CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.0 Introduction

This chapter treats the review of the related literature under the following
headings.
2.1 Conceptual Framework
2.2 Theoretical Framework
2.3 Empirical review
2.4 Summary of literature review

2.1 Conceptual Framework

Agriculture is a major contributor to Nigeria’s GDP and small-scale farmers play a

dominant role in this contribution (Rahji and Fakayode 2009), but their productivity and
growth are hindered by limited access to credit facilities (Odoemenem and Obinne 2010).
Credit institutions can be categorized into three groups:

a. Formal, such as commercial banks, microfinance banks, the Nigeria Agricultural

and co-operative Rural development Bank (NACRDB), and state government-
owned credit institution.

b. Semi-formal, such as non-governmental organizations-micro-finance institutions

(NGO-MFIs) and co-operative societies, and

c. Informal, such as money lenders, and rotating savings and credit associations
(ROSCA). Enhancing financial Innovation and Access (EFINA) (2008) notes that
23 percent of the adult population in Nigeria have access to formal financial
institutions, 24 percent to informal financial services, while 53 percent are
financially excluded.

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 The role of credit facilities to small scale farmers has been identified as a major
ingredient to agricultural development in the present economics. The small scale
farmers are often considered as having greater opportunities of increasing production
and farm income by adopting new technology, this potential can only be realized if
farmers can gain access to funds to finance the additional inputs that are invariably
required. All too frequently, small scale farmers have insufficient savings to finance
the investment in additional inputs. Under the circumstance the obvious solution for
farmers is to borrow, unfortunately, the desire is not available. This is largely because
institution lenders are reluctant to advance credit to the agricultural sector. This can be
attributed to the dependence of agricultural production on Nature and the high co-
variance of risk from adverse weather and incidence of disease in any given location.

The failure to realize the potential increase in agricultural production has forced
the Nigerian Government to introduce programmes to address the problem of risk and
accessibility of credit to small scale farmers.

2.1.1 Concept of Agricultural Productivity

Agricultural productivity in Nigeria was defined by Olayide (1991) as the rate of

index of value of agricultural produce to the value of input employed in production. The
essential inputs are land, labour, capital, water and management of all inputs listed above,
land holds a unique place in the developing countries where the economics are still in the
infant stages. Capital formation is always low since savings is a function of income. He
mentioned further that production technique is characterized by small holder’s using
manual technology, and inconsistency in the government agricultural policies account for
poor production in Nigeria. Agricultural credit facilities for many developing countries of
the world, Nigeria inclusive is not enough and the few facilities are not made available to
farmers. This has led to the Nigerian Economy. The decline has for a long time been
blamed on unavailability to access credit by small scale farmers in rural areas.

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If a small scale farmer is to grow to become a medium and eventually a large scale
farmer, he must have among other incentives an assured supply of credit either in
medium or long-term.

Agricultural productivity refers to the rise in per capita output of agricultural

produce within an economy during a given period of time. The period of time can be
monthly, quarterly or annually. However, the annual period of time is usually adopted by
most researchers in the field of economists and statistics due to the accurate and coherent
information it tends to offer. Agricultural productivity refers to the output produced by a
given level of inputs in the agricultural sector of a given economy (Amire, 2016). More
formally, it can be defined as the ratio of the value of total farms outputs to the value of
total inputs used in farm production (Iwala, 2013).

Agricultural productivity is measured as the ratio of final output, in appropriate

units to some measure of inputs. Singh and Dhillion (2000) suggested that yield per unit
should be considered to indicate agricultural productivity. Many scholars criticized this
suggestion while pointing out that the approach only considered land as the factor of
production. Several researchers were of the opinion that agricultural productivity should
contain all the factor of production such as: labor, farming experiences, fertilizers,
availability and management of water and other biological factors. Also, agricultural
productivity can be measured by total factor productivity (TFP). This method of
calculating agricultural productivity compares an index of agricultural inputs to an index
of outputs.

Increase in TFP is usually attributed to technological progress. Agricultural

productivity is very significant, because it increases food production and farmer’s
prospects for growth and competitiveness in the agricultural market. As farmers adopt
new techniques and differences, the most productive farmers benefit from an increase in
their welfare while farmers who are not productive enough will exit the market to seek
success elsewhere (Yair, 2007). Agricultural productivity is becoming increasingly

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important as the world population continues to grow. It is not only the people employed
in agriculture who benefit from increases in agricultural productivity.

Those employed in other sectors also enjoy lower food prices and a more stable food
supply.

2.2 Overview of Credit Scheme to Farmers in Nigeria

Agricultural development is a process that involves adoption by farmers

(particularly small scale farmers) of new and better practices (Garba, 1987; Orebiyi,
1999). This is due to the fact that most of the new practices have to be purchased but few
farmers have the financial resources to finance it.

Before the introduction of credit schemes to farmers in Nigeria, commercial banks

were often skeptical to give credit to farmers. This is because small scale farmers lack
acceptable collateral security whereas bankers are interested in collateral securities which
are highly liquid and which possess “money value” certainty. It was in recognition of this
fact that the federal government at various periods put in place credit policies and
established credit institutions and schemes that could facilitate the flow of agricultural
credit to farmers (Adegeye and Dittoh, 1985).

