ACCESS TO CREDIT AND PERFORMANCE OF SMALL SCALE FARMERS IN NIGERIA

ABSTRACT

In spite of the attempts made by some studies to explore access to credit and its effect on output of small scale farmers in Nigeria,  most of these studies did not apply the  widely accepted impact assessment methodologies and therefore, may be subject to serious problems due  to  sample  selection  bias.  This  problem  inspired  this  study  which  seeks  to  find  the demographic   and  socio-economic   features   of  small  scale   farmers  in  Nigeria   which significantly determine their access to credit and the effect of credit access on the output of theses farmers, and a further attempt was made to  check whether or not the poverty and marital statuses of small scale farmers who accessed credit caused a significant difference in their output using Instrumental Variable(IV) and Heckman Two-Step Estimation Techniques to correct for endogeneity and sample selection biases. Both the first stage of IV and first step of Heckman approach  revealed that value of land, household size and the highest level of education  of small  scale farmers were, at 5% level, the significant  determinants  of their access to credit. Both techniques agree that household size, acreage cultivated, age in years, years  of  experience,  sex  and  total  annual  income  of  the  small  scale  farmers  were  the variables that significantly influence their output at 5% level. However, they disagree on the effects of the highest level of education and marital status of these farmers on their outputs. While Heckman estimated them to have significant effect on small scale farmers’ output, the generalized  method  of moments  showed  they  are  not  significant,  even  at  10%  level,  at determining the output of theses farmers. They also agreed that credit access, which has a negative significant effect on output at only 10% level, does not significantly impact output of small scale farmers at 5% level of significance. Again, among the small scale farmers who accessed credit, there were significant differences in their outputs due to their poverty and marital  statuses.  This  study  suggests  that  government  and  private  financial  institutions should consider improving  their  (financial)  services to small scale farmers to boost their performance.

CHAPTER ONE INTRODUCTION

1.1     BACKGROUND TO THE STUDY

Agriculture is the mainstay of most developing nations’ economies. It accounts for about 70 percent of full-time employment,  33 percent of national  income  and about 40  percent of African countries’ total export earnings (Otsuka, Larson & Hazel, 2013). Agricultural sector is  fundamental  to  the  provision  of  food  for  human  development  and  raw  materials  for industries.  In  Nigeria,  agriculture  has  great  potential  for  growth.  This  comes  from  the country’s abundant natural resources, particularly land, and the large yield gap that we can explore to increase food security and reduce poverty (AGRA, 2013). The proportion of rural poverty  is  the  highest  in  Sub-Saharan  Africa  and  it  also  has  the  greatest  potential  for smallholder   agriculture-led   poverty  reduction  (Christiaensen,   Demery  &  Kuhl,  2011). Christiaensen  et al. (2011), also  found that a 1% increase in agricultural per capita Gross Domestic Product (GDP) reduced the poverty gap five times more than a 1% increase in GDP per capita in other  sectors, mainly among the poorest people who, mainly, are small scale farmers.  Since   agriculture  employs  a  large  number  of  people  in  Nigeria,  increasing productivity is essential to eradicating extreme hunger, poverty reduction and ensuring food security  (Chigbu,  2004). The Sub-Saharan  Africa countries  (Nigeria  inclusive)  invest,  on average,  only  5-7%  of  public  expenditure  in  agriculture,  compared  to  8-10%  in  Asia (RESAKSS,  2010),  whereas  in  the  2003  Maputo  Declaration,  African  Heads  of  State committed to increasing expenditures on agriculture to 10 percent of their national budgets (Diao, Thurlow, Benin & Fan, 2012).

However,   small  scale   farming   contributes   to  the   national   objective   of   employment opportunities  creation and income generation by providing  a source of  livelihood  for the

majority of low-income households in Nigeria. Despite these significant roles played by the sector, the small scale farmers have, over the years, experienced many constraints that have limited the achievement of their full potentials. The figure 1 below shows clearly, that the contribution of agriculture to the Gross Domestic Product has been less than N400 Billion since 1981.

FIGURE      1:      Contribution     of     Agriculture     to     Gross     Domestic      Product

400.00

350.00

300.00

250.00

200.00

150.00

100.00

50.00

0.00

Year

Source: Author’s Plot Using Excel and Data From CBN Statistical Bulletin, 2014.

From the figure 2 on the next page, agricultural sector has always received the least from the commercial banks since 2008.

Figure 2: Distribution of Commercial Banks’ Loans and Advances To Some Sectors In

Nigeria (In Billions of Naira)

Source: Author’s Plot Using Excel and Data From CBN Statistical Bulletin, 2014.

Also, access to credit index by farmers rose from 1% in 2010 to 13.3% in 2011 but fell to

3.1% in the third quarter of 2014, as shown in the figure 3 below.

FIGURE 3: Index of Credit Access Between 2009 Quarter 1 To 2014 Quarter 4.

