NON INSTITUTIONAL SOURCES OF FARM CREDITS: PROBLEMS AND PROSPECTS (A CASE STUDY OF MAKURDI LOCAL AREA OF BENUE STATE)

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Agriculture, which is the cultivation of crops and rearing of livestock for the satisfaction of human needs, is the most important sector towards the development of any nation [CBN, 2013]. The greatest avenue for employment, income and food for Nigerian populace (general public) is through Agriculture. The agricultural sector has been an important component of the Nigerian economy with peasant farmers producing over 90% of available food in the country and 70% of the labor force relying on these sectors [Amao et al, 2013]. The Agriculture sector lies in the hands of small scale farmers, whose expansion in terms of provision of scale of production is low due to low inputs and low income. The Nigerian economy is declining particularly in the area of agricultural productivity because of lack of credit facilities, which prevented many farmers from adopting improved practices, since some of them lack the collateral for secure loan or credit from financial institutions [Asogwa et al, 2014]. Informal credits have been gaining increasing attention in literature with reports of popularity of informal lenders among the rural poor who in some cases see them as the only means of financing their farm and other business activities. Informal financial institutions are well patronized in Nigeria. Writing on the popularity of fixed and rotating savings and credit associations (ROSCAs), Seibel (2010), notes that there may be only few Nigerians who are not a member in one or several of them. Virtually, all ethnic group has its own institutions and proper names (adashi, in Hausa, perhaps the best-known besides esusu); and most adults are members in one or several (Nwankwo 2013). The money lender is no less important in the informal credit arrangements in rural communities, in spite of the fact that he may not be the most desired person in the community because of his antecedents. In spite of his usurious rates, Ijere (2015) affirms that he is patronized by many in Nigeria’s rural areas because his timeliness in credit disbursement, a broader interpretation of farm credit to include the farm and home financing and expeditious enforcement of loan terms to ensure enforcement. Khandker and Faruqee (2013) noted that informal credit is largely used for consumption and it’s not large enough to spur investment and growth. Credit in agriculture is very important as technical inputs can be purchased and used by farmers only if sufficient money (funds) is available with farmers and most farmers suffer from the problem of inadequate financial state. This situation leads to borrowing from an easy and comfortable source. Up until 1935 professional money lenders were the only source of credit to agriculture. Their charges rate of interest used to be unduly exorbitant and follow serious practices while giving loans and recovering them. As a result, farmers were heavily burdened with debts and many of them are left with perpetuated debts. There were widespread discontents among farmers against these practices and there were instances of riots also. Informal credit dominates agricultural financing among the rural households as in the case of other rural settings (Avishay & Guash, 2016). The dominance of informal finance with a lack of market-based rural finance has negative implications for rural growth and welfare (Khandker & Farugee, 2015). The demand for credits from this rather highly segmented informal market is increasingly high despite these pitfalls. The government policy of providing cheap credit to the agricultural sector by developing economies through formal financial intermediaries has failed. As pointed out by Hoff and Stiglitz (2013) and Basu (2015), apart from the inability of rural dwellers to access these cheap funds, the would-be beneficial trickle-down effect of reducing the usurious rate of interest in the informal sector by lowering the cost of fund to the lenders is far from being achieved. In rural settings credit from informal sector continues to dominate agricultural financing. The informal credit sources have played more significant roles in agricultural financing than formal sources since it is closer to the rural farmer in Nigeria. In Nigeria some of the informal credit sources that are popular are; savings cooperatives, credit associations, rotating savings, lending, gifts from relative and friends, merchants, various clubs, village banks, and money lenders (Otu 2013; Udoh, 2011, Oni et al., 2011 and Ugbomeh et al., 2008). The role of informal lenders in financing agricultural activities is huge owing to the fact that more than 80% of farmers in the state operate in small scale basis in so many states (Akpan et al., 2010). Farmers could not afford stringent requirements of formal credit sources; and are therefore left with very little access to financial services from the formal financial system (Udoh, 2011). Following the current policy of Akwa Ibom state government on increased agricultural production and achievement of selffood sufficiency; there is an overwhelming need to increase financial capital into rural agricultural sub-sector in the state. Informal lending institutions provide the best platform for the achievement of this goal since majority of them operate in rural areas. In spite of the importance of credit in agricultural production, its acquisition and repayment are fraught with a number of problems especially among farmers in the rural communities (Awoke, 2010; Udoh, 2011; Oladeebo et al., 2008). Increase in informal credit delinquency among farmers in Benue state could negate the state government policy objective on increased agricultural productivity. The sustainability of the informal lending institution which is the closest to the farmers in the state could be in jeopardy with increasing loan default among it beneficiaries. However, Aryeetey (2012) stated that the informal rural financial sources in Africa perform better than the formal sources because they have adapted to the high-risk environment. Hence, there is need to assess farmers’ specific characteristics that could affect loan repayment to informal lenders in the state. The credit inadequacy has been a major problem militating against the effectiveness and development of rural farmers in Markurdi local government area of Benue State, and thus it is need for credit source to help break this vicious cycle of poverty that exists among them and thereby improve their socio-economic well-being.

