Hello, welcome to this hall on the Sources Of Agricultural Finance
Table Of Contents
- Meaning of agricultural finance
- Meaning of agricultural credit, agricultural subsidy and interest.
- Sources of farm finance.
- Importance of agricultural finance
- Problems farmers may encounter from same credit source.
- Implications of farm credit or problems militating against farmers in securing loans.
- Problems meditating against banks and organizations in granting laws to farmers.
- Classification of credit
- Capital market
- Sources of fund for the Capital market
- Roles of Capital market
- Agricultural business
- Characteristics of agri business
The Meaning of Agricultural Finance
Meaning: Agricultural finance refers to financial services and products designed to meet the specific needs of agricultural producers (Farmers) and businesses. This includes loans, insurance, leasing, and other financial instruments tailored to the unique challenges and opportunities of the Agricultural sector.
Agricultural finance can also be defined as the act of acquisition and use of capital in Agriculture. In order words, it deals with supply of and demand for funds in the Agricultural sector of the economy.
Sources Of Agriculture Finance
Farmers can get credit or loan to finance their farming business through any of the following sources of agricultural finance:
1. Agricultural Bank: Agricultural bank such as the national or Nigerian Agricultural and co-operative bank 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 agricultural finance and a major sources of lending to agriculture banks like first bank, Uba, Union bank have agricultural department where farmers can get loans 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.
4. Thrift And Saving Societies: Members of this society 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: This is another sources of agricultural finance, money lenders are the people who lend out their money to farmers to enable them to produce. However, the money lenders will charge high interest rate and demand security for such loan.
6. Government Agencies: In this sources of Agricultural Finance farmers can easily get loans from certain government agencies like the NATIONAL DIRECTORATE FOR EMPLOYMENT. And agricultural development projects for their farming activities.
7. Co-operative Societies: In this sources of agricultural finance, these people are who come together to pool their resources together to produce. Members can easily get loan from the society. Apart from this, commercial banks preferred to give loans to co-operative society than individual farmers.
I have written a full article on co-operative societies
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.
10. Microfinance Bank: Microfinance bank is about providing financial services to the poor who are traditionally not served by conventional financial institutions. Three features distinguish microfinance from other former financial products. This are the smallness of loans advanced, the absence of asset base collateral and simplicity of operation.
11. Insurance companies: Insurance companies are important sources of agricultural finance in Nigeria. They mostly give long-term and immediate loans for the purchase of equipment. They obtain financial resources from policy holders are used excess liquidity to provide credit to farmers.
12. International Development Agencies: (IDAs) like world Bank, food and agricultural organizations FAO, United nation development agricultural development also give financial assistance to qualified farmers in Nigeria.
MEANING AGRICULTURAL CREDIT, AGRICULTURAL SUBSIDY AND INTEREST
AGRICULTURAL CREDIT: Agricultural credits are loans obtained by the Farmers to start or to expand his farming business. It is repayable over a period of time with some interests as determined by the source of the credit.
AGRICULTURAL SUBSIDY: Agricultural subsidy refers to a non-refundable aid granted to a farmer. Examples include reduction in the prices of inputes such as fertilizers, improved seeds and chemicals, free information such as weather forecast, new technology and market sources.
INTEREST: Interest is the amount to paid on borrowed capital or an amount above the cost of goods. Interest is usually paid on borrowed capital which usually comes along.
Importance Of Agriculture Finance
The importance of Agricultural Finance can’t be over emphasize but here are the main importance:
- It enables farmers to meet seasonal and annual fluctuations in income and expenditure.
- It enables the Farmers to enlarge and increasing the size of his farmland.
- It also increases the efficiency of the Farmers.
- Another importance of agricultural finance is that it helps to protect against adverse conditions on the farm.
- It enables farmers to acquire more Farm inputs for increase production.
- It enable Farmers to adjust to changing economic conditions.
Problems Farmers may encounter from some Sources of Agricultural finance.
1. Commercial Bank
- They are usually biased in favour of large scale farmers only.
- The demand collateral which farmers cannot provide.
- There is the problem of relatively high interest rates.
2. Community Banks
- The amount of credit is usually small and inadequate to meet the needs of farmers.
- They insist on a woulad – be lender coming to open account with them before loans are given
3. Money Lenders
- They are usually biased towards Enterprise that bring in quick returns to replay the loan.
- Their interest rates are too high to allow for an appreciable inputs from the Farm Business.
4. Family Sources
- The use of loan is usually small and inadequate
- They usually insist on short term credit.
PROBLEMS MILLITATING AGAINST FARMERS IN SECURING LOANS
The procurement of loans or credit for farming activities is associated with some implications. In other words, farmers find it difficult to get loans from bank because of the following reasons.
1. Interest Rate: 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 why low interest rate encourages borrowing. Therefore, farmers cannot borrow when the interest rate is too high.
