ACCESS TO FORMAL CREDIT BY FARMERS’ CO-OPERATIVES IN ENUGU STATE NIGERIA

ABSTRACT

This study examined access to formal credit by farmers’ co-operatives in Enugu State. The specific  objectives  were to: (i) ascertain  the institutional credit  guidelines  which  affected access to  formal credit by farmers’ co-operatives in Enugu State, (ii) describe the patterns of access to credit, (iii) ascertain the extent of access to formal credit by the respondents, (iv) ascertain the factors which determined access to formal credit, (v) examine the respondents’ perceptions of the effects of institutional credit guidelines on access to credit and (vi) identify the constraints experienced by banks and farmers’ co-operatives in the course of providing and accessing credit respectively. The study adopted survey design. Multi-stage, purposive and random sampling techniques were used for data collection. Nine local government areas (LGAs) were purposively selected from the seventeen LGAs that make up Enugu State. One hundred and eleven active formers’ co-operatives were randomly selected out of a population of two hundred and  twenty-two active farmers’ co-operatives  found in the selected LGAs. Twenty each of  commercial and micro-finance  banks that provided  credit to farmers’ co- operative  societies  in the study area were also  randomly selected.  Therefore,  the overall sample  size  for  the  study  was  151  respondents.  Data  were  collected  using  structured questionnaire. Data were analysed using Ordinary Least Square (OLS) Regression Models, Access Index (AI) and Likert Scale Rating. Institutional credit guidelines which negatively affected access to formal credit were: interest rate (83.49%), collateral requirement (39.89%), minimum account balance (69.81%), and number of documents required from co-operatives by banks (71.27%). Patterns of credit flow from banks to  farmers’ co-operatives were cash (73%), production goods (20%) and technical training (7%). Out of the whole farmers’ co- operatives  that applied  for credit, only  twenty-seven  (24.3%)  were able to access  credit. Extent  of access  to  credit  was  very  minimal  (17.3%).  Socio-economic  characteristics  of farmers’  co-operatives  that  determined  access to formal credit were: age of co-operatives (p<0.01), educational level of co-operative members (p<0.05), co-operatives’ equity capital value (p<0.05), co-operatives’ asset value (p<0.01), and cost of processing credit application (p<0.05).  Banks’ institutional credit guidelines which determined access were: interest rate (p<0.01), value of collateral (p<0.10), minimum account balance (p<0.01), and number  of documents  required  by  banks  (p<0.01).  Farmers’  societies  without  access  were  more constrained  by  the  guidelines  than  those  that  had  access.  Factors  that  constrained  co- operatives  with access were: interest rate (1.98), minimum  account  balance  (1.99), while those  that  constrained  co-operatives  without  access  were:  interest  rate  (2.83),  collateral requirement  (2.53), minimum  account  balance  (2.87),  and number of documents required (1.97). The problems experienced in the course of sourcing credit were: lack of information (69%), stringent banks’ credit policies (77%), long period of processing credit applications by banks   (67%),   banks’   discrimination   against   agricultural   lending   (60%),   cumbersome documentations  (70%),  and  approval  of  insufficient  amount  by banks  (64%).  Problems encountered by banks in the course of providing credit to farmers’ co-operatives were: credit repayment default (90%), difficulties in enforcing credit contracts (45%), inability on the part of co-operatives to provide collateral (55%) and lack of borrowers’ credit history (42%).

