LITERATURE REVIEW
Literature is reviewed in line with the specific objectives of the study and arranged based on the following headings:
Concept of Agricultural Credit
Socio-economic characteristics of smallholder farmers
Sources of Agricultural Loan
Problems of Agricultural Credit Acquisition
Roles of credit in Agriculture
Credit Constraints and Agricultural Production
Agricultural Productivity and
Long-standing Constraints to Smallholder Agriculture
2.1 Concept of Agricultural Credit
Credit connotes the capacity to borrow (Adegbite, 2009). He further conceptualized agricultural credit as such assistance offered to farmers either in cash, kind or both for the purpose of farm production, the repayment of which beneficiaries are expected to make at a future date with or without interest rates. Credit and loan are used interchangeably in this study. Loan is money borrowed at an agreed interest rate for an agreed time. Thus all loans are credit but not all credit are loans in other words cash credit are loans (Okorji, 2004). Credit also means the ability to command the capital of another in return for a promise to pay at same specified time in future. Afolabi (2010) however asserted that before the command of the capital stated above, three basic questions called 3R’s of credit should be considered by the farmers as the plan for credit, the lender and borrower must answer the questions in the affirmative, as the credit application is studied. They include; returns, repayment capacity and risk- bearing ability.
Suitability:
Credit institutions exercise produce to ensure that credit used by the borrowers does not conflict with the economic policies of the regulatory agencies as well as own policies.
Safety:
There must be reasonable certainty that credit granted can generate enough profit and cash flows from the business used so that a farm business enterprise should be able to produce acceptable security which would serve as a fallback in case the expected source of repayment fails.
Profitability:
Any farm business that is not making profit may not be classified as viable for extension of credit; therefore, a profitable venture is more likely to attract the attention of creditors. Awoke and Okorji (2004) asserted that severally and individually, the inaccessibility of formal credit is caused by rigorous processes involved in obtaining credit, lack of collateral and short term repayment periods, high rate of interest and the late arrival of credit.
2.2 Agricultural Productivity and Needs for Credit
The Nigeria Agriculture Public Expenditure Review, a collaborative study carried out by the International Food Policy Research Institute (IFPRI) and the World Bank in 2008, revealed that public spending on agriculture was less than 2 percent of federal expenditure during 2001 to 2005. This is far below the 10% goal set by African leaders under the Comprehensive Africa Agricultural Development Program (CAADP).
A wide gap exists between the productivity of farmers who make use of credit and those who do not. Ochai, (2003) noted that there is improved productivity in agriculture when farmers use credit; because such credit would be used in the acquisition of production supportive inputs like machinery, fertilizer, improved seeds etc. He asserted further that non- beneficiaries of credit would be confined to the use of traditional inputs in farming with a resultant low productivity. In contrast, Adofu, Orebiyi & Otitolaiye, (2012) maintained that agricultural production is retarded when small scale farmer’s ventures into using credit for farming. This is because production time is wasted while negotiating for this facility which would seldom come, if it does come arriving at unproductive amount and time.
2.3 Socio-economic characteristics of smallholder farmers
According to literature, the social-economic factors affecting repayment performance can be divided into four namely, individual/ borrowers, firms, loan and institutional/lenders factors (Sharriff, 2010). However, findings show mixed result. A number of studies like Greenbaun & I hakor, (1995), Hoque (2000), Coyle (2000), and Ozdemeir & Boran (2004) show that when loan is not repaid, it may be as a result of borrowers unwillingness and/or inability to repay. However, Stiglitz & Weiss (1981) advised that the lending institutions should screen the borrowers and select good borrowers from bad ones to ensure that loans are used for intended purposes. Furthermore, the borrower’s past records and economic prospects should also be considered in order to determine whether the borrower is likely to repay or not (Greenbaun & Ihakor, 1995). Besides the characteristics of the borrowers, the collateral requirements, capacity or ability to repay and condition of the market should also be considered before loans are granted to borrowers. Sheriff (2010), writing on individual/ borrower’s characteristics, also identified such factors as age, educational level, gender, borrowers business experience and monthly income as impacting positively on repayment performance. Some other studies such as Arene (1992), Nannyonga (2000) and Oke (2007) still give evidence to buttress the fact that individual/ borrowers characteristics to a large extent affect repayment performance of loans.
2.4 Sources of Agricultural Loan
The financial systems of most developing countries including Nigeria are made of two sectors: the formal and informal financial sectors that operate side by side. The formal sector, also known as the organized sector is made up of the Central Bank, Commercial Banks, Development Banks, Building Societies, Insurance Companies etc. these institutions are mostly found in the urban and semi-urban setting. On the other hand, the informal financial sector also known as un-organized sector consists of individuals such as money lenders, relatives, friends, neighbours, landlords, traders and group of individual that operates mainly in the rural areas (Bindseil, 2004). Bindseil, further said that in a number of countries like Nigeria, Ghana, Liberia, Cameroon, Togo and Senegal, there are also other financial institutions such as savings and credit cooperative and credit unions which are generally classified as semi-formal financial institutions because they are neither controlled by the countries’ banking laws nor by Central Bank regulations.
