CREDIT ACCESS AND THE PERFORMANCE OF SMALL SCALE AGRO- BASED ENTERPRISES IN THE NIGER DELTA REGION OF NIGERIA

ABSTRACT

The study was designed to analyze credit access and performance of small scale agro- based enterprises in the Niger Delta region of Nigeria. A multi-stage sampling technique was adopted in selecting 264 and 96 agro-based enterprises that accessed informal and formal credit respectively, through the use of structured questionnaire and oral interview. A total  of  360  respondents  were  selected  and  used  for  the  study.    Socio-economic characteristics of the enterprises were described using descriptive statistical tools such as percentages,  means and frequencies.  The logit  model was used to examine enterprise characteristics  that had significant  influence  on informal  and formal credit access by small scale agro-based enterprises. The Heckman model was used to examine the factors affecting informal and formal credit amount accessed. The Poisson regression model was employed to examine the factors affecting frequency of informal or formal credit access by the enterprises.  Current  ratio and return on capital were employed to examine the performance of enterprises that borrowed from informal and formal credit markets in the area. Separate treatment of Informal and Formal Credit served to identify the similarities and differences between the credit source concerning the determinants of credit access, amount of credit accessed, frequency of access, credit default and financial performance of the enterprises. The results showed that 60.13% of small scale agro-based enterprises had access to the informal credit market, whereas only  21.86% had access to formal credit market. Enterprise age (p<0.10) and social  capital (p<0.01) had significant and positive  influences  on informal  credit  access,  while  gender  (p<0.01)  had  a negative influence on informal credit access. Formal credit access was positively influenced by enterprise  age  (p<0.05),  enterprise  size  (p<0.05),  collateral  (p<0.05)  and  education (p<0.10). Informal credit amount received was positively influenced by enterprise size (p<0.10), guarantor (p<0.05) and social capital (p<0.01), and negatively influenced by gender (p<0.05) and income of enterprise (0<0.01). Formal credit amount received was positively influenced by age of enterprise (p<0.10), size of enterprise (p<0.05), collateral (p<0.01)  and  social  capital  (p<0.05).  However,  influence  on  income  of  enterprise (p<0.01) had a negative effect. Frequency of informal credit access had  a significant positive influence on experience in borrowing (p<0.01) and social capital (p<0.01), while it had a significant negative influence on income of enterprise  (p<0.01) and non-agro- based income (p<0.01). Frequency of formal credit access was positively influenced by education (p<0.10) and collateral (p<0.01), and negatively influenced by interest amount (p<0.01)  and  non-agro-based  income   (p<0.01).  Furthermore,  income  of  enterprise (p<0.01) had a significant positive effect on informal credit default, whereas, gross profit margin (p<0.01), interest amount (p<0.05) and shock (p<0.01) had a significant negative effect on informal credit default. Also, formal credit default was negatively influenced by gender (p<0.01), education (p<0.05), gross profit margin (p<0.01) and shock (p<0.05). There  was  a  significant  difference  between  mean  return  on  capital  employed  by enterprises  that  borrowed  from  formal  and  informal  credit  institutions,  hence  their performances varied.  It was recommended that Government and development partners in the region  should  realize  these  changing  realities  and designed  appropriate  credit packagesfor the enterprises in the region. This will go a long way in complementing the amnesty programme of the Federal Government of Nigeria in the region.

CHAPTER ONE

INTRODUCTION

1.1      Background Information

Studies on developing economies have considered financial development vital for economic growth and poverty reduction. Strong financial systems have helped delivered rapid  growth  as  well  as  direct  and  indirect  benefits,  across  income  distributions (Honohan  and Beck, 2007).  Beck and Demirguc-Kunt,  (2005)  indicate  that financial development reduces inequality by disproportionately boosting the income growth of the poor. Hence across Africa, access to finance is rightly seen as a key to unlocking the income growth for poor families, as much as for expanding trade (Honohan and Beck, 2007).

