ABSTRACT
The study was carried out to examine the Effect of Informal Credit Sources on Performance of Cassava-based Farmers in Akwa Ibom State, Nigeria. The objectives of this study were to: identify the informal credit sources utilized by cassava-based farmers in Akwa Ibom State, estimate the determinants of choice of informal credit sources by cassava-based farmers in the study area, estimate the determinants of performance of the cassava-based farmers in the study area, examine the effect of informal credit on performance of cassava-based farmers in the study area and identify constraints faced by cassava-based farmers in accessing informal credit in the study area. Three hypotheses were tested in this study. Multistage sampling procedure was used to select 96 informal credit beneficiaries and non-beneficiaries respectively to make up a total of 192 respondents for the study. Data collection was done through the application of structured questionnaire and interview schedule. Analyses of data were done using descriptive statistical tools such as frequencies and percentages and inferential statistics such as Ordered Probit Regression Model, Ordinary Least Square (OLS) Regression Model and Chow Test. The major sources of informal credit in the study area were Rotatory and Non-Rotatory Savings and Credit Associations, Village Cooperatives and Daily Money Collectors (Etibbe). Ordered probit regression estimates of determinants of informal credit sources showed that out of the nine explanatory variables, six were statistically significant with five exhibiting positive effects (sex, age, interest amount, educational level and farm size) and one exhibiting negative effect (annual net farm income). The significant variables that positively influenced the performance of informal credit beneficiaries were farm size, farming experience, amount of credit used, household size, educational level and cost of farm inputs; age of farmers and interest amount charged on credit were negative and significant for the beneficiaries. On the other hand, the significant variables that positively influenced performance of non-beneficiaries were farm size, farming experience and educational level while the household size, distance to market and total cost of farm inputs negatively influenced the performance of non-beneficiaries. The Chow test analyses of effect of informal credit on performance of cassava farmers in the study area showed inequality between the coefficients of informal credit beneficiaries and non-beneficiaries in the study. The result also confirmed heterogeneity of slopes and shift in intercepts between the two groups. Inadequate credit, short repayment time, late disbursement of credit and inability to repay credit were the major constraints to informal credit access in the study area. Among other recommendations, the study recommended that informal credit sources should be improved to compete favourably with the formal credit sources through a direct linkage between Central Bank of Nigeria (CBN) and the informal credit sector to facilitate the direct extension of credit to the sector without going through intermediaries.
TABLE OF CONTENTS
Title Page i
Declaration Page ii
Certification iii
Dedication iv
Acknowledgements v
Table of Contents vi
List of Tables x
List of Figures xi
List of Appendixes xii
Abstract xiii
CHAPTER 1 -
INTRODUCTION
1.1 Background to the
Study 1 - 5
1.2 Statement of the
Problem 5 - 6
1.3 Objectives of the
Study 7
1.4 Hypotheses of the
Study 7
1.5 Justification of the
Study 7 - 8
1.6 Scope and Limitation of the Study 8 - 9
CHAPTER 2 - LITERATURE REVIEW
2.1 Conceptual Review 10
2.1.1 Concept of
credit 10
2.1.2 Concept of
agricultural credit 10 - 11
2.1.3 Role of
credit in agricultural performance 11 - 13
2.1.4 Credit
types and sources 13
2.1.4.1 Formal
credit sources and institutions 13 - 14
2.1.4.2 Informal
credit sources and institutions 14
2.1.4.2.1 Social
network 14 - 15
2.1.4.2.2 Money
lenders 15
2.1.4.2.3 Rotatory and Non-Rotatory Savings Credit Association
(ROSCA/Non-ROSCA) 15 - 16
2.1.4.2.4 Daily money
collectors 16 - 17
2.1.4.2.5 Village
cooperatives 17
2.1.4.3 Semi-formal
credit sources and institutions 17 - 18
2.1.4.3.1 Cooperative
societies 18
2.1.4.3.2 NGO
microfinance institutions 18
2.1.5 Reasons
for low patronage of formal credit sources by small-holder
farmers 18 - 20
2.1.6 Conceptual
framework of the study 20
2.2 Theoretical Review 22
2.2.1 Credit
information asymmetry theory 22
2.2.2 Rational
choice theory 23 - 24
2.3 Empirical Review 24
