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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.



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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