ACCESS TO AGRO-CREDIT BY FARMERS IN KADUNA STATE, NIGERIA

ABSTRACT

This study examined access to agro-credit  by farmers in Kaduna state. This study  employed survey research methodology which covered the three agricultural zones in the study area. To achieve the objective of the study, five research questions guided the study and one hypothesis was  formulated.  Hypothesis  was  tested  using  Chow  test  model.  The  data  generated  were analyzed using multiple regression and 4-point likert scale rating. A reliability coefficient of 0.78 was obtained using Cronbach Alpha to establish internal consistency. It was shown that, majority of the respondents (40%) were aged between 31 and 40 years, 32.5% where aged between 41 and 50 years and 18.33% were between 21 and 30 years. About 41.20% of the respondents had no formal education, 34.2% attended primary education, 16.7% obtained secondary certificate while 7.5% attended tertiary institution. About 48.3% of the respondents had farming experience of 20 years and above, 19.2% had farming experience of between 10 to 14 years and 17.5% had 15 to 19 years. Majority of the respondents (41.67%) sourced a total amount of between N100,000 and N400,000  from  either  formal  or  informal  sources,  25.83%  sourced  less  than  or  equal  to N100,000.  Others, 10.83%,  15% and 6.67% have obtained credit to the tune of  N400,001  – 700,000, N700,000 – N1,000,000 and more than N1,000,000 respectively. Age, marital status, level of education, interest rate and credit awareness were the major determinants of (p<0.05) credit sourced by the farmers in the study area. Sixty-five percent and 52.5%  of the farmers obtained their credit from informal sources (personal savings and rotating savings respectively) while 42.5% of them obtained theirs from formal sources. Lack of trust to pay back the credit (2.89), inability to receive the amount applied for (2.93), risk of repaying the credit because of crop failure (2.84), difficulty before getting the credit (2.63) and problem of getting guarantors (3.00)  were  the  major  problems  under  informal  sources.  For formal  sources,  time  spent  on getting the credit (2.58), complicated  procedures  (2.71), high interest rate (2.80), inadequate collateral  security  (3.00),  repayment  time  is  short  (2.55),  illiteracy  (2.98),  lack  of  good information about agro-credit (2.81) and lack of presence of banks in the rural areas (2.68) were the major problems encountered by farmers.

CHAPTER ONE

INTRODUCTION

1.1      Background Information

With an estimated 140 million inhabitants and a population growth rate of 2.5% annually, Nigeria  is  the  most  populated  country  in  sub-Saharan  Africa  and  the  10th  most  populated country  in  the  World  (National  Population  Commission  [NPC],  2006).  Approximately,  49 percent  of the population  engages  in agriculture  as their major  occupation.  The agricultural sector is the mainstay of the majority of Nigerian rural poor, with over 70 percent of the active labour force in rural areas employed in agriculture and the sector contributing over 23 percent of the GDP in 2006 (World Bank, 2007).

Agricultural credit plays a critical role in agricultural development (Duong & Izumida, 2002).  Farm credit has for long been identified  as a major input in the development  of  the agricultural  sector  in  Nigeria.  The  decline  in  the  contribution  of  the  sector  to  the  Nigeria economy has been attributed to the lack of a formal national credit policy and paucity of credit institutions. The provision of credit or loanable fund (capital) is viewed as more than just another resource such as labour, land, equipment and raw materials (Rahji, 2010). It determines access to all of the other resources which farmers require (Shephard, 1979). Agricultural practice requires money for the purchase of various factors of  production including land. There are two main sources of agricultural financing; formal and informal sources. According to Nchouji (2007), the formal sources are organized  and  guided  by law with effort on the part of the government, examples  are Bank  of  Agriculture  (BOA),  commercial  banks,  supervised  agricultural  credit, cooperative  societies  and  government  agencies.  Informal  sources  include  friends,  relatives, money leaders, saving societies and traditional groups. These sources are meant to facilitate and increase   agricultural   production.   Though   farmers   may  patronize   these  sources,   but   the implication  involved  is  the  provision  of  collaterals  and  other  necessary  requirement  before obtaining those credit facilities. Oladeebo (2003), reported that years of farming experience with credit  use  and  level  of  education  were  the  major  factors  that  positively  and  significantly influenced the amount of loan obtained by farmers.

