Impact of Agricultural Financing on Farmers' Activities

What is it about?

In this study, we identify the channels through which agricultural financing has an impact on farmers' productivity. Our findings show financing enables farmers adopt fertilizers earlier than otherwise. In the presence of financing, farmers without crop insurance are more likely to adopt fertilizers. In addition to fertilizer adoption, financing increases farmers' willingness to adopt hybrid seeds for land cultivation. In aggregate, our findings provide evidence that financing serves primarily to decrease farmers' risk aversion, resulting in an increase in willingness to adopt productivity enhancing activities.

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Why is it important?

Our finding that farmers are less likely to spend on productivity enhancing activities if loan amounts from financial intermediaries are sub-optimal indicates agricultural productivity programs can be ineffective even when funds are utilized by farmers for farming activities. If as is the case in our study, farmers simply spend on more land in the presence of sub-optimal financing amounts, agricultural productivity programs simply boost agricultural output without having any significant impact on agricultural productivity. If farmers are not productive, their real incomes do not increase, they feel they are working to pay back loans, and as a result are less likely to repay their loans. Our findings indicate it is extremely important to provide farmers with loan amounts that facilitate both land purchases and enough capital for investments in productivity enhancing activities. In the presence of optimal financing amounts, the outcome that seems unthinkable - self funded agricultural programs - is more likely to be achievable.

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