Abstract:

The objective of this study was to identify the impact of financial education on financial

inclusion and technical efficiency in small scale farmers in Pakistan. The study was

informed by the Asset building and Financial Inclusion theory, Behavioral economics,

capability theory and institutional theory. The target population in this research is small

farmers of Pakistan. Small farmers are those having land less than 5 acre. The study

collected primary data through a questionnaire. Before collecting data a prior test will

be conducted to check validity of the data. The data form World Bank and other

financial institution will be used in research. After analysis of the data, the results are

presented in this report. This report will be beneficial for the small scale farmers, Policy

maker, Agricultural department, Financial Institutions, Government bodies, banks,

educational institution. These institutes and bodies will be able to make and modified

the policies by considering financial education and financial inclusion in mind .

CHAPTER ONE: INTRODUCTION

BACKGROUND TO STUDY

Financial education is much more necessary in today’s world and is significant element

of sound financial decision making (Atakora, 2013). A number of academic researches

revealed the importance of agriculture sector in Pakistan and farmers are the main

elements of this sector. Agriculture is the important sector of Pakistan’s economy. This

sector directly supports the country’s population and accounts for 26 percent of gross

domestic product (GDP) (Rehman, 2015). Farmers are the key elements for this

contribution and main purpose of this study is to examine the impact of financial

education on financial inclusion and technical efficiency of farmers in this agricultural

sector. (Dev, 2015) Stated that financial exclusion in terms of access to credit from the

formal institution is high for small and marginal farmers and some social groups.

Financial education plays a very important role in making sound decision making.

Decision making is a very important part of the farmer like, without making sound

decisions prosperity of the farmers is not possible. Lusardi and Tufano (2009)

established financial literacy have an impact on financial behavior whereby persons with

low financial literacy commonly have problems with debt. In Pakistan many farmers
have issues with the debt. The debt is the one of the cause of less efficient performance

of farmers. Farmer is bounded into the circle of the debt as it takes money from one

and give it to others without saving a single penny for their future investment. That’s

why financial education plays a very important role in the debt management of the

farmers and it will definitely have a impact on the technical efficiency of the farmers.

The knowhow of income, spending, money management and saving can prepare people

with understanding to take charge of their finances (Tschache, 2009). So, knowledge

about the income, spending, money management and saving is also very important for

farmers. These are factors which affects the life of the farmers. This study will examine

these factors in detail and check the impact of these things on the living standard of the

small scale farmers in Pakistan.

This study is informed by Asset Building and Financial Inclusion Theory, B e h a v i o r a l

Economics, Capability Theory, and Institutional Theory. Behavioral economics and the

institutional theory of saving have informed recent advances in asset building

(Sherraden et al., 2015). The capability theory put more stress on the function that

access to favorable financial products as well as services plays in households’ financial

wellbeing (Sherraden, 2010). Financial inclusion involves both the capability to act

(knowledge, skills, confidence, and motivation) as well as the occasion to act (through

access to beneficial financial products and institutions) (Johnson & Sherraden, 2007).

Institutional theory posits that persons and households are faced with institutional- level

aspects that make it unfeasible to use financial products and services (Sherraden

&Ansong, 2016).
Small-scale farmers In Pakistan are playing vital role in the economy. Pakistan keeps

agricultural economy. Agriculture account for 18.9% of GDP of Pakistan and employees

around 42% of labor. Pakistan has produced 67.1 million tons of Sugarcane  (5th largest

producer in the world, behind Brazil, India, China and Thailand),25.0 million tons of

wheat (7th largest producer in the world),10.8 million tons of rice (10th largest producer

in the world),6.3 million tons of maize (20th largest producer in the world) ,4.8 million

tons of cotton (5th largest producer in the world),4.6 million tones of potato (18th

largest producer in the world),2.3 million tones of mango (5th largest producer in the

world, only behind India, China, Thailand and Indonesia),2.1 million tons of onion (6th

largest producer in the world),1.6 million tons of orange (12th largest producer in the

world),593 thousand tons of tangrine,1,601 thousand tons of tomatoes,545 thousand

tons of apple,540 thousand tons of watermelon,501 thousand tons of  carrot and 471

thousand tons of  date (6th largest producer in the world) (source, Wikipedia 2021).

