ABSTRACT
The study specifically analyzed the factors that influence arable farm-households’ participation in microcredit market, level of access to microcredit and credit source selection in Akwa Ibom State. It also estimated microcredit transaction costs incurred by participants and the determinants of such costs. Multi-stage sampling technique was employed to obtain cross sectional data from 240 respondents. Descriptive statistics were used to evaluate respondents’ socioeconomic profiles and transaction costs incurred by market participants. Hecman two-stage model was used to examine the determinants of households’ participation in the market and level of access to microcredit. Linear Probability Model and multiple regression technique were respectively utilized in assessing the determinants of choice of microcredit source and transaction costs. The result obtained showed that the most important transaction cost component was opportunity cost of time (N5576.41), followed by travelling cost (N3272.62). The study also showed that loan size, interest cost and waiting period had significant positive relationship with microcredit transaction cost at 1%; distance to lending institution and savings were both positively signed and significantly related to transaction cost at 10% while education had a significant negative relationship with transaction cost at 1%. The study further showed that transaction cost, distance to lending bank, number of guarantor and road condition were all significant at 10% and negatively related to participation in microcredit market; qualifying account relationship period, number of visits to lending bank and number of hours spent in a financial institution all had significant negative relationship with market participation at 5%; while gender was significant at 10% and positively related to market participation. Interest and transaction costs were significant at 1% and negatively related to households’ access to microcredit; while annual income and moratorium period had positive and negative significant relationship with access to microcredit respectively at 10%. Education, dependency ratio and borrowing experience all had significant and positive relationship with households’ microcredit source selection at 5%, 10% and 1% respectively while interest amount was significant at 5% but had negative relationship with choice of credit source. Policies that are aimed at ensuring the proliferation of pro-poor financial institutions in rural areas such as; reduction in compensating balance rate, timely disbursement of microcredit to farm-households and provision of grants to farm-households for higher education are advocated to encourage participation in microcredit market, ensure increased access to microcredit, reduction in microcredit transaction cost and enhance informed choice of microcredit source.
TABLE OF CONTENT
Title page i
Declaration ii
Dedication iii
Certification iv
Acknowledgement v
Table of Content vi
List of Tables ix
List of Figures x
Acronyms and their
Meanings xi
Abstract xii
CHAPTER 1: INTRODUCTION
1.1
Background Information 1
1.2
Problem Statement 5
1.3
Research Questions 7
1.4
Objectives of the Study 7
1.4 Hypotheses 8
1.5
Justification for the Study 9
1.5.1
Definition of Terms 11
CHAPTER
2: LITERATURE REVIEW
2.1. Conceptual Framework 13
2.1.1 Concept of agricultural credit,
microcredit and microfinance 15
2.1.2 The concept of access to credit and
participation in credit market 16
2.1.3 Concept of smallholder or small scale
farmers 17
2.1.4 Concept of transaction costs 17
2.2
The Agricultural Credit Markets 18
2.3
Theoretical Framework 21
2.3.1 Random utility theory 21
2.3.2 The classical theory of interest 22
2.3.3
The theory of demand for and supply of loanable funds (loanable funds
theory of interest) 23
2.3.4 The credit rationing theory 24
2.3.5 The theory of transaction cost 24
2.4 Empirical Studies 27
2.4.1 Credit market participation and its
determinants 27
2.4.2 Other studies on market
participation 28
2.4.4 Transaction costs and market
participation 33
2.4.3 Determinants of transaction costs of
credit 36
2.4.4 Other studies on transaction costs 37
2.4.5 Works on credit source selection 38
2.5
Analytical Review 40
2.5.1 Heckman two step model (Heckit model) 40
2.5.2
Multiple regression model 42
2.5.3 Linear probability model 43
CHAPTER 3: METHODOLOGY
3.1
Study Area 45
3.2 Sampling
Technique 45
3.3
Data Collection Procedure and Validity of Research Instrument 46
3.4
Analytical Technique, Model Specification and Variable Measurement 47
CHAPTER
4: RESULTS AND DISCUSSION
4.1 Socioeconomic Characteristics of the
Respondents 58
4.1.1Gender 59
4.1.2 Age 59
4.1.3 Marital status 60
4.1.4 Educational qualification
60
4.1.5 Membership of cooperative society
61
4.1.6 Amount of credit borrowed 61
4.1.7 Household size 62
4.1.8 Annual Income 62
4.1.9 Borrowing experience 63
4.1.10 Participation status 63
4. 1.11 Source of credit 63
4.1.12 Farming experience 64
4.2
Determinants
of Participation in Formal Microcredit Market and Level of
