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Factors infl uencing farmers adoption of agricultural credit as a risk management strategy The case of Pakistan Shahab e Saqib a n Mokbul Morshed Ahmada Sanaullah Panezaib Ubaid Alic aRegional and Rural Development Planning RRDP School of Environment Resources and Development SERD Asian Institute of Technology AIT Thailand bDepartment of Disaster Management and Development Studies University of Balochistan Quetta Pakistan and Doctoral Student Asian Institute of Technology AIT Thailand cHigher Education Department Khyber Pakhtunkhwa Pakistan a r t i c l e i n f o Article history Received 28 January 2016 Received in revised form 25 March 2016 Accepted 25 March 2016 Available online 28 March 2016 Keywords Agricultural credit Risk management strategy Risk perceptions Risk attitude Probit model Pakistan a b s t r a c t Agriculture yield is the main source of income in all agricultural operations It is indispensable for farmers to ascertain and then manage production risks Agricultural credit plays an important role in farm management It is used around the globe and particularly in Pakistan as an ex ante and ex post risk management strategy by famers However there is limited literature available on the adoption of agricultural credit as a risk management strategy in post fl oods disasters The purpose of this paper is to study the impacts of socio economic factors on the adoption of agricultural credit as risk management strategy by farmers in Pakistan This study incorporates explanatory research design to investigate the causal relationship between the dependent binary and independent variables Data were collected through survey and checklist from 168 farmers in the study area Probit model was employed to explore the said relationships Risk perception risk attitude and access to credit were calculated for each in dividual and used as independent variables along with other socio economic factors Results from probit estimation showed that overall model was a good fi t most of the socio economic factors were found signifi cant Experience education risk perception of heavy rains income distance and access to credit sources had positive relationship with the adoption of agricultural credit rather it needs to be viewed as a threat that affects rural economies as a whole There are fi ve main sources of risk in agriculture production marketing fi nancial legal environmental and human resources 41 Production risk is related to the possibility of variations in crop yields and livestock Causal factors include uncertain weather conditions and incidence of disease and pests Marketing risks are associated with fl uctuations in commodity prices and the quan tities that can be marketed Likewise fi nancial risks are related to a farmer s ability to pay their bills in order to be fi nancially able to continue farming and avoid possible bankruptcy In addition there are legal and environmental risks connected with possible pro cesses initiated by other businesses and individuals and changes in government regulations related to environmental and farming practices Lastly human resources risks are concerned with the unavailability of family members for labour and farm manage ment Among these production is the most important risk faced by farmers Thus Drollette 20 rightly argues that agricultural production is confronted with risks that can negatively affect production levels which can consequently lead to considerable production losses Moreover variations in weather are also im portant risks associated with farm production These variations are driven by extreme natural calamities such as fl oods cyclones Contents lists available at ScienceDirect journal homepage International Journal of Disaster Risk Reduction http dx doi org 10 1016 j ijdrr 2016 03 008 2212 4209 rather a planning process of risk management is required com posed of several criteria that play a key role in decision making This is a key issue infl uencing farmers decision making and gov ernment policies that may affect their decisions 49 6 Owing to uncertainty in yield price and resources risk is always a factor in all management decisions of agricultural systems 23 It is therefore inevitable that vigilant assessment of agricultural risks is made and handled through the application of suitable strategies Otherwise improper risk management decisions may result in a decline in farmers revenue Moreover the sale of resources and assets use of savings and worsened livelihood conditions could also be the negative results of inappropriate risk management decisions 28 Due to the absence of formal techniques for managing risks farmers might also be forced to lower their in vestments as a risk averse strategy which would thus negatively affect overall production and prices Hence they need assistance in reducing the adverse effects of their decisions under risk 3 Farmers have adopted a number of risk management strategies These include risk reduction ex