In this regard, policy makers have held the conception that micro and small scale firms in developing  countries  lack access  to adequate  financial  services  for  efficient inter-temporal  transfers  of  resources  and  risk  coping  (Besley,  1995).  Without  well- functioning financial markets, small scale firms may lack much prospects for increasing their productivity  in many significant and sustainable  ways  (Nwaru, 2004). Based on these reasons, and the fact that traditional commercial  banks typically have minimum interest  in  lending  to  small  firms  due  to  their  lack  of  viable  collateral  and  high transaction costs associated with the small loans that suit them, most developing country governments, have set up credit programs aimed at improving access to credit (Arene, 1993; CBN, 2010).

Efforts targeted at small businesses are based on the premises that they are  the engine  of  economic  development,  but  market  and  institutional  failures  impede  their growth, thus justifying government interventions (Gomez, 2008). However, the failure of government supported financial institutions is a convincing evidence of the need for a better understanding of how these firm in the Niger Delta, often operating in highly risky environment insure against risk and conduct their inter-temporal trade in the absence of well-functioning financial markets (Ministry of Niger Delta Affairs, 2011). In response to these failures and 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 mechanism of improving micro and small scale firms’ access to credit (CBN, 2010)

A  little  over  four  decades,  the  issues  confronting  the  Niger  Delta  region  of Nigeria have caused increasing national and international concern. The region produces immense oil wealth and has become the engine of Nigeria’s economy, but it also portrays a paradox as the vast oil revenues barely touch Niger Delta own pervasive poverty, hence giving birth to formidable challenges to sustainable human  development in the region UNDP, 2006). People are more volatile, resulting in youth restiveness, conflicts between youths   and   community   leaders,   youths   and   government   agencies,   youths   and multinational  companies (UNDP, 2006).  These  propagated  negative  nominal and real shocks  in  every  sector  of  the  economy,  including  small  business  sector,  with  the economy  operating  under   atmosphere   of  politically  unstable  environment,  eroded productivity and declined private investments (Ministry of Niger Delta Affair, 2011).

With respect to indicators on disposable income or ability to fulfill basic needs, much of   Niger Delta population  fall into the ‘very poor’ category;  monthly   income levels of the people recorded as ’employed’ in 2003 were, Less than N5,000 (US$ 38) for 46% of all Employees; N5,001 to 10,000 (US$ 75) for 20% of all employees; N10,001 to

15,000 (US$ 113) for 10.6% of all employees; N15,001 to 20,000 (US$ 151) for 9.1% of all employees; N20,000 and more (over US$ 151) for 14.3% of all employees (Ministry of Niger Delta Affairs, 2011).

Further, according to Niger Delta Affairs (2011), income levels were found to be higher in Local Government Areas and senatorial districts of the individual NDDC States where there are larger settlements and lower still in the rural areas. At present, some 70% of the population of people living in the Niger Delta Region live below the poverty line as measured by the following indicators; disposable income, access to health care, access to safe water, educational attainment, access to shelter and access to gainful employment (Ministry of Niger Delta Affairs, 2011).

It is a common perception that small enterprises in the Niger Delta and  some other parts of Nigeria are primarily undertaken by vendors and small traders (Hassan and Olaniran, 2011). There is some truism associated with this assertion  since majority of enterprises in other developing countries are predominantly engaged in commerce while the vast majority of establishments are sole proprietorships (Mead and Liedholm, 1998). In the face of limited  employment  opportunities,  SMEs  are recognized  as the major source of poverty alleviation via  income stability, growth and employment  (Kongolo, 2010). Globally, there is a growing impetus for the development of a strong SME sector as the engine of economic growth and development. Internationally, small businesses are increasingly becoming the most vital part of the economy (Christianson, 2004). In Asia, China’s  economy  was largely  driven  by small  scale  businesses,  the Philippines  also invested heavily in small scale businesses too (Gungen, 2003). Within Western Europe, enterprises employing fewer than two hundred and fifty persons were reported in 2004 to account for 99.8% of all  enterprises  and 66.2% of employment  (Christianson,  2004). Despite the huge relevance of small enterprises globally, they are faced with variety of constraints  owing to the difficulty  of absorbing large fixed costs and the absence  of economies of scale (Liedholm and Mead, 1987) According to Chen and Chivakul (2008), constraints affecting small businesses are  marketing,  equipment  and  technology,  external  competition,  inputs,  problems, Licensing, registration requirement and institutional constraints. However, lack of access to  finance  is  noted  as  the  dominant  constraints  to  MSEs  in  developing  countries (Honohan  and  Beck,  2007).  Conceptually,  the  nature  of  credit  markets,  which  are segmented   and  incomplete,   is  one   possible  explanation.   Hence   in  Nigeria,   the institutional structures necessary to propel the functioning of the Niger Delta marketing system  were  not  adequately   effective  before  the  conflict,  especially  at  the  data compilation front (Ministry of Niger Delta, 2011). Relevant agencies such as the Niger Delta Development Commission, the Federal Ministry of Agriculture, Federal Ministry of Finance and until recently, the Ministry of Niger Delta affairs responsible to institute this framework, were inadequately capacitated, evidenced by the lack of comprehensive records on the structure of Micro and Small Enterprises (Ministry of Niger Delta Affairs,