2.3.1 Sources of
credit to farmers 24 - 29
2.3.2 Determinants
of access to and choice of credit sources 29 - 36
2.3.3 Determinants
of farmers’ performance 36 - 37
2.3.4 Effect of
agricultural credit on farm performance 37 - 43
2.3.5 Constraints
to credit access 43 - 45
2.4 Analytical Review 45
2.4.1 Ordered
probit regression model 45
2.4.2 Ordinary
least squares (OLS) 46
- 47
2.4.3 Chow test 47 - 48
CHAPTER 3 - METHODOLOGY
3.1 The study area 49
3.2 Sampling procedure 51 - 52
3.3 Data collection 54
3.4 Methods of data
analyses 54 - 59
CHAPTER 4 - RESULTS
AND DISCUSSION
4.1 Socio-Economic Characteristics of the
Respondents 60
4.1.1 Age distribution of
the respondents 60 - 61
4.1.2 Sex distribution of
the respondents 61 - 62
4.1.3 Education distribution
of the respondents 62 - 63
4.1.4 Marital status
distribution of the respondents 63 - 64
4.1.5 Household size
distribution of the respondents 64 - 65
4.1.6 Distribution of
respondents by farming experience 65 - 66
4.1.7 Farm size distribution
of the respondents 66 -67
4.1.8 Distribution of
respondents by membership of farmers’ groups 67
- 68
4.2 Sources
of informal credit available in the study area 68 - 69
4.3 Determinants
of choice of informal credit source 69 - 73
4.3.1 Test of Hypothesis one
(H1) 73 - 74
4.4 Determinants of
production performance of cassava-based farmers 74
4.4.1 Analysis of costs and returns to cassava production by the two
groups of Farmers 74 - 77
4.4.2 Regression result of
the determinants of performance of respondents 77
- 82
4.4.3 Test of Hypothesis two
(H2) 82
4.5 Effect
of informal credit on performance of respondents in the study area 83 - 84
4.5.1 Test of Hypothesis
three (H3) 84
4.6 Constraints to
informal credit access 84 - 87
CHAPTER 5 - SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary 88 - 90
5.2 Conclusion 90 - 91
5.3 Recommendations 91 - 92
References 93 - 107
Appendixes 108-110
LIST OF TABLES
3.1 a priori expectation of the independent
variables used in the determinants of
choice of informal credit sources in the study 56
3.2 a priori expectation of the independent
variables used in the determinants of
performance of informal credit beneficiaries and
non-beneficiaries in the study 58
4.1 Distribution of
respondents by age 60
4.2 Distribution of
respondents by sex 61
4.3 Distribution of
respondents by education 62
4.4 Distribution of
respondents by marital status 63
4.5 Distribution of
respondents by household size 64
4.6 Distribution of
respondents by farming experience 65
4.7 Distribution of
respondents by farm size 66
4.8 Distribution of
respondents by membership of farmers’ group 67
4.9 Distribution of
informal credit beneficiaries by informal credit source(s) utilized 68
4.10 Result of ordered
probit model analysis of determinants of informal credit sources
by informal credit beneficiaries 70
4.11 Cost and returns on
cassava production of beneficiaries and non-beneficiaries 75
4.12 Regression
estimates for determinants of performance among informal credit
beneficiaries and non-beneficiaries 78
4.13 Chow
test analyses of effect of informal credit on performance of respondents in
the study area 83
4.14 Constraints to
informal credit access in the study area 85
LIST OF FIGURES
2.1 Conceptual
framework of the study 21
3.1 Map
of Akwa Ibom State 50
3.2 Sampling
procedure for selection of informal credit beneficiaries and non-beneficiaries 53
LIST OF APPENDIXES
1 Sampling procedure
and sample size selection – beneficiaries 108
2 Sampling procedure
and sample size selection – non beneficiaries 110
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
For many decades, developing countries have heavily relied on
agriculture. Accordingly, there is a rising
interest in the agricultural sector arising from high population growth and
urbanization which has led to increasing demand for agricultural produce (Wiggens,
2013). As opined by World Bank (2008),
agriculture contributes maximally to the Gross Domestic Product (GDP) for
agriculture-based economies when compared to other sectors and serves as the
primary livelihood option for majority of their total workforce. Agriculture in Sub-Saharan Africa has
continued to be a vital instrument towards the achievement of sustainable
development, alleviation of rural poverty and a reliable means of gaining
self-sufficiency in food production for the region (World Bank, 2008). Notwithstanding, agricultural productivity in
the region has been experiencing continuous decline over the last decades with
a resulting rise in poverty levels (Olwande et
al, 2009).
