THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL SCALE AGRICULTURE IN NIGERIA (A CASE STUDY OF UDI, AWGU, EZIAGU AND ENUGU SOUTH)
This chapter contains the review of related literature about what other writers ,authors and people said concerning the topic chooses . In reviewing the related literature ,text book ,journal and magazines has been used .THIS chapter is divided into different sub –heading for easy understanding .
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- SIGNIFICANCE OF SMALL FARMERS
In Nigerian as in many developing countries agriculture production in overwhelming in the hands of small holders .
According to McNamara S. ROBERT on his address to the board of Governors delivered by the president of the world bank at the annual meeting in Nairobi Kenya , on September 1973 . He said that there are over 100 million families involved and more than 700 million individual in developing country ,the size of the average holding is small and often fragmented .More than 100 million farms are less than hectares .
Chidebelu Angus S.N on problem of small holders credit in south Eastern Nigerian also in support of the above statement stated that small holders farms dominates food production in south –Eastern Nigerian .Average farms size for food crops in [1970-1971] ,according to him as 0.2 hectares .
Also Read: The Roles Of Central Bank Of Nigeria And Merchant Banks In Financial International Trade In Nigeria.
Shultz 2-transforming traditional Agriculture 1964 noted that these small holders exhibit a wide range of physical , economic and cultural characteristics which affect resources use and in turn the of farm productively . Thy have some common features. Most of then are technically backward and financially weak and kick access ,to opportunities for increased productivity and income. This factors severally restricts their output and income and also threaten their viability.
- SOURCES OF FINANCE
Most small scale farmers in Nigerian as we all know depends on private sources of finance such as personal savings, relative and friends, money renders ,thrift societies e.g. (ESUSU CLUBS)and co- operative sources .private personal savings is an insufficient sources in most cases .
IN Injure M.O – Economic development in NSU university of Nigerian 2000 determine that in the case of ESUSU club financing, the amount used for agricultural purpose varies according to the competitive demand of the non-agriculture sector ,personal needs and the level of agriculture production . The ESUSU type of credit institution has a basis principles of self imposed or group influenced savings on a regular interval with some form of credit facilities made available to most of the participating member .loan in this type of institution are usually small ,garneted on personal basis , secured with verbal pledge ,but backed with an obligation to repay .
What appears to the major economic function of the system centers on the fact that funds which have been frittered away in small bits are pooled together in more econmic lump sums in some activities . EZE and OGBANNA, MN [1972] .The present financing of agriculture in the east central state “. Observed that one serious weakness of the club was its great incidence of default loan and gifts from relative ,friends and neighbors constitutes another .Under this source of finance an individual seeking for money for his farming operations , goes to either his relative or friends for credit or grant . These loan attract very low interest rate where it exist at all, and loan are given out based purely on their confidence that the borrower will definitely repay them .The authors [EZE and OGBONNA ] feel that this form of credit is not a very sure source and where possible should not be relied on fully as a means of credit for agriculture . This according to them was because of the collaterals in form of mortgages of ones palm plantation usually given of prices below the market prices associated with this source of credit In addition, the lending capacity was found to be low .
Another source of finances open to small-scale agriculture is the moneylender. According to the economics of the developing countries written by Myint H. (1974) irrespective of the fact that these money lenders change exorbitant rate of interest ,the government sponsored agencies have rarely been able to provide the market and credit facilities needed by the peasant farmers as easily and effectively as the existing money lenders . The financial institutions are other sources of finances for agriculture. The two institutions that appear suited to be need of small scale farmers are commercial banks and co-operative banks. This study however, is committed in analyzing the role of both .The role that commercial banks can play in the prevision of finances for agriculture cannot be over –emphasis , because of their ability to control large sums through thy are held as regarding agriculture and its related enterprises as too risky and an unreliable area of investment .
Okaijbo P.N .C (1981) Nigerian financial system structure and growth. He observed that though co –operative banks are suited for agriculture financing, they suffer the problem of slender resources and the provision of credit to non-operative ventures. Ijere M.O (1987) regarded the NACB as hither to favoring bigger agricultural entrepreneurs than rural small scale farmers .In its proposal for a national scheme for agricultural credit for small scale farmers ,he noted observable achievement of the NACB in loans and advances to medium and large scale farmers . However, it noted that as at may 1980 loans approved by the N.A.C.B amounted to N358.4 million of which N308.7 million were disbursed .On the average, these loans were sizable amounting to 1.2 million per project which is an indication that the loans were sometime mainly for large scale projects of the 290 project financed by the banks that same year, 207 or 74.4% were large scale project often enjoying state patronage.