2.2.1 The Nigerian Agricultural and Co-Operative Bank (NACB)

NACB (now known as the Nigerian Agricultural Co-operative and Rural

Development Bank) was established in November, 1972 to grant loans for sources has
neither supplied the amount of credit needed, nor has it provided credit on the term
required by farmers to modernize their farming method.

According to CBN (1986), other farm credit schemes included;

1. The establishment of rural branches of commercial banks throughout the country

following a mandatory Federal Government policy Directive in 1976.

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 2. The creation of the River Basin Authorities in 1979 throughout the country.

3. The establishment of both enhanced and state-wide Agricultural Development

Projects throughout the country between 1972 and 1980 to facilitate among other
things the provision of agricultural credit to farmers.

4. The development of state ministry operated and other Government sponsored

Agricultural credit programmes in the second half of the 1970’s.

5. The development of technical support and agro service establishments that would
facilitate the supply of credit to farmers throughout the country between 1976 and
1980.

However, the persistent failure of the above institutions and conventional banks to
adequately finance agricultural activities in the mid 1970’s was a clear evidence that the
country was in need of further financial and institutions reforms that would revitalize the
agricultural sector by encouraging the flow of institutional credit into it. Also, the
unpredictable and risky nature of agricultural production, the importance of agriculture to
our national economy, the urge to provide additional incentives to further enhance the
development of agriculture to solve the problem of food insecurity, and the increasing
demand by lending institutions for appropriate risk aversion measures in agricultural
lending provided justifications for the establishment of the Nigeria in 1977 (Mafimisebi
Et al, 2009).

2.2.2 Agricultural Credit Guarantee Scheme Fund (ACGSF)

The agricultural credit guarantee scheme fund was established by the Federal
military Government Decrees 2007 1977, but began proper operation on 3rd of April,
1978. It was amended on 13th June, 1988. The main objective was to boost agricultural
production and income of small-scale farmers, improve farmer’s welfare and standard of
living and primarily to create access to bank credit to farmers.

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 The decrees provided for a fund of ₦100 million subscribed to by the Federal
Ministry (60%) and Central Bank of Nigeria (40%). As at December 1982, ₦85.5 million
was paid up as maximum liability of the fund 75% subject to ₦50,000 and ₦1 million for
a loan to individual and co-operative society respectively. The loan under the decree
includes advances, overdraft and facilities to the agricultural sector and should be taken
as such whenever it uses those guidelines and other circulars. The interest rate chargeable
was fixed from time to time as prescribed by the commissioner for finance.

The fund was enhanced to ₦1 billion on the 8th of December, 1999 and later to
the present level of ₦4 billion as at early 2006 (CBN, 2007). All these are aimed at
solving the problem of inadequate funding of farm operate by banks and to cushion these
financial institutions against the effects of high risks associated with investments in farm
enterprises as well as to raise the productivity and earnings from farm investments so that
the incidence of loan repayment default among the farmers will be minimized (CBN,
1977; Ogwuma, 1985; Eyo, 1985; Oguoma, 2002).

Role of the Scheme

Various studies have shown that credit plays an important role in enhancing
agricultural productivity of the farmer (Okorji and Majeha, 1993; Nneze, 1991;
Mafimisebi Et al, 2008). The general purpose of the Nigerian Agricultural Credit
Guarantee Scheme fund is to encourage banks to lend to those engaged in agricultural
production and agro-processing activities. Thus, the specific objectives of the Scheme is
the stimulation of total agricultural production for both domestic consumption and export,
and the encouragement of financial Institutions to participate in increasing the productive
capacity of agriculture through a capital lending programme.

The scheme is expected to provide guarantee on loans granted by financial

institutions to farmers for agricultural production and agro-allied processing. The fund’s
liability is limited to 75% of the amount in default net of any amount realized by the
lending bank from the sale of the security pledged by the borrower. Since the inception of
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the scheme, there has been a continuous aggregate increase in the number of loans to
agriculture from a paltry 341 loans amounting to ₦11, 28 million in 1978, to 3,571 loans
amounting to ₦218, 60 million as at May, 2006. Also, data at the Central Bank of Nigeria
show that a total number of 453, 748 loans valued at ₦11.28 billion were guaranteed
from the inception of the scheme in 1978 to May, 2006. This translates to an average of
16,205 loans valued at ₦402.86 million per annum.

The agricultural activities that can be guaranteed under the scheme include the;

a) Establishment and/or management of plantation for the production of rubber, oil

palm, cocoa, cotton, coffee, tea and other cash crops.

b) Cultivation and production of cereals, tubers and root cash crops, fruits of all
kinds, beans, groundnuts, peanuts, beniseed, vegetables, pineapples, bananas and
plantains.

c) Animal husbandry that covers poultry, piggery, rabbitry, snail farming, rearing of
small ruminants like goats, sheep and large ruminants like rattle.

The scope of C above was expanded in the amendment decree of 1988 to include
fish culture, fish captures and storage. The scheme guarantees loans to farmers from
lending institutions up to the tune of 5 million naira for individual farmers and, 10 million
Naira for group/co-operative farmers (CBN 2007). In the event of default in loan
repayment, the lending bank will serve the guarantor (the CBN), a notice of default.
Afterwards the lending bank is expected to make further efforts as it deems fit to recover
the amount in default from the borrower. If any balance remains after the above steps and
the default persists after 6 months of notice of default, the lending bank could realize the
pledged security and thereafter put a claim on the scheme fund so as to realize 75% of the
balance outstanding as to the time of application for claim to the bank.