Access to Microcredit among Respondents 64
4.3 Determinants of Households’ Choice of
Formal Institutions for Microcredit
72
4.4 Components of Transaction Cost Incurred by Households in Microcredit
Market 78
4.5 Determinants of Level of Microcredit
Transaction Costs among Participants in the Credit Markets 77
CHAPTER 5: SUMMARY, CONCLUSION AND
RECOMMENDATIONS
5.1.Summary 85
5.2 Conclusion
87
5.3 Recommendations
87
5.4 Contribution to Knowledge 89
5.5 Suggestions for Further Studies 90
References
91
Appendices
107
LIST
OF TABLES
2.1: Classification of
Transaction Costs 28
4.1: Distribution
of Respondents According to their Socioeconomic
Characteristics 58
4.2: Factors
Influencing Farmers Participation in Microcredit
Market and Level of Access to
Microcredit: Heckit Results 65
4.3: Results of Linear Probability Model
for Determinants of Households’ Choice of Formal Credit Institutions 72
4.4: Marginal Effects for Continuous
Determinants 76
4.5: Components of Microcredit
Transaction Cost 78
4.6: Regression Estimates of the Determinants of Microcredit Transaction
Costs among Participants in Akwa Ibom State 80
LIST OF FIGURE
1: Conceptual Framework of the Study
ACRONYMS
AND THEIR MEANINGS
MFIs Micro
finance Institutions
MFBs Microfinance
Banks
BOA Bank
of Agriculture
ADB Asian
Development Bank
DFID Department
for International Development
SMEs Small
and Medium Scale Enterprises
NACRDB Nigerian Agricultural Cooperative and Rural Development Bank
PBN People’s
Bank of Nigeria
FEAP Family
Economic Advancement Program
ICT Information
Communication Technology
EEA Ethiopian
Economic Association
NQMN Nigerian
Quarterly Microfinance Newsletter
NPC National
Population Commission
ESRM Endogenous
Switching Regression Model
GDP Gross
Domestic Product
OLS Ordinary
Least Square
CHAPTER
1
INTRODUCTION
1.1 BACKGROUND
INFORMATION
The
amazing impacts of agriculture on the growth of the economy of Nigeria cannot
be overstated. Agriculture contributes about 88% of the nation’s non-petroleum
export earnings (Oji-Okoro, 2011), accounts for more than 40% of the nation’s
GDP, provides about 70% of the population with employment and supplies about
80% of the food that is needed by the population (Aye, 2013). However, the bulk
of these agricultural products are currently produced by farmers with
insufficient resources, low levels of income and high levels of poverty
(Olorunsanya et al., 2009).
Traditionally,
agricultural production capital can be sourced from personal savings of the
farmers or farm credit (Udoh, 2005). The
expenditure pattern of families reveals that hardly do they have any savings to
fall back on for future investment in production (Arene, 2008). It is, therefore, challenging for smallholder
farmers to grow out of poverty without being provided with adequate and
affordable financial services (Papais and Ganesan, 2010). Microcredit is a
means of making credit available at low cost to these resource poor farmers
(Olorunsanya et al., 2009).
Microcredit
has over the years been used as a development tool, especially in the
developing world mostly targeting poor and vulnerable farm households (Akudugu,
2004), the cost of the facility has continually remained high and a great
source of worry to borrowers. Microcredit
has also come to be regarded as a supplementary development paradigm, which
widens the financial service delivery system, by linking the large rural
production with formal institution (Harish, 2012). Though, the financial system in Nigeria has
witnessed a lot of policy incentives to ensure that actors in the agricultural
value chains have access to credit to finance their operations (Olomola, 2014),
the cost of the facility has continually remained high and a great source of
worry to both borrowers and prospective borrowers. Credit cost reduction is therefore crucial in
ensuring efficient financial system and increased patronage of the financial
markets.
Microcredit
cost minimization can only be realized when prospective borrowers make informed
borrowing decisions. Borrowing decisions essentially include the decision to
borrow, the decision of how much to borrow and the decision of where to borrow
from. Rational borrowing decisions are instrumental to the avoidance of credit
diversion, achievement of optimum credit utilization and realization of the
numerous benefits of credit. Generally, farm credit is among the crucial inputs
considered fundamental in agricultural production (Omonona et al., 2010). This is
because it increases the level of productivity, farm profit and efficiency, and
enhance standard of living in rural areas by breaking the vicious cycle of
poverty of small scale farmers (Abu et
al., 2011). It is also important for modernization of smallholder farming
and commercialization of goods and services produced in the rural economy
(Hosseini et al., 2012). The
modernization can be in the form of provision of improved seedlings, other
inputs, capital equipment and the employment of qualified agricultural
personnel.