15

10

5

0

-5

-10

credit access index

-15

-20

-25

Year

Source: Author’s Plot Using Excel and Data From CBN Statistical Bulletin, 2014.

The microfinance banks loans and advances to the sector (shown in figure 4 below) fell from its peak (9,704.9 million) in 2005 to (7,735.7 million) in 2014.

Figure    4:    Micro    Finance    Banks    Loans    and    Advances    to    Agric.    Sector

12,000.0

10,000.0

8,000.0

6,000.0

4,000.0

2,000.0

Micro Finance Banks Loans and Advances to Agric Sector in Millions of Naira

–

Years

Source: Author’s Plot Using Excel and Data From CBN Statistical Bulletin, 2014.

These figures, however, are discouraging for the sector that sustains about 70 percent of our population (CBN, 2014).

The major challenge facing these farmers is lack of and limited access to credit as we saw in the figures 2, 3 and 4 above. Credit is, no doubt, the important instruments that can enable small-scale farmers overcome their liquidity constraint, but lack of acceptable collateral and procedural bureaucracies  of credit borrowing that also affects the timing  of the credit are some of the constraints the smallholder  farmers face in accessing  credit from the formal institutions. These problems have led to majority of small scale farmers limiting themselves to subsistence activities. Illiteracy also affects the small scale farmers’ access to credit and the success of the agricultural development efforts in Nigeria. The farmers who have no basic education  are  denied  credit  access  and  this  reduces  their  output  by  keeping  them  in subsistence farming (Chigbu, 2004). This type of subsistence farming is characterized by low

output, income and savings, poor access to inputs, and very importantly,  lack of access to credit  financing  (Diagne,  2002).  In  fact,  lack  of  credit  to  agricultural  sector  has  been identified as the major cause of high rate of exit from agricultural businesses and the poor performance of the sector (Okurut, Schoombee & Berg, 2004).

These   constraints   induced   successive   Nigerian   governments   to   initiate   policies   and programmes that would ensure adequate availability of cheap and accessible credit to small- scale farmers (Nwanze,2011). Some of these programmes introduced over the years include: The  Agricultural  Credit  Guarantee  Scheme  Fund  (ACGSF),  established  in  April,  1978, mainly to cushion the effect of lack of collateral of the small scale farmers in Nigeria; The Rural Banking Scheme (RBS), which established about 300 branches in rural areas between

1980   and   1989;   The  Community   Bank  of  Nigeria   (1990);   The  Family   Economic Advancement   Programme   (FEAP),   established   in  1997;   and  recently,   The   Nigerian Agricultural  Cooperative  and  Rural  Development  Bank  (NACRDB)  renamed  Bank  of Agriculture  (BoI)  in  October,  2000.  A  complete  list  of  the  policies  and  programmes established to improve agriculture, alongside their aims, achievements and reasons for their failures, are in chapter two (the policy context of this study).

Whether  these  programs  and  policies  of  the  government  have  succeeded  in  terms  of improving  the small  scale  farmers’  output  significantly  is one area researchers  have not adequately  investigated.  This may be because  increasing  access  to  credit  by  small  scale farmers has never formed a major goal of the policies and programs of the government and even when it is listed as part of her development objectives, realities may prove otherwise. It may also be that most of the research works in this area did not use the acceptable research methodologies  which  account  for  sample  selection  bias  and  endogeneity.  Interestingly, empirical evidences of the effect of credit use by smallholder farmers on their output can be

used  as a reliable  guide  to design  agricultural  policy and  program  necessary  to  achieve efficient allocation of scarce resources among the sectors of the economy.

In the light of the above premise, this study seeks to ascertain the demographic and  socio- economic features of the small scale farmers which significantly determine their  access to credit, if there is significant effect of credit access on the output of small scale farmers who accessed credit, whether the poverty levels of small scale farmers who  have credit access have significant effect on their output relative to non poor small scale farmers who accessed credit and if marital status has any significant difference in the output of small scale farmers who accessed credit, employing the proper econometric tools which correct for endogeneity and sample selection bias.

1.2     STATEMENT OF THE PROBLEM

Notwithstanding  that the agricultural  sector  employs  nearly three-quarter  of the  Nigerian work force (Ugbaja & Ugwumba, 2013), it has been observed to be performing poorly. In Nigeria, however, agriculture is dominated by small scale  farmers (as can be seen in their small-scale farming activities) most of whom are  rural-based, with low level of education; poor access to useful information and market and lack access to credit finance. Inaccessibility of credit by these farmers hinders their  acquisition of the required inputs to increase their output. Lack of these required  inputs  limit agricultural development by reducing farmers’ output, expected income,  savings (needed for investment) and overall welfare of the small scale farmers in Nigeria(Daveze,  2000). Again, the enduring lack of credit access faced by these farmers have significant consequences for their household-level outcomes, as well as, technology adoption,  agricultural  productivity,  food  security,  nutrition,  health and  overall welfare of the smallholder farmers’ households (Eyo, 2008). Increasing small scale farmers’ output for self-sufficiency, no doubt, requires more use of inputs such as improved seedlings,