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Problems of the Scheme

In the course of the fund’s operations, a number of problems have been identified as
militating against its smooth performance. According to Akinleye Et al (2005), some of
the problems are:

a) Increasing incidence of loan default: The rate of loan repayment by AGGs

beneficiaries is very low. This view is also held by Njoku (1986) and Ojo (1986).
Reasons adduced to this are natural disasters, poor farm management, low product
prices, loan diversion, deliberate refusal to pay and the inability of farmers to
assess loan requirement properly leading to farmer’s receipt of inadequate or
excessive loans.

b) Bank related problems: Participatory banks in the ACGs do not cooperate fully in
lending to farmers. Because of the high cost of processing loans relative to the
actual loans and the high default rate of the farmers, many banks prefer to pay
penalty than to risk lending their funds to agriculture. Also, banks fault the farmers
for submitting incomplete application forms. In some cases where loans are
approved, it rises too late for it to fulfil the purpose for which it was intended.

Another problem that militates against the smooth operation of the scheme is on
“personal guarantee” as a security that may be offered to a bank for the purpose of loan.
“Personal guarantee” as a condition was not explained in the decree. This therefore,
makes it almost nothing as its interpretation rests on the bank officials.

2.2.3 The Green Revolution Programme (GRP)

With the birth of civilian administration in 1979, the question of food shortage in
the country once more received a critical look as a drain in the nation’s foreign reserve
and its threat to the economy and existence were realized. Thus, the Green Revolution
Programme was launched in 1980 by the then Shagari administration.

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 It’s objectives are centered on self reliance in food production and diversifications
of Nigeria’s sources of foreign exchange. To achieve this, all known constraints to
increased production were to be removed.

2.3.1 The Nigeria Incentive-Based Risk-Sharing System for Agricultural Lending

(NIRSAL)
The Nigeria Incentive-Based Risk-Sharing system for Agricultural Lending
(NIRSAL) a new innovative mechanism targeted at de-risking lending to the agricultural
sector is designed to provide the singular transformational and one bullet solution to
break the seeming jinx in Nigeria Agricultural Lending and Development. The Central
Bank of Nigeria (CBN) in August 2010, engaged the Alliance for Green Revolution in
Africa (AGRA) to develop the NIRSAL.

NIRSAL is an approach that tackles both the agricultural value chains and
agricultural financing value chain. The goal of NIRSAL is to trigger an agricultural
industrialization process through increased production and processing of the greater part
of what is produced to boost economic across the value chain.

NIRSAL breaks with tradition by doing two things simultaneously:

 Fixes the agricultural value chains, so that banks can lend with confidence into
cohesive and complete value chains and

 Encourages banks to lend into agricultural chains by offering them strong

incentives and technical assistance.

It is based on five pillars that aim to “de-risk” agricultural lending and lower the
cost of lending for banks. US$ 500million is divided across the pillars.

a. Risk-sharing facility (US$ 300 million)

To break down banks’ perception that agriculture is a high risk sector, NIRSAL will
share their losses on agricultural loans.
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 b. Insurance Facility (US$ 30 million)
The facility’s primary goal is to expand insurance products for agricultural lending
from the current coverage to help reduce credit risks and increase lending across the
values chain. Both will be by expanding the coverage of existing products provided by
the Nigerian Agricultural Insurance Cooperation (NAIC), and piloting and scaling new
products, such as weather index insurance, new variants of pest and disease insurance etc.

c. Technical Assistance Facility (US$ 60 million)

NIRSAL will equip banks to sustainably lend to Agriculture. At the same time, it will
equip producers to borrow and use loans more effectively, and produce more and better
quality goods for the market.

d. Holistic Bank Rating Mechanism (US$ 10 million)

This mechanism rates banks based on two factors: the effectiveness of their
agricultural lending and its social impact.

e. Bank Incentives Mechanism (US$ 100 million)

To complement NIRSAL’s first three pillars, this mechanism offers banks additional
incentives to build their long-term capabilities to lend to agriculture.

2.3.2 Uniqueness of NIRSAL compared to other CBN Schemes

 Previous scheme have encouraged banks to lend but had no clear strategy to fix
the agricultural value chains to make lending effective.
 Previous schemes focused on just one size of producers and/or one segment of the
value chain.
 NIRSAL will be managed and implemented by a Non-Banking Financial
Institution and not the CBN.

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2.3.3 Measures of Success for NIRSAL
 It will generate additional US$ 3 billion of bank lending within 10 years to
increase agricultural lending from the current 1.4 to 7 percent of total bank
lending.
 It will increase lending to the “pooled” small farmer segment to 50 percent of the
total (typically, banks do not reach these producers individually but through
“pools” that is aggregating mediators such as MFIs and cooperatives)
 NIRSAL will reach 3.8 million agricultural producers by 2020 through pooling
mechanisms such as value chains, MFIs and cooperatives, and
 It will reduce banks break-even interest rate to borrowers from 14 to 7-5-10.5
percent.