That’s the huge contribution of the Pakistani farmers. But these contributions are

ineffective when farmers have no knowledge about their profit and losses, about their

expenses, about their financial decisions, about their money management and about

their decision making scenario while keeping full information about their finances. The

small-scale farmers in Pakistan do not have enough financial literacy and financial

inclusion. There is a need for farmers to be taught on financial education so as to enable

them to suitably use the financial products and services to enhance financial inclusion.

Financial Literacy:
Financial literacy has been referred to as possessing the knowledge, skills and abilities

on financial matters to confidently take effective and responsible decisions and to make

appropriate use of financial resources. Financial education is a lifelong skill that plays an

important role in providing the socio-economic benefits to the citizens resulting in

improving their financial state (Tribune, 2019). Financial literacy is a complete package

to understand the finance of the business, finance of life and Literate us about the

financial instrument and tell us how to use these instruments in a better and efficient

way.

Financial literacy refers to the possession of knowledge of how money works and how to

manage and invest it, as well as spend it (Atacama, 2013). The topic of financial literacy

focuses on the capability of an individual to manage their finances well and make the most

appropriate decisions. The significance of the subject matter lies in the fact that making

sound financial decisions enables an individual to plan efficiently for their future and that

of their families and avoid financial problems. With the changing financial environment,

identifying earnings and ensuring that one does not spend what they do not have is

crucial. Relatively, financial education or literacy contributes to stability and growth,

affecting socioeconomic levels in the process (Atacama, 2013). Notably, financial

literacy is a sign of knowledge of global economics, technology, consumer rights,

attention to detail, and organizational skills.

Financial Inclusion:

Financial inclusion refers to the use and access of a broad range of affordable and quality

financial products and services (Johnson & Sherraden, 2007). It’s make person to being
able to make their daily transaction, being able to safe their saving, being able finance

their enterprises, being able to plan and pay their expenses, being improve their buying

capability and do anything for their welfare.

According to Ford, Baptist, and Archuleta (2011), over 2 billion people (almost half of

the world’s total population) lack an account in a formal financial institution. It is an

understandable show of financial non- inclusion. There are many reasons why financial

inclusion is important. One is as a result of it reduces poorness and difference within the

society. Second, it drives economic process. Third is as a result of it allows and

empowers members of the community to manage their cash and create sound money

choices. Additionally, it ends up in individual advantages like growing business,

educating kids, and handling uncertainties. Basically, money inclusion boosts standing

and financial gain.

Financial Literacy and Financial Inclusion:

Literacy and inclusion in financial services and product are imperative in the

international community. Financial exclusion affects billions of people worldwide,

making them experience economic problems that affect them and their families both in

the future and at present (Ford, Baptist, and Archuleta, 2011). There are varied

company and restrictive constraints that form barriers, resulting in a rise in illiteracy in

finances. In several countries, an outsized proportion of the world are still continues to
be excluded in these financial services. Pakistan is one of them. A country with low

financial inclusion with very low financial education. Policymakers should acknowledge

the imperativeness of efforts to develop financial inclusion ways and educate the bulk of

the world relating to money management. National policies at completely different

stage should give a framework to boost money inclusion and acquisition. Government

with other private organization should work on it. Education institute should notice and

fill the gap of financial education.

Financial education is very important to farmers. And in this Study we will check the

effect of financial education on financial inclusion and technical efficiency in small

farmers in Pakistan. As Pakistan is the agricultural country. So, in order to understand

the effect of financial education on farmers that’s the important study. Annamaria

Lusardi defines “ the financial literacy as people’s ability to process economic

information and make informed decisions about the financial planning, wealth

accumulation, debt and pension” (Annamaria Lusardi,2015). It’s very important to

understand the abilities of farmers to process the economic information, about the

financial planning of the farmers, about the wealth accumulation strategies of the

farmers. Financial education and financial inclusion will play key role in understanding

and getting all information about these factors. Financial inclusion will define the key

indicators of the financial inclusion which are very important for the farmers.

Small scale farmers In Pakistan:

Small scale farmers constitute of 60% of rural population of Pakistan while their

financial survival completely depends on agriculture. As per laws of Pakistan lands

are property are continuously dividing into small parts generation after generation.

