THE IMPACT OF MICROFINANCE CREDIT ON AGRICULTURAL PRODUCTIVITY IN NIGERIA
CHAPTER TWO
REVIEW OF LITERATURE
2.1 Introduction
In this chapter, the focus will be to review related and relevant literatures .on Agricultural productivity and credit financing. This review will be categorized into theoretical review and the empirical review.
2.2 Theoretical Literature Review
2.2.1 Risk and Uncertainty
Theory Risk and uncertainty concepts in agriculture are subjects internationally discussed by theoretical economists and empirical analysts. The operations of a farm enterprise are not as protected as in the case of commercial and industrial enterprises. Forecasting farm income is a difficult task. Agriculture suffers from various risks and uncertainties for example risks emanating from natural hazards and calamities, risks of loss of property by fire, thefts, loss due to abrupt and wide fluctuations in prices of farm products and the risk arising out of the death or disability of the farmer. Credit risk is faced by both lenders and borrowers. An increase in farm investment will take place only when the risks and uncertainties in the minds of farmers are removed (Jugale, 1991)
2.2.2 Demand and Supply Theory
The theory of demand plays a very important role in business management because it looks at the concept of elasticity of demand and the determinants. It enables a firm to determine what to produce into the market, how much of it, when and where. Theory of demand forms the basis of pricing and it enables firms to measure the reaction of customers towards critical market forces. With intense knowledge and understanding of demand and supply theory, production and the subsequent sale of the produce is well forecasted.
This reduces losses attributed to excess supply. According to Singh and Nyandemo (2007), quantities demanded will change whenever there is a change in the determinants of demand and supply. This therefore means that knowledge of elasticity of demand and supply is necessary because it is a measure of the responsiveness of demand or supply of a commodity to the changes in its price or changes in the income of the consumer.
2.2.3 Agency Theory
The effect of employing external debt rather than equity financing is that it reduces the scope for managerial perquisite consumption, which can have an adverse effect on the value of the firm. With debt outstanding, the most of excessive perks consumption will result in managers losing control of the company due to default and bondholders seizure of the company assets.
Thus external debt serves as a bonding mechanism for managers to convey their good intentions to outside shareholders. Because taking on debt validates that managers are willing to risk losing control of their firm if they fail to perform effectively, shareholders are willing to pay a higher price for the levered firms. The use of debt to control the agency of external equity can be accomplished in two ways: Debt forces managers to be monitored by the public capital. If investors have negative view of management‟s competence, they will charge high interest rate on the money they lend to the firm or they will insist on restrictive bond covenants to constrain management‟s freedom or both.
Outstanding debt limits management‟s ability to reduce firm value through incompetence or perquisite consumption, (Jensen, 1986). The discipline that debt provides has been further explored by Jensen (1989) and Ofek (1993). They argue that high leverage can provide benefits in the dynamic sense that companies with high leverage ratios may respond more quickly to the development of adverse performance than companies with low debt to equity ratios.
Ofek (1993) argues that: A choice of high leverage during normal operations appears to induce a firm to respond operationally and financially to adversity after a short period of poor performance, helping to avoid lengthy periods of losses with no response. The existence of debt in capital structure may thus help to preserve the firm‟s going concern value. The above however, are still considered to be insufficient to outweigh the agency cost of debt. The cost entail writing detailed covenants into bond contracts which sharply constrain the ability of the borrowing firm‟s managers to engage in expropriate behavior. The agency cost reduces the benefits of the debt interest tax shield. However an optimal (value maximizing) debt to equity ratio is reached at the point where the agency cost of debt equals agency cost of equity.