CHAPTER ONE

INTRODUCTION

1.1      Background of the Study

Access to financial services (especially credit) for agricultural enterprise development and  sustainability  is  of  paramount  importance  to  both  Nigerian  governments  and  the citizenry. To create more jobs and inclusive roles in the Nigerian economy, especially in the rural areas, access to formal credit is very necessary.   Access to credit helps to boost rural farmers’  financial  capacity which  eventually  affords  them  the opportunity  of farm  input diversification and the adoption of better and modern farm technologies for increased output. Credit is considered as a catalyst that activates other factors of production and makes under- used capacities functional for increased production (Ijere, 1998). Funding and development of agriculture is  analogous  to rural development. Over 80% of the farming populations  in Nigeria  are  small  holders,  residing  mostly  in  rural  areas  (Afolabi,  2010).  The  author therefore, argued that the need for agricultural loans among the small scale farmers cannot be overemphasized  as  this  enables  them  to  establish  and  expand  their  farms.  Ijere  (1978) observed that over 70% of rural small-scale farmers are dependent on farming as their means of livelihood and the nation relies on their output for food self-sufficiency. The provision of credit has increasingly been regarded as an important tool for raising the incomes of the rural populations (Atieno, 2001). In Nigeria, between 70% and 80% of the population live in the rural areas and a vast majority of this population totally depends on agriculture for livelihood (CBN,  1999;  World  Bank,  1999  and  Odo,  2005).  Three  out  of  every  four  people  in developing countries (including Nigeria), live in the rural areas and most of them rely directly or indirectly  on agriculture  as a  means  of earning  a living (World  Development  Report (WDR), 2008). Therefore,  rural development is closely linked to agriculture as majority of the  rural  dwellers  depend  on  farming  and  various  aspects  of  agribusiness  activities  for livelihood.

This study focused  on access to formal credit from commercial  and  microfinance banks.  Commercial  banks  are  the  financial  hub  of  Nigeria’s  financial  infrastructure  and therefore do not suffer much of insufficient lending fund. On the other hand, microfinance banks are closer to the rural dwellers (including farmers’ co-operative societies). The concept of micro-finance  has  been used  to successfully  expand  the availability of credit  to rural communities including farmers’ cooperatives. Micro-finance involves the provision of small loans to borrowers without conventional collateral. Though, interest rates charged by micro- finance banks were higher than those charged by commercial banks.

Lack of access to finance in the agricultural sector is a major hindrance to increasing rural income and development. According to Demirguc-Kunt,  Beck, and  Honohan, (2007); and  Beck,  Demirguc-Kunt,   and  Honohon  (2008)  financial  exclusion  retards  economic growth, and development, it also increases poverty and inequality. According to Reed (1984) cited in Adekanye (1986), one of the primary functions of commercial banks is the extension of credits to worthy borrowers. In making credit available, production is increased, capital investments are expanded, and a higher standard of living is raised. Financial intermediaries are therefore, agents of socio-economic change.

The  strategic  importance  of  agricultural  credit  prompted  Federal  Government  of Nigeria at various times to implement some policies aimed at boosting farmers’  access to credit.  Umebali,  (2005); Olaitan,  (2006),  Badiru,  (2010),  Oladeebo  and  Oladeebo  (2008) observed  that among  such projects  were:  establishment  of the  Nigerian  Agricultural  Co- operative  Bank (NACB)  in 1977,  which  was later  changed  to Nigerian  Agricultural  Co- operatives and Rural Development Bank (NACRDB) and the Agricultural Credit Guarantee Scheme of 1977. Others were the establishment of community banking 1990; Rural Banking of 1977,  the small  holder  loans scheme  and  sectoral  credit  allocation  to  agriculture,  the Commercial Agriculture Credit Scheme (CACS) that was initiated in 2009 and the Nigerian Incentive-based Risk-Sharing System for Agricultural Lending (NIRSAL) (CBN, 2011).

Table 1.1 Commercial Banks Agricultural Lending Under (CACS) from 2009 to 2011.

Financing Banks                                         

Amount in (N Billion)

                                                                   Projects                                               

Access Bank Nigeria plc	9		7.926
Fidelity Bank Plc	7		6.225
First Bank of Nigeria  Plc	46		14.951
Guaranty Trust Bank Plc	8		5.55
Oceanic Bank International Plc	2		2.350
Skye Bank Plc	6		8.667
Stanbic IBTC	20		8.476
Union Bank Plc	18		15.343
United Bank for Africa Plc	35		38.912
Unity Bank Plc	5		6.695
Zenith Bank Plc	10		15.335
Citibank Plc	1		1.500
Diamond Bank Plc	4		0.919
Sterling Bank Plc	3		2.320
Mainstreet Bank (Afribank)	1		2.000
Wema Bank Plc	2		0.155
Total	177		137.32

Source: CBN, 2011.

