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

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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

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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

No. of

Amount in (N Billion)

Projects

Access Bank Nigeria plc

9

7.926

Fidelity Bank Plc

7

6.225

First Bank of Ni