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MANAGEMENT OF RISK IN AGRICULTURAL FINANCING (A CASE STUDY OF NIGERIA AGRICULTURAL AND COMMERCE BANK PLC, ENUGU BRANCH)

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Agriculture has been the main stay of Nigerian economy before the Nigeria independence until the era of oil boom.  Statistics show that in 1963/64 agriculture provided about 50% of the Gross National Product (GNP) and 88% of the country’s basic foreign exchange earner of crops like palm oil, palm kernels, cocoa, cotton, groundnut, cereal, woods as raw material for their industries. Although after independence a gradual drift in cities in search of white-collar jobs began and this handicapped the agricultural sector, which lead to a serious decline in agricultural produce, compounding this problem is the oil euphoria, which added more impetus to population drift and neglect thereby leading to Nigeria’s loss of agricultural manpower.  Nigeria quickly turned from a food exporting country with bill accounting for 18% in 1979 and more than 26% in 1983.  Total import bill at this rate compared with 8.5% in 1971 was a sign of total collapse of the agricultural sector. It is in realization of the importance of agriculture in overall economic growth and development of any nation that various Nigerian governments (military and civilian administration) decided to take a bold and realistic step to bring agriculture back to its position of prominence in the national economy.  Government has played significant roles in Agriculture financing with several strategies towards risk management.  Some of these role are:

1. SUBSIDIES:  Aimed at encouraging farmers to produce more.  The effect of subsidy reduces the cost of production for the producers since they will be required to pay less per unit of farm inputs (fertilizers seeds palm).  Also the producers are able to purchase more of these subsidy inputs, which if used intensively as recommended will lead to increased product.  The resultant effect would be fall in prices if demand does not increase more than proportionately.

2. AGRICULTURAL RESEARCH INSTITUTE:  The establishment of the research institute to develop high yielding and the disease resistant seedlings and livestocks.  Such research institutes are National Roots Research Institute, Ibadan and Livestock Research Institute Von etc.

3. FARM SETTLEMENT:  This was established in early 60’s.  It involves the government in the acquisition of land for agricultural production and marketing.  By this means farmers were able to get parcels of land from the government without actually paying for the lands in order to enhance their agricultural products.

4. LAND USE DECREE OF 1978:  In this year the government promulgated the Land Use Act which sought to vest ownership of land on government.  The use of land for agricultural purpose was recognized under this act with a view to eliminating the customers impediment to mechanization.

5. STRATEGIC GRAIN RESERVE:  The original target of the federal government was to build up to 250,000 tonnes strategic grain reserves capacity during the 1975 – 80 development plan period.  But very unfortunately very little was achieved because of the light domestic market situation.

6. OPERATION FEED THE NATION (OFN):  The take-off of operation feed the nation was aimed at boosting food production for the growing nation and to encourage everybody to be involved in farming irrespective of social status but unfortunately this could not live long due to change of government.

7. FINANCIAL INSTITUTION:  Research finding has shown that agricultural finance is very important. Based on this the federal government established Nigerian Agricultural Co-operative Bank (NACB) in 1973 to help in managing and financing agricultural production.  Commercial banks were also given credit calling by the federal government through the Central Bank of Nigeria (CBN) to contribute towards agricultural financing and also authorized to open up rural branches.

8. AGRICULTURAL CREDIT GUARANTEE SCHEME:

This decree of 1977 No. 20 was established with N100m which 60% of the subscription was made up of the federal government and 40% by Central Bank of Nigeria.  This was meant to help farmers in their need necessary to boost agricultural produce and on the other hand to provide guarantee in respect of loans granted by commercial and merchant banks for agricultural purpose with the aim of increasing the level of bank credit to the agricultural sector.  The liability to the guaranteed fund is 75% of the amount in default subject to a loan to an individual of N50,000 maximum and co-operative or limited liability company a maximum of N1 million.

Basically, all these programmed/scheme are:

- Aimed towards providing or marking available.