Table 1.1 shows commercial banks’ agricultural lending under CACS from 2009 to  2011 with the number of agricultural projects sponsored, and amount disbursed under the scheme by each participating bank.

However, due to poor targeting and implementation, most of these projects could not yield  maximum  results  as the  actual  clients  for  whom  projects  were proposed  were not properly reached.  Again  government  interventions  are not demand-driven  as  they do not reflect priority needs of the poor, expressed by the poor themselves. Government projects for the poor are not bottom-top driven. For instance, Nweze (2001) notes that World Bank (WB,

2000) estimates that NACB, PBN and CBS could only reach 10% of the rural population. Lack of access to credit is one of the major causes of declining agricultural production and development in Nigeria as this keeps farmers in want of necessary inputs and technology.

Some authors Nwaru (2011) and Essien (2009) blame shortage of agricultural credit on commercial banks’ reluctance  to offer credits for farming enterprise in  Nigeria. Banks refer  to  farmers  as “bad  risks  and  unbankable”  and  therefore  adopt  risk averse  attitude towards them (Onuoha, 2002). For instance, Eboh (2011) observed that the agricultural sector which accounts for the largest single portion (about 42%) of  national output (GDP) is the least favoured by commercial banks in terms of loans  and  advances among all economic sectors. From 2006 to 2008 the average annual flow of bank credit to agriculture was mere 2.27% (CBN 2009). Only about 18% of farm households have access to financial services in Nigeria (Akramov 2009).  Central Bank of Nigeria (2008) also reports that only about 2.5% of total commercial bank loans and advances were directed at agriculture.

Agriculture   provides   food,   raw   materials   for   locally   agro-based   industries, employment,  income,  and  also  generates  revenue  from  exports  which  could  be used  for development of other sectors of the economy, and therefore should not be kept at the rear of the economy. World Development Report (2008) argues that it is time to place agriculture afresh at the centre of the development agenda, as it presents vastly different opportunities for both national and global growth and development.

For  efficient  mobilization  and  allocation  of  financial  resources,  vibrant  and  well functioning   financial   institutions   are   imperative.   Financial   institutions   are    service establishments for the mobilization and disbursement of funds to achieve definite economic objectives  (Ijere,  1977).  Financial  institutions  are  very  important  component  of  every economy  as  they  contribute  to  equitable  and  efficient  distribution  of  resources  in  both developed and developing nations. This engenders equal opportunity for access to developing earnings  and  creative  ability which  leads to  national  economic  growth  and development (Penson  Jr.  and  Lins,  1980).    An  efficient  formal  credit  market  mobilizes  savings  and allocates  greater  proportion  to   those  investments  with  higher  returns  prospects  after

considering risks (Okereke-Onyiuke 2000) in Ubesie (2006). According to Beck, Demirguc- Kunt and Martinez-Peria (2007), financial market and institutions exist to mitigate the effects of information asymmetries and transaction costs that prevent direct pooling and investment of savings thereby enhancing the process of access to formal credit. Anyanwaokoro (2005) argued that apart from the two major roles of saving mobilization and provision of finance by credit institutions, they also provide investment and business advisory services to guide those that may wish to go into various project as a way of poverty alleviation.

Formal  credit  has  been  defined  as  all  loans  and  overdrafts  occurring  within  the regulations of a central monetary or financial market authority of a country. Access to formal credit takes place within all financial arrangements and facilities that are under the various countries’ control and regulations on banking and other financial institutions (Aryetee and Udry, 1997; Adams and Von Pischke, 1992). Adegeye and Dittoh (1985), defined access to formal credit as a process of obtaining control over the use of money, goods and services to repay at a future date with or without interest (Ugwuanyim, 1998).

Access to credit has many dimensions; services have to be tailored to specific needs; the prices for these services need to be affordable, including all non-price transaction costs, such as information processing costs and physical distance to the  location of credit service provider (bank branch). Access is not limited to borrowers  with connections,  collateral or track records  rather  than projects  with the  highest  expected  returns.  Provisions  of credit services  as  well  translate  to  profits  for  the  providers  (Demirguc-Kunt  et  al,  2007)  and therefore, are available on a continuous and sustainable basis.

