Informal Debt and Agricultural Marketing Decisions of Smallholder Farmers

Abstract

The present study investigates the impact of informal debt dependency of farmers on marketing decisions of crops and explore the mechanisms through which this relationship takes place. It determines if informal debt impacts farmers' marketing decisions via creating repayment pressure in harvest period and through constraining farmers' market choices. The data was collected from 100 farmers of smallholders of Faisalabad and there were four constructs, namely, Informal Debt Dependence, Debt Repayment Pressure, Market Choice Restriction and Market Channel Choice Behavior. Hypotheses were tested using Partial Least Squares Structural Equation Modeling and bootstrapping, while controls related to socio-economic factors were used to test the robustness of results. It was found out that informal debt dependence has a significant impact on debt repayment pressure (β = 0.317, p < .001), which, in its turn, leads to increased restrictions on farmers' market choices (β = 0.395, p < .001). Market choice restriction was also found to be significantly influencing farmers' market channel decisions (β = 0.313, p = .002). At the same time, the direct effect of informal debt and repayment pressure on market channel choice proved to be insignificant. Thus, it can be concluded that informal credit does not directly control marketing decisions of farmers, but influences them through the time pressure of repayment.