Study On Information Technology-based Innovative Financing Model For Organic Agriculture In Pakistan

Organic farming is at the forefront of the sustainable agriculture movement and has captured growing attention all over the world due to its increased demand for hazard-free nutritious food.Access to credit is a key enabler in this regard,however,organic producers in Pakistan,continually face severe problems in getting the finance that leads to reduced investment.This not only affects the sustainability of the organic food business but also risks the livelihoods of small-scale farmers.Usually,the Banks charge higher interest rates for high-risk farmers and lower interest rates for low-risk farmers due to information asymmetry problems,which caused credit rationing.The lack of credit financing penetration on the one hand stems from the information asymmetry between banks and farmers,on the other hand,it stems from the lack of collateral assets of small-scaled organic farmers limiting their access to financing.As of now,there are three financing model of traditional value chain finance in Pakistan: the first one is Salam financing model,and intermediary financing model based on “hard information”,the other one is social collateral model based on “soft information”.All these models partly meet the financing need of farm businesses,especially social collateral model.But the course of this kind of credit financing needs more cost and have proved to have the lowest financial sustainability.Therefore,the urgent task on hand is to explore new way to innovate the financing model,which are consistent with the characteristic of the financing needs of organic farmers by minimize credit risk,information asymmetry and transaction cost.From the case studies,literature review and theoretical analysis,it is found that emerging trends within information technology in Pakistan has huge market with big potential in optimizing credit structure to increase the financial flow and revenue of the farmers.With the introduction of information technology,credit financing to the farmers from the perspective of value chain,promotes more effective business operations and cash flow management,enabling all participants in the entire chain to obtain higher sales and faster turnover which ultimately improve profitability.Based on information technology we believe that financing model innovation resolve the problem of information asymmetry,credit risk and transaction cost.The paper uses asymmetric information theory,credit rationing theory,game theory,relational contract theory,and financial theory to analyze the effect of information technology in financing model.From the game analysis between farmers and banks,it is hypothesized that farmers tend to submit the real information of organic farm business that increase creditworthiness;while evolutionary game analysis among value chain partners establish long-term relationship of mutual trust,information sharing,and collaboration strategy to ensure the long-term stability of bilateral cooperation.Through the derivation of theoretical analysis,we assumed that developing an IT-based innovative financing model for organic agriculture in Pakistan can effectively link farmers,financial institutions,core enterprises,and government agencies.That will be beneficial to solve the financial bottleneck of organic farmers,develop organic agricultural economy,and effectively links the participants in the value chain with the market,especially to alleviate the financing dilemma of the disadvantaged farmers due to lack of mortgage guarantee and solve the problems of information asymmetry,high transaction cost and collateral.The literature review began with a search of two mediating variables,namely innovativeness and agility,which influence the perceive success of IT based innovative value chain financing model.With these two mediating variables,five underlying independent variables were also emerged from the literature study.All these variables were then hypothesized,as they were supposed significantly influence the success of IT based innovative financing model in Pakistan.Each factor was then operationalized by carefully defining each variable within the context of the theory in which it appears.To test the relationships among the variables,a structured questionnaire was developed and sent to the organic producers,lending institutes,and traders.First,exploratory factor analysis(EFA)was conducted to assess the discriminant validity of the research instrument,and to confirm whether or not the data contained the underlying dimensions of the perceived success of IT based innovative value chain financing model.Secondly Cronbach alpha coefficients were calculated for each of the identified factors to confirm the reliability of the research instrument.The significance of the hypothesized relationships in the model was then tested using data obtained from 331 respondents through partial least square structural equation modeling techniques(PLS-SEM).Based on the structural equation model(SEM),this study found potential reasons that affect the perceived success of IT-based value chain financing model in Pakistan.The empirical study provides strong evidence of significant relationships between the dependent variable,and the mediating and independent variables.The results from the study demonstrated that agility and innovativeness of financial product development significantly and positively corelated to the perceived success of IT-based financing model that can be achieved through IT integration,trust,information sharing,contractual governance,information and communication technology.It is concluded from the results that an IT based innovative financing model show the potential to increase the creditworthiness of smallholders and overcome uncertainties that impede traditional value chain credit arrangement.This study demonstrates that the mediations of innovativeness,assist the financial institutions for the development of new financial product,while agility succor quick response to the customer need and make swifter the financial flow.The findings from the research demonstrated that inclusion of factors related to information technology truly promotes the development of organic agricultural economy and effectively links the farmer in the value chain and with the market,especially alleviate the financing dilemma of the disadvantage farmers due to lack of mortgage guarantee and reduce the information asymmetry and transaction cost.The study was conducted in an environment where the traditional financing model has proved the lowest financial sustainability and lacks the ability to address the financial challenges.The theoretical and empirical analysis demonstrated that the IT-based innovative financing model successfully overcame the barriers to providing financial services and improving the efficiency of financial transactions.It saves the financing cost of banks,ensures the reliability of the information,realizes economies of scale through information integration,solves the problem of information asymmetry of organic farmers in a low-cost way,and further promotes the development of organic agriculture.The study will help financial institutions to understand the advantages of integrating the smallholders into the value chain,according to the fast-growing technological era,which will enhance the financial flow in the value chain and boost the living standards of smallholder farmers.We believe the IT-based innovative financing model is helpful to do away with intermediaries who only play an auxiliary role in the bank-farmer relationship,which carries a high cost for the financial institutes and is caused by information asymmetry and adverse selection.The present study supports lenders to better evaluate the creditworthiness of smallholders within the chain through identifying risks and analyzing the competitiveness of that chain.The inclusion of information technology has opened the new door for organic farm business growth with the inclusion of small producers from the remote areas.By carefully managing producers’ and buyers’ relationships,financial institutions can greatly improve their ability by strengthening the process of product innovation,improves delivery performance,and reduces development time.Given the transformative ability of organic agricultural growth,the IT can serve as a powerful mechanism to address the financial issues of smallholders in Pakistan and reduce the exploitation(predatory role)of intermediaries(middleman-cartel).The IT-based innovative financing model provides a development framework that has the ability to establish a reconnection between financial institutions and small-scale organic producers with information technology hence increase creditworthiness as well as a livelihood by doing so.The study was based on Pakistan’s current financing model and the past failed government initiatives.The outcome of the present research project may however influence the successful implementation of commercially viable financing solutions in the sector.The theoretical model is therefore limited to conditions in the organic agricultural sector in a specific time cycle and within a specific institutional framework.