Access is more of a supply-side issue, relating to the potential services  providers’ (lending banks’) choice of the limit of the credit to be provided  even if  the borrower  is willing to borrow at the ruling interest rate and has met all the other requirements. This limit depends on the limits of the resources of the potential lender (the bank). Access to credit from

a given source is the maximum amount a beneficiary can borrow from that source  (Agbo, 2006). In Nigeria, the Central Bank of Nigeria (CBN) oversees to the operations of formal credits institutions and therefore performs the regulatory and supervisory functions.

Formal  credit  can be  accessed  in  various  forms.  It  could  be  loans  or  overdrafts (Adekanye, 1986). In order to avoid loan funds diversion by farmers to non-farm activities, lending  banks  sometimes  provide  credits  in non-cash  forms while  inputs  such as seeds, fertilizer  and  pesticides  could  be  provided  instead  (Emekekwue,  2005).  Banks  can  also engage in direct financing of farm equipment such as tractors and harvesters. With regards to loan term (period of loan repayment), credits could be accessed on short-term basis (credit not exceeding one year), medium term basis (above one year but not exceeding ten years) and long-term  basis  (above  ten   years)   (Umebali,   2004a).   However,   due  to  the  liquidity requirements of commercial banks in meeting the obligations of their loan portfolios, they find it difficult to advance medium and long-term credits to borrowers.

In recognition  of the critical role that credit  can play in alleviating  poverty  in  a sustainable way, innovative credit systems are being developed and promoted in Nigeria as a more efficient  means  of improving  micro  and small scale  firms’ access  to  credit  (CBN,

2010). Providers of financial services (especially commercial banks) are more  comfortable transacting with farmers’ groups, such as farmers’ co-operative societies, because this lowers information  and  transaction  costs.  According  to  Okonkwo  (1989)  farmers’  co-operatives could  be  registered  as single-  or  multi -purpose  co-operatives  and  could  be adopted  by farmers according to Kohls and Uhl, (2002) and Ijere (1992) as one possible solution to their common socio-economic problems.   Farmers’ co-operative societies serve as collateral and use  peer-group  pressure  to  compel  defaulting  members  to  comply  with  loan  terms  and conditions.  Onuoha  (2002),   defines  a  co-operative  society  as  an  open  and  voluntary association of persons who have identified a commonly felt social or economic need among

themselves and who in order to meet this need, have set up a joint enterprise which they manage  democratically  and  whose  benefits  they share  equitably.  In Nigeria,  modern  co- operative  movement  started, according to Emejulu  and Emejulu  (1998)  and  Umebali and Nwaoke  (2005)  after  the  enactment  of  the  first  co-operative  ordinance  in  1935.  Cocoa farmers in the then western Nigeria registered the first modern co-operative societies in the country (Okonkwo, 1989).

A study of farmers’ co-operatives access to financial services (especially credits from commercial and micro-finance banks) is imperative considering the strategic importance of finance in procuring other necessary farm inputs. Hence, credit will as well compliment their equity capital in funding targeted projects.

1.2      Statement of the Problem

There  is  a  paradigm  shift  of  Global  focus  on  rural  development  from  direct government intervention to community initiatives and actions (Onugu and Ugwuanyi, 2007). Puri  (1979)  states  that  Nigeria  has  her  fair  share  of  development  problems  of poverty, depressed   economy,   mass  urban  and  rural  unemployment,   food   shortages,   structural imbalance  etc,  all  of  which  are  favourable  conditions  for  rapid  growth  of  cooperative enterprises .Credit for investments and working capital is a crucial element that enables rural entrepreneurs to seize good economic opportunities as well as purchase agricultural inputs (Info-resources, 2008); and eventually helps to close socio-economic inequality and poverty gaps in the society. Access to financial services especially, formal credit is likely to promote national economic growth (Demirguc-Kunt, Back and Honohan, 2008).

