LITERATURE REVIEW

THEORETICAL LITERATURE

Microfinance refers to the entire flexible structures and processes by which financial services are delivered to micro-entrepreneurs as well as the poor and low income population on a sustainable basis. It recognized poor and micro- entrepreneurs who are excluded denied access to financial services on account of their in ability to provide tangible assets collateral for credit facilities (Jamil, 2008).

Microfinance can be seen as a supply of loans, savings and other financial services to the poor. It is the practice of delivery those services in a sustainable manner so that, poor households will have access to financial services so that they can build sustainable micro-enterprise while micro-enterprise is a business that is independently owned and operated by its owners and does not meet certain standards size which in most cases operated as informal business. Currently microfinance banks are of two forms, as all licensed community banks in Nigeria that met CBN guidelines have been transformed to microfinance Bank.

The two forms of microfinance Banks (MFBS) are, 1. Microfinance Banks (MFBS) licensed to operate as a unit. These are hitherto community Banks

licensed to operate branches and cash centre subject to meeting the prescribed prudential requirements and availability of free funds of opening branches/cash centre. The minimum paid-up capital for this category of banks is #20 million for each branch. The branching should be gradual within a council local before it spreads to other local council and state. 2. Microfinance banks licensed to operate in a state. These are MFBS licensed to operate in all part of the state at once without recourse to gradual coverage (spread) as in unit MFBS.

Branches are opened subject to meeting the prescribed prudential requirements and availability of free funds.

The minimum paid-up capital for this category of banks is #1 billion. About 600 community banks have migrated to microfinance banks by January 1st 2008 and there are several others that have been licensed to operate CBN, 2008.

The ministry of finance and central bank of Nigeria (CBN) have been advised to stop the bank of agriculture (BOA) from setting up microfinance banks. The development follows the decision of the banks of agriculture to establish microfinance banks in the 776 local government councils giving the advice, the national association of microfinance Banks (NAMB) said is tantamount to the aduictrain of duties and responsibilities on the part of bank of agriculture . NAMB’s chairman, Lagos state chapter, Mr. Olufemi Babajide, said the bank of

agriculture would lose focus if it goes ahead with the decision to set up microfinance banks. He said the policies of setting up microfinance banks and the banks of agriculture are different. While the former was setup to reduce poverty to a minimal level, the letter was established to provide loans to small and medium scale farmers at a more flexible and lower rate. The inability to stop the bank of agriculture on the issues that would affect the operations of the microfinance industries. If the bank of agriculture loses its focus, what would happen to the farmers?

He said the development is going to have spillover effects on operations of microfinance banks, adding that the goals of setting up the banks would be defeated, “we have over 900 microfinance banks in Nigeria today, what the federal government agencies need to do is to support the microfinance institutions financially, instead of trying to duplicate the efforts of the banks.”

Babajide (2011) said agencies, such as defunct people’s bank, directorate for food roads and rural infrastructure (DFFRI), better life programs among others were set up in the past to render microfinance services without making any success, advising the bank of agriculture to learn from history.

“Where are DFFRI and the people’s bank today? They have gone. All these agencies set up microfinance banks in the past. But they have failed to tackle the

issue of poverty in Nigeria”, he added that access to loans also failed. The CBN owns 40percent in the Bank of agriculture, while the ministry of finance owns 60percent. Under the regulation, the two agencies are required to monitor and control the affairs of the bank. Besides, they are mandated to ensure the bank keeps to its goals of promoting agriculture, via providing facilities to the farmers

Grace Azubuike (2011), she said that, as part of efforts to facilitate increase lending to the agriculture sector of the economy, the Bank of Agriculture (BOA),has given the sum of #1 billion to rural microfinance banks. Speaking in Abuja at the financial linkage forum held by Rural Finance Institution building programme (RUFFIN), the National programme coordinator RUFIN, Mallam Musibu Azeez, said that financial linkage was a good tool which provides the needed refinancing window for the agricultural and rural transformation in the in the country. According to him, locus management strategy manual already developed by the national programme for agriculture and food security (NPFS), should be widely circulated in order to help microfinance banks develop best practices in in-lending arrangements.