In Nigeria, agriculture contributes greatly to the Gross Domestic
Product (GDP) and small-scale farmers play significant roles in this aspect
(Rahji and Fakayode, 2009). Despite this
contribution, the Nigerian agricultural sector incidentally lies on the
shoulders of small scale farmers whose expansion is hampered by low inputs and
low income. Several factors add to the
pitiable performance of Nigerian agricultural sector; these include among
others: virtual neglect of the sector, poor access to modern agricultural
inputs and technologies and lack of optimum credit supply (Enyim et al, 2013). Apart from the problem of poor accessibility
to cutting edge farming technologies, the abysmal performance of Nigeria’s economy,
majorly in terms of agricultural productivity and growth, hinders the
availability of adequate inputs and credit for agricultural activities
(Odoemenem and Obinne, 2010; Salami and Arawomo, 2013; Asogwa et al, 2014).
Report from literatures has affirmed that domestic agricultural
output in Nigeria is extremely lower than quantity demanded (Adegbola et al, 2011; Akpan et al, 2012). Investment in
small scale agriculture and modern technologies suited to local conditions
would create possibilities for local food production sufficiency thereby
alleviating poverty and hunger. It was estimated that the national poverty
incidence in Nigeria is about 54.7 per cent, while majority of Nigerians live
in absolute poverty (National Bureau of Statistics, NBS, 2012). Billions of dollars are spent yearly on food
aid yet about one billion people of the world’s population are still suffering
from hunger and malnutrition (Jansen, 2010) and Nigeria is not an exception. Agricultural credit therefore provides the
needed strategy in reaching the small-scale farmers and building a global
financial system that will cater for the financial needs of agriculturists
(Cottheim, 2010).
Cassava (Manihot esculenta)
originated from South America and is cultivated in all warm regions of the
world. Cassava has been reported to be
the most popular root crop grown in West Africa and presently a staple food in
Nigeria (Okon, et al, 2012). Given the importance of cassava to the
Nigerian economy, the Nigerian government in 1999, embarked on the Cassava
Production Initiative to enable the country achieve independence in cassava farming
and have excess for export with a goal of producing 150 million tons of cassava
every year (Awotide et al,
2015). After many years of massive
investment in this programme, the objective has not been met. The failure of this programme is traceable to
the fact that despite all the objectives outlined; the ease of accessing credit
facilities was not properly considered; coupled with the fact that at the farm
level, the costs of production for cassava in Nigeria are very high when
compared to other countries (Akinnagbe, 2010).
Nigeria’s agricultural sector, particularly cassava production, therefore
requires a large chunk of agricultural inputs and finance to achieve increased
output and performance necessary for improvement in the production of this staple
crop.
By definition, agricultural credit is the immediate conveyance of purchasing
power by the owner to another person who needs it, allowing the borrower
opportunity to command the use of capital belonging to another person for
farming purposes, but with the assurance that the borrower will be willing and
able to pay back the capital at an agreed date with or without interest (Nwaru et al, 2011). Agricultural credit is considered as a
guarantee by individual farmers/farm owners to acquire funds and inputs from
mediators for investment in farm operations.
Agricultural credit is an essential factor of agricultural production
which enable farmers to secure farm credit like equipment and labour (Odoh et al, 2009). Agricultural credit is extensively
acknowledged as an important intermediating factor between adoption of farm
innovations and technologies and increased farm income. Moreover, it serves as a fundamental
ingredient of sustainable production and its accessibility, demand and correct
usage is among the pre-requisites for realizing the national objective of poverty
eradication and self-sufficiency in food production (Omonona et al, 2008; Oladeebo and Oladeebo,
2008; Nwaru et al, 2011; Anyiro and
Oriaku, 2011; Akpan et al, 2013; Akudugu,
2012). Furthermore, credit to
agriculture serves as a vital secondary input among others to boost
productivity (Sriram, 2007; Das et al,
2009). Farmers’ need for agricultural
credit is justified by the infinite challenges facing agriculture in Nigeria
such as inadequate funding, scarcity and high cost of inputs, underdeveloped
marketing channels and systems as well as poor infrastructural facilities
(Fakayode et al, 2008). With technological advancement in farming
systems, farmers require more investments by way of agricultural credit.