- USES OF FINANCE
Several authors such as Baun (1970) Ijere (1972) and a host of others have discussed the role of finance in the economic development of small farm agriculture. Pishke J.O.U 1983 describe credit as a vehicle for agriculture development and suggestion that credit was necessary if small farmers has to drive the benefits of the improved technology. Mac namara 1973 was of the same opinion when he declared that for small holders , operating with virtually no capital , access to credit was crucial no matter how knowledgeable or well motivated he may be without such credit , he cannot buy improved seeds , apply the necessary fertilizer and pesticides , rent equipment for development of his water resources.
Olanrewala A. O on his financial and from commercial banks to small and large scale farmers in Nsukka local government area. 1981, In a field survey of 50 small farmers reported that their need for financial aid in the form of credit stem from the following factors.
- i) The seasonality of farming in the areas which results in farmers income being unstable and a seasonal.
i)i. The need to meet labour expenses.
iii). The provision of adequate storage arrangement which would enable them hold stock, till favourable price prevail in the market thereby strengthening their position in the disposal of the farm products
- iv) The need to service capital equipment and purchase input.
- v) The need to meet financial commitments outside the farm like paying children school fees, naming and burying ceremonies, taxes and dues and buying necessities for the home. There mo 1972 (pole and future organization of credit in east central states agriculture). He observed that the effect of credit on the farms was greatest with labour and suggested that credit enable labour to be better utilized. Lee at el w.f. Agricultural finance 1980 classifies financial need of agriculture with respect to time into three groups accounting to the term of loan.
- Short term (production capital) monthly, 0-3,3-9 months seasonal.
- Intermediate term loans 1-5 years or 1-10 years.
- Long-term loans (real estate credit).
According to Ukanwa S.I, liquidity problems of agricultural credit institution (1981). The various uses which agricultural finance is put into showed the need for agricultural credit institution to overcome whatever problems they have, so as to mobilize all their financial resources for agricultural developmenent specifically and economic development in general. Crick W.F “common wealth banking system 1965’’ pointed out that the need to integrate the credit structure is of high importance. He state that this arose from the major role which agricultural production and processing play as foundation for a successful development programme. On the other hand, inadequate capital or the inability to meet up with financial need of agriculture appears to be the central factors around which other factors militating against agricultural development in Nigeria resolve as argued by Oguntawora and Ogunfawora (1981).
They stated that not only capital shortages limits the adoption of improved cultural and business practices and large scale expansion, but it also has been identified as constituting a drag on the rate of agricultural modernization in the country.
They use of farm credit as a necessary input for the structure transformation and expansion of rural agricultural production has been highlighted by Olayide and Ogunfawora (1981).
They contented that inadequate credit would prevent rural producers from adopting innovation especially where mechanical, biological and chemical form involved. Also actual cash to pay for labour and hold product in store constituted a major bottleneck to rural development. They observe that the bulk of farm credit in Nigeria come from private sources, which were largely inefficient. Thus for efficiency, credit should be institutionalized and backed by adequate funding, proper supervisor and timeless of operation
- ROLE OF COMMERCIAL BANK
Friedman (1977) summarized the advantage of the private bank as deriving from their adversities competitiveness, international connection, magnitude of lending capability, flexibility, reasonable terms and speed of response, it is however doubtful whether the diversity of commercial banks operation is a significant advantages to those seeking to utilize the institution as a means by proving a majo5r share of agricultural financing. Ijere (1982) in a paper. He presented in canda, noted that Nigerian commercial banks have been spectacular in credit mobilization, despite their potential for the same, though he added, that they can be a very great institution source of agricultural financing. Although commercial banks have in recent years steadily expanded their loans to the agricultural sectors, the prevailing concern is that their lending has been directed to few large farmers and corporate agricultural enterprises to almost the exclusion of many farmers who are small scale producers.
According to Orakwe (1982) on his small farmers credit problem sof availability and repayment in Nigeria’’ an important aspect of the show pace of farmer advances by commercial banks to small scale producers has to be searched on the side of farmers who have by and large displayed shyness or unwillingness to adopt to the condition imposed by banks in providing credit. The credit policies under which commercial bank operate do not take small farmers into accounts. This fact is supported by the management of the agricultural credit guarantee scheme of the various state government appear to have attracted many prospective borrowers especially the small ones. Who perhaps found the terms much easier and more preferable than loan obtained directly from banks. It is a well known fact that mo st of the small farmers are for example not credit worthy in the sense acceptable to the banks and cannot produce the substantial security which the banks require. According to the management of the agricultural credit scheme they have urged the banks to be less rigid in this demand for security especially with respect to small ones, it is obvious from the small farmers, that this plea has not been effective.
- FACTORS AFFECTING THE DISTRIBUTION OF CREDIT TO FARMERS.
Chidebelu angus S.N (1985) in this paper state that the banks face internal and external constraints to their credit operation with small farmers.