He, however recommended that credit facilities to farmers and the rural populace should be channeled through MFBS across the country and that the existing cooperative lending institutions should be knowledge and built upon in the design and implementation of rural financing programmes. In his words, “in terms

of disbursement of funds under the linkage programme, the existing cooperative farmers groups under the on going donor projects namely: NPFS and FADAMA 111, should be used to pilot the scheme and there should be need for capacity building training for MFBS on designing partnership and linkage service agreement “Azeez (2011)”.

Ochi, 2007 owing to the subsistence nature of production, Nigeria farmers who are mainly poor can, therefore, hardly save. Such a situation underscores the importance external microfinance bank credit as part of the strategy to support expansion of the scope and scale of their operation.

Adera (1995), the rules and regulations of the formal financial institution have tagged poor small-holders famers as unbankable.

Braveerman and Guash (1986) stated that despite efforts to overcome the widespread lack of financial services amongst small-holder in developing countries and expand credits in rural areas of these countries, only the majority still has limited access to bank services to support their private initiatives.

Rok (1994), opined that improving the availability of credit facilities by the microfinance bank to the agricultural sector is one of the incentives that has been proposed for stimulating its growth and the realization of its potential contribution to the economy.

CERAM (2007) stated that, microfinance banks credits is one of the essential prerequisites for agricultural development. Money is needed to employ labour as well as for consumption for household members. In addition, it is required for improvement in farming technique, such as the use of fertilizers and pesticides, farm supply, storage, marketing and processing.

CERAM (2007) further categorized microfinance bank credit into three types namely, short term credit to finance the current cropping season’s operation, seeds, fertilizers and farm family expenses until the crop is sold, medium-terms loans(longer than one crop year and less than three years) which is needed for the purchase of breeding stock and equipment, and long-term credit needed to purchase machines and embark on major improvement of farmland and buildings.

Atsuko Toda (2011) stated that access to finance could play a crucial role in the agricultural transformation agenda, because farmers have always been looking for credit for the adoption of technologies. She also emphasis the importance of microfinance credit to agricultural development, saying it was necessary to fuel the growth of value chains and creation of job opportunities for the unemployed youths, adding that access to microfinance was crucial for small-hold farmers.

THE ROLE OF MICROFINANCE BANKS IN PROMOTING AGRICULTURAL DEVELOPMENT IN NIGERIA

CREDIT DELIVERY

This is perhaps one of the most important roles of microfinance banks, as the loans extended are used to expand existing business as the loans and in some causes to start new ones. According to CBN (2008) microfinance loans granted to clients is increasing from 2007 to date and most of it goes to financing micro-enterprises in rural areas.

Ketu (2008) observed that microfinance banks have disbursed more than N800million micro-credit to over 13000 farmers across the country to

empower their productive capacities. As such it is expected that agricultural output will increase with increase in finding. The entrepreneurial capacity of the farmers will thus improve.

BOOSTING SMALL SCALE ENTERPRISES/AGRICULTURE.

About 60 percent of the poor people in the country live in the rural areas and 80percent of them are farmers and artisan (NBS 2005). Microfinance banks have therefore groups. Rural people are empowered through microfinance loans and services, and hence small scale agricultural practice and micro-enterprises is developed.

Governments go into cooperatives to partner with the microfinance banks to raise bulk loans to be disbursed to the beneficiaries, in so doing the

banks are increasing and sustaining the number of people going into small businesses.

EMPLOYMENT GENERATION

Agriculture and micro-enterprises contributes immensely to job creation, and which particular interest to all microfinance bank in rural areas. Microfinance banks have so far engaged in extending credits and other services to making many rural enterprises and hence generating employment in rural areas by microfinance banks covers the follow in areas, blacksmithing, goldsmitting, watch repairing, bicycle repair, basket weaving, barbing palm wine tapping, cloth weaving, dye, food selling, carpentry, bricklaying, pot-making, leather works and drumming.

