (2007) examined impact of credit disbursed by commercial banks on the productivity of sugar cane in Faisalabad district.
Cobb Douglas production function (CDPF) was used to calculate the impact of credit on the crop productivity. The coefficient of credit was highly significant, which showed that credit has a positive impact on the productivity. All the findings concluded that commercial banks were effectively serving the agricultural sector of Pakistan through their credit disbursement schemes hence improving the living standard of people living in rural areas, reducing the poverty and ultimately helping the economy of the country. Naushad et al. (2007), found out the effects of short term agriculture loans scheme of ZTBL on the increase in farm production . The study was carried out in four villages of district Karak in 2005-06.
The main findings of the study suggested that short term agricultural credit by Zarai Tarraqiati Bank has positive effects on wheat, gram and livestock production. Based on the encouraging response of the farmers towards credit porgramme and timely repayment by the farmers, it is recommended that for increasing production per unit area in the area, ZTBL should expand the short term credit programme and increase the credit imits so that large number of farmers could benefit from the credit programme of the bank. Shah et al. , (2008) studied the impact of credit on farm productivity and income of the sample farmers in a backward District i. e. Chitral, of Northern Pakistan. For this purpose data were collected from both borrowers and non borrowers from selected villages in the district of Chitral during the year 2007. The findings showed positive relationship between farm productivity and agricultural credit. Similar relationship was found with income of the sample farmers.
This relationship could be attributed to the timely availability and application of the required inputs due to obtaining of the loan from ZTBL. However, complaint about the interest rate charged and the procedure for obtaining this credit ware also recorded. In the light of these findings it is recommended to review interest rate and further simplify the procedure for obtaining credit advanced by ZTBL. Muhammad et al, (2009) developed a financial liberalization index (FLI) and evaluated its impact on agricultural growth. The study used the Autoregressive Distributed Lag (ADL) approach to determine the long run and short coefficients.
The empirical results showed that FLI affected agricultural growth positively in the short and the long run; but real interest rate positively affects agricultural growth in the short run and negatively in the long run. Abedullah et al. , (2009) employed stratified random sampling approach to collect the input-output and socioeconomic data set to examine the impact of credit on the growth of livestock sector in the rural areas. The income elasticities of meat and livestock products were highest compared to all other food items except fruits. It was observed that credit availability expanded the livestock sector almost two folds while monthly family income from livestock increased about 181%. The elasticity values of the family size, literacy rate and credit were 00. 18, 0. 05 and 0. 06 respectively. The elasticity of family size was highest, followed by credit and literacy rate, indicating that adequate potential exists that can be explored to utilize unemployed and untrained rural labor in the agriculture sector. It would help to mitigate the increasing population pressure on mega cities of Pakistan by providing employment opportunities at the door steps of rural community.
Hussain (2010) estimated the impact of major agriculture inputs (credit disbursement, area under cultivation, fertilizer consumption and water availability) on total rice production in Pakistan using a time series ranging from 1988 to 2010. He used a log-linear Cobb-Douglas production function to estimate the impact and importance of these inputs. He found that area under cultivation and water availability had a positive and statistically significant impact on rice production and the other two inputs had a positive but statistically insignificant impact.
The insignificance of credit disbursement and fertilizer consumption indicates the presence of inefficiencies which begs for some policy attention. Saima and Hussain (2009) highlighted the level of production efficiency of the farming sector in district Faisalabad in the Punjab province of Pakistan. Stochastic Frontier Analysis (SFA) technique was utilized at farm level survey data of 300 farmers for the year 2009. Results showed constructive and significant effect on the farmer’s technical efficiency. The variable of credit showed highest coefficient value (–0. 4) indicating the importance for the agricultural credit showing that availability of credit to farmers was much more important than any other factor to improve the resource use efficiency in agriculture sector. Saleem (2009) saw impact of credit on agricultural gross domestic product. Data regarding disbursement of credit from different formal sources for different purposes and agricultural gross domestic product of major crops in study area D. I. Khan from 1990 to 2008 was collected from statistical office for crop reporting services DIK. Data was analyzed using linear regression model on The Cobb-Douglas Production Function (CDPF).
Credit disbursed for seed along with fertilizers and pesticides, irrigation and tractors were found strongly correlated to agricultural Gross Domestic Product with values 0. 87, 0. 58 and 0. 42 respectively. Above 80% impact was of credit on agricultural Gross Domestic Product was estimated with credit for seeds, fertilizers etc had greater role in this collective impact. At the end it was concluded that availability of credit increased agricultural production. MATERIALS AND METHOD Data used in this study will be time series data for period of 1980-2012 on annual basis.
Secondary data penetrating from 1980-2012 will collecte and analyze using E. views. The data will be collected from diferent sources like, Federal bureau of statistic, Ministry of finance, and ZTBL etc. In the areas of applied economics, we face problems of endogeneity amongst dependent and independent variables. Endogeneity can occur in cases where there is a two-way influence between the independent and dependent variables. This influence can arise from auto regression with auto correlated errors, omitted variable bias, simultaneity between variables as well as measurement and/or sample selection error.
Different methodological techniques have been adopted to deal with this issue, such as instrumental variable (IV) methods, simultaneous equation models, VAR model, non-linear techniques, and cointegration. To assess contribution of institutional credit in agricultural output VAR Model will be used. Vector autoregression (VAR) is a statistical model used to capture linear interdependencies among multiple time series. The term autoregrcssivise due to thc appearance of the lagged value of the dependent variable on the right-hand side and the term vector is due to the fact that we are dealing with a vector of or two (or more) variable.
The basic idea behind the model use is the vector autoregression (VAR) model is one of the most successful, flexible, and easy to use models for the analysis of multivariate time series. It is a natural extension of the univariate autoregressive model to dynamic multivariate time series. The VAR model has proven to be especially useful for describing the dynamic behavior of economic and financial time series and or forecasting. It often provides superior forecasts to those from univariate time series models and elaborate theory-based simultaneous equations models.
Forecasts from VAR models are quite flexible because they can be made conditional on the potential future paths of specified variables in the model. It treat all variables symmetrically, such that variables which that we are not confident are exogenous are modelled as endogenous. This leads to an n-equation, n-variable linear model, where each variable is explained by its own lagged values, plus the current and past values of the other lagged variables Yt = a1yt-1 +ak yt-k +ak+1 Xt-1 +ak+1+nXt-n + et Xt =b1 yt-1 +bk yt-k +bk+1Xt-1 +bk+1+n Xt-n+ et Hence VAR Model will expressed as follow
AGDP = ? + j=1 k?j AGDPt-j + j=1k?j Creditt-j + µ1t Credit = ?` +j=1k?j AGDP t-j +j=1k?j Creditt-j + µ1t VGDP =b1 +b2Vgdp -1 +b3creditt-1 +b4creditt-2 +b5 credit t-3….. bpcredit t-p + et Vcredit = a1+a2Vcreditt-1 +a3V GDPt-1 +a4Vgdp t-2……aVgdp t-p+ et Agricultural Gross Domestic Product (AGDP) will be used as the dependent variable and agricultural GDP was assumed to be the function of credit disbursed by different financial institutions for irrigation purpose, seeds, fertilizers, pesticides, implementation of tractors and other purposes. Variables: Agriculture Gross Domestic product Credit Disbursement