- Investment funds for and improvement of agriculture.

Unfortunately, for various reasons, these measures made only marginal impact on the flow of credit to farmers the main factors on which this death of credit to farmers in the risky nature of agricultural lending.  The risks element in commercial and merchant bank lending to farmers is manifested not only in the compulsion to lend long terms and concessionary interest rates which contradict commercial banks lending policy of short terms, self liquidation credit at discretionary rates of interest negotiated by the parties to the loan contract.  It is also shown in their fear of default by the borrowers as experience reports points to the existence of a high default rate in rate agricultural credit in Nigeria. According to OLUMRINDE ONI, the lack of progress achieved in agricultural sectors is because of the risks associated with the agricultural sectors investments.

These risks result from factors such as natural risks (e.g. weather, pest, disasters etc) and social risk (theft, embezzlement, strike, ware change in social structures and technological change) economic risks (price fluctuation, loss or unexpected depreciation of investment change, in price of farm requisite) and personal risks. (e.g. death, old age, sickness, maternity, accidents, employees liability, inability to sell power).  The effect of these factors make risk management in agricultural investment not just important but inevitable and indeed very urgent for the success of lenders and suppliers of agricultural finances, also the effect of middle men in the disposition of agricultural produce to the western country has contributed to the risk encountered in agricultural finance in the sense that most of these farmers at their end of the day do not get actual worth of their products because the middle men cut them short as they had to make their own gain from their negotiation of selling of these agricultural products.  This necessitates the formation of the boards that amount to this but still they had little or no effect as themselves deviate from their scheme of work.

1.2 STATEMENT OF PROBLEM:

Upon all the efforts of the government to ease the availability and the use of agricultural credit as enumerated in the foreign section, the average farmer has continued to complain and grumble and his inability to obtain financial assistance in the farm of credit facility while the bank on the other hand have over the years sneered at the use of force to make them lend to farmers.  The banks unwillingness to lend for agriculture purpose is the result of the belief that agriculture is considered a high risk and low yield venture for banks financing. As it is well known, the development of agriculture and self-sufficiency in food production coupled with the provision of raw materials for the growing industries is among the top priorities of the present government in the country.  Furthermore, every well meaningful Nigeria is concerned with the continuous escalation of our food input bill.  It is really a very dangerous situation for a developing economy like ours to heavily rely on other countries for food supplies.  There is need for all hands to be on deck to put through these ideas which can be used to formulate meaningful policies that will stimulate a positive  take off of our agricultural sectors, and how the imminent risks could be managed to ensure an optimum realization of our agricultural sectors, it is such idea that this research aims to put across at the end.

Agricultural development is old and closely associated with the creation of mankind since food is one of the essentials of life.  The researcher identifies the risk in agricultural financing and recommends some management strategies in the case of Nigerian agricultural development because its one of the factors of production, while management of the finance and risk is also among manor factors similarity management of agriculture by NACB as part and parcel of total financing input in agricultural develop.

1.2.2 PROBLEMS ASSOCIATED WITH AGRICULTURAL FINANCING:

Numerous are the problems associated agricultural financing in Nigeria for a better understanding, these problems are classified into three categories which are as follows:

(a) Generally identified problems

(b) Farmers related problems

(c) Financial institution problems.

(a) GENERALLY IDENTIFIED PROBLEMS:

(i) High cost labour

(ii) Infrastructural deficiency 

(iii) Lack of incentives

(iv) Institutional constraints

(v) Technical constraints

(vi) Marketing problems

(vii) Lack of viable rural development

(viii) Inadequate transport system 

(ix) Environmental constraints

(x) Inadequate planning

(b) FARMERS RELATED PROBLEMS:

(i)Delay in processing of application forms.

(ii) Lack of adequate appraisal before taking loans.

(iii) Granting of inadequate loan by financial institution 

(iv) Lack of tangible assets and clear little to borrow.