At present, the Ministry in collaboration with CBN is working only with states that
have given expression of interest and are prepared to work with NIRSAL to resolve key
barriers to agricultural productivity e.g. Infrastructure, Extension workers, supply of
inputs etc. The scheme has received active expressions of interest from Zamfara, Ekiti,
Delta, Plateau, Adamawa, Lagos, Kano, Sokoto, Niger, Nasarawa, and Benue states. The
CBN/project Implementation Office is still in active discussion with other states and
structured dialogue designed to create a transparent process for attracting investors.

Source: www.fmard.gov.ng

2.4 Rural Finance Institution Programme

The Rural Finance Institution Building Programme (RUFIN) is a loan agreement

of US 27.2 million between the international fund for Agricultural Development (IFAD)
and the Federal Government of Nigeria.

The Central objective of the programme is to develop and strengthen Micro-

Finance Banks (MFBs) other member based Micro Finance Institutions (MFIs) by
enhancing the access of the rural populace to the services of these institutions in order to

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expand and improve agricultural productivity and micro-small Rural Enterprises. The
goal is to alleviate poverty with a particular focus on the rural poor and especially
women, youths and the physically challenged.

The programme is being implemented along with four(4) participating institutions

namely; the Central Bank of Nigeria (CBN), the National Poverty Eradication
Programme (NAPEP), Nigerian Agricultural cooperative and Rural Development Bank
(NACRDB) and the Federal Department of cooperatives (FDC).

Under the programme the following categories of Non-Bank Micro Finance

Institutions i.e. cooperative societies, unions and cooperative Finance Agencies (CFAs),
and Grass root Informal Finance Institutions would be supported in the needed areas of
capacity building and access to loanable funds. This is with a view to establishing
appropriate linkages with micro finance banks/institutions and commercial banks for
credit delivery to the rural populace.

The FGN and IFAD supported Rural Finance Institution Building Programme
(RUFIN) has within one and half years of the implementation impacted on the Central
bank of Nigeria (CBN). The programme has been mentoring some selected MFBs,
Financial NGOs, Financial HGOs, Financial cooperatives and the informal community
credit and savings organisations in the twelve (12) participating states. The programme
also developed a training manual for capacity building of MFBs and financial NGOs
selected from the outcome of Risk Institutional Assessment of HDIC/CBN and the over
4,000 Community Based Credit and Savings Organizations in the past one and half years
has been subjected to vigorous capacity building and provision of necessary hardware
and software ICT equipment. In line with the identified gaps from the Risk/Institutional
Assessment for MFBs, financial NGOs and financial cooperatives, a tailor made
curriculum was designed to ensure their capacitation.

Office equipment such as desktop computers and hardware were distributed to 32

participating MFBs. As part of the capacity building of MFBs, MFIs and RMFIs, which
12
is one of the cone mandates of the programme, RUFIN trained 27 MFBs and increased
deposit mobilization. Also, 33 MFBs have been trained on risk management while 1,524
staff of RMFIs were trained on Gender learning and Action system, making microfinance
work, Enterprise Management and Governance and Entrepreneurial skill Development.

In order to enhance client outreach through establishing linkages between RMFIs

and formal Banks 3, 516, Rural, micro-finance Institutions have been linked with formal
Banks. A total of ₦ 66,598,865.88 of voluntary savings have been mobilized from 31,149
savers in the 12 participating states. Out of these 44.68% of these savers were women,
while 55.32% were men. A further analysis showed that 20.69% were youths while
0.91% are physically challenged. The total wholesale credit amounting to ₦134,756,484
was provided to the village savings and credit associations for onward lending to their
members/clients in the participating states.

The programme has formed and strengthened 6,295 village credit and savings
groups consisting of 149,990 members in the 12 participating states. In addition, 529
RMFIs with 1413 members were trained on gender learning and action system, making
micro-finance work and governance etc. in 11 states consisting of 875 men and 38
women. Access to credit facilities has increased by 122.24% from ₦60,636,845. 45, in
June, 2011 to ₦134,756,484 in February, 2012. Savings mobilization, increased by
226.23% from ₦20,546.189. 43, in December, 2010 to the current value of
₦67,562,505,88 in February, 2012. Source:

An online Report Rendition Workshop conducted in collaboration with other

financial Institutions Supervision Department (OFISD) of the central Bank of Nigeria
(CBN) for micro-finance Banks in the country. In an effort to facilitate increased
wholesale lending and refinance facility for the microfinance institutions, the Bank of
Agriculture (BOA) dedicated ₦1 million for the refinancing of MFBs in 2011.

In addition, the two Apex organisations, the National Association of Non-Bank

microfinance institution and the National Association of micro finance Banks are being
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capacitated in the area of capacity building and ICT equipment to enable the two
institutions carryout oversight functions on the entire micro finance institutions in
Nigeria.

2.5 Agricultural Credit Support Scheme (ACSS)

The ACSS is an initiative of the federal Government and the Central Bank of
Nigeria with the active support and participation of the Banker’s committee. The scheme
has a prescribed fund of ₦500.00 billion. ACSS was introduced to enable farmers exploit
the untapped potential of Nigeria’s agricultural sector, to reduce inflation, lower the cost
of agricultural production (i.e. food items), generate surplus for export, increase Nigeria’s
foreign earnings as well as diversify its revenue base. At national level, the scheme
operates through a Central Implementation Committee (CIC) while at the federal capital
Territory (FCT) and state levels, the scheme operates through state implementation
committee (SICs) instituted to ensure that the objectives of the scheme is realized without
hindrance.