1.2 STATEMENT OF THE PROBLEM

Nigeria has been known as a developing country with most of her population living in rural areas, in which employment in agricultural production accounts for more than 50% on individual basis. The proportion of households that have their main income from agriculture is much. However, farmer’s access to credit in Nigeria remains a difficult task because of the nature of the rural credit markets and the lending procedures. Non institutional and institutional markets are observed to commonly exist in rural Nigeria. The supply of institutional lenders is quite restricted, because of the formal market imperfection, so the non institutional credit sources are likely to be dominant in rural areas. Poor and low-income households are often limited to access institutional credit, because they do not have enough collateral, so cannot borrow on the basis of their income. Improving the availability of credit facilities to this sector is one of the incentives that have been proposed for stimulating its growth and the realization of its potential contribution to the economy (ROK, 2015). In addition, there is no empirical study indicating the potential role of improved lending policies by both formal and informal credit institutions in alleviating problems of access to credit. Knowledge in this area, especially a quantitative analysis of the effects of lending policies on the choice of credit sources by farmers, is lacking for the rural financial markets of Nigeria. Although non institutional sources of credit intermediaries have proved relatively successful in meeting the credit needs of small enterprises in some countries, their limited resources restrict the extent to which they can effectively and sustainably satisfy the credit needs of these entrepreneurs (Nappon and Huddlestone, 2014). This is because as small scale farmers expand in size, the characteristics of loans they require become increasingly difficult for informal credit sources to satisfy, yet they still remain too small for the formal lenders (Aryeetey, 1996a). Credit inadequacy has been a problem militating against the development of the rural farmers in the world at large and Nigeria in particular. This inadequacy is caused by a number of factors, which include the part of farmer’s lack of knowledge of the sources of credit. Based on the considerations above, the aim of this paper is providing an overall review of problems and prospects of non-institutional sources of farm credits in Nigeria.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine non-institutional sources of farm credits: problems and prospects. Other general objectives of the study are:

1. To examine the sources of non-institutional credit in the study area.
2. To examine problems farmers face in loan procurement and repayment.
3. To examine the impact of informal credit on farm income in Markurdi, Benue state.
4. To Identify the major constraints affecting the use of informal financial institution in the study area
5. To examine the relationship between non-institutional farm credits and sustainable development.
6. To suggest ways in which better agricultural financing could guarantee a sustainable development in Nigeria.

RESEARCH QUESTIONS

1. What are the sources of non-institutional credit in the study area?
2. What are problems farmers face in loan procurement and repayment?
3. What is the impact of informal credit on farm income in Markurdi, Benue state?
4. What are the major constraints affecting the use of informal financial institution in the study area?
5. What is the relationship between non-institutional farm credits and sustainable development?
6. In what ways will agricultural financing guarantee a sustainable development in Nigeria?

RESEARCH HYPOTHESES

Hypothesis 1

There is no significant impact of impact of informal credit on farm income in Markurdi, Benue state.

There is a significant impact of impact of informal credit on farm income in Markurdi, Benue state.

Hypothesis 2

There is a significant relationship between non-institutional farm credits and sustainable development.

There is a significant relationship between non-institutional farm credits and sustainable development.

1.6 SIGNIFICANCE OF THE STUDY

The study is aimed at evaluating the financing, policies and initiatives in the agricultural sector in Nigeria, for a sustainable development. The findings from this study will help various stages of Government in Nigeria, thereby helping in policy statement, especially now that the economy is begging for diversification. The Private sectors, Non-Governmental Organizations, farmers and potential farmers will find the findings of the study useful for their decision making process. Researchers and potential ones are likely to benefit from this study. In essence, the study will be beneficial and add knowledge to students so as to enlighten them more on Agricultural credit programs. The study shall therefore serve as a reference for further research.

1.7    SCOPE OF THE STUDY 

The study is based on non-institutional sources of farm credits: problems and prospects, a case study of Makurdi Local Government Area of Benue state.

1.8 LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Agricultural Finance: "Agricultural finance is the study of financing and liquidity services credit provides to farm borrowers. It is also considered as the study of those financial intermediaries who provide loan funds to agriculture and the financial markets in which these intermediaries obtain their loan able funds”

Rural Finance: Is a spatial concept, which encompasses the provision of different financial services to households and enterprises in rural areas for both productive and consumptive purposes. Rural financial services include loans, savings, payment and money transfer services, and risk management (e.g. insurance, hedging and guarantees).