EVALUATING LOAN REPAYMENT IN THE SAUDI ARABIAN AGRICULTURAL SECTOR BY MEANS OF A FARM CREDIT INTERDEPENDENT SYSTEM

Scope of Study. The Saudi Arabian economy has been dominated by the oil industry in recent decades. To lessen the dependence on oil as the main source of national income, the government of Saudi Arabia has taken the initiative toward diversifying the economy. It is in keeping with this objective that the Saudi Arabian Argicultural Bank (SAAB) was founded in 1963. The function of SAAB as a government entity is to provide farm operators with adequate interest free credit for purchasing machinery, equipment and other factors of production and hence improve their income and well-being. Although in full operation and rapid expansion throughout the kingdom for about sixteen years, SAAB has thus far fallen short of achieving the goal of reaching a majority of farm operators with its services. So far, only five percent of the total farm operators have obtained agricultural loans from SAAB. In addition, loan delinquency is currently about 30 percent. The inability to reach large numbers of farm operators and the high delinquency rate indicate the existence of bottlenecks in administering credit and lack of appropriate means of loan evaluation within SAAB preventing attainment of the stated objectives. Hence, it is the objective of this study to evaluate non-repayment of agricultural production loans and to develop alternative lending policies and procedures for SAAB which would improve the effectiveness of credit distribution and loan repayment. In pursuing this objective, loan delinquency was analyzed using methods of ordinary least squares (OLS), two stage least squares (2SLS), and discriminant analysis. Data used in this study were obtained from SAAB credit files and personal interviews of 42 farm operators in two major agricultural areas, Hufuf and Kharj. Loan delinquency was measured in terms of number of days payments were past due.;Findings and Conclusion. Results of the OLS and 2SLS models indicate loan delinquency is negatively associated with net farm income, non-farm income, and total crop cultivated, and positively associated with size of annual payment, family living expenditures, and timelinesss of credit. The 2SLS system of equations consisted of: (1) four input demand functions--machinery, facilities, hired labor, and variable capital; (2) a farm production function; (3) two identity equations (net farm income and total capital); and (4) delinquency rate. The objective of using 2SLS is to examine the effect and importance of intermediate-term credit in explaining the variation in machinery and facilities demand and the effect of short-term credit on the demand for hired labor and variable capital. The results of the study in general conformed to the hypothesized relationships between the dependent and the explanatory variables in the system. Based on the thorough analysis of results obtained, policy and management implications are outlined for improving SAAB effectiveness in evaluating and administering needs for achieving of increasing farm production and hence improving farm income and farm family well-being.