To access loans under ACSS, applicants (practicing farmers and agro-allied

entrepreneurs with means) are encouraged to approach their banks for loan through the
respective state chapters of farmers associations and state implementation committees.
However, large scale farmers are allowed under the scheme to apply directly to the banks
in accordance with the guidelines.

ACSS funds are disbursed to farmers and agro-allied entrepreneurs at a single-

digit interest rate of 8.0 percent. At the commencement of the project support, banks will
grant loans to qualified applicants at 14.0 percent interest rate. Applicants who pay back
their facilities on schedule are to enjoy a rebate of 6.0 percent, thus, reducing the
effective rate of interest to be paid by farmers to 8.0 percent. The implementation
Guidelines will be determined administratively as soon as a decision is taken on the
proposed fund.
Source: www.cenbank.org
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2.6 Theoretical Framework

The need for credit (cash and kind) for rural development is something that cannot
be overlooked. This explains why accessibility of credit facilities has been one of the
most popular types of state intervention in the agricultural sector. Ideas about rural credit
in developing countries are predicted on various theories about rural household behaviors
and the working of market in economics. One of such models was by Frank Ellis (1998)
in his book.

2.6.1 Agricultural policies in developing countries

Agricultural policies in Developing Countries which was written in 1992. The

model concerns the savings, borrowing and investment behavior of the household
irrespective of the type of financial market the household faces. According to Frank, the
farmers most at time have no resources to save and it even, they have anything at all, and
their potential to save is very low. This situation, accordingly, does not enable them to
have access to credit so as to channel it into investment. The theories presuppose that
before anyone can make a viable investment, there should be savings. With savings one
will have access to credit. This implies that, investment has a direct relationship with
credit.

Thus, if the farmer is given credit, he can use it to expend his/her agriculture
activities. Besides, with the use of the credit in hand, the farmer can increase his/her
productivity and for that matter his income levels. This will in the long run or invariably,
improves the standard of living of the farmer. The theory also implies that, an efficient
and appropriate rural financial institution can tap the rural resources into savings and
channel them into investable funds Frank, (1992).

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2.6.2 Formal and informal sectors

Frank (1992) defined credit as a sum of money in favor of the person to whom
control over it transferred. He maintained that credit itself, if not capital, can be used,
among other things, to make investment.

To Frank, credit may be formal or informal. The informal sector is made up of

largely of individuals (traders, landlords or farmers) who lend money as business. They
are traditionally characterized as being usurious and in position of considerable power
due to lack of competition, although some well dispute that Yaron, 1992; Poulton et’al
(1997). Formal credit channels are those bound by the large regulations of a country and
they include private banks, state owned banks and registered co-operative Frank Ellis,
(1992).

According to Smith and Thompson (1991), credit may do a private good in the
sense that, it is excludable and subtract able, but these attributes are not necessarily
sufficient to make it attractive to private suppliers. This is because; the credit market
combines the problems of imperfect information and risk.

2.6.3 Issue of collateral for loans

In developing countries, these risk drivers, especially from the legal framework for
loan recovery and securing collateral Yaron, (1992). Risk aversion in the private sector
leads to the accessibility of credit only to those with better access to collateral or
particular ties to lenders. The implication here is that, any financial institution wants to
make sure that credit issued is recovered.

This is why Frank (1992) said that, a typical device for selecting borrowers is to
demand that borrowers provide some collateral for the whole or a portion of the loan. To
him, this might be in a form of a plot of land, a piece of equipment or a draft animal,
usually a bullock. Credit has always had a special place in the mainstream thinking of

16
agriculture development. In the 1950’s and the early 1960’s, it was considered to be the
key instrument for breaking the “ vicious cycle” of low incomes in the rural area.

However, in that period, emphasis was placed on the market oriented farmers and
the commercial agriculturist rather than the rural dwellers. From mid-1960’s, however,
the target had been on the rural dwellers, especially on the rural farmers. The aim of
targeting this group is to improve the efficiency of farmers and to solve the exploitation
or monopolistic behavior of private money lenders Frank Ellis, (1992).

2.6.4 Government subsidies to small-scale farmers.

To enable rural farmers and entrepreneurs to obtain credit, there has been an
argument that government should subside rural credit. However, Yaron (1992) pointed
out that subsidized loans often end up in the hands of the relatively rich people with
broader economic interest. He cited an example of two World Bank, OECD studies on
Mexico, Pakistan and the Philippines, which found out that, of the Bank funds provided
in these countries, only 25-50%, was estimated to have added to agricultural
development. He therefore suggested that, instead of providing credit itself at subsidized
rate and thereby reducing the opportunities for the development of a functioning private
credit system, the public sector should focus on reducing the risk that individual leaders
face.