Agricultural credit access has particular salience in the context of agricultural and rural development in Nigeria. Some 70% approximately of the population live in the rural areas with their main source of livelihood being agriculture. Recent studies showed that the growth rate of investment in the agricultural sector is less than that of the other economic  sector. Therefore, financing agriculture is one of the most important factors to develop rural areas in developing countries (Kohansal and Mansoori, 2009). Credit accessibility is important for improvement of quality and quantity of farm products, so that it can increase farmer’s income and reduce rural migration. Credit constraints to farm households thus impose high cost on the society. This is in terms of rural unemployment,  rural poverty,  and  distortion  of production  and liquidation  of assets.  Governments  in both developed  and developing  countries  attempt  to overcome  these problems by subsidizing  credit,  setting up Agricultural  Credit Guarantee Fund Schemes (e.g. ACGFS in Nigeria, 1977)  and specialized  Agricultural  Credit Bank (e. g NACB,  1973 now BOA, 2010) and stimulating institutional innovations in the financial system (e.g. People’s Bank, Community Bank, Rural Banking Schemes, etc) (Rahji, 2010).

The  Nigerian  agricultural  sector  is  among  the  most  heavily  regulated  sector  of  the Nigerian economy.  The special interest of government in the agricultural sector is  due  to its relevance in the provision of raw materials for industries and most importantly the provision of food for the teaming Nigerian population and also serving as a source of foreign exchange for the economy (Adofu, Abula & Audu, 2010). The Nigerian  agricultural sector is not alone in government intervention in terms of regulation, Akiri and Adofu (2007), opined that the banking industry owing to the nature of the activities and functions it performs in the economy, is also one of the widely and heavily regulated sector in both developing and developed countries of the world.

Anyanwu,  Oyefusi,  Oaikhanan,  and  Dimowo,  (1997)  opined  that,  commercial  banks encourage savings. Since investments are made out of savings, the establishment of commercial banks  especially  in the rural  areas  makes  savings  possible  hence  economic  development  is accelerated. The government most often may think it’s necessary to intervene in the operation of the  banking  system  with  the  intention  of  correcting  the  short  comings  of  the  price  fixing mechanism to ensure that what is commercially rational for an individual bank is approximately rational for all (Adofu, et al., 2010). Socially, interest rate charged by banks could be regulated to encourage savings mobilization, ensure and foster adequate investment for rapid growth and development, bearing in mind the view of Goldsmith (1969) that the financial superstructure of an economy accelerates economic performance to the extent that it facilitates the migration of funds to the best user i.e. to the place in the economic system where the funds yield the highest social return.

According to Akiri and Adofu (2007), the existence of externalities and imperfection in the financial markets of most developing  economies  has often called for intervention  by the government through its appropriate agent (the Central Bank of Nigeria in the case of Nigeria) to encourage investment and to re-channel credit to those economic units with high social rate of returns  but  low commercial  rate  of returns.  Under  the  deregulated  interest  rate  system,  the market forces of demand and supply play a very prominent role in the determination of interest i.e. banks and their customers are free to negotiate to arrive at a suitable interest rate on both deposit  and  loans.  Kohansal  and  Mansoori,  (2009),  noted  that  the  main  part  of  financial resources of agricultural bank come through recovery of overdue granted credits while lending activity for banking system is  accompanied  with some risks and problem. In the other hand, Awoke,  (2004),  stated  that  inspite  of  the  importance  of  loan  in agricultural  production,  its acquisition and repayment are fraught with a number of problems especially in the smallholder farming. Therefore, most of the problem arose from poor management procedure, loan diversion and unwillingness to repay. Thus, lending is a risky enterprise because repayment of loans can seldom be fully quaranteed.

1.2      Problem Statement

The prolonged crisis pervading the Nigerian economy has risen to an unexpected point. The present condition of the Nigerian economy is indeed unprecedented in the history of global economic downturn. All macroeconomic indices that spell a nation’s economic well being at a given point in time portray a rather pitiable and gloomy outlook for the nation. Pointing to an economy   trapped   in   the   vicious   cycle   of   stagnation,    declining   productivity,   rising unemployment,  and mounting  foreign  debt, widening  inequality  gap at a magnitude  without antecedent (Usman, 2000).