2011).

The Credit market in the Niger Delta is dualistic in nature with small scale Agro- based  enterprises  relying  on  both  formal  and  informal  financial  sources  to  fund production (Ministry of Niger Delta Affairs, 2011). Whereas the formal credit market is organized,  basically  under government  supervision,  the informal  credit market is not organized with a lot of informality in its operations (Essien and Idiong, 2008). However, while there can be little doubt of the formal sectors superiority over the informal  sector when it comes to financing large scale economic development and projects of national and regional importance, the role  and the strength of informal finance agents in small

scale economies and their subsequent importance to low income households cannot be under-estimated (Srinivas, 1993).

Within   the   parley   of   agricultural   financing,   informal   credit   sources   are unquestionably most popular (Udoh, 2005).   Collateral free lending, proximity,  timely delivery and flexibility in loan transaction are some of the attractive features of informal credit available to farmers    (Khandler and Farugee, 2001). This is  similar to what is obtainable in Islamic banking where flexibility in transaction  is  highly emphasized, a situation which advocates that all parties in a transaction share the risk, the profit or the loss of the transaction (James, 2008). However, unlike formal financial sources, informal financing may not be adequate for meaningful  food crop production.  The nature and operation  of formal sources which have  failed not only in delivering  credit to larger farmers but also in promoting a  viable  delivery system has caused an increase in the patronage of informal credit sources by rural farmers (Egbe, 2000; Udoh, 2005).

With  these  issues,  a  well-organized  credit  market  system  can  assist  the  poor  and marginalized  people  to access  credit  (Rutherford,  2001).  Also,  issue  of  cooperatives cannot  be  left  out  in facilitating  credit  access  as social  groups  such  as cooperative societies increasing involvement  in production and farm inputs  distribution  in Nigeria has  been  widely  reported  (Alufohai  and  Ilavbarhe,  2000;  and  Nweze,  2003).  Credit system  facilitates  the  process  of  job  creation,  making  many  to  be  self-employed entrepreneurs involved with distinct business related activities (Thomas, 1992).

In fostering the development of well-organized credit system, the CBN instituted the micro-finance  policy framework to guide and enhance the provision  of  diversified microfinance  services  on a sustainable  long-term  basis for the poor  and low-income group (CBN, 2010). Microfinance services in the Niger Delta are offered by a number of providers, including microfinance  banks, credit   institutions,  NGOs, Rotating  Savings and  Credit  Associations  such  as Esusu,  Money  lenders,  Family  Credit  Associations (CBN, 2010). Against this background, an empirical investigation into the activities of small Agro-based firms will enable policy makers to understand drivers of credit access, constraints, default and performance for appropriate intervention in the Niger Delta

1.2      Problem Statement

Small scale enterprises can play a key role in fostering growth, creating jobs and thus alleviating poverty, but they still remain underserved by financial markets to meet operational  and investment  needs in developing  countries,  especially  Nigeria  (United Nations Development Programme(UNDP)(2011).  The extent of unemployment and high rate  of  poverty  in  Nigeria  makes  it  imperative  for  financing  intervention  of  small businesses  to alleviate  these problems  (Ogechukwu  and Latinwo,  2010). The current problems of poverty and unemployment have undermined the capacity of the economy and  small  and  medium  scale  enterprises  are  seen  as mechanism  for  intervention  to addressing  these  long  term  problem  of  the  economy  (UNDP,  2011).  Unfortunately, SMEs have not been able to propel economic growth and development due to inadequate and proper financing (Ministry of Niger Delta Affairs, 2011).