This, therefore, calls for a sustainable financial scheme, which should not rely on
external source or subsidies. To this, Frank (1992) maintained that, in order to achieve
sustainable rural credit, some countries have set up rural credit scheme. The objective of
this is to make rural credit not reliant on ever increasing subsides to cover losses and not
dependent, forever on foreign donors. The implication here is that, there is the need for
self-sustaining rural financial system. This means that, there should be savings
mobilization in the rural areas to ensure rural financing. This means that, the people in
the rural areas should mobilize their own savings, which will serve as the bedrock of rural
financing. This means minimal government intervention and because of this, Diana
17
Carney (1998) has observed that donors, both North and South-based NGO’s are funding
co-operative credit institutions which rely on savings mobilization.

Some, such as Bennin’s rural saving and loans or Bank for Agricultural and
Agricultural Co-operatives (BAAC’s) scheme of Bangladesh, are outside the public
sector entirely, whilst other such as Ghana’s Rural Banks have minority government
participation. The generation of funds from savers is considered a key feature of self-
sustaining credit institution. It is felt that, a strong saving base reduces the reliance on
external funding.

Also, savers and borrowers are after the same people at different points in time in
the community thereby reducing information cost of transactions. Again, it is considered
that, people tied to an institution for both saving and borrowing are less likely to default
Frank Ellis, (1992).This means that, because the institution that is set up to mobilise
savings belong to the people of the community, there is the less likelihood that, they will
default in payment. Yaron (1992) therefore, cited an example of a successful credit
scheme in Indonesia and Thailand where over a very short period of time, it has been
possible to finance lending largely out of voluntary rural savings.

From the foregoing analysis, therefore, it can be said that, in order to achieve sustainable
credit scheme for rural agricultural development to ensure a balance between urban and
rural development, there must be a self-sustaining credit scheme, which calls for saving
mobilization within the community.

2.7.1 The Credit Rationing Theory and Access to credit facilities

The credit rationing theory, propounded by Magembe, (2017), provides a

framework for analyzing financial market inefficiencies.

The theory states that, information asymmetry is the main cause of financial
market malfunctioning in developing countries. Therefore, in our world today where
people can easily get all the information they need, banks could precisely predict all
18
actions by borrowers but may not be able to control such actions. According to Magembe
(2017), the financial institutions design the terms of loan in a manner that induces
borrowers to take actions in the interest of banks, and that also attracts low risk
borrowers. For both reasons, the expected returns of banks increase less rapidly than the
interest rate and beyond a certain point, actually declines. The moral hazard problem, on
the other hand, is that a risk-neutral firm will prefer projects with low probability of
bankruptcy and hence make lower expected returns.

The most important conclusion from Stiglitz and Weiss (1981) argument is that
information asymmetry in the form of adverse selection and moral hazard is the source
of market inefficiency in developing countries and this leads to high-risk borrowers such
as smallholder farmers exclusion from the stream of potential borrowers and their
discrimination regarding access to financial services. Most small-scale farmers groups
experience difficulties in obtaining credit for production inputs. With the collapse of
agricultural development banks and the closure of many exports crop marketing boards,
which in the past supplied farmers with inputs on credit, difficulties in accessing credit
have increased.

The development and commercial banks view the small-scale and micro
entrepreneurs as risk borrowers and extending loans to them is to cut down their
profitability in the transactions and to incur irrecoverable losses to the banks (Dzadze,
Osei, Aidoo,& Nurah, 2012). There is a believe that smallholder famers, borrowers are
much riskier than commercial farmers for reasons often related to the difficulty in
obtaining accurate information about and that they do not keep farm records

2.7.2 Access to Agricultural Credit

Agricultural credit is one of the major inputs in the development of the economy
especially in the agricultural sector. Access to this credit entails among other procedures
applying to the institutions that offer credit. These institutions include the formal sources
like commercial banks, microfinance institutions and other approved lenders. The other
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one is through the informal sector like the rotating and saving credit schemes, saving and
cooperative credit schemes, contributions from friends and relatives, and subscriptions
fee (Saleem, Jan, Khattak, & Quraishi, 2014).

The applicant must meet the necessary requirements before accessing credit.
(Kosgey, 2013) stated that these requirements are common in most of the formal credit
lending institutions than the informal ones. Some of the requirements are the collateral
security, which is the sufficient prove that shows that a farmer can pay back the loan on
time, the guarantors, and the signed commitments showing that the borrower agreed to
abide by the terms and conditions of the credit contract. Lending agencies require
collateral to reduce the risks related to lending therefore cushioning themselves from the
setback of default by the small-scale farmers. However, Sebatta et al. (2014) shows that
the requirements have made the access of credit to be a not friendly exercise for many
famers. The bureaucracy involved and tedious procedures to access loans has discouraged
many farmers in their quest for accessing the needed credit.

2.8 Empirical Review

The empirical review exercise, which to a very large extent, adds more weight to
the theoretical literature has been carefully analysed from journals, textbooks, pamphlets
and Newspapers accounts .It should be noted however that, these materials have been
systematically arranged in line with the following;

i. The problems of credit acquisition by the farmers

ii. ii. The extent to which effective Rural Banking system could mobilize rural
resources into savings and channel it into investible funds.
iii. The need to finance agriculture and for that matter, the farmers by financial
agencies and the government.

