Does Microcredit Play a Role in Improving the Technical Efficiency of Paddy Farmers? A Case Study in the Anuradhapura District of Sri Lanka

This study examines the effect of microcredit on the technical efficiency of paddy production in the Anuradhapura district of Sri Lanka using the Cobb-Douglas stochastic frontier analysis. The study employed non-probability sampling techniques to select a sample of 60 farmers consisting of both microcredit borrowers and non-borrowers. The results revealed that the average technical efficiency of the considered paddy farmers was 89%, implying that farmers have the potential to increase their paddy productivity by 11%. Farm inputs such as land extent (p<0.05), seed paddy quantity (p<0.05), and agrochemical costs (p<0.1) showed a significant effect on paddy productivity. Agricultural experience (p<0.05), education level, extension services, and use of microcredit (p<0.1) showed a positive impact on paddy farmers' technical efficiency. The majority of selected farmers (85%) obtained small loans of up to LKR 100,000 for their production, with 57% using only formal credit and 40% using only informal credit. However, there was no significant difference (p>0.05) in terms of production efficiency between formal and informal credit access. The results also showed evidence of constant returns to scale. Effective and well-functioning extension services, training to improve the managerial capacity of farmers, and the provision of micro-credit improve the efficiency of paddy production. The findings of this study emphasize the importance of providing agricultural credit facilities to farmers.