The Niger Delta region of Nigeria until recently has experienced series of unrest that  has  adversely  affected  the  economy  of  the  area  and  that  of  Nigeria as a whole (Omofonmwan and Odia, 2009). Unlike other developing countries, the unemployment and poverty rates in post-conflict  Niger Delta,have  become  predominant  (Ministry of Niger Delta Affairs, 2011). Thus, majority of those  engaged with investment in small enterprises are poor and therefore engulfed with serious financing obstacle to escape the vicious circle of poverty (Obanuyi, 2008). According to the pecking order theory, firms prioritize their source of financing from internal to external sources but the former are always insufficient for small firms to undertake the required level of investment (Udoh, 2005). Bigsten, Collier, Dercon, Gauthier, Fafchamps,  Gunning, Oduro,  Oostendorpk, Pattillo,  Soderbom,  Teal, and Zeufack(2003),  identified  high credit  requirements  and insufficient collaterals as potential factors affecting firms decision not to apply for credit and reflection of those that applied for credit in low income societies.

Moreover,  youth  restiveness  is  particularly  high  in  countries  emerging  from conflict such as Liberia, Sierra Leone, Guinea, and the oil rich Niger Delta  region of Nigeria where large numbers of ex-militants are seeking reinsertion into the civil society (United Nations, 2009). In Nigeria for instance, the post-amnesty  programme  for ex- militants was designed to address the challenge of youth  restiveness (Oladipo, 2012). But, unfortunately, the amnesty programme only concentrates on those who bore arms instead of accommodating all persons from the oil bearing communities who are willing and ready  to be  trained  in gainful skills  and education  (Oladipo,  2012).  Agro-based enterprises as critical tools for conflict mitigation have proven to be useful in fostering recovery  through  vocational  trainings,  job  creation,  re-opening  of  businesses,  and livelihood rehabilitation (United Nations, 2012). Investing in Agro-based enterprises by opening  up  access  to  credit  will  promote  social  cohesion  and  reconciliation,  which constitutes the building blocks for sustainable peace.

However,  for  small  Agro-based  businesses  to realize  their  potential,  enhance overall macro-economic performance in the Niger Delta, their growth is crucial. Access to  credit  is  essential  to  finance  their  investment  to  achieve  this  growth  but  the characteristics of small enterprises constrain them from accessing external funds (United Nations, 2001; Okoye and Arene, 2005). Despite evidence of credit constraints among micro and small businesses in the country, limited attempts have been made to mitigate the financing constraints of small businesses most especially Agro-based businesses. The estimated large gap between the demand for and supply of credit to small  agro  firms serves as vital research concern for investigation  (UNCDF, 2005). To  meet this large unmet  demand,  financial  institutions  are  facing  increasing  pressure  to  expand  their outreach and enhance their impact on small enterprises (Paxton, 2002).

With  the  need  for  effective  credit  system,  an  analysis  of  credit  delinquency among SMEs in Niger Delta indicates prevalence of default rate as evidenced by non- performing loans (Obamuyi, 2007 and Udoh, 2008). Despite effort by the Central Bank of  Nigeria  to  institute  mechanism  of  ensuring   improved  credit  environment,   the development of credit default flagged the problem of slow loan recovery (CBN, 2010). Small scale enterprises  have  performed at very abysmal  level (Hassan and Olaniran,

2011). This low performance has exacerbated poverty, hunger, unemployment and low standard  of  living  of  people  in  a  country  whose  economics  is  ailing  (Hassan  and Olaniran, 2011).