Need for increased agricultural productivity
Increased agricultural productivity is essential around the world to feed the global hungry people. Agricultural productivity is low in Sub-Saharan Africa in compared to other developing regions like South Asia and Lain America (ECG, 2011). For example, an average farmer in Sub-Saharan Africa gets a maximum of 2 metric tons grain per hectare whereas an Indian farmer receives double, a Chinese farmer gets four times more, and an American farmer gets five times more of what an average farmer of Sub-Saharan Africa gets (AfDB-IFAD, 2010). Hence, productivity should be increased in Sub-Saharan Africa. To increase agricultural productivity in Sub-Saharan Africa, it is necessary to know about the obstacles of agricultural production as well as productivity growth in agriculture in that region. Limited land rights, inadequate access to water, insufficient access to credit, underdeveloped rural roads and transport infrastructures, narrow market support, underprivileged agribusiness activities, and underinvestment in research and extension etc. are some of the major constraints in agricultural productivity in that region (IEG 2010).
In addition, institutions like coordination within organizations and among the donor agencies are also most difficult task and are related to market failures and property rights. Six action areas namely i) access to land and formation of land rights, ii) access to water, iii) access to credit, iv) improve transport and marketing facilities, v) market opportunities, agribusiness activities and policy reforms, and vi) investment in research and extension have to be prioritized to improve agricultural productivity in SubSaharan Africa (ECG, 2011).
Moreover, weakness in institutions and in any of these action areas can slow down the agricultural productivity in these regions. Hence, appropriate institutional framework is also necessary for that region. Interventions in these areas can create different scenarios in agricultural production in Sub-Saharan Africa. For example, investment in agribusiness, which can help in increasing productivity, improving market opportunities for smallholders, delivering reasonably priced, nutritious and healthy foods to growing urban and semi-urban populations, increasing employment opportunities, and eventually improving food security and may contribute in rural and regional economic growth in Sub-Saharan Africa.
Impact of Credit on Productivity
As far back as the 1960s, Takes (1963), studying the impact of credit on agricultural production in Okigwe division of the then Eastern Region found that lack of credit impeded farmers expansion of land holdings as well as agricultural production in general. He observed that farmers that benefited from government loans made considerable gains, though the amount per farmer and the number that benefited was small.
Jongur (1993) in a study to analyse the performance of agricultural cooperative societies which had access to credit and non-co-operators, in Gongola State made the following observations: 17 (i) Co-operators had significantly larger farm sizes. (ii) Co-operators used more labour (iii) Co-operators had significantly higher farm incomes than non- co-operators.
Findings on farmers’ elasticities of production by Tarauni (1996) showed that the fertilizer variable was the only, and the most efficiently utilised resource among the sampled farmers in the study area. The labour and land resources were found to be under-utilised. Net farm income was found to be higher among the borrowers, implying greater profitability among the borrowers than non-borrowers. Ilebanmi (1983) in Ondo State concluded that (a) borrowers had larger farms and (b) borrowers had higher operating expenses and investment per hectare.
In Kwara state, Mobayo (1987) studying the impact of credit on small farmers’ income in Oyi Local Government Area used regression models to compare borrowers and nonborrowers and found that credit had a positive effect on farmers’ income. Idah (1996) also observed farm income to be positively correlated to credit. Aiyedun’s (1996) results showed that the farmers’ gross and net farm income were greater after the implementation of the programme than before and the difference between the two groups was significant. His results further showed that labour had the most positive effect on crop output, both before and after implementation. Other studies have however shown and highlighted that certain other factors influence input use and productivity apart from credit.
Auchan (1986), analysing the impact of institutional agricultural credit on the farm size, output and adoption of new technology by farmers in Funtua Local Government Area of Katsina State observed that apart from being 18 influenced by credit, farm input is influenced by factors such as years of formal education, non-farm income, farm size, value of assets and the gross farm income in the preceding year.
Fabiyi and Ositimehin (1984) studying the impact of credit on rice production in Oyo and Ondo States also observed that factors such as farm size, amount of credit and farming experience influence farmers’ output.
Idah (1996) also discovered in his own study, that respondents’ socio-economic characteristics influenced their use of credit where he observed that the older borrowers honoured their loan obligations more than the younger ones, while the younger and more educated farmers adopted more modern inputs. There is still the need for further research in Credit Impact Studies. According to International Fund for Agricultural Development (IFAD) in 2000, the primary aim of microcredit programmes is to alleviate poverty by increasing borrowers’ earnings.