Because of this average holding land size of farmer is decreasing and more people

are standing under the criteria of small farming. In Pakistan average farm size is

5.6 acre. A UN agency study in 2010 disclosed that solely 2 % of farm households

management 45 % of farmland whereas 98 % management the remaining 55 %.

This pattern of landholding is below the belt inclined towards the massive

landlords and is accountable in some ways towards increasing the plight of tiny

farmers, as well as their inability to induce their due share in irrigation water and,

to some extent, bank funding too. But now condition is different in 2021, as more

than 60% Farmers are managing the lands on a small scale. A typical small-scale

farm contains crops and farm animals that are enough for a family to clothe and

feed them on an annual basis. Pakistan is an agricultural country and about 49.79%

land is fertile land which has sufficient nutrients for farming. Its very important to

understand the financial education and inclusion among this huge portion of

Pakistan economy.
CHAPTER TWO: LITERATURE REVIEW

Introduction
Financial inclusion result in the reduction of income inequality and lower the

poverty level. When the poverty reduce, the human development level increase. We can

say the financial development increase human development (Beck et al., 2017). Serrao

et al. argued that financial inclusion provide an equal opportunity for everyone in the

economy, make him able to take benefits and better contribute, and integrate himself

and safe himself against the disruption in the economy. Singh (2017) Observed a

difference between credit taker and noncredit taker farm household, the credit taker

farmer produced 3 mounds per acre on average, while the later produced significantly

less than the former. It means that when we give a suitable access to credit, it will result

in increase the efficiency of farms. And he can use the factor of production in an

effective and efficient way and increase the production as compared to the one who

didn’t take credit.

Theoretical perspective

The theory of inclusive growth.

According the finance growth theory the main reason of slower growth and income

inequality is due to the lack of access to finance. Akanbi et al. (2020) argue that the

financial development creates a rich environment for growth through “supply leading”

or “demand-following” effect.Schumpeter (1991) observed that bank can play an

important role by providing efficient platform for funds, which help the economy to

grow. Ndebbio (2004), Levine, Zervos (1996) and McKinnon (1973), like many others,

pointed and effective role of financial systems in economy growth. The origin of the

finance-growth hypothesis can be traced back to Bagehot (1873). Many researchers

proposed that the presence of an effective financial sector contains a positive effect on

the growth of economy.Moreover, an affordable, accessible and timely access to finance

help in reduction of income disparities andaccelerating growth..Furthermore, the main

argument of proponents of the supply leading theory was that financial markets evolve

in response to increased demands for financial services from an already budding

economy and as such, the development of financial markets should be a reflection of

growth in other sectors of the economy.

(Dabla-Norris, et al. (2015) argue that, according to financial and economic development

theory, financial development pursue economic growth by both a supply and demand

side. An efficient financial system help the members of economy to anaccessible and

affordable way to the funds , rather than go to the informal channel which cause a high

cost in term of interest rate and others things. The members of the economy have

chances to deposit, credit payment and other services. Aknabi at el. Argue that It Is

highly observable that, lack of financial services minimize the scope of entrepreneur

activities household and firms, particularly for small and medium sized firms. When the

public access the credit easily, it help them in starting businesses and generating sources

of income for them, and benefit the overall economy and ultimately reduce the income

inequality.
Financial inclusion and inequality

Inconsistency in access to finance is seen as the determinant of inequality. Honohan

(2004) observed that efficient financial system help in poverty reduction. When more

and more people access to finance, the average risk of bank reduced and the cost of

intermediation decrease. In this way, a poor person can access the financial products at

a lower rate (karpowicz 2014). Afzal (2007) observed that a significant portion of

government strategies for sustainable growth include policies for inclusive growth. The

fundamentals of economic growth are to ensure economic wellbeing, maximizing

economic opportunities and to ensure equal opportunities to economic growth. With

total access to finance, the vulnerable groups can improve their economic situation...

Also, as people earn more money, they can at least provide their own basic needs.

