The role of credit in enhancing drought resilience in agriculture

Abstract

Credit constraints can undermine livelihood sustenance strategies of farmers faced with prolonged droughts. Marginal farmers with low wealth endowments could be especially vulnerable. The model developed in this paper explores the role of credit in enhancing long-term drought resilience. When repeated droughts increase reliance upon groundwater resources, credit availability may promote or undermine groundwater sustainability. Timely availability of credit can be used for water-saving technology adoption and towards maintaining minimum consumption levels during drought years. It is demonstrated here that high costs of credit coupled with a high risk of repeated droughts occurring in the future could be detrimental to groundwater sustainability. This is counter to the earlier findings in the literature that cheap credit could be damaging to groundwater sustainability. The duration to credit maturity also has a bearing on farmers’ groundwater extraction strategies and hence there could be a role for credit granting financial institutions in influencing sustainable outcomes. Specifically, medium-term loans have a better effect on groundwater sustainability as compared to long-term loans.

Keywords:

• credit constraints
• farm credit
• repeated droughts
• livelihood resilience
• irrigation technology adoption
• drought resilience

Acknowledgements

This work benefited from the author's association with an ACIAR funded project (LWR/2006/072) as well as from suggestions by seminar participants at CIMMYT (Nairobi) and IFPRI (Washington DC) in 2012. Any remaining errors are author's alone.