ante strategies to lower or minimize risk and risk coping strategies ex post strategies to mitigate risk 54 64 Furthermore these are categorized into formal and informal strategies Informal strategies are practiced at the farm level by farmers whereas formal strategies are institu tional and driven by national governments 6 67 Informal stra tegies at the farm level include income diversifi cation crop di versifi cation precautionary savings selling of assets etc Whereas formal strategies are government policies such as agricultural credit crop insurance schemes price stabilization information systems and subsidizing inputs 43 For instance Below et al 12 stated that farmers adopt several risk management strategies to cope with climatic risks such as diversifi cation outside of farming activities migration crop and variety diversifi cation different timing of farm practices irrigation water conservation techniques and agricultural conservation Similarly Ashraf and Routray 8 reported that farmers adopt several risk management strategies to cope with drought in Pakistan such as adjustments in input use water shortage coping techniques income diversifi cation asset depletion expenditure adjustment and migration Ullah et al 61 also added that in fl ood prone areas of Pakistan farmers adopted diversifi cation and precautionary savings strategies Jodha 31 discussed the role of agricultural credit as a risk management strategy in ex ante and ex post risk situations As a leading sector in the economy of Pakistan agriculture is highly vulnerable to natural disasters like fl oods heavy rains drought and cyclones Despite the sectoral changes towards in dustrialization of the economy agriculture remains the leading contributing sector to Pakistan s Gross Domestic Product GDP Despite the substantial decrease in share of agriculture in GDP to 21 4 in 2013 from 64 in 1947 48 48 still 44 7 of the labour force is involved in it and 60 of foreign earnings are derived from it representing a signifi cant contribution to the economy of Pa kistan 34 Pakistan has faced three massive fl oods that deva stated the entire economy in general and the agricultural sector in particular For example the most recent fl oods in 2010 2011 and 2014 caused huge damage to agriculture crops fi sheries forestry livestock and primary infrastructures like water channels tube wells houses human seed stocks animal sheds fertilizers and agricultural equipment machinery Moreover the most recent fl ooding in September 2014 took the lives of 367 persons 129 880 houses were damaged and over 2 5 million people were affected In addition more than one million acres of cultivated land and 250 000 farmers were affected The estimated cost for recovery was of 439 7 million and 56 2 million for resilience building 42 The role of agricultural credit has signifi cant impacts on farmers income production and food security particularly for those vulnerable to fl oods heavy rains pests and disease and other catastrophic hazards Undoubtedly there is a plethora of literature that has explored the role of agriculture credit in crop production 10 21 50 9 livestock production 1 15 and increase in income 21 4 Likewise rural fi nance can enhance farm pro ductivity and increased access to credit enhances pro poor agri culture growth 66 Pakistan s agriculture policy has focused on providing agri cultural credit to support subsistence farmers According to Pa kistan s agricultural credit policy of 2003 about 70 of agricultural credit was allocated to subsistence farmers up to 12 5 acres 20 to economic farmers up to 50 acres and 10 to above economic farmers above 50 acres During the period 2014 15 as per the government s priorities in the agriculture sector the State Bank of Pakistan SBP allocated indicative agricultural credit disburse ment targets of PKR 500 billion to 7 microfi nance banks 20 commercial banks four Islamic banks and two specialized banks which are involved in the provision of production and develop ment loans to farmers for agricultural activities Pakistan Eco nomic Survey 2014 15 Among commercial banks there are fi ve major commercial banks Muslim Commercial Bank Habib Bank Limited Allied Bank Limited National Bank of Pakistan and United Bank Limited In specialized banking Zari Taraqiati Bank Limited and Punjab Provincial Cooperative Bank also provide credit in Pakistan Whereas in the fi eld survey only two banks were pro viding credit to farmers the fi rst was Zari Taraqiati Bank Limited which is a specialized bank and the other was Khushali Bank which is the major microfi nance bank in Pakistan These fi nancial institutions require fi xed or liquid assets as collateral in order to provide credit with the exception of Khushali Bank which provides credit on a group guarantee basis Fixed assets include agricultural land non agricultural land commercial plots and buildings whereas liquid assets include gold silver and jewelry 29 4 Farmers can obtain agricultural credit in two ways equal to the