Olyde et al. support this view by suggesting that good financial services build a welfare

system, because it creates opportunities for saving, provision of efficient services, and

facilitate poor in savings. Moreover, this prevent them from visiting informal

moneylenders. Many other researchers such as Feder and Umali (1993) and Cornejo and

McBride (2002) observed that giving access to credit result in agriculture innovations .it

encourage household to adopt agriculture technologies with more risk bearing

capability and give relaxation from becoming liquidated. Hence the need for well-

functioning micro credit programmers that can stimulate the poor in increasing their

income. Due to the adoption of these technologies, an effect of poverty reduction,

increase of productivity, and attainment of food security has been seen in developing

countries like Uganda (Iyanda et al., 2014). Financial inclusion increase the productivity
as well as a certain impact on the livelihood of farmers. This suggests that financial

inclusion of the rural smallholder farmers do not only increase their productivity, but

also have impact on their livelihoods. However, most of these smallholder farmers are

mainly interested in the agricultural loan to boost their agricultural productivity

Chitra and salvim observed that credit for poor is necessary to peruse sustainable and

economic development in the country. They use IFI to measure inner state variations in

the access to finance, which show a significant association between socio-economic

factor and level of financial inclusion.When anyprogram is initiated , that give loans to

the farmers on minimum interest rate, give motivation to farmers and they tried to go

into semi merchandising farming rather than remain in a labor-intensive farming, which

provide income to only subsistence level. The credit also enable the farmers to buy

sprays and pesticides, thus get a chance to increase its production, as result get a

chance to increase their income. At the whole, the economy grows and give benefit to a

wider population. And, thereby creating opportunity for farmers to increasehis/her

income at the lower level of the agricultural value chain. In this way, entire economies

can grow, eventually benefitting the wider population(Ogi C, 2015).

When financial inclusion increase, it will reduce the indeptness of farmers that is the

main cause of poverty. It will improve the agriculture sector rapidly. If to improve

agriculture sector and to adopt new technologies like modern machinery and

equipment’s, seeds and fertilizers, it is very capital intensive and need more working

capital. It means that when financial inclusion occurs it will provide better risk
management tools to the farmers, motivated them to adopt new technologies in a more

fast way, that will result in more inclusive growth.,

Financial literacy

Financial literacy refers to the ability to make informed judgments and to take effective

decisions regarding the use and management of money. It is regarded as an important

requirement for functioning effectively in modern society. It enables a person to understand the

importance of savings
CHAPTER THREE: RESEARCH METHODOLOGY

INTRODUCTION:

This chapter will focus on the methods, techniques, models and procedures used to

conduct the research. This chapter includes the study population, data collection

methods and procedures, research models and research design. Research methodology

is the most important chapter because it’s the backbone of the research to conduct the

efficient and effective study with accurate and reliable results.

Research Design:

Research design acts as the map that enable a researcher to produce results to the

given research problem and acts as a guideline for the researcher to follow

(McLaughlin, 2012). For this research, a descriptive research design is adopted.

This is the most feasible research design for this kind of study. Descriptive

research design allows a researcher to collect information, simplify, analyze,

identify and present it to get good results. William describe in a research that

descriptive design allows a researcher to focus on a large sample group and gives

proper description of the research population. The design technique is best for

conducting social research involving humans as it gives accurate data from

collection to analysis and providing accurate answers to the given hypothesis.

(Williams, 2007).

Descriptive research design was the most appropriate way of doing research
 study because it provide many grounds to collect data accurately and give

reliable results according to research problem. According to this design, a

researcher can get reliable and accurate answers of their research questions.

This design also supports the effective and efficient use of questionnaire that

helps the researcher in the collection of qualitative and quantitative data.

Population

Population study is the set of variables, people objects, or events under

investigations. They may be real or hypothetical. Normally, the variables under a

given population study do contain a common characteristics that enables them to

be identified under a common pool (Bryman, 2012).

To analyze the effect of financial literacy on financial inclusion and technical

efficiency of farmers in Pakistan, the research targeted the small scale farmers in

Pakistan. As more than 60% farmers in Pakistan are small scale farmers. The

farmers having less than 5 acre land are the small scale farmers. The population

of the Pakistan is 220 millions, out of which 39% are engaged with the

agriculture and out of this 39%, 60% are associated with the small scale farming.

Therefore population of small scale farmers is large and there is no define data

available. The study will depend upon the statistics from National Bureau of

statistics Pakistan and World Bank (Global findex).

The purpose of the research is to give a result that represent all small farmers in

Pakistan. So, focus will be on small scale farmers in small villages of Pakistan.
 The exact number of small scale farmers is currently unknown.

