Rural Poverty and Credit Use: Evidence from Pakistan (Social Development) (Report‪)‬

Credit plays an important role in the lives of rural poor. Despite attempts, by successive governments over time the rural credit market continues to be fragmented and beset by distortions. Given the importance of credit in the lives of rural poor, this paper aims to evaluate the underlying relationship between rural poverty and use of credit. Using household data collected in 1990 from a representative sub-sample of the 1985 Rural Credit Survey of Pakistan by the International Food Policy Research Institute (IFPRI), this paper looks at whether credit use does, in fact, affect rural welfare. The paper examines the key characteristics of credit use patterns by rural households at different levels of poverty and looks at the source structure of such borrowing; thereby highlighting inadequacies in policy and governance of institutional rural credit in Pakistan. The findings of this paper confirm the welfare enhancing and poverty reducing linkages of rural credit use in Pakistan. The availability of credit plays important role in allowing households, especially poor ones, to smooth consumption and adopt modern technology through purchase of inputs and be able to bear greater risk. This paper concludes that significant poverty alleviation is possible in rural Pakistan through a better functioning rural credit market. Major welfare gains can result from higher input use, and resultant higher productivity, as well as through improved and more efficient consumption smoothing. I. INTRODUCTION