An analysis of rural informal credit sources in Iran (Case study: Khorasan Razavi and Western Azarbayjan)

  This paper is an outcome of a research aimed at recognizing the impact of various factors of formal and informal credit systems and their contributions in the process of agricultural input supply , agricultural products purchase and credit supply.   Field studies and questionnaires sampling at rural areas of Khorasan Razavi and Western Azarbayjan provinces provided primary data of this study. Research methodology is based on binary econometrics estimation (Logit model).   Research results indicate that informal credit supply sources with various productions are active in rural areas and their role and impacts in providing farmers needs and agricultural inputs are undeniable. The impact is as much as 28.8% and 72.2% for the contributions of formal and informal sectors in the purchase of agricultural products respectively. Moreover, 70% of the loans received by the farmers were provided through formal sector and 30% was provided by the informal sector (excluding family members and friends)   In addition to the credit and liquidity needs of the farmers, informal sources also play role in providing agricultural machinery and tools in the form of renting these inputs or providing them at installment basis or advance purchase of agricultural products of the rural people. There are some advantages in informal sources such as easier accessibility and needing no security or guaranteed bond which are difficult for farmers to afford, however interest rate of informal sources are higher when compared to formal sources. Interest rate of the informal sources loan is lower than the interest rate charged for the advance purchase or rented agricultural machinery.   Findings of this study indicate rural cooperatives enjoy some advantages compared to the banking system as well as informal sources. Results of the logit model estimation show that as the area of cultivated land increases, the probability of the use of informal credit sources will also increase. Also, as the age of the household head increases (since aged people are less risk taking) and as the non agricultural income of the household increases, the probability of the use of informal sources will decrease.