It has, therefore been acknowledged that the rural setting is an area of many industries, which could be developed to contribute significantly to the national economy, just as rural people are more frequently self-employed than urban people (2008).

IMPROVEMENT IN SKILL ACQUISITION

Improvement of the conditions of women through the provision of skills acquisition and adult literacy is another role played by microfinance banks. This is done through building capacities for wealth creation among enterprising poor people and promoting sustainable livelihood by strengthen rural responsive banking methodology and the introduction of simple cast-benefit analysis in the conduct of business. In most cases a profit sharing agreement is entered between a bank and an entrepreneur and new methods and innovation are passed to the prospective entrepreneur by the banks professionals, while at the end of the productive period the proceed in being shared and the entrepreneur if so wishes can continue on his own after the necessary skills and production technique are acquired (Umar, 2005).

FACILITIES POVERTY ALLEVIATION.

Employment and increase generation are important aspect of poverty alleviation efforts microfinance banks have accelerated the operate of government poverty alleviation programmes and in doing that promising entrepreneur are supported and new ones emerged. The federal government National Poverty Education programme (NAPEP) and National Economic Empowerment and development Strategy (WEEDS) to mention a few aimed at achieving the limited Nations millennium institutions for success. The success of these programmes and projects

for advancement of the MDGs are linked with the promotion of entrepreneurs in rural areas and subsequent reduction in the level of poverty (Ketu 2008).

As Thomas Malthus stated that, food is necessary to the existence of man. An economy cannot develop well if its populace is stared as the productivity of the labour force will be below optimum. Agriculture makes important contributions to national food security and macro economics stability. At the macro level, inadequate and irregular access to food reduces labour productivity and decreases investment in human capital (Bless and Sterm 1978). .

CHALLENGES FACED BY DEPOSIT MONEY BANKS AND MICROFINANCE BANKS IN THE DELIVERY OF MICRO CREDIT PROGRAMMES

The inability of deposit money banks and microfinance banks to meet the credit needs of small holders has been occasioned by challenges faced by the lending institutions and the borrowers. Most of the lending institutions are yet to accept agricultural lending as a profitable business. While they venture into lending to other equally risky sectors, agricultural activities have always been tagged as fraught with uncertainties of weather, natural hazards, and possible attack from pest and diseases. This is further compounded by the dearth of skills in agricultural

credit appraisal, monitoring and administration in most of the banks. The credit officers of the banks are traditionally accustomed to lending to commerce, trading, services and industrial, oil and gas sectors. In most of the institutions, there are no specialized departments or agricultural experts to take charge of agricultural loan portfolios, while at the same time, there are no special trainings on agricultural lending to update staff on the technicalities involved. Another major challenge faced by the banks is the lack of rural branches, a situation which impedes outreach to widely-dispersed customers.

BORROWERS-RELATED CHALLENGES

Aside from the challenges faced by lenders, the borrowers are also faced with several constraints. First, their small-holdings and scattered nature presents technical and market diseconomies, as it require huge costs of loan administration. Also important, is the fact that many farm holdings operate under diverse cultural and agronomic practices, and this creates huge extension challenges which loan officers are ill-equipped to address.

Second, most of the farming population lacks the understanding and the competence/ appreciation of the importance of keeping farm records. This makes it difficult for them to take appropriate economic decisions and, thus, constitute

serious hurdles to loan officers in assessing their credit worthiness and risks. Third, the subsistence nature of farming hampers savings, investment and asset accumulation. The farmers can scarcely afford to provide tangible security, as a requirement for lending from banks. The communal land tenure system with shared land rights/ownership adversely affects the acceptability of land as alternative security. In rural areas and villages, land values are abysmally low and might not offer easy foreclosure processes. Finally, lack of good cultural and economic practices coupled with ineffective extension machinery, predispose borrowers to inefficiencies that affect productivity, storage and, thus, occasion defaults amongst them.