In the process however there may be other impacts such as schooling and family planning decisions. As such IFAD states, it is difficult to determine the precise impact of microcredit because of the fungibility of loans. Tarauni (1996) had also earlier stated that one thing that is lacking in credit impact studies is research on farmers with the same type of resource base. He opined that if non-borrowers with higher resource base are sampled there would not be much difference in their input use and productivity, which could lead to inconclusive results
Access to Credit and Agricultural Productivity
Agriculture forms the back bone of any meaningful economic development in the developing countries and this explains why credit facilities should be made available and accessible to the rural areas in order raise productivity (Adera, 1995). Access to credit by the poor farmer enable them to obtain new machinery, improved seed fertilizers and other necessary inputs needed toexpand thescaleof production(Akwai-Sakyi, 2013). Likewise, Yu(2008) posits thatbeyond the ability to procure farm equipment, agricultural inputs, modern technologies and irrigation systems, smallholder farmers are able to obtain the needed storage facilities.
Beyond increase in productivity and income, access to credit affords rural households the opportunity to improve their social well-being especially in the area of health and education (Millerand Ladman, 1983). Access to rural credit has the capacity to raise the level of the national income distribution of the country (Miller, 1977). This assertion is informed by the perspective that the bulk of the people in the country are engaged in the area of agricultural and therefore if farmers are able to secure such financial support then it may go a long way to improve their economic contributions to the country.
IFAD (2007) contends that during off farming seasons or after poor harvest, access to credit could raise the income status of the low income rural households. Again, they further add that in situations of income disparities between smallholder farmers and large holder farmers, credit may be used as a tool to bridge such a poverty-widening gap. Ahma (2010) argues that access tocredit enables poorrural farmers toventure into newareas of economicactivities, broadentheir sourcesof capital and manageshocksand stress thatare bound to occur. He further stated the poor farming households majority of who are impoverished have to develop the habit of saving, obtaining loans for production and transferring cash. Oyateye's (1980) position is nodifferentas according tohim, the persistent case of low productivity resulting in low income and saving capacity could only be offset when the poor rural farmer is guaranteed access to a credit facility. He added that credit improves the capacity of the smallholder farmer to have access to labour. Poor income households could lift above the poverty line provided they could reliably have access to a number of micro-finance activities in order to strengthen their asset building capacity. Access to credit, to them, strengthens the need for the poor rural households to achieve food security.
Brief overview of the agricultural finance schemes in Nigeria
The schemes for financing agriculture have the first objective of encouraging banks to lend to the sector despite the relatively higher inherent risk and uncertainty. This was done by providing the banks with low-cost funds for lending. Another way was to cover their risk exposure to some extent using one instrument or the other. The second objective is promoting farmers’ access to credit by the provision of concessionary terms.
Agricultural Credit Guarantee Scheme Fund (ACGSF), 1978 till date. Established by Act No. 20 of 1978, this offers a 75 per cent guarantee backed by the Central Bank of Nigeria (CBN) on agricultural credit in default, net the amount realized from the disposal of security for such credit. Financing is at market-determined interest rates. The CBN offers a rebate equivalent to 40 per cent of the loan interest when loans are duly repaid. This scheme deals with small scale farmers who need small loans to operate. For instance, in 2005, more than 70% of all loans were smaller than fifty thousand naira to each farmer who applied and accounted for 36% of total loan value. Only 11% of all loans were larger than N100, 000and accounted for 32% of total loan value. The scheme has, however, suffered bureaucratic and administrative bottlenecks. For instance the processing of applications and claims has been slow so much so that at the end of 2005, there was an accumulated backlog of 4064 unprocessed claims, the oldest of which dated back to 25 years (IFPRI, 2008).
Small and Medium Enterprises Equity Investment Scheme (SMEEIS), 2001. This is a voluntary initiative of the Bankers’ Committee to support micro, small and medium enterprises (MSMEs), including agro and agro-allied businesses. Financing is in form of either debt or equity. In the case of debt, the borrowing rate is not to exceed single digit.
