Agricultural Financing

MEANING OF AGRICULTURAL FINANCE AND CREDIT

Agricultural finance is defined as the act of acquisition and use of capital in agriculture.  In other words, it deals with the supply of and demand for funds in the agricultural sector of the economy.  On the other hand, agricultural credits are loans obtained by the farmer to start or to expand his farming business.  It is repayable over a period of time with some interest as determined by the source of the credit.

Types of Farm credits

There are three types or classes of credit.  These are:

1. Short term Credit: This is a productive credit which the borrower is expected to refund in a year or less.  It may be used to purchase livestock feed, fertilizers, seeds, fuel, or to pay for hired labour.
2. Medium term credit: This credit is to be repaid within a period of two to five years. It may be used to purchase machinery, breeding livestock or housing for livestock.
3. Long term credit: This credit is repayable within a period of three to 20years. It can be used to purchase costly fixed assests such as land, construction of farm buildings, dams and irrigation projects.

Agricultural Subsidy: Agricultural Subsidy refers to a non-refundable aid granted to a farmer.  Examples include reduction in the prices of inputs such as fertilizers, improved seeds, chemicals, etc, free information such as weather forecast, new technology, market sources, etc.

Interest

Meaning: Interest is the amount paid on borrowed capital or an amount earned above the cost of goods.  Interest is usually paid on borrowed capital which usually comes along with loans.  For example, if a farmer borrows N500,000.00 from a bank and the interest on the loan is 10%, it means the amount he will pay as interest is N50, 000.00 per annum, i.e.,

x  = N50,000.00

When the farmer is paying back the loan with the interest, the total amount he will pay the bank is N550, 000.00

Differences between Subsidy and Credit

S/N	CREDIT	SUBSIDY
i.	Credit is a repayable loan.	It is a non-repayable loan.
ii.	Credit is always in cash	It may be in cash or in land.
iii.	It includes bank loans, credit schemes and cooperative	It includes reduction in prices of input like chemicals, seeds, fertilizers, etc.
iv.	It has a time  period for its return	It is given and never to be re-turned
v.	Government does not bear part of the burden of a loan	Government bears part of the burden of a subsidy

IMPORTANCE OF AGRICULTURAL FINANCE

1. It enables farmers to meet seasonal and annual fluctuations in income and expenditure
2. It enables farmers to adjust to changing economic conditions.

• It also increases the efficiency of the farmers

1. It enables the farmer to increase the size of his farm.
2. It helps to protect against adverse conditions on the farm.
3. It enables farmers to acquire more farm inputs for increased production.

SOURCES OF FARM FINANCE

Farmers can get credit or loan to finance their farming business through any of the following sources:

1. Agricultural bank: Agricultural bank such as the Nigeria Agricultural and Cooperative Bank (N.A.C.B) was established in 1973 to grant loans to all potential farmers. Only farmers can borrow money from the bank, hence it is called the Farmers’ Bank”.
2. Commercial Bank; Commercial banks are major sources of lending to agriculture. Banks like First Bank, U.B.A, Union Bank have agricultural departments where the farmers can get loan to carry out their farming activities.
3. Supervised agricultural credit Scheme: This scheme was set up with the purpose of granting loans to farmers. The scheme is supervised by the Central Bank of Nigeria (C.B.N)
4. Thrift and saving societies: Members contribute money either daily, weekly or monthly. At the end of an agreed period, the money is paid back to the members which they can use for their farming activities.
5. Money lenders: These are people who lend out their money to farmers to enable them to produce. However, the money lender will charge high interest rate and demand security for such loan.
6. Cooperative societies: These are the people who come together to pull their resources (money) together to produce. Members can easily get loan from the societies.  Apart from this, commercial banks prefer to give loans to cooperative societies than individual farmers.
7. Government agencies: Farmers can easily get loans from certain government agencies like the National Directorate for Employment (N.D.E) and Agricultural Development projects (A.D.P) for their farming activities.
8. Self Finance: This refers to the money saved by an individual which can be used to finance his farming activities.
9. Individuals: Farmers can also borrow money from individuals like friends and relatives to finance a project.

Problems Farmers may Encounter from Some Credit Sources.

1. Commercial Banks
2. They are usually biased in favour of large sacle farmers only.
3. They demand collateral which farmers cannot provide.

• There is the problem of relatively high interest rate.

2. Community Banks
3. The amount of credit is usually small and inadequate to meet the needs of farmers.
4. They insist on a would-be lender coming to open account with them before loans are given.
5. Money Lenders
6. They are usually biased towards enterprises that bring in quick returns to repay the loan.
7. Their interest rates are too high to allow for an appreciable input from the farm business.
8. Family Sources
9. The use of loan is usually small and inadequate
10. They usually insist on short-term credit.

IMPLICATIONS OF FARM CREDITS

The procurement of loans or credits for farming activities is associated with some implications.  In other words, farmers find it difficult to get loans from banks because of the following reasons:

1. Interest rates: Interest rate is the rate at which farmers can borrow money from bank, i.e, the amount of interest a farmer will have to pay on the money borrowed. High interest rate discourages borrowing while low interest rate encourages borrowing.  Therefore, farmers cannot borrow when the interest rate is too high.
2. Collateral Security: This is what the banks and other financial institutions will want a borrower to present before a loan can be given. Such securities include landed property, buildings, etc.  most farmers do not have these securities and therefore, cannot borrow money.
3. Long gestation period of some crops: Some crops like rubber, cocoa and oil palm take a very long time to mature. Banks, therefore, find it very difficult to grant loan to farmers engaged in the cultivation of such crops.
4. Unpredictable climate which can lead to crop failure: Agricultural activities in Nigeria depend naturally on rainfall. A good rainfall encourages productivity but lack of rainfall is a doom to farming activities.  Banks, therefore, are always afraid to lend money to farmers because unfavourable climate can lead to crop failure.
5. Lack of farm records: Farmers lack good farm records of all their activities which can be used to assess their credit worthiness.
6. High level of loan defaulters: Farmers may not be able to repay the principal, let alone the interest charged, in case of natural disaster.
7. Lack of insurance Policy: Farmers do not take insurance on their farms.
8. Lack of moratorium: Banks do not give moratorium or deferment of payment of loans to farmers.
9. Land tenure System: The prevalent land tenure system works against procurement of agricultural loans.
10. Small farm holdings: Farm holdings are too small and uneconomical to operate for mechanization and profit.
11. Lack of awareness: As a result of high level of illiteracy among farmers, they are hardly aware of the existence of loan facilities in banks.
12. Bureaucracy: Bureaucracy (red tapism) which is normally involved in the procurement of loan does lead to non-disbursement of loans to farmers.