SUGGESTED STRATEGIES FOR ADDRESSING THE CHALLENGES FACED BY BANKS IN MICRO CREDIT PROGRAMMES

Addressing the challenges would go a long way to removing the bottlenecks on the part of lenders and borrowers. This paper posits that, for increased agricultural production in Nigeria to be achieved in order to meet the needs of the populace, guarantee food security, reduce local imports and promote non-oil exports, there would be need for innovative policy changes on various fronts:

FINANCIAL LITERACY

Field experience reveals that the poor farmers lack basic knowledge with regards to finance/financial services. An average farmer does not know how to keep records, manage credit, savings and other financial opportunities. There is need to provide specially crafted educational programmes which can develop their capacity in record-keeping, simple farm management principles, loan usage and repayment.

CREATION OF WELL-EQUIPPED AGRICULTURAL FINANCE DEPARTMENTS IN LENDING BANKS

Lending banks need to have full-fledged agricultural finance departments manned by staff with training in relevant fields. Agricultural economists, rural sociologists, agricultural extension specialists, economists and business management specialists would be handy for such specialized agricultural finance department. Agricultural experts are more likely to understand the dynamics of agricultural production, adopt appropriate risk mitigation strategies, loan monitoring and recovery procedures than non-experts.

There should be training and capacity building through classroom and attachment programmes for loan officers of banks. A loan officer should be able to understand the peculiarity of agricultural production, properly assess agricultural loan

proposals and effectively determine the credit worthiness of borrowers using techniques that are applicable to the sector. Training should be a continuous exercise and this would enable them to disburse loans at appropriate times, monitor loan utilization and give simple advice during their interactive visits with borrowers.

AGRICULTURAL CREDIT FUND/INCENTIVES

Special wholesale funding arrangements should be put in place from which agricultural lenders; particularly microfinance banks could draw resources for on lending to farmers. Some eligibility criteria should be set for deciding the institutions that would access these funds. These would include proven record of previous channeling of certain portion of their portfolio to performing agricultural/agro allied activities, and that such credit disbursement would be structured to meet the production cycle of the farmers. Such proviso will encourage the microfinance institutions not only to lend to the sector but to innovate ways to better improve agricultural finance and production.

CREATION OF ENABLING ENVIRONMENT FOR AGRICULTURAL LENDING

There is need for stakeholders to collaborate in order to create an enabling environment that will attract young school leavers and graduates into the agricultural sectors. This can be achieved through provision of basic infrastructure such as pipe-borne water, road network, electricity and working tools and equipment. Government should channel subsidies to areas that demonstrate potentials for increasing the efficiency of agricultural production and, hence, its profitability. Incentives such as tax holidays for profits on agricultural lending could also be an added advantage to the financial institutions. Agricultural financing at the grassroots require peculiar products; for instance, while tangible collaterals are essential and effective in urban credit delivery, small-holder lending cannot provide such securities, and as such would require the promotion of appropriate products and methodologies.

IMPROVEMENT IN EXTENSION SERVICES/DONOR COORDINATION

A good number of donor agencies in Nigeria are active in various agricultural activities. While some are focusing on functional demand-driven programmes, others, especially new entrants are still on the supply side. There is need to coordinate these activities not only to share experiences but for optimum delivery of intervention with reduced duplication of efforts. To improve extension services, extension workers must be regularly and properly trained and be supervised to ensure they are active, efficient and innovative. More so, sharing experiences with others in the same field would help in disseminating valuable information at minimum cost.