fertilizers, pesticides, land and labour and they all necessitate the use of credit (Odoemenem and Obinne, 2010). However, small scale farmers in Nigeria need tangible financial resources to enable them cope with the increasing cost of inputs (Diagne, 2002). Therefore, credit is the main solution to the low savings capacity of the small scale farmers in Nigeria due to its role in enabling farmers take care of the expenses/investments  associated with increase in their output. Thus, solving the problem of small scale farmers’ access to credit is very important in improving their performance and, as a result, will lead to economic development through its role in agricultural development.

The little efforts to encourage the farmers by the government, however, most times, do not get to the grass root, and when they are channelled at the grass root, only the farmers with political affiliation or loyalty get them. Sometimes, these credits get to false farmers who use them for non agricultural activities, thereby making the effort of the  government  fruitless (Nwaeze, 2001).

In addition, credit institutions are often constrained from serving the small scale farmers by lack of property rights (acceptable collateral), high cost of transaction (cost to the financial sector for giving the loans to these farmers),  high risk and low returns from  agricultural businesses (Chigbu, 2004). Also, the methods (for example, loan rationing) and practice (high interest rate charge) adopted by the financial institutions have not in any way attenuated the yearnings of these smallholder farmers. The timing of the loan, however, is an issue also as most of the loans granted were advanced to farmers later after they had finished their planting (Okunmadewa, 2003).

Furthermore,  the research efforts in this area have not adequately evaluated  the effect  of credit access on the output of small scale farmers who accessed credit. This prompts me to delve into ascertaining  if the demographic and socio-economic  features of the  small scale

farmers significantly determine their access to credit, if there is significant effect of credit use on the output of small scale farmers in Nigerian, whether the poverty levels of small scale farmers who have credit access have significant impact on their output relative to their peers who are non poor and if the outputs of small scale farmers who accessed credit significantly vary due to their marital status. To do this, this research  work will attempt to answer the following research questions:

1.3      RESEARCH QUESTIONS

1.   What are the demographic and socio-economic features of the small scale farmers in

Nigeria that significantly determine their access to credit?

2.   Has access to credit by small scale farmers in Nigeria any significant effect on their output?

3.   Does  the  poverty  status  of  small  scale  farmers  who  accessed  credit  have  any significant effect on their output?

4.   Is there any significant difference, due to marital status, in the output of small scale farmers who accessed credit?

1.4   OBJECTIVES OF THE STUDY

The  broad  objectives  of  this  study  is  to  know  the  demographic  and  socio-economic characteristics of the small scale farmers that significantly determine their access to credit and to ascertain if credit access by small-scale farmers in Nigeria  significantly influenced their output, after correcting for endogeneity and selectivity bias. In particular, this research work will seek:

1.   To determine  if demographic  and socio-economic  characteristics  of small  scale farmers significantly influence their access to credit.

2.   To ascertain the effect of credit access on the output of small scale farmers  in

Nigeria.

3.   To  know  if  poverty  status  of  small  scale  farmers  who  used  credit  has  any significant effect on their output.

4.   To estimate the difference in output, due to marital status, of small scale farmers who accessed credit.

1.5   RESEARCH HYPOTHESES

HO1 : The demographic and socio-economic status of small scale farmers do not significantly determine their access to credit.

HO2: Credit access by small-scale farmers has no significant effect on their output.

HO3: The influence of credit use on output of small scale farmers is the same irrespective of their poverty statuses.

HO4: The effect of credit access on output of small scale farmers is the same for both the married and single small scale farmers.

1.6   SCOPE OF THE STUDY

This research  will  look at the demographic  and  social-economic  features  of small  scale farmers which determine their access to credit and the effect of their credit access on their output. It will consider the credit obtained from both formal and informal credit sources by small scale farmers in Nigeria. The analyses will be on national level. Output will be used to measure performance of small scale farmers in Nigeria. It will use data from the agricultural section of the Nigeria Living Standard  Survey, 2009 and the  Harmonized  Nigeria Living Standard Survey, 2012, Version 1.0.

1.7      SIGNIFICANCE OF THE STUDY

This research will be significant to the government, ministry of agriculture and policy makers

–as empirical revelations from the effect of credit access on the output of small scale farmers can be used as a reliable guide in designing agricultural policies and programs  needed to bring about efficient allocation of scarce resources among the sectors of the  country. The research  will  also  be  relevant  to  farmers  –to  enable  them  know  the  areas  they  need improvement on and researchers (both students and non-students) to  know the appropriate research methodologies to adopt when researching in this area.

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