Talking about the need for credit, both in cash and in kind for rural development,
Kofi Atta Bronya (1990) has observed that, the financial system is very crucial in

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accelerating the rural development and that credit is very much more than just one impute
especially in an economy which is getting monetized and commercialized but has not yet
developed into an integrated national market. To him, harnessing the banking system for
development has long been recognized in Ghana and various ways and means have been
sought and tried on how to harness banking to support agriculture so that food and raw
materials for manufacturing could be produced in abundance to feed the people.

Also, Dr. Agama, in his address to the chartered institute of Bankers at their 1995
annual dinner, observed that, the need for credit facilities is highly felt in the rural areas
since they form the main foundation upon which any meaningful economic development
programme can be based. Again, in talking about the importance of credit to rural
development, Opoku Afriyie (1984) observed that, the scarcity of credit is considered as
one of the disincentives and obstacles to efficient and rapid agriculture development
Brown C.K, (1986).

In the same vein, Owusu Acheampong (1986) also observed that agricultural
credit could play a very important role in rural development. What he meant here was
that, for rural development to be accelerated there must be a credit scheme to support
agriculture which is the main form of occupation in the rural areas. What all these writers
seem to suggest is that, for rural development to be achieved through the activities of
farmers, there must be rural credit in the form of both cash and kind.

However, according to a survey by Aluko (1982) and quoted by Ukue (1993), the
most common source of credit for rural farmers has been the non-institutional or the
private sector credit which Frank Ellis (1992) called the informal sector. This means that,
financial institutions, which Frank (1992) called the formal sector are not much prepared
to grant credit to the rural dwellers, hence, they resort to the non-institutional source of
credit which constitute 78% of the total credit. Institute of Statistical, Social and
Economic Research (ISSER report, 1992). This may be due to the fact that, either the

21
people have lost confidence in the institutional credit scheme or that the traditional
banking institutions are not prepared to offer credit to the rural dwellers.

As observed by Peirson et’al (1990), the establishment of credit scheme involves

the following:

i. the company’s preparedness to offer credit

ii. the standard to be applied in the decision to grant credit to customers
iii. how much credit should be granted to a customer, and
iv. what credit terms should be offered?

This means that, the decision to grant credit is taken by the financial institution A
staff writer of the People’s Daily Graphic (May 11, 1995) observed that, people are not
having satisfaction from the traditional banks, especially the desired rate of returns on
whatever investment they have made with banks. Most of them are small time severs who
need a little money to turn themselves around but do not get from the Banks. Bank
customers need to provide collateral securities to be able to obtain loans to do whatever
projects they intend undertaking. Hence farmers are not able to make big time investment
to enable them get the collateral the banks require. This observation has also been made
by Musa (2000). To him, credit institutions granting loans require collateral security
which the small-scale farmers may not have and this limits their loans acquisition.

In some instances, bureaucratic procedures in the acquisition of credit from the

financial institutions drive the farmers away. It is to solve these problems that the rural
bank concept came into being. According to the ISSER, report (1992), it is to improve the
credit source for farmers and rural entrepreneurs that, the Rural Bank system was
introduced in Ghana in 1976. According to the same report, the establishment of rural
banks has led to a decline in the proportion of commercial and secondary banks’ loans
and advances since 1985. This means that, the rural bank system in Ghana is gradually
becoming a sustainable source of rural financing. This observation buttresses Frank Ellis’
(1992) observation that sustainable rural credit is that one that is generated from rural
22
savings mobilization. This is why Atta-Bronya (1990) observed that, the challenges
facing the rural banking system is to make the people living in the rural areas have
confidence in the rural banking system for all their monetary transactions.

However, by March, 1991, data from the Bank of Ghana showed that out of the
122 existing rural banks at that time, 98 had become distressed and were not able to
refund depositors money on demand. Bank of Ghana had to come to the rescue of these
banks. As at January, 1994, Bank of Ghana, had used the tax payers money to pay to
depositors of the distressed Rural Banks an amount of ¢611 million in order to preserve
the confidence of the depositing public in the rural banks Atta-Bronya, (1997). This
observation shows that, the rural banks have not lived up to expectation and therefore, in
order to serve as an instrument of rural development, a lot has to be done by these banks.

This means that, if the rural banks are not well organized to cater for the needs of
farmers, capital needed for rural development will be transferred from the rural areas to
the urban areas by the traditional commercial banks. The refusal of these banks to grant
credit facilities to the rural dwellers may be attributed to the low level of repayment of
credit granted to them. This low level of repayment can also be a reason why some of the
rural banks have become distressed. For the banks to continue granting loans to the
farmers there must be a good recovery system. This requires good administrative work on
the part of the banks and better understanding on the part of the borrowers or rural
dwellers. It is because of this that Lele (1983) asserted that, the credit delivery and
recovery and therefore, it’s administration to both the lender (banks) and the farmer
(borrower) have been beset with problems which have given the agricultural sector and
for that matter small-scale food crop farmers a headache in organizing credit
programmes.

According to Beckett (2004), the primary cause of low repayment is that farmers
spend large proportion of their incomes on semi luxury items like school fees, religious
activities, imported food stuffs and clothing. This means that loans granted to the rural

23
dwellers are not used as intended but rather used for other secondary matters which show
why there is low credit recovery among the rural dwellers. Therefore, a good recovery
performance required the credit institutions should have legal tools which would permit
them to take rapid action against defaulters as observed by Cleaver (1998).