produce index units of land or 50 80 of its market value which must be specifi ed by the District Revenue Offi cer DRO Some banks provide credit equal to 50 of the stipulated value of agricultural land whereas Zari Taraqiati Bank Limited provides up to 80 of the stipulated land value Other farmers owner cum tenants or those who have rented land can also get loans by providing their offi cial Khasra Girdaware1documents However there is a limit placed on the specifi ed loan amount for each crop by the State Bank of Pakistan The issues of farmers vulnerability to natural disasters have not been addressed in current credit policies Farmers adoption of risk management strategies to a large extent is infl uenced by 1 Offi cial document contains records of land crops and owner s detail issued by District Revenue Offi ce for no own agricultural land S e Saqib et al International Journal of Disaster Risk Reduction 17 2016 67 7668 their socio economic characteristics Therefore it is necessary to investigate those factors which are responsible for adoption of agricultural credit as a risk management strategy among farmers This study aims at exploring the factors infl uencing adoption of agricultural credit as a risk management strategy among sub sistence farmers groups who were allocated 70 of the credit according to the policy The fi ndings will guide government in taking policy initiatives toward helping farmers in post disaster situations particularly in case of fl oods 2 Material and methods 2 1 Study area The data were collected from Mardan District Khyber Pakh tunkhwa Pakistan located in the central region of the province Mardan is the second largest district in the province and 19th largest city in Pakistan The district lies at 34 12 0 North 72 1 60 East at an altitude of 283 m It has population of 1 4 million 51 6 male and 48 4 female About 80 of the population live in rural areas 22 According to the land use statistics 76 of the total area is used for cultivation 22 is uncultivated and the remaining land making up only 2 is forested The district has three tehsils Mardan Takht Bhai and Katlang In total there are 75 union councils2in the district These union councils are made up of vil lage councils3 which are the lowest tier of the decentralised government This district was selected purposively for the study area due to its high vulnerability to fl oods and heavy rains Around 80 of its population is directly or indirectly dependent on agri culture The total area of the district is 1632 square kilometres The selected villages are located in the areas most affected by fl oods in 2010 2 2 Sampling As our main focus was on farmers households in rural areas of the district we dropped the urban population mentioned vulner able from the sample The secondary data were collected from the contingency plan of the Provincial Disaster Management Authority PDMA for the year 2013 where the vulnerable population was shown within specifi ed areas of the district The plan also de marcated the bank of a small river fl owing in the middle of the city causing fl oods during monsoon rains In Pakistan NDMA and PDMAs have identifi ed vulnerable households such as those concentrated in rural areas engaged in agricultural activities and having low skills 18 In Mardan District a total of 970 farm households were identifi ed as vulnerable by PDMA We drew a sample size of 168 subsistence farmers at a 95 confi dence level and 77 margin of error by using Yamane 68 It is pertinent to mention that Hussain and Thapa 29 used 77 and Ullah et al 61 a 713 margin of error n N Ne11 2 n Sample size N Total number of farming households in an area e Precision value set as 77 0 07 The data were collected from 168 sampled subsistence farm households landholdings up to 12 5 acres through a ques tionnaire survey as well as a checklist Primary data were collected about their socio economic characteristics risk perception of fl oods and heavy rains and risk attitude The sampled households were selected through a multi stage sampling procedure Firstly the Khyber Pakhtunkhwa was purposively selected being a highly fl ood prone area in Pakistan Secondly Mardan District was pur posely selected due to its vulnerability to fl oods and high credit disbursement by fi nancial institutions Thirdly subsistence farm ers were selected as the target population due to the fact that they constitute 97 of the farming community in Mardan District 2 According to the government agricultural credit policy 70 of total credit was allocated to subsistence farmers 56 Therefore the list of subsistence farmers was prepared with fi ve Kisan4Councillors for each of the eight villages located in Fig 1 and were selected randomly from a list of farmers 2 3 Socio economic factors There are several risk management strategies that farmers adopt to manage their farms For instance Ullah et al 61 re ported that farmers use precautionary savings and diversifi cations as risk management strategies to cope with risks from