DELIBERATE FOCUS ON INVESTING IN LARGE-SCALE FARMING

Nigerian agricultural population is basically rural and should be capacitated to achieve the objective of food security. Efforts should also be made to develop a new crop of properly trained agricultural practitioners that have capacity for managing big agricultural plantations, adopt improved technologies and interlink with research institutes, and markets as well as sources of raw materials. It is suggested that while efforts are being made by development agencies to meet the needs of small-holders such as through Fadama 2, the time is now ripe for strategic

steps to be taken in favour of large-holders. In addition, specialization and large- scale production of identified crops should be encouraged.

FORWARD INTEGRATION AND FUNDING OF VALUE-ADDED PROCESSING ACTIVITIES

Most successful large-scale farm businesses are integrated projects with backward and forward linkages. Bank support to agriculture should pursue the twin objectives of primary production and processing, either in one unit farm or linked with a firm that processes the primary farm products. This will not only guarantee market for the producers but put the products in forms that will improve shelf life, market and export potentials.

REORGANIZATION OF LENDING STRATEGIES FOR BETTER EFFICIENCY

Lending to agriculture under the current dispensation should be strictly market driven. The Federal and State governments should create enabling environment that will attract young people, particularly school leavers and graduates to take agriculture as a profession. This can be achieved through systematic commitment

to the provision of social amenities such as pipe-borne water, road network and electricity in rural areas. For instance, improved roads will ease the evacuation of products to the market on time and possibly bring about cheaper prices, while provision of electricity could enhance value-added processing opportunities that might increase the revenue of farmers. Also important, is the provision of working tools for agricultural extension staff to support the dissemination and application of research findings by the farmers. Support for research and extension would lead to increased output and, consequently, increased returns on investment, profitability and higher debt capacity/ repayment. Subsidies by government should be applied in areas that can increase the efficiency and profitability of agricultural activities. Micro borrowers should be the targeted area of the microfinance banks while the deposit money banks should concentrate on large borrowers.

The Bank of Agriculture (BOA) (formerly the Nigerian Agricultural Cooperative and Rural Development Bank (NACRDB)) should provide wholesale funds for on- lending activities of microfinance banks. Government subsidized credit to the agricultural sector should be channeled through the microfinance banks or other market based financial institutions so as to promote harmony, market discipline as well as avoid market distortion in the financial sector.

EMPERICAL LITERATURE

Chirwa (1997) specified a probit model to access the determinants of the probability of credit repayment among small-holders in Malawi. The model allows for analysis of borrowers as being defaulters or non-defaulters. Various specifications of the x-vector were explored by step-wise elimination. However, only five factors (sales of crops, size of group, degree of diversifications, income transfer and the quality of information) were consistently. Significant determinants of agricultural credit repayment the explanatory power of the model is plausible with the log likelihood statistically significant at 1-percent four independent variable gender amounts of loan, club experience and household size were put statistically significant in various specifications.

Oni (1999) studied the proportion of loans repayment by small-holder farmers in Osun state. His explanatory variables were amount of loans collected, expenditure on farm, interest rate, and extent of farmers contact with bank disbursement log, cultivated land area and years of experience in farming. The result of linear and log form equations showed that the regression coefficient associated with amounts of loan (+), disbursement of loan by microfinance log (-) and extent of farmers contact with banks (+) had expected-signs and were statistically significant at 5percent.

Ogwuma (1981) studied on microfinance bank credit in agricultural sector using econometric analysis. Based on his report, agricultural financing in Nigeria

shows a positive relationship between interest rate and loan able funds on the level of agricultural sector ended up with faster industrial growth than those that focused on industries alone. Hence, agriculture may therefore be the fastest road to industrialization.

Sohali et al (1991: 38) in the study on the relationship between microfinance bank credit and agricultural development in Pakistan found out that a statistical significant relationship existed between microfinance bank credit in Pakistan and agricultural development.

LIMITATION OF THE LITERATURE REVIEW

Given that this research depend on existing literature and data on the theme of the subject (microfinance), its availability to a great extent limits the comprehensiveness and reliability of this study, coupled with the limited time frame and the unwillingness of the microfinance institutions to release data to the researcher.