(v) Problems of lend fragmentation

(vi) Low level of production

(vii) Illiteracy and ignorance.

(c) FINANCIAL INSTITUTIONS PROBLEM:

(i) High risk inherent in agricultural production.

(ii) Diversion of loans meant for agricultural project into other projects.

(iii) Misconception about loan being regarded as national cake.

(iv) Loanable fund are limited and therefore cannot meet the demand of innumerable farmers.

(v) Difficulties associated with loan recovery.

(vi) Increasing incidence of loan default farmer inability to provide collaterals.

(vii) Farmers inability to provide collaterals

(viii) Farmers inability to provide feasibility report on the projects for which credits are sought.

(ix) Very low rate of return on some agricultural projects.

(x) Natural hazards e.g. unfavourable weather, wind, draught, pest etc.

(xi) Lack of agricultural exports officers in processing of application forms for release of funds etc.

The above-mentioned problems are among the major problems regarding agricultural production.  It is equally true that the latter ones inhibits the farmers from reaching or laying hands on the needed finance as and when needed Nigeria Agricultural and Co-operative Bank (NACB) and other agricultural financial institutions for those reasons stated above something away from granting loans even though it is meant for that and also because agricultural projects are dependent on so many extraneous factors that can adversely affect investment on them.  They believe that you cannot talk about agriculture and on the other hand talk about safety of fund, profitability quickness and ability to pay bank within specified period, which are very important lending considerations. In summary, our agricultural industry to a large extent is engulfed with problems of high risks associated with illiteracy land tenure system, delays in obtaining financial assistance with its favourable interest rates near absence of collaterals, lack of efficient making system and a host of others.  All these tend to make funding of agricultural risk and less attractive to agricultural from financial institution.

It is on this background that the researcher tend to examine the performance of Nigerian Agricultural and Co-operative Bank (NACB) the measure adopted in financing agricultures and the achievement so far in increasing the level of agricultural output in Nigeria as a whole through adequate financing by the bank potential management of outputs by farmers and limitation or at least reduction of the magnitude of risks and based on the results of finding and evolution, suggest avenue for improvement in the field, ideas which could be meaningful to our policy makers and most of all, how these uninsurable risk could be managed to its barest minimum.

1.3 OBJECTIVES OF THE STUDY:

The primary objective of this study is to examine the issue relating to the management of risk in agricultural financing put succinctly, it is objective of these study to find solution to the following.

1. To survey the numerous problems and constraints faced by NACB in financing agriculture.

2. Identify the problem encountered by farmers in getting loans from banks and other agricultural financing institutions.

3. To examine the causes and nature of risks in agricultural financing.

4. To identify possible variation of the risks and reasons therefore for such variation among project and lenders.

5. Suggest avenues of effective management in the field of agricultural and proper solution that would help to eliminate or at least managed effectively the identified risks associated with agricultural financing.

1.4 SIGNIFICANCE OF THE STUDY:

Agriculture is a business and like any other business sector cannot be carried out effectively and successfully unless there are good management power for effective utilization of all necessary inputs with a reduction of risks and uncertainty. The problems of food shortage and economic stagnation suffered in recent years can be traced directly to scarcity of farm input and lack of management in turn is the result of shortage of farm credits.  At a stage in agricultural development when a man with energy and initiative who lack only the resources for more and efficient production is enabled by the use of finance eliminate the area block on his part of improvement.  Today, more than ever before there is a dire and need for not only finance to purchase all necessary factors, fertilizer feeds, lands, land improvement of storage facilities etc. but also managerial capacity to control direct and manage the finance and inputs for reduction of not elimination of the risks involved in the production.  It meets the need of the present day.  It is obvious to say that the development agricultural and self sufficiency in food production coupled with the provision of raw material for growing industries is among the top priority of the present of raw material for growing industries is among the top, priority of the present government.  It is agricultural sector that will be reality assessable to save a dangerous situation of escalation of our import bill, heavy reliance on other countries for our good suppliers and economy in general.  Hence, all eyes are on the lee of activities and output of agricultural sector with emphasis on the extent of financial investment in the sector of achieving the set objectives.