In response to the problems, the government deregulated interest rate in 1987 as part of the Structural Adjustment Programme (SAP) policy package. The official position then was that interest rate liberalization would, especially help manufacturers  who are  considered to be the prime agents and by implication promoters of economic growth. However, in a policy reversal, the government in January 1994 outrightly introduced some measures of regulation into interest rate management. It was claimed that there were “wide variations and unnecessarily high rates” under the complete deregulation of interest (Usman, 2000).

Moreover, interest rate rose over the years following the lifting of the partial controls on the interest rate regime of the preceding  year. A noticeable  feature during the year  was the incidence  of  wide  variations  in  interest  rates  among  the  commercial  banks  as  a  group. Furthermore, despite the sharp increase in nominal rates, the prevailing average realized rates on both deposits  and loans were generally  negatives  in real terms,  in the  light of high rate of inflation.  This  is  to  say  that  since  deregulation,  interest  rates   have  been  rising  almost uninterruptedly (Usman, 2000). This then raises the question of how increases in interest rate has affected farmers’ access to agro-credits.

In Nigeria there is a wide gap between owned and required capital for financing most agricultural activities of farmers due to increase in the cost of borrowing (Iroh, 2012). The lack of access to capital due to high level of interest rate is one of the major factors which hinder the development of agriculture (Tefera, 2004). One of the major problems responsible for inadequate credit facilities  required by farmers for their agricultural  activities  is constant and persistent increase in the cost of borrowing, despite the fact that these farmers produce the bulk of the food consumed in the country (Ojo, 1998). In order to design appropriate financial policies that will bring about an efficient financial sector in the country there is need to investigate the effects of the present interest rate regime in the country especially in the agricultural sector.

Considering the efforts being made by the Federal Government through the Central Bank of Nigeria in providing agricultural credit to farmers through various avenues it is necessary also to assess the effects of these credit facilities on rural farmers. Notable among such programmes include; Agricultural Credit Guarantee Scheme Fund (ACGSF) where the Federal Government holds 60% and the Central Bank of Nigeria, 40% of the shares. The  Fund guarantees  credit facilities extended to farmers by banks up to 75% of the amount in default net of any security realized. The Fund is managed by the Central Bank of Nigeria, which handles the day-to-day operations of the Scheme.  Agricultural Credit Support Scheme (ACSS) was also introduced to enable farmers exploit the untapped potentials of Nigeria’s agricultural sector, reduce inflation, lower the cost of agricultural production (i. e. food items), generate surplus for export, increase Nigeria’s foreign earnings as well as  diversify its revenue base.   Agricultural Credit Support Scheme are disbursed to farmers and agro-allied entrepreneurs at a single-digit interest rate of 8.0 percent.  At the commencement  of the project  support,  banks  granted  loans  to  qualified applicants at 14.0 percent interest rate. Applicants who paid back their facilities  on schedule were to enjoy a rebate of 6.0 per cent, thus reducing the effective rate of interest to be paid by farmers to 8.0 percent. As part of its developmental role, the Central Bank of Nigeria (CBN) in collaboration with the Federal Ministry of Agriculture and Water Resources (FMA&WR) also established the Commercial Agriculture Credit Scheme (CACS) in 2009 to provide finance for the country’s agricultural value chain (production, processing, storage and marketing).  Loans to eligible entities under the Scheme are disbursed at a maximum  interest of nine percent. The subsidy  arising  from  this  stipulated  rate  and  the  market  rate on all loans  granted,  and  the administrative expenses of the Scheme are borne by the Central Bank of Nigeria (CBN, 2012).

The  roles  of  interest  rates  emphasize  their  significance  in  the  structure  of  basic agricultural  productivity  and indicate  the  need  for  study  about  their  effect  under  a  flexible regime. The speculative movement of funds into/out of agricultural activities  depends on the level of interest rates. There is however an apparent lack of information regarding the effects of these variations in interest rates, that may help to determine to what degree government should modify her interest rate policy especially with respect to agro credit. There is also the need to understand the effects of interactions of high/low interest rates and how they affect credit supply to farmers.