2. Collateral Security: This is what the bank and other financial institutions will want a borrower to present before a loan can be given. Such securities are landed properties and buildings. Most farmers do not have this securities and therefore, cannot borrow money.
3. Lack Of Farm Record: Farmers lack Good Farm records of all their activities which can be used to assess their credit worthiness.
4. High level of loan defaulters: Farmers may not be able to repay the principal, let alone the interest charge, in case of natural disaster.
5. Lack of insurance policy: Farmers do not take insurance policy on their farms.
6. Lack of moratorium: Banks do not give moratorium or deferment of payment of loans to farmers.
7. Land Tenure system: The prevalent land Tenure system works against procurement of Agricultural loans.
8. Small farm holdings: Farm holdings are too small and uneconomical to operate for mechanization and profits.
9. Lack of Awareness: As a result of high level of illiteracy among farmers, they are hardly aware of the existence of loan facilities in the bank.
10. Bureaucracy: Bureaucracy (red tapism) which is normally involved in the procurement of loans do not lead to non-disbursement of loans to farmers.
11. Long gestation period Of some crops: Some crops like rubber, cocoa and oil palm takes a very long time to mature. Banks therefore find it very hard or difficult to Grant loans to farmers engaged in the cultivation of such crops.
12. Unpredictable climate which can lead to crop failure: Agricultural activities in Nigeria depend naturally on rainfall. A good rainfall encouraging productivity but lack of rainfall is a doom to farming activities. Banks, therefore, are always afraid to lend money to farmers because favorable climate can lead to crop failure.
PROBLEMS STANDING AGAINST BANKS AND ORGANIZATIONS IN GRANTING LOANS TO FARMERS
1. Inadequate Farm record and account: Majority of farmers do not keep accurate records and account of their farming business and this make it difficult for banks so ascertain the profitability of the farming business.
2. Uncertainties in farming business: There are lots of uncertainties in the operation of agricultural business as profit may not be easily determined by the bankers.
3. Problem of diseases and pests: Banks are always afraid to put their money in agriculture as pests and diseases may affect crops and livestock which may erode or reduce the harvest from such business.
4. Unpredictable weather: The weather condition May be unpredictable as this may affect the outcome of harvest. Banks are always afraid to put their money in farming business
5. Low level of education by Farmers: Majority of the Farmers are illiterate and this may result in farming failure due to the inability of the Farmers to properly utilize and manage the loan given to them by the bank for farming business.
6. Diversion of loan for other purposes: Most farmers do divert their loans for other purposes because the banks may not be able to monitor utilization of such loans.
7. Inadequate technical know how by the bankers: Most of the banks of some farming business, e.g. The bank accountant for example know nothing about poultry farming and may find it difficult to Grant loans to farmers.
8. Long gestation of some Crops: Some Crops like cocoa and oil palm take a long time to mature. Bank therefore find it very difficult to Grant loans to farmers.
CLASSIFICATION OF CREDIT
These are three classes of credit. These three classification of credit are based on the following:
1. Classification based on length of period (i.e time period) of the loan: under this classification, there exist three classes of loan or credit, these are;
- Short-term credit
- Medium-term credit
- Long-term credit
2. Classification based on sources of credit: Under this classifications, two classes emerge, these are:
- Institutional credit
- Non Institutional credit
3. Classification based on liquidity: Under this classification, 2 classes emerged, these are;
- Loan in cash
- Loan in kind
CAPITAL MARKET
Definition: Capital market is a market for Raising medium term and long-term loans for agric business. In this market, medium and long-term loans are made available for investment. They are institutions, structures and mechanisms whereby medium-term and long-term loans are pooled and made available to investors in agri-business.
Sources of fund for the Capital market
- Bond
- Issue of preference stock
- Shares
- Debentures
- Selling off common stock
- Borrowing
Roles of Capital market: Capital market do play an important role in angry business. This roles of functions are as follows:
- Mobilization of long-term funds for on lending.
- Reduction on overreliance on money market
- Avenue for lending and borrowing
- General running of the economy
- Channeling of funds to productive investment.
AGRICULTURAL BUSINESS
Definition: Agri business is a business that n most or office revenue from agriculture: it is basically the Business of farming.
Characteristics of Agric Business
- Scale of operation
- It has both vertical and horizontal integration
- It runs as a true business
- Criticism of agric business
Revision Questions
- (a) Briefly explain the sources of agricultural finance (b) state six implications of farm credit.
- (a) explain the meaning of agricultural finance and agricultural credits (b) name six sources of agricultural credit available to small scale farmer (c) mention six problems associated with agricultural credits.
- (a) What is agricultural finance (b) state six implications of Farm credits.
- Briefly explain four problems militating against banks and organizations in granting loans to farmers