Refinancing and Rediscounting Facility (RRF), 2002 to date. Banks that lend long-term to agriculture and are in need of liquidity are availed an amount which is a certain percentage of the outstanding asset portfolio to long-term agriculture by the CBN at reduced rates at the discount window.
Agricultural Credit Support Scheme (ACSS), 2006 till date. The initial ACSS fund of N50 billion was established with contributions mostly from the CBN and deposit money from banks for the financing of large agricultural projects such as establishment or management of plantations, cultivation or production of crops, livestock, and fisheries and farm machinery and hire services. The borrowing rate is 14 per cent, with the CBN absorbing 6 per cent while the borrower pays 8 per cent at full repayment. The purpose of ACSS is to facilitate the development of the agricultural sector by advancing credit to farmers at low interest rates. By pursuing this strategy, the government hopes to exert downward pressure on prices of agricultural produce, especially food, leading to reduced inflation, increased exports, diversification of government revenue base, and increased foreign exchange earnings.
Large Scale Agricultural Credit Scheme (LASACS), 2009. A N200 billion fund established by the Federal Government in the wake of the current global economic crisis to finance large integrated commercial farm projects with an asset base of at least N350 million (excluding land) with prospects of increasing this to N500 million in three years time, and medium-sized agricultural enterprises with an asset base of N200 million (CBN, 2009). The terms of borrowing are favourable, including a long tenor and single digit lending rate.
Supervised Agricultural Loans Board. Most state governments set up these boards to dispense finance in form of credit to farmers. It should be added that aside this boards, the state Agricultural Development Programmes (ADP) have recently been working in conjunction with the National Programme for Food Security (NPFS) in the provision of credit to farmers
2.3 Empirical Review
Iderawumi, & Ademola, (2015) conducted a study aimed at knowing the impact of microcredit financing on agricultural production. They used Structured questionnaire as well as personal contacts to gather data from the farmers. One hundred (100) questionnaires were distributed randomly to farmers while Ninety one (91) questionnaires were retrieved. Correlation coefficient were used to describe and summarize the data collected. Their findings shows that Farmers in rural area do enjoy this micro finance, but effect on farming operations was not commensurate. Further findings shows that the farmers do not have access to other micro credit finance institution other than cooperative societies, because there is no asset like machine collateral security that will serve as guarantee for the commercial financial institutions. High interest rate is another vital thing that put farmers into limitation in obtaining micro credit from commercial institutions.
Adewumi, et al. (2013) examined the contribution of microfinance banks (MFBs) towards agricultural development, analyzed and compared the loans given out by these banks to agricultural sector with those given to other investment activities in Kwara State, examined the repayment level of the various sectors and identified the constraints hindering efficient contribution of the banks to agricultural development in the study area. Data obtained from ten MFBs in Kwara State were used for the study. Descriptive and inferential statistics were used for data analysis. The study revealed that most of the banks’ loan were granted to trade and commerce sector while the agricultural sector obtained just about one-fifth of loan disbursement annually. As regard loan recovery however, the agricultural sector compared more favourably than other sectors to which more loan was disbursed. The problems facing the MFBs in making more contribution to agricultural development in the study area include less saving habit of farmer clients, limited loan products, shortage of logistics in rural areas, less willingness of the commercial banks to lend MFBs, shortage of experienced human resources, inadequate capital to operate and lack of effective management information system.
Ayegba, & Ikani (2013) assessed the Impact of Agricultural Credit on Rural Farmers in Nigeria. Data were collected from the primary sources and a total of 500 questionnaires were administered of which 300 copies were properly completed and retrieved. The study appraised the impact assessment of agricultural credit on rural farmers in Nigeria and generally discovered that much is yet to be done to boost agriculture by encouraging farmers via adequate agricultural credit without strings. The results also indicate that unregulated private money lenders (53.33%) constitute the major source of credit which is not healthy for an economy that is ready to grow. It was equally clear that the much needed banks in the rural areas are mainly found in the urban areas leaving the rural farmers without formal sources of credit. Ayegba, & Ikani noted that the major limitations or challenges in accessing agricultural credit include; high interest rates, bureaucratic bottlenecks, late approval of loans, unnecessary request for guarantors and collateral. Ayegba, & Ikani recommended that the federal Government in collaboration with banks should create credit instruments and services that are tailored to the risk and cash flow patterns in the agricultural sector to avoid or reduce the level of the aforementioned challenges.