Koomson (1999) also pointed out that, a short repayment period encouraged grant
payment. Also, to Udry (1990), informal sanctions can be used to persuade individuals to
repay loans. It is in the view that, this financial handicap has been a threat to the socio–
economic development of most rural communities. Dampare-Buadu (Daily Graphic
September 24, 1997, p7).

2.9 Evidence of factors determining small scale farmers’ access to credit

Evidence from the literature suggests that institutional factors, product features
and household socio-economic characteristics influence small scale farmer’s access to
credit facilities from both formal and informal sectors (Sebatta, et al, 2014). Baiyegunhi
& Fraser (2010) indicated that formal lenders in the credit markets incur high costs in
assessing the creditworthiness of small borrowers; yet make low returns due to the small
loan amounts involved. Strauss Commission (1996) indicated that some institutions
spend as much as R1.50 to lend one rand, excluding the cost of capital. The commission
concluded that this motivates formal lenders to adopt strict collateral requirements as a
screening device to minimize default risk, hence keeping small borrowers out of formal
credit markets or rationing their credit.

Access to formal financial services tends to be limited to salaried workers,

therefore excluding self-employed and informally employed (Porteous, 2003). This is
attributed to the fact that most banks demand a pay slip as a pre-condition for account
opening. In a study of rural credit accessibility in Northern Nicaragua, Vaessen, (2001),
showed that, the target group (either women, men or both), the geographical area of
operation, and the features of financial products are to be provided to address

24
sustainability concerns, and are identified as important factors which lenders base their
decision on when lending to small scale farmers.

The borrower’s characteristics such as the strength of previous business

relationships, borrowers’ reputation in the market, borrower’s credit history, borrowers’
debt-service capacity and borrowers’ wealth status all influences access to credit. In their
study, Sebatta et al. (2014), found that level of education, off-farm activities such as
employment status and access to extension services are all positive and significantly
influence the probability of access to credit. Access to credit is positively influenced by
age and household income, while being female has a statistically significant negative
effect, (Hussain, & Thapa, 2012).

Chandio et al. (n.d) concluded that the result implies that an older person who had
control of household resources is likely to be rated to be more creditworthy, while
women were discriminated against in the credit market. According to Mohamed, (2003),
empirical evidence of the study carried out among fishermen in Zanzibar indicates that
age, gender, education and income levels are factors that influence credit accessibility by
smallholder business producer groups. Daniels (2001), asserted that collateral
requirements are a major determinant of household access to credit, especially in the
formal sector. He observed that the low levels of collateral among the poor to a great
extent explained their limited access to financial instruments in the formal financial
market.

2.9.2 Barriers to small scale farmers’ access to credit facilities

One of the most promising ways to reduce poverty, improve farm productivity and
ease the smooth transition from subsistence farming to large scale and agribusiness
farming is access to credit and other financial services by small-scale farmer (Mukasa, et
al. 2017). Small scale farmers still encounter a number of challenges that hinder their
productivity and growth.

25
 Some of the challenges include the key long standing challenges of low
productivity stemming from the lack of access to modern technology; failure to comply
and meet grades, standards and quality in product markets, weak legal framework
regarding agricultural marketing; and a lack of access to formal financial services. It is
not only small-scale farmers who experience difficulties, but also banks as major
suppliers of credit face various challenges in providing the same to small scale farmers.

Banks have to handle the challenge of asymmetric information as they have

difficulty in assessing the creditworthiness of agribusiness entrepreneurs, especially those
located in remote areas and those who lack financial records (Nawai,& Shariff, 2010) .

According, to the World Bank (2013), unfavourable interest rates, complex

application procedures, information asymmetries and high collateral requirements are
among the major challenges arising from both the demand and supply side of the credit
market. Small scale farmers in most cases lack credit history and accounting records,
which banks normally use to assess their credit worthiness. As a result, banks tend to
require more collateral and set higher interest rates to compensate for the high risk of
borrowing smallholder farmers (Coate, et al. 2011).

2.10 Summary of Literature Review

Credit is essential for agricultural development and is a often a key element of

agricultural modernization. It has been primarily been seen as promoting agricultural
production and increasing income to farmers. However, access to credit is limited in rural
areas and the majority of poor small-scale farmers are excluded from credit systems.

The rate of obtaining loans from the formal financial institutions in the developing
countries by rural borrowers is low due to the complicated and lengthy procedures that
overwhelm the poor and uneducated farmer-borrowers. In other cases, credit problems
which have restricted them from borrowing include commodity-specific credit, lack of
participation in planning agricultural credit programmes, lack of or inadequate, financial

26
institutions in the rural areas, and late releases of loans which led them to borrow from
the informal sources.

Determining the problems and the credit needs of small-scale farmers are
important considerations in designing appropriate credit systems for them. The design of
credit products should be based on clients’ demands and needs. Designing appropriate
rural financial systems for small-scale farmers is an adequate financing strategy. A
thorough understanding of the small-scale farmers’ credit awareness and factors that
influence access will assist policy makers to make better decisions in designing
appropriate credit systems for them. There is, however, limited information to enable
understanding of the farmers awareness and factors that influence credit regarding access
to credit. Thus gap in the literature prompted this research.

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