Due to prevalence of fragmented land holding, poor saving,
insufficient owner-equity; farmers resort to external borrowings from diverse
sources which are formal or informal (Chisasa and Makina, 2012). Formal sources such as agricultural,
commercial, microfinance and development banks, poverty eradication programmes,
Non-Governmental Organizations (NGOs) and United Nations Development Programme
(UNDP) supply about 35% of farmers’ credit needs whereas the informal credit
sources such as friends, local money lenders, relations, traders and merchants,
Osusu (Isusu) and informal traditional lenders not bounded by the legal
framework, supply about 65% of farmers’ credit needs (Ugwumba et al, 2009). From available statistics of commercial bank
total sectorial allocation of credit, the amount of credit allocated to
Nigeria’s agricultural sector has declined over the years. For instance, credit quota to the sector
fluctuated between 6.98% and 10.66% in 1981 to 1985 and between 1.67% and 3.44%
in 2010 to 2013 (Central Bank of Nigeria, Statistical Bulletin, 2013). Usually,
poor farmers have no claims to funds from the banking system given the
difficulties in mortgaging required collaterals, high loan administrative charges
alongside high rates of interest on loans (Hermes and Lensink, 2011).
A study by Bassey et al
(2014a) observed that due to high rate of agricultural loan default in Akwa
Ibom State, commercial banks seldom approve loans to farmers and often times do
so at very high interest rates with other stringent requirements such as the
provision of collaterals thereby making financial services inaccessible to poor
farmers (Nelson and Nelson, 2010). Most
times, small-holder farmers operating in Akwa Ibom State who succeed in getting
bank loans receive such loans after planting season thereby resulting in
diversion and subsequent default (Bassey
et al, 2014a). With all these
problems associated with accessing agricultural credit from formal sources,
most farmers depend on the services of informal financial units and groups for
credit for funding agricultural activities (Henri-Ukoha et al, 2011). As posited by
Osondu et al, (2015), the informal
financial sector through which small-scale farmers can access credit comprises
essentially the informal credit groups and money lenders. Agents of obtaining informal credit include
Rotatory and Non-Rotatory Savings and Credit Association (ROSCA/Non-ROSCA),
Daily money collectors, village cooperatives, age grades, work groups, town
unions, religious associations, family and kin associations. These informal groups have impacted
tremendously in the development of villages where they reach out to give credit
facilities to participating members devoid of collaterals except guarantors
(Onyeagocha et al, 2012). A survey carried out in Nigeria by World Bank
(2007) indicated that only few rural farmers obtained credit from formal
financial institutions. This may also be
the case for Akwa Ibom farmers, who are mostly small holder farmers. Accordingly, Okon et al, (2012) concluded that agricultural credit can provide a striking
increment to production and profit levels of small-holder farmers in the state which
further helps to improve their living conditions and enhance rural household
welfare.
1.2 STATEMENT OF THE PROBLEM
The low output from the agricultural sector in the South-South
region has been seen to have negative effect on the livelihood activities of
farmers with its resultant effect shown in rise in poverty levels, huge capital
flight, unemployment, malnutrition and militancy (Kolawole and Olufunsho,
2014). Cassava production is a very
common enterprise in Akwa Ibom State but most of the cassava farmers operate at
the subsistence level, characterized by use of crude tools, traditional farming
techniques and low capital investment, hence, low productivity and output
(Akpan and Udoh, 2016). The government of the state has introduced various
programmes aimed at boosting cassava output in the state but these programmes
have not achieved its intended objectives as large proportions of cassava and
its by-products are still being brought in from the neighbouring states to
complement local production (Akpan et al,
2015). The continuous reliance on
neighbouring states for provision of cassava products in Akwa Ibom State indicates
an increase in capital flight from the state.
The challenges associated with formal lending from financial
institutions for agricultural purposes has led cassava farmers to shift their
attention to informal sources of credit which has been notable for the
provision of a large chunk of finances to small-scale enterprises in Nigeria
(Ojo, 2010). Olusola and Tayo (2012)
observed that informal credit units have gained preference of micro and small
scale entrepreneurs due to their accessibility and simple loan procedures
despite their limited financial capacity.
These informal sources of credit have helped to fill the void to meet
the financial demands of Nigerian farmers in general and Akwa Ibom State
specifically.
Informal credit sources are often neglected despite their simplicity
of operation and reliance by small-scale farmers. They are often times faced with problems of
inadequate credit facilities to extend to their borrowers. The amounts of informal credit obtainable
from those informal sources are usually small because informal credit sources
are under-funded. This study aims at providing
an insight into the operations of informal credit groups operating within Akwa
Ibom State in terms of extension of credit to small-scale cassava farmers as
well as their general role in improving the performance cassava producers in
the state.
Several empirical studies have revealed a positive effect of credit
on farm performance within Akwa Ibom State (Nelson and Nelson, 2010; Okon et al, 2012; Ekwere and Edem, 2014;
Udoka, 2014; Akpan and Udoh, 2016; Ekpo, 2016; Malachy and Ikot, 2016). However, empirical assessment of the effect
of informal credit on farmers’– performance in Akwa Ibom State, and
particularly in relation to cassava productivity is relatively lacking. This shows that there is still a gap that
must be filled. Inorder to fill this
gap and complement other studies, this study intends to examine the effect of
informal credit sources on performance of cassava-based farmers in Akwa Ibom
State through the following research questions:
1.