Madugu, & Bzugu,(2012)examined the role of micro-finance banks in financing agriculture in Yola North Local Government Area of Adamawa State. Primary data were collected from a total of 100 farmer selected by simple random sampling. Structured questionnaires were the instrument for data collection from the farmers. Simple descriptive statistics such as means and percentages and frequencies were used to analyze the data collected from respondents. Their results revealed that, majority (67.11%) of the respondents were males, while 32.8% were females, 44.74% of the respondents were within the age limit of 31 – 40 years, 73.68% of the respondents were married, and 85.53% of the farmers had formal education. 60.53 % used the loan for the purpose for which it was collected and 55.26% repaid the loan collected from the Microfinance Bank Yola in (2010). 15.29% of the respondents identified high interest rate on loan acquired from microfinance bank as a major problem, 10.95% identified delay in loan disbursement as their major problem while only 1.18% of the respondents stated that they were not given the loan they applied for. Madugu, & Bzugu recommended that loans for the farmers should be disbursed in good time; banks should reduce the interest rates on agricultural loans. Also, microfinance banks should be encouraged to act as a major lender in financing small scale farmers in the country to meet the food requirement of the teeming population.
In their studies to establish the relationship between access to credit and agricultural productivity in Ghana, Baffoe et al. (2015) analysed responses from 109 farm households of borrowers and non-borrowers concluded that the difference in productivity of borrowers and borrowers was statistically significant. The increase in productivity was attributed to the technical efficiency of borrowers.
A study conducted by Akwaa-Sakyi,(2013) to determine the effect of agricultural credit participation on farmers' productivity revealed that agricultural credit has a positive significant effect on rice yield. The results revealed that credit users had 157.2 kg per hectare of paddy more than non-credit users.
According to Dong et al. (2010), credit access, the education and capabilities of rural farmers cannot be fully utilised. Using the endogenous switching regression model to analyse responses from 511 households in Heilongijang province of Northeast China, they indicated that productivity and income of credit unconstrained farmers are higher than credit constrained farmers.
Kibaara (2006) conducted a study whose primary objective was to examine the evolving models of rural financial service providers with a broad aim of understanding models that are working, why they are working, characteristics, opportunities and constraints. It sought to understand the extent to which these models have improved access to the rural financial services for producers and traders in the rural areas. This study utilized data from primary and secondary sources. Secondary data was gathered during the discussions with stakeholders from the rural finance. Primary data on the emerging models were gathered purposively from 15 districts within six agro-ecological zones. The study found out that most households in the rural areas borrow credit for farming. Provision of agricultural credit is skewed toward the production region and it‟s mainly provided by the commodity Based Credit Providers and co-operatives. Therefore any intervention that strengthens the performance of the above will improve access to rural credit.
In his analysis of the “Impact of agricultural credit on farm productivity” using the quintile regression and Stochastic Frontier Analysis techniques and responses from 654 farmers sampled from Mekong Delta region of Pakistan, Duy (2012) revealed that the rice yield and technical efficiency of farmers increased tremendously because of access to credit, educational levels of farmers and high level of technology. His study also showed that rice production was positively affected by the use of formal credit rather than informal credit.
Asimilar conclusion was drawn by Diagne (2002) in his analysis of the impact of agricultural credit on farmers' output and yield. The results of his analysis concluded that agricultural credit has a significant positive impact on agricultural productivity
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.
2.4 Summary of the Review
From the above review, lots of studies have been carried out on Micro-finance credit and agricultural productivity. Some local studies have established a relationship as well as international studies. In this review we also adopted the agency theory, whereby the micro-finance banks were seen as agents responsible for agricultural productivity. This is due to the credit financing they provide to farmers. However no study have been conducted in Otuoke nor Bayelsa state with special reference to micro-finance credit financing and agricultural productivity. Hence, it is the position of this study to fill this identified gap.