Unfortunately,  in spite of the significant  demand  for credit  in rural areas,  formal financial institutions such as commercial and micro-finance banks are typically reluctant to serve  the credit  needs  of the  rural populace.  These  banks are major  components  of the Nigerian  financial  infrastructure  and  therefore  can  help  to  foster  economic  growth  and

development  through  their  credit  creation  activities.  Banks  shy  away  from  agricultural lending due to some agricultural industry specific risks. Floods, plant and  animal diseases, inherent  fluctuations  in agricultural  yield  and  produce  prices  etc.  constitute  problems  to agricultural lending.  Banks are more interested in risk aversion and short term lending due to the depositor/ownership nature of their financial resources which requires high liquidity ratio.

Imperfect information and the inherent costly information lead to adverse  selection and moral hazards in credit markets (Atieno, 2001). There may be the tendency that a party to the credit contract can decide to keep/hide some relevant information or  supply false data. For example, farmers’ co-operatives may decide to falsify their assets and liability values in order to attract some credit.    Information and transaction costs (cost of screening prospective borrowers, communications and administrative costs, all impinge on the profit motives and incentives of formal financial intermediaries and therefore are transferred to the final users of funds (borrowers) in the form of high  interest rates and commissions on turnover (COT). High interest rates also impede access to formal credits. In order to mitigate the effects of adverse  selection  and moral  hazards,  banks engage  in thorough  screening  of prospective borrowers and as well  ration the banks available loan-able funds to those borrowers with lower risk prospects.

Lack  of  formal  identification,   and  credit  history  (registry)  of  the   prospective borrowers, collateral requirement including difficulties in registration of mortgages and liens, the Nigerian Land Use Act of 1978, all constitute problems to  access to formal credit in Nigeria (Isern et al, 2009).  The Land Use Act of 1978 vested the authority over all lands in Nigeria  with the Federal and States’  Government  as the  Agents.  The current land tenure system   in  Nigeria  and  the  inherent   weak   land   titling  is  also  a  hindrance   to  land collateralization  and  other  land  usages  by  owners.  Coffey (1998)  argued  that  weak  land titling, cumbersome and costly court procedures also compound  the problem of  providing conventional collateral for loans in rural areas.

Many researchers,  however,  have done a number of empirical studies on  related topics in other geographical locations. For instance, Agbo and Chidebelu, (2010) carried out an empirical research on socio-economic determinants of co-operative societies’ access to the services   of   the   Nigerian   Agricultural   Co-operative   and   Rural   Development   Bank (NACRDB), using percentages, means, range, Levene’s test for equality of means and Likert Scale  Rating  to  achieve  objectives.    On  his part,  Nwaru  (2011)  empirically  studied  the determinants of informal credit demand and supply among food crop farmers in Akwa Ibom State, Nigeria  with the Simultaneous  Equation Technique using two Stage Least Squares. Onugu  (2007)  did  his work on  the     credit  mobilization  challenges  of Agricultural  Co- operative  Societies  in  Anambra  State,  Nigeria,  using  descriptive  statistics  to  realize  his objectives of study. Atieno (2001) in an empirical study of formal and informal institutions’ lending policies and access to credit by small-scale enterprises in Kenya argues that access to credit is determined by the credit policies of the supply side of the market rather than the demand side. Ibrahim and Aliero (2012) carried out an analysis on farmers’ access to formal credit in the rural areas of Nigeria with Probit Modeling Approach. Badiru (2010) worked on small Farmers’ Access to Agricultural Credit in Nigeria, while  Infor-resources (2008) also researched on Accessing Financial Services in Rural Areas. To the best of the researcher’s knowledge therefore, no empirical work has so far been done on the topic of this study in Enugu State, Nigeria. Hence, this research is also set out to fill this knowledge gap.

1.3      Objectives of the Study

The broad objective of this study was to examine access to formal credit by farmers’

co-operatives in Enugu state, Nigeria.

The specific objectives were to:

(i)        ascertain  from  co-operatives  and   the banks under  study,  commercial  and  micro- finance banks’ institutional credit guidelines which affected access to  formal credit among  farmers’  co-operatives  in  Enugu  State,  and  identify  the  socio-economic characteristics of farmers’ co-operatives studied.