Further,
farm credit is provided for relief of distress and for purchasing
productivity-enhancing inputs such as seeds, fertilizers and farm implements
(Muhongayire et al., 2013). Credit improves household power relations
(Pitt et al., 2006), boost welfare
development (Alhassan and Akudugu, 2012; Alhassan and Sagre, 2006; Dadzie and
Ghartey, 2010) and is essential for agricultural and rural development
(Koformata et al., 2014). Lack of
access to credit can result in inability to acquire sufficient physical farm
inputs and adopt improved technology, inability to hire skilled and sufficient
labour, low level of output and productivity, increase in poverty level and
food insecurity.
Farm
credits are obtained from the financial markets. The financial market in rural areas in developing
economies consists of informal, semi-formal and formal financial institutions
(Steel and Andah, 2004). According to
Mehrteab, 2005 (cited in Aderinto et al.,
2011), the formal sector, also known as the organized sector is made up of the
Central Bank, commercial banks, development banks, mortgage bank, insurance
companies etc. Smallholder farmers participate in credit market to get access
to financial resources and the extent of access to the golden resource (credit)
will definitely influence farming decisions (Badiru, 2010).
Microcredit are accessed from institutions that
provide microfinance. Microfinance is the provision of financial services to
the poor who are traditionally not served by large commercial banks (Jaffari, et al., 2011; CBN, 2005; and Conroy,
2003). The intervention of commercial banks in agriculture leaves much to be
desired. The managements of the banks
are of the view that agriculture involves so much risk. Due to this reason, they prefer to
substantially channel their loans to other sectors of the economy such as the
transportation sector, tourism sector, etc.
They may, however, lend to large scale agro-traders and large
agro-allied firms which they consider less risky than lending to small-scale
farmers. Generally, the small and medium
scale entrepreneurs in rural areas lack the necessary physical collateral to
access credit from the commercial banks; and are, therefore, considered not
credit worthy (Muktar, 2009). This impediment shrinks formal microcredit
outlets and causes prospective market participants, especially farmers, to have
few sources of microcredit to choose from.
Participation
and selection of credit source are two different but related economic
decisions. Participation involves
decision to borrow or not while choice of credit source has to do with decision
of where to actually borrow from (formal market or informal market;
conventional credit source or specialized credit source, etc.). Participants enter the credit market through
a particular source or through different specific sources. Participation in formal financial
institutions’ credit schemes is often seen to be related to the degree of
penetration of the institutions in rural areas (Muhongayire et al., 2013). The institutions are mostly found in the
urban and semi-urban settings, thereby posing a proximity problem to some rural
dwellers who wants to participate in formal credit market. In addition, stringent credit conditions deter
participation in credit market. Some other factors that hinder participation in
credit market include susceptibility to high level of risk, operation of farm
business at small-scale level, poor technical ability, lack of adequate capital
(Ton, 2010), geographical barriers in poor and isolated places, lack of
economies of scale, marketing risks and large transaction costs (Macharia, et al. 2014).
Transaction cost does not only impede market
participation but also adversely affects level of access to credit and makes
rational choice of credit source difficult.
Transaction costs comprise every cost apart from interest cost that are
incurred by borrowers in the course of obtaining credit (Hosseini et al., 2012). The presence of these
costs partially explains why some farmers participate in the market and some do
not (Cuevas, 2014).
1.2 PROBLEM
STATEMENT
Studies
on determinants of participation in agricultural credit markets and the level
of access to credit are still insufficient in developing economies (Kofarmata et al., 2014). Most of the researches
available have enumerated and measured several factors such as demographic or
socio-economic characteristics of farmers, regional, social capital
characteristics, wealth accumulated from past savings, idiosyncratic and
covariate shocks among others, as the key determinants of credit market
participation (Mpuga, 2008; Tang, Guan and Jin, 2010; Udoh, 2005; Yu, 2009).
However, these attributes influence households differently in such a way that
what influences participation of households in credit market and their level of
access to credit in a particular area might be different for other households
in another area (Koformata et al.,
2014).
The
level of participation of agricultural dealers in the formal credit market is
still below expectation (Olomola, 2004).
Farmers who need loans may have difficulties obtaining collateral or a
guarantor, a requirement at formal financial institutions; therefore, they may
not be able to borrow or may not borrow enough funds from these formal
institutions (Yuan et al., 2011).
There is a need to ascertain the hitherto reported level of access to formal
credit by smallholder households to ascertain the level of improvement or
otherwise, given the impediments of getting collateral or a guarantor and
incurring high transaction costs.
