Determinants of Rice Farmer's Access to Credit in Niger State, Nigeria
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Journal of Rural Economics and Development vol. 20 No. 1 Rural Economics and Development Determinants of Rice Farmer’s Access to Credit in Niger State, Nigeria Odu O.O1*.,V.O. Okoruwa1, K.O. Adenegan1, A.O. Olajide1 1Department of Agricultural Economics University of Ibadan, Ibadan Abstract The performance of the agricultural sector has been relatively poor considering the attitude of existing financial institutions to the support of the sector. Informal credit supply is limited while formal credit supply is often inaccessible to smallholder farmers. Therefore, borrower’s characteristics that determine access to formal and informal sources of credit were examined. Data collected by the Africa Rice Centre from Niger State in 2009 were used. Multi-stage sampling technique was used to obtain a sample of 373 out of 470 rice farmers from whom information was collected. Descriptive statistics and multinomial logit model were then used to analyse the data. Results revealed that agricultural credit programmes and village residents in the formal and informal credit sectors respectively were the accessible sources of credit. The results also revealed that access to formal credit was significantly increased by experience in rice farming, expenses on fertilizer input and rice income while access to informal credit was significantly increased by gender, duration of village residency, experience in rice farming and expenses on fertilizer input. It is recommended that a suitable credit support programme for access to formal credit should be introduced. JEL Classification Code: Q12, Q14 Keywords: Access to credit, Determinants, Rice farmer, Niger State *Correspondence E-mail: [email protected]; Telephone number: +2348033119504 Introduction meeting operating costs during the cultivation season (Iqbalet al., 2003). The lack of access Credit has a significant role to play in to creditor a given source of credit can be increasing farm productivity because the defined as when the maximum credit limit for cultivation of most agricultural products for that source of credit is zero and access to example paddy involves a high cash outlay for 8 Journal of Rural Economics and Development vol. 20 No. 1 credit exists when the maximum credit limit are usually not located within the reach of for that credit source is positive (Diagne, rural farmers and there is insufficient 1999). Access to credit could increase the information on the formal agricultural credit willingness of farming households to adopt sector among the rural farming population. more farming technologies resulting in This situation discourages most rural farmers increased production as well as increased from patronising the formal credit sector income (Li and Zhu, 2007). The two most which has resulted in an over-dependence on critical periods when credit is needed during the informal credit sector (Adebayo and the season are at pre-planting and harvesting Adeola, 2008). In addition, formal credit (Akpokodjeet al., 2001), hence, the acuteness institutions impose credit limits for different of credit needs at different times during the operations without detailed knowledge of the cultivation season. Furthermore, credit is not operations. These ceilings lead to imbalances only needed for farming purposes, but also for in credit supply during the farming season household consumption expenditure, which results into farmers being prone to especially during the off-season period. Under credit constraint conditions. Smallholder rice the Structural Adjustment Programme (SAP), farmers usually have a large household size to the Nigerian Agricultural and Cooperative complement their farm labour needs which Bank (NACB) set up in 1988 special credit increases their household dependency ratio as schemes to boost rice production (CBN, they have to spend more on family 2006). Under the scheme, the number of consumption. This increased family loans granted for rice production increased consumption has adverse effect on their from three to five thousand seven hundred and access to formal credit facilities because of eighty approved loans in 1989 (Akpokodjeet the high risk of default. Coupled with this is al., 2001). Later on in 1989, the government the relatively small size of many rice farms in launched an agricultural policy for self- Nigeria, a factor that is also related to the sufficiency in rice production for a ten years limited access of farmers to the credit market. period. In 2004, funding for implementing the Short-term seasonal loans from informal Presidential Initiative on Rice project was suppliers of credit which are more readily augmented from the additional ten percent available to farmers however create unique tariff on imported rice, apart from normal limitations for the level of projects that can be budgetary provisions for the project (Progress undertaken such that most rice farmers Report on Presidential Rice Initiative, 2004). experience credit constraint early in the The introduction of these policies by planting season (Adebayo and Adeola, 2008). successive governments underscores the fact The willingness of the borrower to pay that sustainable economic growth cannot be interest rate and/or collateral still does not achieved without putting in place well- place the right to fix the maximum credit limit focused programmes to increase the access of in his or her hand. Lenders often fix the farmers to factors of production, especially maximum credit limit based on their credit. willingness to lend and not their ability as In Nigeria, the performance of the they put into consideration various criteria agricultural sector has been relatively poor such as the risk of default and characteristics considering the attitude of the existing of borrowers (Diagne, 1999). Therefore, financial systems to the support of the access to credit is affected by certain variables agricultural sector. Formal credit institutions such as availability and eligibility criteria of 9 Journal of Rural Economics and Development vol. 20 No. 1 credit programs. In other words, access is 2002). The theory of rational choice considers more of a supply-side issue related to the the choice behavior of one or more decision potential lender’s choice of the maximum making units which could be consumers or credit limit (Diagne, 1999). firms (farms). Rational choice theories Furthermore, taking a look at available credit represent preferences with a utility function. sources in both the formal and informal credit In this case utility is the ability of a good or sector, it has been discovered that though service to satisfy a particular human want. credit is important for sustainable agricultural The basic assumption of utility theory is that development, there still exists a gap between the decision making unit in this case a farmer its demand and supply as induced by certain always chooses the alternative for which the factors. It is therefore the contention of this expected value of the utility is maximum. For study that there is insufficient information as example a crop farmer is faced with the to these factors that determine the access of decision of which crop to produce or of how farmers to formal and informal credit. The much of his farm resources such as land and contribution of this study is therefore to labour should be used in cultivating rice as profile the credit sources accessible to and opposed to some other crop like maize. The used by rice farmers in the state and to rational choice approach to this problem is determine the factors that would influence based on the fundamental premise that the access to formal and informal credit sources. farmer’s choice would be based on those Again, Niger state has been discovered to choices that would help him or her achieve his account for the largest share of credit or her objective of maximizing profit and recipients from informal credit sources in a minimizing cost given all other factors that survey conducted by Erenstein et al., (2003). are beyond control. Therefore the rational This study is based on the research need for choice theory is based on the following information on financial markets that meet the axioms regarding consumer preferences. peculiar demands of the rural farming These are that the consumer faces a known set household and to provide empirical evidence of alternatives, secondly for any pair of on the determinants of access to credit by alternatives (A and B), the consumer either smallholder farming populations. The rest of prefers A to B, prefers B to A, or is indifferent the paper has been organized into four between A and B. Thirdly, if a consumer sections. Next, it addresses the logic behind prefers A to B and B to C, then he or she the concept of credit access while the necessarily prefers A to C but if he or she is following section would then specify the indifferent between A and B and indifferent empirical model and description of data. A between B and C, then he or she is necessarily discussion of the results would then follow indifferent between A and C. In addition, if with a conclusion. the consumer is indifferent between two or more alternatives that are preferred to all 2. Theoretical framework others, he or she will choose one of those Rational choice theory is an approach alternatives, with the specific choice from used by social scientists to understand human them remaining indeterminate. The utility behavior and it has been the dominant function has certain properties. The first is paradigm in economics. However, in recent that the change in utility associated with a decades it has become widely used in other small increase in the quantity of a good disciplines in the social sciences (Green, consumed i.e. marginal utility is positive. The 10 Journal of Rural Economics and Development vol. 20 No. 1 second is that of diminishing marginal utility multinomial logit model and multinomial which states that the positive marginal utility probit model. of each good gets smaller and smaller as more of the good is being consumed.