Heterogeneous effects of agricultural credit on productivity and sustainability: farm-size dynamics in Pakistan's agricultural sector

This study investigates how farmers' socioeconomic characteristics and sustainability conditions shape agricultural credit allocation, productivity, and credit utilization across farm-size groups in Pakistan. Using survey data from 1,150 farmers and three complementary econometric approaches multiple linear regression (MLR), structural equation modeling (SEM), and propensity score matching (PSM) the analysis reveals that age, education, farming experience, farm size, and income all exert positive and statistically significant effects on the amount of credit received, with farm size emerging as the strongest determinant of loan volume. Sustainable agriculture indicators, particularly the Crop Production Index and irrigated land share, are positively associated with both credit and productivity, indicating that more productive and sustainability-oriented farmers are more likely to secure higher credit and translate it into yield gains. The structural model shows that farm size and income dominate the latent socioeconomic status construct that drives credit access, while the Crop Production Index simultaneously enhances credit allocation and farm productivity, underscoring the central role of sustainability in the credit productivity linkage. Propensity score matching further demonstrates that borrowers attain substantially higher annual farm income than comparable non-borrowers, confirming a robust income-enhancing effect of agricultural credit after controlling for observable selection. A key novel contribution of the study, reflected in the detailed credit-use patterns by farm size, is that smallholders allocate a larger share of credit to core farm inputs, whereas medium and large farmers divert a non-trivial portion of loans toward non-agricultural expenditures, revealing heterogeneous and sometimes inefficient credit utilization. These results support differentiated, farm-size–sensitive credit policies that prioritize concessional, input-tied credit and simplified procedures for smallholders, link lending conditions to sustainability performance, and strengthen monitoring of off-farm diversion among larger farms, thereby aligning agricultural credit policy with inclusive productivity growth and sustainable, SDG-consistent agricultural transformation in Pakistan.