Since credit, though recognized as playing important roles in modern agriculture, finance to farmers is important empirical investigation into the cause of its death for immediate removed of such cause any such investigation will be significant to farmers, the lenders and the government.  The study is significant to farmers since it seeks to remove the bearer between them and access to agricultural loans and consequently improvement in agricultural production.  It is significant to the banks that supply agricultural loans to the farmers.  Finally, the study is timely and significant to the government and indeed the national economy.  This is seen from the importance of the study as helping to achieve the age long dream of government of improving agricultural production through the provision of farm credit.

1.5 HYPOTHESIS STATEMENT:

For the purpose of this study the following hypothesis have been formulated.

NULL HYPOTHESIS ‘HO’ALTERNATIVE HYPOTHESIS ‘H’

1 Agriculture in Nigeria does not present a high risk to the agricultural financial credit institution. Agriculture in Nigeria presents a high risk to the  agricultural credit financing institution.

2 Credit made to agriculture is enough to develop and modernize Nigerian agriculture Credit made to agriculture is not enough to develop and modernize agriculture in Nigeria.

3 Credits meant for agriculture are not diverted to other sector of the economy Credits meant for agriculture are diverted to other sector of the economy

1.6 SCOPE AND LIMITATION OF THE STUDY:

This study is intended to expose the risks in agricultural production between financial institution and farmers and make suggestion of how these risks could be managed efficiently.  The study covers the operation of Nigerian Agricultural and Co-operative Bank (NACB) and to what extent farmers have benefited from their financing in development of agricultural projects. The study covers a period of 10 years stretching from 1980-1990.  It is hoped that this period will allow for effective and detailed study of problems and lead way to suggestions that provide effective solutions to the problems of risk and adopt risk management strategies. On the limitation on this study, it would be out of place to think that a study of this nature, like any contemporary scientific investigation was free from hindrances.  The researchers encountered several problems during the course of this investigation. One of the most significant limitations of this study was that there was a general lack of adequate data, necessary for the work.  the quality of the research would have been enhanced if these data were available.

Another related problem was secretaries and hoarding information by both the financial institution and the farmers interviewed.  The bank officials deliberately shield away from interviews and some accepted.  They only gave information on their operation to the extent that would not implicate them and without giving some necessary data towards as confidential. The literacy level of the respondent especially the farmers posed some heavy threat as they did not understand what the whole idea of research was all about, some were stark illiterate that they would not read between the lines and the need for interpretation came in, some half-baked farmers saw it from entirely a different view and refused complying as the term the whole study risky. Time and finance was another constraint of this works, since there was no time specifically mapped out for this, it has to be coordinated with other school works, finance was another.

1.7 DEFINITION OF TERMS:

RISK:  Risk is the possibility of losing, in the case the finance invested in agricultural projects.

FINANCE:  Money from the government or financial institutions used in the financing of farm agricultural procedure.

GROSS NATIONAL PRODUCT:  The total value of goods and services produced in a country under a particular year.

RURAL POPULATION:  These are the village dwellers who provide labour for agricultural production.

AGRICULTURAL MANPOWER:   Here referred to experienced labour for agricultural management.

LEASE:  Having of some items e.g. land, tractors etc for agricultural production.

EXTENSION SERVICE:  Trained agricultural officers who visit farm to advise farmers on how to manage the farms and use agricultural input for bombard harvest.

FARM MACHINERY:  Farm machinery is the tractor equipment and other related machinery used in farming.

DEPRECIATION OF INVESTMENT:  This is the fall in value of both cash and asset of all that was put into agriculture.

NATURAL HAZARDS:  Here is dangerous natural activity which risks this activity occurs unknowingly and it is not caused by human beings.

IRRIGATION:  This is the supply of water to a dry land through man-made stream of other technological know how.

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