Factors Affecting Loan Payment

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Tropentag 2009 University of Hamburg, October 6-8, 2009
Conference on International Research on Food Security, Natural Resource Management and Rural Development

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Factors Affecting on loan Repayment Performance of Farmers in Khorasan-Razavi Province of Iran Mohammad Reza Kohansal Assistant professor of agricultural economic dep., Ferdowsi University of Mashhad, Iran Hooman Mansoori Msc student of agricultural economic dep., Ferdowsi University of Mashhad, Iran Abstract This study investigated the factors influencing on repayment behavior of farmers that received loan from agricultural bank by using a logit model and a cross sectional data of 175 farmers of Khorasan-Razavi province in 2008. Results showed that loan interest rate is the most important factor affecting on repayment of agricultural loans. Farming experience and total application costs are the next factors, respectively. Keywords: credit, agricultural bank, marginal effect, Logit model Introduction Agricultural lending involves giving out of credit (in cash and kind) to small- scale farmers for the purpose of farming. There is no doubt about the crucial roles of credit in economic development. Agricultural household models suggest that farm credit is not only necessitated by the limitations of self-finance, but also by uncertainty pertaining to the level of output and the time lag between inputs and output. Recent studies show the growth rate of investment in agriculture is less than other economic sector. So financing agriculture is one of the most important factors to develop rural areas in developing countries. Banking system payment is a way of financing. Generally, credit accessibility is important for improvement of quality and quantity of farm products so that it can increase farmer’s income and reduce rural migration. In the other hand, Lending is a risky enterprise because repayment of loans can seldom be fully guaranteed. Generally In spite of the importance of loan in agricultural production, its acquisition and repayment are fraught with a number of problems especially in the small holder farming

(Awoke, 2004). It is reported in empirical studies that large rate of default has been a perennial problem in most agricultural credit schemes organized or supported by governments. Most of the defaults arose from poor management procedures, loan diversion and unwillingness to repay loans. For this reason, lenders devise various institutional mechanisms aimed at reducing the risk of loan default (pledging of collateral, third-party credit guarantee, use of credit rating and collection agencies, etc.). In the context of providing credit to the rural asset-poor, what is required is institutional innovation that combines prudent and sustainable banking principles with effective screening and monitoring strategies that are not based on physical collateral (such as land). Recent theoretical and empirical work in economics has established that credit markets in developing countries work inefficiently due to a number of market imperfections. The literature cites a number of market imperfections which lead to loan default. These imperfections include: 1) Interest rate ceilings usually imposed by the government 2) Monopoly power in credit markets often exercised by informal lenders (Bell et al., 1997) 3) Large transaction costs incurred by borrowers in applying for loans 4) Moral hazard problems Koopahi and Bakhshi (2002) used a discriminant analysis to identifying defaulter farmers from non-defaulters of agricultural bank recipients in Iran. Results showed that use of machinery, length of repayment period, bank supervision on the use of loan had significant and positive effect on the agricultural credit repayment performance. In the other hand incidence of natural disasters, higher level of education of the loan recipient and length of waiting time for loan reception had a significant and negative effect on...
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