Among the studies reviewed, none has successfully investigated the effects of  interest rate on farmers’ access to agro credit. Few of these studies eg Onwumere (2012), and Jim (2002) concentrated on the impact of interest rate variability on the entire economy of Nigeria without any particular reference to agriculture. For instance, Wasser Allen and Kuoteiner (1994), Monteil (1991), Fahrer and Rohling (1990), Bono (1995) only used interest rate as one of the tools of monetary policy with no particular interest in agriculture.

Interest rate affects the maximum amount one can borrow or ones request for  credit. Available studies on the effects of interest rate on farmers’ access to agro credit in Kaduna State do not cover the general effects (increase/decrease)  in interest rate. These  gaps then raise the questions on the effects of interest rate on farmers’ access to agro credit in Kaduna State.   We also know  that interest  rate variability  can determine  the level  of investment,  consumption, production and the growth of output. In Nigeria over the years it has been difficult to determine the nature of government policies and/or reform(s) needed to achieve a desired level of interest rate. This study therefore, tends to deal with the following research questions;

i.         what are the socio-economic characteristics of farmers in Kaduna State

ii.        what are the sources  of credit used and amount  of credit  sourced  by the farmers  in

Kaduna State

iii.       what are the factors affecting the volume of credit sourced by farmers from  financial institution

iv.      what are the problems encountered in obtaining loans from formal and informal source

1.3      Objectives of the Study

The broad objective of the study was to determine the effects of interest rate on access to agro-credit by farmers in Kaduna State Nigeria. The specific objectives include to;

(i)        identify the socio-economic characteristics of farmers in Kaduna State

(ii)       determine the sources of credit used and amount of credit sourced by the farmers . (iii)     determine the factors affecting the volume of credit sourced by farmers

(iv)       determine the problems encountered in obtaining loans from formal and informal sources

(v)       make useful recommendations from the study for macro economic policies.

1.4      Hypothesis of the Study

The hypothesis was tested:

HO1:      There is no significant relationship  between socio-economic  characteristics  of  farmers and the volume of credit sourced

1.5      Justification of the Study

In  order  to  design  appropriate  policies  that  will  bring  an  efficient  and  effective accessibility  and utilisation  of credit facilities for optimum agricultural  productivity,  there is need to carry out a study on access to agro credit in Nigeria. This  will greatly enable policy makers to identify constraints and potential areas for its improvement considering the need to enhance  food  security.  The  findings  of this  study  will  enable  farmers  to be aware  of  how appropriate interest rate effects can influence agricultural practices and assist in the fight against its  negative  effects.  Increased  knowledge  of  farmers’  access  to  credit  facilities  due  to  the prevailing and existing level of interest rate will enable international expertise trickle down to local levels. It is also expected that this study will help to widen the knowledge of farmers on the available  and  proper  interest  rate  level  that  will  enable  them  to  achieve  the  best  level  of agricultural  practices.  It is hoped to help financial  institutions  to realise  and charge  interest suitable to meet the credit needs of farmers.

In addition,  this study  will  enable  government  bodies  to identify  problems  faced  by farmers in their bid to access credit facilities and be able to come up with interventions that will help bridge the gap between what is and what ought to be. Information from this study will also help the government to recognize, facilitate and support the development  and use of suitable interest rates in both agricultural and commercial banks. Also, this study will be helpful in the sense that the negative effects of interest rate on farmers’ access to agro credit will be identified and appropriate recommendations made. Moreover, this study will help in formulating a future strategy for the realization and sustenance of a suitable interest rate that will enhance Nigerian farmers’ access to credit facilities.

This research  is directed  at providing  information  that would  assist  in knowing  these effects of interest rate regime on farmers’ access to agro credit in Kaduna State. It is expected that this study will expose the effects of interest rate which will help  government/  financial institutions  to  formulate  programmes  in  favour  of  a  suitable  interest  rate  for  farmers’  for effective credit acquisition. This study will also serve as a guide to other researchers who wish to embark on related studies.

Finally, it is hoped that the results of the study will be useful to researchers and farmers. Government  and policy makers will also benefit from the findings of this study  by utilizing information from the study to address the problems of interest rate fluctuations. This will be used as checks and balances by policy makers and academics in designing subsequent ways to make effective and efficient determination of agricultural interest rate.

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