Sampling Technique and Sample Size

Sampling is used to conduct a research with a large size population. Sampling is

a technique which enables the researchers to choose samples from a large size

population and these samples resembles the whole population. According to

(Mugenda, 2008) sampling involved selecting a given number of individuals in

such as way that they represent the general population in question. And

(Bernard, 2013) said a sample as sub-group within a large main group.

The Cochran (1963) formula is used in this research. This formula is used to

determine the sample size of populations that are large. The modified equation

takes the fallowing form.

Where: n0 = required sample size

Z = Confidence level at 95% (standard

value of 1.96) p = is population

proportion

e = Margin of error at 5% (standard value of 0.05).

n0 = 1.962 x 0.5 x (1-0.5) = 384
0.052
Therefore, n= n0……………
1+(n0 – 1)/N

= 384
1+ (384-1)/ 1,000,000

= 383.85
The sample size was 384 farmers in small agricultural village of Pakistan. The

samples were collected randomly from the various small villages of Pakistan.

There are 130 districts in Pakistan and we will make sure that each district will be

divided into 3 zones. We will collect sample from the village of each zone. We

will need at least 20 respondent from each zone, we will collect additional

information from each zone.

Data Collection:
This study will focus on primary data which will be collected from respondent.

Questionnaires will be used to collect primary data as these are easy to use with good

effectiveness. Secondary source of data will be the data from World Bank and National

statistics Bureau of Pakistan. Secondary can be collected from previous researches,

financial institutions, government bodies, agricultural department and other institutions.

To collect secondary data, the questionnaire included the both open ended and close

ended questions.

Questionnaire will be presented to sample size populations and questionnaire will be

ensured by the researchers to explain and clarified the points to respondent. As one of the

studies by the ( Kombo & Tromp, 2009) stated that Questionnaires have been found by

researchers to be the most appropriate instrument for data gathering collection in survey

studies. Questionnaire will also be able to give explained answer of the complez

problems.
 Data Analysis and Presentation
When the data was gathered, it was carefully analyzed and tested for understandability

and accuracy. The raw data was then subjected to cleaning and passed for evaluation

via SPSS version 20) Statistical Package for Social Sciences. Using both descriptive

and inferential statistics, the results are analyzed. Standard deviation means, and

frequency will be used for data analysis.

Bar graphs, pie charts, frequency tables, and percentages for the quantitative data were

used. They were classified into groups with regard to the study objective for the

qualitative date and published in prose format along with the results of the quantitative

data. For inferential statistics, a multiple linear regression model was used to create the

relation between variables.

Conceptual Model

The conceptual model took the following form:

Y = f (X1, X2, X3, X4) (1)

Where: Y =

Financi

al

Inclusi

on X1 =

Saving
 practice

s X2 =

Debts

manage

ment

X3 =

Financi

al

plannin

X4 = Investment Practices

Analytical Model

The analytical model took the following form:

Y= β0 + β1 X1+ β2 X2 + β3 X3 + β4 X4 + εi (2)

Where: Y =

Financi

al

Inclusi

on X1 =

Saving

practice

s X2 =

Debts

manage
 ment

X3 =

Financi

al

plannin

X4 = Investment Practices

β0 = the intercept (value of EY when X = 0)

β1 = the regression coefficient or change

included in Y by each χ, εi = error term

Study Variable Table:

Study Variables Indicators

Dependent Variable
Financial Inclusion  Access of financial services
(Frequency of use of Financial Services)
 Usage of financial services
(Frequency of usage of Financial Services)
Control Variables
Saving practices  Amount saved
 Frequency of saving

Debts management  Ability to pay debts

(How soon debts are paid)
 Timely payment of
bills/borrowings (Time taken to pay
debts)
 Financial planning  Budgeting
(Frequency and extend of Budgeting)
 Spending plan
(Rate of
spending)
 Money management goals
(Achievement of financial goals made)
Investment Practices  Knowledge on investment
Awareness regarding about investment options
 Ability to finance the investment
Level of enhancing access and use of financial
services (Likert scale)

Summary:

The methodology used in the research study was outlined in this chapter. It clarified the

research methodology adopted, the instrument and procedures for data collection, and the

procedures for data analysis that detail how the data collected was summarized into real results.

The chapter ends with a section on the conceptual and analytical model adopted in the study.
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