Many  of the small  scale  agro-based  enterprises  borrow  from the informal  or formal  credit  markets.  Therefore,  considering  the  emergence  of  many  formal  and informal financial  institutions  in the Niger Delta, there is hope for small  Agro-based enterprises,  but  to  what  extent  has  credit  advanced  to  these  enterprises  influenced performance? Assessment of the influence of financing is popular, but lacking, is the role of small scale agro-based enterprise characteristics  in credit in a post-conflict context. Therefore, attempts to formulate credit policies without substantial information on how agro-based firms respond to the different credit sources in the market, how they perform with these credit sources, and the  factors militating against their response in a region such as the Niger Delta may be deficient since it is not backed by empirical evidence.

The study therefore sets out to investigate the following questions:

i.   What attributes of small scale agro-based enterprises explain access to credit in the

Niger Delta?

ii.  What determines credit amount received by small scale Agro-based enterprises in the region?

iii. What factors determine the number of times an enterprise accesses credit within a year?

iv. What causes firms to default in repayment of loan in the area?

v.   How are agro based enterprises performing in the area?

1.3      Objectives of the Study

The  broad  objective   of  this  study  was  to  analyze  credit  access  and   the performance of small scale agro-based enterprises in the Niger Delta region of Nigeria.

The specific objectives were to:

i.     describe the socio-economic characteristics of small scale agro-based enterprises in the Niger Delta;

ii.     analyze the effects of selected socio-economic and enterprise variables on access to formal and informal credit markets by the firms in the region;

iii.     examine the factors influencing the amount of creditreceived by these enterprises in the region;

iv.      determine the factors affecting frequency of accessing credit by the enterprises in the area;

v.     examine  the factors  influencing  default  in repayment  of credit accessed  by  the enterprises in the area;

vi.      assess and compare the performance  of the enterprises  that access credit in  the region; and

vii.      draw policy recommendations based on the research findings.

1.4      Hypotheses of Study

The null hypotheses tested are as follows:

i.    Enterprisecharacteristics do not influence access to credit markets.

ii.    Credit amount received is not influenced by Enterprise characteristics. iii.    Enterprise characteristics do not influence frequency of credit access. iv.    There is no significant difference in performance of enterprises.

1.5      Justification of the Study

Financing  of small  agro-businesses  is vital  to spur solidarity  and even  assist conflict torn Niger Delta communities to rebuild and reconcile (Irobi, 2010). Given the increasing  importance  of these firms in the life of the people, this  study  investigates access and performance of small agro-based firms.

However, in view of the increasing slow growth and instability of production in agro-based firms( Ministry of Niger Delta Affairs, 2011), the outcome of this study is expected to enable producers and prospective entrepreneurs and groups in taking rational

decision, contributing   their quota in the productive advancement  of these firms. It  is hoped that this work will be a guide to government bodies in charge of rural and national economic  development  policies  that  will  enhance  efficient  utilization  of  available resources, thereby achieving profitability and growth in the sector.

Furthermore,  in  Nigeria,  empirical  evidence  has  established  a  positive  link between  the  declining  agricultural  productivity  and  limited  credit  facilities  (Nwaru,

2004).    This  situation  threatens  the  capacity  of  firms  in  their  quest  for  sustainable production.   Therefore   analyzing  factors  influencing   access  to  credit   would  have significant policy implications which would be helpful in redressing the relative decline from low patronage of credit facilities.

Access to these credits and targeted transfers can be an important mechanism in poverty reduction, social protection and income redistribution (World Bank, 2003). It is however observed that credit meant for investment in agro-based businesses is diverted for other uses (Oni, Oladele, and Oyewole, 2005). Therefore, the result of this study will reveal those factors that influence credit default by  small  scale agro-based enterprises and this will enable government and other agencies to fashion out ways of curtailing if not totally eradicating the trend.

The outcome of this research will provide major building blocks for  decisions involving the region and the betterment of the life of its impoverished  citizenry, who may not have carried arms but are grossly affected by the graved economic condition in the area.

Essentially, this study attempts to extend literature on small agro-based financing in a post-conflict  region. Understanding  the different  drivers of credit to  small agro-
based  firms,  could  help  illuminate  how  banks  and  other  financial  institutions  can rearrange lending mechanisms in order to target vulnerable firms in post conflict regions.

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