fl oods Likewise diversifi cation beyond farming activities migration crop diversifi cation different timing of crops irrigation water pre servation techniques new plant varieties adoption of new tech nologies agricultural credit and crop insurance are strategies that farmers typically adopt to secure themselves from climate risks 12 Similarly spreading sales and forward contracting are ex amples of agriculture risk management tools at the farm level 63 Research studies have reported that several socio economic fac tors infl uence the adoption of risk management strategies These factors include age 16 61 education 19 47 farming experience 40 7 family size 61 income 60 63 landholding size 62 63 proportion of owned land 63 and health status 24 We also added distance from the river bank and farm labour proportion Self perceived health status was used as one the explanatory variables in the analysis to see the impact of health status in de cisionmakingontheadoptionofriskmanagementtools 14 24 57 Regarding age and experience of farmers it is expected that as age and experience increase famers are more likely to adopt risk management strategies 16 19 47 Education is also expected to have a positive effect on adoption of agricultural credit Educated farmers can make decisions regarding farm management more wisely than illiterate farmers 19 36 Risk perception of fl oods heavy rains and risk attitude are expected to have positive effects as risk perception increases farmers are more likely to adopt agricultural credit as is the case when they are more risk averse 61 62 Likewise Ullah 60 reported a po sitive relationship between family size and landholding size in adopting risk management strategies The proportion of owned land has a negative relationship with adoption of risk manage ment strategies 62 63 The proportion of fi eld labor is expected to have a negative relationship with adoption of agricultural credit due to the ample availability of labor at the farm level with which farmers can manage their farms Likewise health status is ex pected to have a negative relationship because farmers in good health are less likely to adopt agriculture credit and thus would be more risk seeking Access to formal and informal sources of credit is expected to have a positive relationship with adoption of credit because greater access to these sources leads to the adoption of credit 61 2 Lowest tier of the local government according to 2001 act 3 Lowest tier of the local government according the to 2013 act 4 Kisan Councilors are the farmers elected representatives according to K P K local government act 2013 S e Saqib et al International Journal of Disaster Risk Reduction 17 2016 67 7669 2 4 Risk perceptions For risk perception the farmers were asked to score the severity and incidence of fl oods and heavy rains A Likert scale was used from 1 very low to 5 very high to identify how these risks affect their farms Later their responses were put into a risk matrix suggested by 44 52 Fig 2 2 5 Risk attitude Risk attitude was calculated through the Equally Likely Cer taintyEquivalentMethod ELCEM usedbyseveralstudies 25 44 55 59 The procedure for ELCEM includes risky outcome with discrete payoffs Z1 Z2 Zm Zn 1 Znwith particular probabilities P1 P2 Pm Pn I Pn where the summation of all probabilities is 1 In this method fi rstly to know the preferences in fi nding a cer tainty equivalent CE for a hypothetical 50 50 lottery with the best payoffs Zn U I and worst possible outcome Z1 U 0 For instance a household with a total monthly income of PKR 60 000 has the best payoff with associated utility 1 with the worst payoff being PKR 0 associated utility 0 Thus there are two risky outcomes which lead to a decision problem Certainty Equivalent CE is the maximum sure payment Zm say PKR 30 000 which implies that the farmer is willing to accept instead to face the risk ThisvalueishigherthanZ1andlowerthanZn Fig 1 Map of the Study area Incidence 5 6 7 8 9 10 4 5 6 7 8 9 3 4 5 6 7 8 2 3 4 5 6 7 1 2 3 4 5 6 1 2 3 4 5 Severity HIGH LOW Fig 2 Risk Matrix S e Saqib et al International Journal of Disaster Risk Reduction 17 2016 67 7670 0o30 000o60 000 Secondly the expected utility for the CE of Zmis calculated through the same procedure U 0 5 The ex pected utilities for corresponding CEs may also reveal the other points between Z1and Zn PKR 20 000 16 000 10 000 40 000 45 000 and 50 000 After obtaining CEs between the range of points Z1and Zm the expected utility for Z1 U 0 and Zm U 0 5 with their respective probabilities of 0 5 was calculated by weighted average Following the same method the CEs of others points are calculated until a suffi cient number of CEs are elicited to plot the utility function 26 44 see Appendix 1 The CEs were put into a cubic utility function to obtain the utility of each farmer Even though wealth is used as an independent variable in the utility function in this study we incorporated income as a sub s

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