Internal constraints he said include, the nature of operation of commercial banks, the need for security and a storage of qualified personnel. Commercial banks are profit oriented and prefer to give loan because of incentives i.e., of investment and the capital market. Farmers, he said often prefer intermediate to loan. Thus without overwhelming guarantee by these farmers, which would have reduced the risk and uncertainties attened on long term, commercial banks are normally reluctant to lend to small holder farmers.
Commercial banks operate with their customers funds hence they require their borrowers pledge of acceptable and easily marketable securities or collateral for loan since there intention to repay often never materializes. Such acceptable marketable securities / collaterals are often beyond the reach of smallholder farmers and therefore, bank manager, for security reasons, refuse loans. Chidebelu argued that shortages of qualified personnel imposes internal constraint on the commercial banks ability t9o grant certain loans.
From his study, he observed that neither the international banks for west African limited (Afribank) nor allied bank of Nigeria plc in Sukka had an agricultural economist. The manager be said complained that loans to farmers involved field work to assess and establish claims, and with the absence of agricultural staff, such project evaluation were impossible.
- REPAYMENT PERFORMANCE IN CREDIT TO PROGRAMME
In Nigeria as in many develop countries, the problem of loan default is not peculiar to small farmers, but it is notable feature in almost all credit programme. According to Boakye – Dankwa, the possible effect of loan recovery set includes the fact that loan arrears decrease lenders not return, thereby reducing the ability of the lender do generate resources internally for institutional growth. The word bank according to central bank of Nigeria progress report on activities of A.C.G.S.F in Anambra state January –July 1985, also reported that credit institution faced with a chronically poor repayment performance face loss of liquidity and suffers the additional costs involved in collective activities. According to food and agricultural organization F.A.O (1973) in ability to small farmers to repay lo an can be traced to the imperfection factors and to the farmers themselves. The food and agricultural organization listed several factors that may causes loan default. They are as follows
(i) Unsuitable technology.
(ii) Poor management ability of the borrowers.
(iii) Lack of adequate market outlets
(iv) Poor selling price.
- Unsuitable disbursement procedures
- Unnecessary rapid in flexible repayment arrangement.
- Lack of supervision
- Natural disaster life pests, diseases etc.
- Unexpected contingency facing borrowers.
The World Bank on the other hand suggested three general reasons.
- Failure of the farmers to use loan for productive purposes.
- Investigation going bad as a result of bad harvest natural disasters change in economic condition followed by a drop in farm price etc.
- Refusal to repay. The world bank then concluded that small farmers appears to be more prone to delinquency because they are more likely to use borrowed fund for consumption and in poor crop yield are less able to generate the marketable surplus needed to repay their loan.
- PROBLEM ASSOCIATED WITH AGRICULTURE ITSELF
The constraints posed by the lack of agricultural credit have been recognized by many eminent scholars. “ Some aspects of farm level credit use in Nigeria’’ written by Osuntogun (1980) contended that lack of credit is an important constraints in food production credit was made available on suitable terms, the majority of small scale farmers be serious handicapped in adoring profitable technology.
To correct the situation demand huge capital investment in agriculture and this too require increase and efficient credit facilities. The food and agricultural organization of the united Nation (1965) also pointed out that “Agricultural credit is not simply a banking business’’. There is more to it than making loans to farnmers especially when the amount required by each borrowed may be small and yet in the aggregate represents considerable risk.
Credit loan is of no avail to small framers if it is not accompanied by complementary services which will help the borrower to use the money productively. With these general observation, let me now enumerate the problem specific to agricultural or rural credit as mentioned.
- Natural hazard such as solid factors pests etc. which are often unpredictable and some of which have no immediate feasible solution.
- Time specify of activities in agricultural product.
- Poor and inadequate infrastructures facilities in the Enugu agricultural Zone.
- Very slow rate of return of some agricultural project and hence prolonged to breakeven.
- Seasonal fluctuation in the demand for certain foodstuff and the high vulnerable, erratic fluctuation in prices.
- PROBLEMS IMPOSED OR CREATED BY BANKS
- Impossible security.
- Complicated application form.
- Late disbursement of loans to farmers.
- High administrative charges.
(ii) PROBLEM CREATED BY THE FARMERS
- Misinterpretations of the objective of government in instituting credit programme. Some farmers regard government loans as national cakes, bonus grant or subsidy that should be distributed equally at the grass root level among local government areas, without much regard to prudent banking practices and norms.
- Diversion of loans means for agricultural project to other ventures and for family consumption.
- Management of loans due to wrong selection of enterprise beyond available material capacity.
- The problem of “Emergency farmers ‘’ who often exploit any loopholes in government programmers to secure loan for selfish ends.
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