What are the socio-economic
attributes of cassava-based farmers in Akwa Ibom State?
2.
What are the sources of informal
credit utilized by cassava-based farmers operating in the study area?
3.
What are the determinants of
choice of informal credit sources by cassava-based farmers in the study area?
4.
What are the determinants of
performance of the cassava-based farmers in the study area?
5.
What is the effect of informal
credit on performance of cassava-based farmers in the study area?
6.
What are the constraints faced
by cassava-based farmers in accessing informal credit in the study area?
1.3 OBJECTIVES OF THE STUDY
The broad objective being considered in this study is to assess the
effect of informal credit on performance of cassava-based farmers in Akwa Ibom
State. The specific objectives (targets)
are to:
(i)
describe the socio-economic attributes
of cassava-based farmers in Akwa Ibom State
(ii)
identify the informal credit
sources utilized by cassava-based farmers in the study area
(iii)
estimate the determinants of
choice of informal credit sources by cassava-based farmers in the study area
(iv)
estimate the determinants of
performance of the cassava-based farmers in the study area
(v)
examine the effect of informal credit
on performance of cassava-based farmers in the study area
(vi)
identify constraints faced by
cassava-based farmers in accessing informal credit in the study area
1.4 HYPOTHESES OF THE STUDY
H1: Choice of informal credit
source is positively influenced by sex, age, farm size, level of education, and
interest amount while it is negatively influenced by annual net farm income
H2: Performance of the
farmers is positively influenced by farm size, farming experience, unit selling
price, amount of credit used, membership of cooperative/farmers’ group,
household size, educational level, marital status and sex while it is
negatively influenced by distance to market, age, input cost and interest
amount.
H3: Informal credit sources has
no effect on the performance of cassava-based farmers in the study area.
1.5 JUSTIFICATION OF THE STUDY
Agriculture significantly contributes to the achievement of any
meaningful economic development in developing countries which explains why
credit facilities should be made available and accessible to farmers (Owusu,
2017). Access to credit facilities by poor cassava farmers enable them to
obtain farm inputs needed for expansion of production scale (Akwaa-Sakyi,
2013). This study will enlighten low
income farmers who intend to venture into cassava production specifically and
agricultural production generally, on the various sources of mobilizing
informal credit. It will further be of
great importance to Non-Governmental Organizations and financial institutions
and groups, cooperative societies, money lenders, Self-Help Groups; in evolving
plans to reduce poverty on small-scale agricultural operators in Nigeria and
beyond. This study will further be
useful to policy makers/bankers/lending institutions in Nigeria in taking
balanced review of the status, performance and role they should play in making
agricultural credit accessible for improved contribution of agricultural
businesses to the national economy.
From a policy perspective, the answers to these research questions
will help to address dwindling cassava productivity within Akwa Ibom State as
well as attain the objective of alleviating poverty and improving the
well-being of Nigerian rural farmers on the whole. This research will also be useful to the
government in setting out modalities and enacting policies that are geared
towards the establishment and promotion of agricultural productivity. Lastly, findings from this research work will
add to available literatures in finance related issues which can be utilized by
students and researchers in agriculture and finance related fields, inorder to
enhance knowledge.
1.6 SCOPE AND LIMITATION OF THE STUDY
The study was conducted in Akwa Ibom State which is situated in the
South – South region of Nigeria. Cassava
is one of the staple crops widely cultivated by farmers in Akwa Ibom
State. Therefore, cassava-based farmers
were targeted for this study. The prevalent
source of credit to the small-scale farmers in the state is informal credit
sources which informed the use of these credit sources for this study. To better understand the effect of informal
credit on performance of cassava-based farmers in the study area, the scope of
this study was extended to include cassava-based farmers who were
non-beneficiaries of informal credit.
As reported by Simon (2011), limitation in a research constitutes
the weaknesses which are outside the control of the researcher. Based on this assertion, the major limitation
faced in the course of this study was the issue of proper documentation of the
activities of the various informal credit sources in the study area which made
the researcher to concentrate on only three out of the numerous informal credit
sources identified in the study area.
Another limitation faced by the researcher was the unavailability of
borrower specific data for non-beneficiaries of informal credit to ensure that
they did not obtain credit from any external sources. To overcome this limitation, the study used
survey data based on the opinions of the non-beneficiaries.
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