2.4.1 Formal Institutions
Formal financial institutions are financial providers that are subject to the operating country’s banking laws. These can be government institutions or private banks (Okojie et al, 2010). Among these, only a limited number, especially the commercial banks, community banks, and Nigeria agricultural cooperative societies are actively engaged in providing loans to smallholder farmers (Olatunde, 2003). The formal sector is an inheritance from the colonial times and activities are being regulated by the government (Iganiga & Asemota, 2008). In Nigeria, the formal financial system provides services to about 35% of the economically active population while the remaining 65% are excluded from access to financial services (CBN, 2005). This 65% are often served by the informal financial sector, through Non-Governmental Organization (NGO), Microfinance institutions, money- lenders, friends, relatives and credit unions.
Formal sources are big lending source and can meet all farming requirements of a farmer (Gustavo & Alberto, 2006). But require specific conditions to advance loan including geographic, climatic, price etc (Bettina et al, 2006). However, high covariate risk of agricultural production, information asymmetry and lack of proper monitoring and enforcement of loan contracts, rent seeking as a result of credit rationing is some of the factors alleged for low patronage of formal credit sources (Binswaner and Rosenzweg, 1986; Braverman and Guasch, 1989; Hoff and Stiglitz, 1990). Formal credit institutions are bogged down in their function by government regulatory controls, interest rate limits, loan ceilings, collateral requirements, high administrative and procedural costs, and subsidized discounts (Srinivas, 1991). Formal financial institutions especially banks have historically been adverse to small and medium scale enterprises especially the smallholder farmers due to:
o Banks ‘unfavourable lending strategies of which do not meet small and medium scale farm/ enterprise requirements.
o the absence of suitable/ adequate collateral
o farmers low education, management and entrepreneurial skills
o high risk of default associated with small operations.
o both financial and other farm records are not adequate to meet capital market listing (Carpenter, 2001).
2.4.1.1 Sources of Formal Finance
Commercial banks: A major job of these banks is to take in deposits from people who want to save and use these deposits to make loans to people who want to borrow. Just like any other private enterprise, the primary objective of a commercial bank is profit maximization. Because they are profit oriented, they usually request for a collateral security so as to ensure that the amount on credit will be recovered if the borrowers cannot repay (Mankiw, 2004). Examples of commercial banks in Nigeria include united bank of Africa plc, First bank plc, Zenith bank etc. Also it is noted that in Nigeria, that the federal government directs Commercial banks to allocate a part of their lending’s to agriculture at a reduced interest rate.
Microfinance banks: The unwillingness or inability of the formal financial institutions to provide financial services to the urban and rural poor, coupled with the unsustainability of government sponsored development financial schemes contributed to the growth of private sector-led microfinance in Nigeria. The federal government on the 15th of December, 2005, through the Central Bank of Nigeria (CBN) issued a microfinance policy surpervisory and regulatory framework that allows for the establishment of microfinance banks that will cater for the need of small scale business and the low income group and permit them to contribute to rural transformation, promote synergy, and mainstream/graduate the informal subsector into the formal financial system.
2.4.2 Informal Institutions
Informal loans are loans from financial institutions that are not registered. The example of such are age grade unions, churches, friends, relatives, unregistered cooperatives, isusu or esusu union among others (Okpukpara, 2009). Aryeety and Udry (1995) discussed the type of informal financial units in Africa. Accordingly, there are three types of informal units, these include, (i) savings mobilisation that do little or no lending, (ii) lending units that seldom engage in savings mobilisation (money lenders); and (iii) units that combine deposit mobilisation with amount of lending, groups, that is, rotating savings. They went on to describe the first units which are available in virtually all the countries of West Africa as savings collections. They do not engage in lending and the member merely collects what he or she saved at the end of the agreed period. The second units include money lenders as may be found in relations, friends, landlords and neighbours who seldom engage in savings mobilisation, but in lending money, while the third unit of the informal market include savings and credit associations and credit unions that take deposits and lend in various forms to members only.