Logical
choice of credit source is crucial in minimizing costs of credit among credit
market participants. Knowledge of the
socioeconomic, institutional and transaction cost factors that affect choice of
credit source is vital to enhancing the positive result of credit schemes. Yet,
there is a dearth of analysis of the influence of these factors on choice of
agricultural credit source (Sekyi et al.,
2014; Hoang and Otake, 2014, both of which concentrated on SMEs).
One
of the major obstacles militating against the expansion of microcredit
availability is the high transaction costs of credit operations to both lenders
and borrowers (Fachini et al., 2008).
Formal financial services are not available in places where the poor can easily
access them at affordable costs (DFID, 2010). Poor infrastructure (road) often
increases the transaction costs of market participation (Takeshima, 2008). When
transaction costs are large, they need to be measured and explained (Okoye et al., 2010). High microcredit
transaction cost portrays a disturbing gross inefficiency in the credit
delivery system and has the capacity to cause the poor to remain perpetually
entangled in poverty.
Though
there are a lot of studies on transaction costs in a number of countries, it is
argued that transaction costs can differ from one country or region to another
depending on the condition of the road and communication network, among other
things (Osebeyo and Aye, 2014) and the relative magnitude of these costs
depends on the farmers’ access to infrastructure (Akramov, 2009). Transaction
costs can also differ as a result of differences in market type, type of
institution (specialized or conventional) from which credit is obtained and
credit scheme or segment (micro or macro credit).
Some
studies have been done on the determinants of transaction costs. However, only
few of these studies are important to agriculture (See for example: Igwe and
Egbuson, 2013; and Hosseini, et al.,
2012, as they both have to do with borrower-farmers); while other researches on
transaction costs determinants tend to focus on Small and Medium Enterprises
(SMEs) that have nothing to specifically do with agriculture. Besides, though
the studies concern themselves with credit markets, they do not specify the
credit segment considered. Much is, therefore, needed to be studied on the
determinants of microcredit transaction costs of borrower-farmers.
Transaction
costs associated with exchange are the embodiment of access barriers to market
participation by resource poor smallholders (Randela et al., 2008; Makhura et al.,
2001; Holloway et al., 2000; Delgado et al., 1999 and Coarse, 1960).
Empirical evidence has shown that transaction costs have a negative link with
market participation (Osebeyo and Aye 2014; Macharia et al., 2014). This relationship is yet to be examined in microcredit
markets.
1.3 RESEARCH QUESTIONS
In
the light of the foregoing, the following research questions yearn for answers:
1. What
are the socioeconomic characteristics of farm-households in Akwa Ibom State as
they affect farm decision making in small holder farms.
2. What
factors influence participation of the smallholder farm-households in formal
microcredit market in the study area?
3. What
factors influence households’ choice of formal microcredit source in the study
area?
4. What
is the magnitude of microcredit transaction cost incurred by the households in
the market?
5. What
are the determinants of microcredit transaction costs incurred by households
that participate in the market?
1.4
OBJECTIVES
OF THE STUDY
The
broad objective of this study is to analyze borrowing decisions and transaction
costs incurred by arable crop smallholder households in Akwa Ibom State. The specific objectives are to:
1. describe
the socio-economic profile of the respondents as they affect borrowing
decisions and transaction costs;
2. determine
the factors that significantly influence participation of the farm-households
in the formal microcredit market and the factors that influence their level of
access to microcredit;
3. analyze
the determinants of households’ choice of formal financial institutions for
credit;
4. calculate
microcredit transaction costs incurred by the respondents in the microcredit market;
5. estimate
the determinants of microcredit transaction costs incurred by participants in
the market.
1.5
HYPOTHESES
The following hypotheses were tested.
H1:
For objective two: Household size,
dependency ratio, annual income, farming experience, borrowing experience, qualifying ledger balance, gender, age,
education, personal means of transportation, road condition and credit source
all have a positive relationship with participation and level of access to
microcredit in the market; while interest amount, transaction costs, moratorium
period, distance to lending institution, number of guarantor, qualifying
account relationship period, number of visits to lending institution and hours
spent in the financial institution in the course of obtaining credit are all negatively related to participation
in microcredit market and level of access to microcredit.
H2: For objective three: Age, gender, education,
membership of cooperative society and borrowing experience all have positive
relationship with choice of credit source; while distance to lending institution, interest amount, household
size and dependency ratio all have
negative relationship with choice of credit source.
H3: For objective five: Gender, distance to lending institution,
interest amount, waiting period and compensating balance are all positively
related to microcredit transaction costs;
while age, education, membership of cooperative society, value of land and
savings are all negatively associated with microcredit transaction costs.
