Rural credit market imperfection in financing climate change adaptation: Evidence from Pakistan

Abstract

With the increasing negative consequences of climate change on agriculture, adaptation has emerged as a viable alternative to mitigation. Adaptation strategies for farmers heavily dependent on availability of credit financing from formal, semi-formal and informal lenders. However, there has been limited access to the credit for adaptation because of inefficiency and inequity in credit markets, caused mostly by the variations in farmer’s socio-economic status. Therefore, in this study we analyze the inefficiency and inequity measures of credit market imperfection by utilizing field data of 400 wheat growing farmers from various agro-ecological zones in Pakistan. In this study we find presence of imperfection in credit markets for financing climate change adaptation strategies. Only 36 % and 37 % of farmers have access to loans from formal (banks) and semi-formal lenders (MFIs), respectively, while 95 % of farmers have access to credit from informal lenders contributing to inequity issues in credit markets. The findings further suggest that 75 % of farmers use ‘personal security’ for loans and travel from far-off areas to get credit which may strengthen the imperfection of credit markets in allocating and financing loans for climate vulnerable farmers. Climate vulnerable farmers mostly use the climate and non-climate adaptation strategies that include ‘better and expensive seed’ (57 %) and the ‘use of tractor’ (83 %). The results of our regression analysis suggest that marginal and small farmers have limited access to credit from all types of lenders, which negatively affects their ability to invest in climate change adaptation strategies. Application cost (registration and trip to lenders) reduces the access to credit and ability to invest in climate adaptations. Finally, credit market imperfection can be minimized for climate vulnerable farmers through direct provision of agricultural inputs at local markets.