Analyzing the Impact of Structural Change in Iranian Agricultural Credit System

Replacement of the traditional interest based credit system with an Islamic credit systemwas one of the fundamental changes in Iran since 1979. The Islamic credit system, offersthe prospect of risk sharing between the borrower and the lender. Small farmers are likelyto be risk averse and they are reluctant to go heavily into debt in order to finance investmentsin new technology and capital intensive methods of production which they perceiveto be risky. Farmer's decision making behaviour with regard to risk under the Islamic andinterest based credit systems are explored with the aid of a simple conceptual model.Analysis of attitudinal data suggests that the majority of small farmers prefer credit providedunder the Islamic credit system. Farmers' preferences for taking out loans from anIslamic credit system were found to be related to a number of factors. Risk sharing andreligious acceptability of the profit and loss sharing loans over the interest based loanswere two significant reasons.