1.6 JUSTIFICATION FOR THE
STUDY
An
insightful understanding of farm-households’ borrowing decisions and
transaction costs of microcredit is of utmost importance to government, lending
institutions, policy makers, would-be-borrowers, development planners and
researchers.
The
study will help government and lending institutions to improve upon their
microcredit schemes by working against factors that significantly impede the
success of the schemes. Furthermore, it will help them to introduce borrower-cost-reduction
innovations in the design of their microcredit schemes so as to ameliorate the
plight of the poor in the course of microcredit extension to them.
The
ugly episode of low level of access to credit has continually worsened despite
policy reforms undertaken by different administrations in the country. This
study will identify factors that negatively influence participation in credit
markets and the level of access to microcredit in the study area, with a view
to reverse the unfortunate trend by suggesting policy options that can help to
enhance participation of households in formal microcredit markets and increase
their level of access to microcredit.
It
will also identify the major component of transaction cost in the study area.
The identification of transaction costs factors could assist in identifying
policy interventions and/or institutional innovations to alleviate constraints
and improve the ability of small scale farmers to be part of the commercial
agricultural economy (Makhura, 2001). It will enable policy makers to formulate
policies that have the capacity to drastically reduce microcredit transaction
cost.
This
work will also help to examine the difficulties farm-households encounter in
choosing formal microcredit sources and the considerations which influence
their choices. A deep understanding of this part of the study will enable
prospective borrowers to make informed choices of microcredit source by taking
cognizance of not only interest cost but also transaction cost of microcredit.
The
study will also help development planners to integrate high microcredit
transaction costs antidotes in their plan for agricultural development in
particular and the development of the economy of Nigeria in general.
The
study provides information on the demographic features of arable crop
households as they affect borrowing and transaction costs which will readily be
employed by those requiring information on farm household and capacity for
decision concerning borrowing and transaction costs. This will be employed by
anyone who requires information on the demographic characteristics of arable
crop farm households in the study area would also facilitate further
researches.
The
study has revealed the magnitude of the various components of microcredit
transaction cost shouldered by farm-households and how they affect credit
decision making.
1.7 DEFINITION OF TERMS
Microcredit: This means a
credit facility of amount not greater than N250,000
(two hundred and fifty thousand naira). This
is in consonance with the classification of microcredit by Bank of Agriculture
Limited, Nigeria. Microcredit ranges
from N1 to N250,000 - Mrs, Irene, Personal Communication, November
7, 2017).
Formal Microcredit
Market: This means a conglomerate of formal
financial institutions from which microcredit can be obtained. It is the market that brings microcredit
lenders and borrowers into contact.
Participation in Formal
Microcredit Market: This
means the probability that a smallholder farm-household obtained microcredit
from any formal financial institution in the study area.
Formal Financial
Institutions: These are licensed institutions that
provide Sfinancial services to their clients, and whose activities are
regulated and supervised by the Central Bank of Nigeria. For this study, formal financial institutions
consists of specialized public finance institution and conventional private
microfinance institutions.
Specialized Public
Finance Institution: This entails government-owned financial
institutions that have a major responsibility of funding a particular sector of
the economy, such as the agricultural sector of the economy. Such institutions may extend all classes or
types of credit (e.g. microcredit, macrocredit, special project loan, etc.) to
its clients. A good example of this type
of institution is Bank of Agriculture (BOA).
Conventional Private
Microfinance Institution: This is a privately owned financial
institution known world over for the provision of only one class of credit
(microcredit) to its clients. A Typical
example of such institution is Microfinance Bank (MFB).
Microcredit Transaction
Cost:
This refers to non-interest cost expenses incurred by farm-households in
the process of obtaining microcredit from lending institutions.
Farm Household: This
consists of a person or group of persons living together usually under the same
roof or the same building/compound, who share the same sources of food and
recognize themselves as a social unit with the head of the unit (NPC,2006)
According
to the United Nation (UN), there are two types of households: A one-person
household and a multi-person household. A
one-person household is a person who makes provision for his or her own
food or other essentials for living without combining with any other person to
form part of a multi-person household; while a multi-person household is a
group of two or more person living together who make common provision for food
or other essentials for living. The persons in the household may be related or
unrelated to each other or one another or comprises a combination of related
and unrelated persons. The persons constituting the household may have a common
budget and pool their incomes (UN, 2008). This definition is adopted in the
study.
Arable Crop Farm
Households: This
are household that are involved in the production of arable crops. Arable crop
grown by many households in Akwa Ibom State include fluted pumpkin, cassava,
maize, yam, cocoyam, waterleaf, melon, bitter leaf, garden egg, cowpea, rice, potatoes,
etc.
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