(ii)       describe the patterns of credit  provided by commercial and micro-finance   banks to farmers’ co-operative societies in Enugu State;

(iii)      ascertain  from  the  respondents  the  extent  of  access  to  formal  credit  by the  co- operative societies studied;

(iv)      ascertain from the banks and farmers’ co-operatives,  the factors which  determined farmers’ co-operatives’ access to formal credit;

(v)       compare the perceptions of farmers’ co-operatives with access to credit and   those without on the  effects of institutional credit guidelines,   (with regards to   access to formal credit).

(vi)      examine   the  constraints   which  the  banks  and  farmers’   co-operative   societies experienced in the course of providing and accessing credit respectively;

1.4   Hypotheses of the Study

The following hypotheses were tested:

(i)        Commercial  and  micro-finance  banks’  institutional  credit  guidelines  do  not  have significant effects on access to formal credit

(ii)       farmers’ co-operatives socio-economic characteristics do not have significant effects on access to formal credit.

(iii)      The effect  of commercial  and micro  finance  banks’  credit  guidelines  on  farmers’ cooperatives with access to credit is not significantly different, in terms of access to credit, from the effect on farmers’ cooperatives  that actually applied  for credit but without access.

1.5 Justification of the Study

Farmers’  co-operatives  in Nigeria  still  have tremendous  potentials  as a means  of bringing about socio-economic  growth and development in Nigeria, especially in the  rural areas. According to Birchall (2008), African co-operatives (including those in Nigeria) are yet to reach their full potentials as they are still addressing their requirements for financial and technical support.

The  result  of  this  study will  be  useful  to  policy  makers  with  regards  to  policy intervention strategies that will best enhance farmers’ co-operatives’  access to  commercial and micro-finance  banks’ credit services, which will eventually yield some socio-economic pay-offs. Access to finance has long-run effects on assets accumulation, economic mobility and evolution of well-being (Quisumbing and Montillo-Burton, 2002).

It will provide a road map  and also serve as a source of secondary data to  other researchers for further research efforts, particularly in the attempt to empirically study the research topic in other geographical locations. Some students, scholars and co-operators may have interest in this topic and hopefully, will find the work handy for their needs.

A study on access  to  commercial  and  micro-finance  banks’  credits  services  will position farmers’ societies advantageously in their quest for institutional credits.  This will afford co-operatives the opportunity of looking inwards and taking proactive measures that will position them well for needed services from these banks. According to Agbo (2006) and Atieno  (2001),  access  is a supply-side  issue.  Hence,  the service  provider  (bank)  dictates contract terms and conditions which clients must strive to comply with.

1.6 Limitations of the study

The major limitations experienced  in this study emanated from the difficult  terrain and topography found in most rural areas. In most cases due to none availability of good roads, the remote and rural nature of farm business and the consequent rural and unofficial

residents of the presidents of the farmers’ societies under study, it was difficult to locate and reach them. However, the researcher was able to overcome these problems by working with the Divisional  Co-operative  Officers (DCOs) in the respective  selected  local government areas. The DCOs knew most of the presidents personally and how to locate them easily.  Of course  due  to  the  rigors  involved  in  getting  the  societies’  presidents  and  collecting responses, more cost in terms of finance, time wasting and personal effort was incurred in data collection from this set of respondents.

In addition, it was not easy to hand over copies of questionnaire meant for banks to the respective credit managers, neither was the collection of responses without much stress because  of  the  managers’  busy  time  schedule.  Bankers  will  give  audience  when  they consider one as a customer or a prospective customer. Also, the managers were skeptical about the actual use of the data on their business transactions with customers hence, they were reticent about customers’ accounts. Legally, banks owe their customers duty of secrecy and therefore shy away from divulging information on customers’ account.

However, these daunting and seemingly insurmountable situations were overcome by the researcher. As a former staff of First Bank of Nigeria Plc, the researcher was  able to secure  the  attention  of  the  respective  credit  managers  in their  various  offices  and  also persuaded them to supply appropriate information needed for the  study. Though, this was not without  series of disappointments  and appointments  which  also  culminated  to more financial cost, time wasting and extra personal effort.

₦5,000.00 – DOWNLOAD FULL PROJECT DOWNLOAD FULL PROJECT Added to cart

---

---

---

---

Related Project Topics :