Toward sustainable agriculture: The impact of interest‐free credit on marketing decisions and technological progress in Pakistan

Abstract

AbstractFarm credit plays an essential role in fostering agricultural productivity. In smallholder agriculture, it aims to provide financial cushion and improve market outcomes leading to improved resource distribution, thus maximizing social and economic returns. In Pakistan, about 90% of farmers are smallholders with the least access to formal financial services. This study explores the impact of sustainable finance—interest‐free credit (IFC)—on smallholders' marketing decisions, producer prices, and technological progress. It explains how liquidity constraints affect itinerant market (primary and secondary) participation and how smallholders get trapped in classical credit bondage with village‐level moneylender‐cum‐traders and do not take advantage of temporal and spatial arbitrage. We use cross‐sectional data from 637 farm households in Punjab‐Pakistan. The results show that interest‐free credit provision and village‐level credit density improve smallholders' level of current and future market participation and increase the producer prices for rice and wheat. The results indicate that sustainable finance improves the vertical linkages between smallholder producers and markets, increasing sustainable supply response and farmers' income. Further, the results show that IFC provision improves technological progress by enhancing the uptake of modern crop varieties, improving cultural operations, and promoting sustainable crop residue management. The findings advocate the interplay between sustainable finance, smallholders' market integration and income earning and provide coherent insights for policymaking. The study suggests mechanisms to improve broader coverage of sustainable finance for breaking the semi‐subsistence‐oriented farming systems, improving technological progress and realizing sustainable development goals, like rural poverty reduction and improved food production and distribution in developing countries.