2.5 Problems of Agricultural Credit Acquisition
The essence of employing agricultural credit is to expand beyond the boundaries presently set by agricultural production. In Nigeria, the problems associated with credit demand and supply has led to cumulative problems in credit acquisition, hence agricultural production problems. Nto, (1992) meanwhile, asserted that agricultural production would be enhanced when agricultural credit is properly harnessed for increasing output in agricultural and other ancillary occupations. He further posited that agricultural production would be enhanced if more credit and conditions of credit were to have their full effect. Government sponsored credit programmes forms the major avenue through which credit is made available to farmers in Nigeria. Eneh (1996) noted that these credit programmes often times fails to take into consideration the peculiar circumstance of small scale farmers, by insisting on such credit conditions that the farmers cannot guarantee. On the part of farmers, he also noted that their failure to identify the following crucial questions, hamper credit acquisition: how much does he want? How does he intend to repay? Is the customer business financially strong enough to keep the business alive? It is in line with the problems inherent in farmers.
Moreover, Gross et al. (1993) identified the problems of agricultural credit acquisition to the falling short of the requirement of lenders by farmers. These he called the six (6) Cs in lending, and include the following: character, capability, capital, collateral, conditions and confidence.
Character: This is an evaluation of the personal characteristics of the farmers such as Age, Credit History, Applicants Behaviour and Law Suit.
Capability: This means the ability and capability of the farmers to repay, it involves his assessment of level of education, management experience, and number of dependants and suitability of income or ability to repay (cash flow evaluation).
Capital: This involves the financial standing, the security and money owned.
Collateral: It is otherwise called security. It is the assets pledged as security for loans. It involves the resale value of the assets pledged or guarantors.
Conditions: They are the current national and local economic conditions limiting or expanding available money.
Confidence: this is the faith of the lender, which is built on the borrower’s character, desire or willingness to repay and his/her capacity, collateral and capital. Institutions like commercial banks, community banks, agricultural banks etc in some cases compounds the problems of farmers taking full advantage of agricultural credit.
2.6 Roles of credit in Agriculture
Credit utilized in agriculture would result to a strong agricultural sector, which is an essential tool to economic development; both in its own right and to stimulate and support growth of industry, stagnation in agriculture are the explanation of poor economic performance (Murray, 1994). He stated also that it has been recognized that sustained agricultural development requires striking an appropriate balance between investment that are directly productive and investment in infrastructures like rural roads, water for irrigation, electricity etc. This cannot be provided by the farmers’ income, but by credit from the financial sector. Agricultural development is a process that involves adoption by farmers (particularly small farmers) of new and better practices (Garba, 1987; Orebiyi, 1999). This is due to the fact that most of the new practices have to be purchased but few farmers have the financial resources to finance it. It was in recognition of this fact that the Federal Government at various periods put in place credit polices and established credit institutions and schemes that could facilitate the flow of agricultural credit to farmers. (Adegeye & Dittoh, 1985).
In the view of Ochai (2003), he deduced that one of such laudable Schemes has been the Agricultural Credit Guarantee Scheme Fund (ACGSF). The ACGSF is not the first credit scheme that the Federal Government put in place to encourage agricultural development.
According to CBN (1986), other farm credit schemes included:
o Nigerian Agricultural and Co-operative bank (now known as the Nigerian Agricultural Co-operative and Rural Development Bank) established in November, 1972;
o Establishment of rural branches of Commercial banks throughout the country following a mandatory Federal Government policy directive in 1976;
• Creation of the River Basin Authorities in 1979 throughout the Country;
• Establishment of both enclave and state wide Agricultural Development Projects throughout the Country between 1972 and 1980 to facilitate among other things the provision of agricultural credit to farmers;
• Development of State Ministry operated and other government sponsored agricultural credit programmes in the second half of the 1970s;
• Development of technical support and agro service establishments that would facilitate the supply of Credit to farmers throughout the country between 1976 and 1980.
2.6.1 Roles of the Credit Scheme
Various studies have shown that credit plays an important role in enhancing agricultural productivity of the farmers (Okorji & Mejeha, 1993; Nweze, 1991; Mafimisebi et al, 2008). The general purpose of the Nigerian Agricultural Credit Guarantee Scheme Fund is to encourage banks to lend to those engaged in agricultural production and agro – processing activities. Thus, the specific objectives of the scheme is the stimulation of total agricultural production for both domestic consumption and export; and the encouragement of financial institutions to participate in increasing the productive capacity of agriculture through a capital
Lending programme (Nweze, 1991).
The scheme is expected to provide guarantee on loans granted by financial institutions to farmers for agricultural production and agro-allied processing. The fund’s liability is limited to 75% of the amount in default net of any amount realized by the lending bank from the sale of the security pledged by the borrower. Since the inception of the scheme in 1978, there has been a continuous aggregate increase in the number of loans to agriculture from a paltry 341 loans amounting to N11,28 million in 1978 to 3,571 loans amounting to N218.60 million as at May, 2006 (CBN, 2007). Also, data at the Central Bank of Nigeria show that a total number of 453,748 loans valued at N11.28 billion were guaranteed from the inception of the scheme in 1978 to May, 2006. This translates to an average of 16,205 loans valued at N402.86 million per annum. The agricultural activities that can be guaranteed under the scheme include:
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2.7 Credit Constraints and Agricultural Production
The literature on credit constraints (e.g. Carter, 1989; Feder et al. 1990; Hauge, 1997) suggests that they can cause a misallocation of resources in farm production. This misallocation of inputs can then cause the credit rationed farmer to have lower profit levels than his unconstrained neighbor. The lower profit levels can come from a number of sources including lower investment levels and a misallocation of variable inputs. At the beginning of a production period, farm households need to allocate their available resources between current period consumption, purchase of variable inputs for production, and investment. The household unconstrained in the capital market can separate consumption decisions from farm production decisions. Households can then choose production inputs optimally for the production process they face. In this case the levels of inputs in production and investment will not be affected by the level of credit they receive. The credit constrained household, however, will have to choose among the investments they make and the inputs they buy dependent upon the level of credit they receive. This will have a potentially detrimental impact on production with it being lower for constrained households. This suggests that constraints in credit markets can influence farm profits and farmer resource allocation. A number of hypotheses spring from the literature:
Profit - Liquidity Effect: Access to credit allows farmers to optimize input usage for a given set of fixed assets in the short term. Credit constrained farmers will use inputs only up to their capital availability. In particular the amount of liquidity a constrained household has will influence the overall profit level.Investment Demand Effect: Farmers facing credit constraints will invest less in capital assets and their land. Credit constrained farmers will not be able to smooth their expenses over time. Feder et al. (1984) provide the most comprehensive review of the agricultural technology adoption literature. Foltz (1998) develops an analytic model of technology adoption and tests its propositions using the same data set from Tunisia. Implying that they will not make long-term investments, especially those which entail sunk costs.
2.8 Agricultural Productivity
Agricultural productivity is one of the key determinants of high and sustained agricultural growth, and in fact a key determinant of its growth over the longer term. Faster agricultural growth has put countries on the path of a much broader transformation process: rising farm incomes raising demand for industrial goods; lowering food prices, curbing inflation and inducing non-farm growth, and creating an additional demand for workers. Rising on-farm productivity also encourages broad entrepreneurial activities through diversification into new products, the growth of rural service sectors, the birth of agro-processing industries, and the exploration of new export market (Harvey, 2006; World Bank, 2008).9 To sum up, as Gollin, Parente and Rogerson (2002) underscore, rising agricultural productivity releases farmers for other activities, leading to structural transformation needed for Africa’s income to catch up with more advanced economies.
Countries with abundant land or rapid expansion of off-farm work have expanded the area cultivated per worker by adopting labor-saving technologies. Given the relative abundance of land in the case study countries, a temporary sectoral growth strategy reliant on expansion of area could be considered as consistent with their resource endowments (Gordon, 2008).
It would follow the historic path of other land-rich countries, such as Argentina, Australia, Canada, the Russian Federation, and the United States. In those countries, labor productivity rose sharply as additional land was brought into cultivation. Growth was accompanied by marked structural change in farming and by rapid technological adoption, largely in mechanical technology. Harvey (2006) emphasized the strong linkage between agricultural productivity, small-scale farmers and economic growth. He noted the impact of agricultural productivity on transformation of poor countries to prosperous ones and concluded that increasing agricultural productivity is a necessary condition for poverty alleviation.
2.9 Long-standing Constraints to Smallholder Agriculture
2.9.1 Land Tenure, Access Rights and Land Management
The uncertainties regarding land tenure and the inadequate access to land have been a critical challenge to smallholder farming in East Africa. These problems can be examined from different perspectives. The constraints related to the tenure system, such as insecurity of land tenure, unequal access to land, lack of a mechanism to transfer rights and consolidate plots, have resulted in under-developed agriculture, high landlessness, food insecurity, and degraded natural resource. Furthermore, the available land in East Africa is overly subdivided into small and uneconomic units, resulting generally in fragmented production systems and low productivity. In fact, the farm sizes range from as low as about 1ha per household in Ethiopia and 2.0 ha in Tanzania and 2.5ha in Uganda and Kenya.
Despite their small sizes, the landholdings in the study countries exceed the African average of 1.6 ha, but remain well below those of North America (121 ha), Latin America (67 ha) and Europe (27 ha). In addition to this very low absolute level of landholding, the distribution of available land is highly inequitable. Specifically, households in the highest per capita land quartile in East and Southern Africa control 5 to 15 times more lands than households in the lowest quartile. In Kenya, for example, mean farm sizes for the top and bottom land quartiles were 6.69 and 0.58 hectares, respectively, including rented land (Jayne et al., 2006).
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