MANAGEMENT OF RISK IN AGRICULTURAL FINANCING
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MANAGEMENT OF RISK IN AGRICULTURAL FINANCING
CHAPTER ONE OF RISK MANAGEMENT IN AGRICULTURAL FINANCING
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Agriculture was the mainstay of the Nigerian economy before to independence until the oil boom. According to statistics, agriculture provided around 50% of the Gross National Product (GNP) and 88% of the country’s basic foreign exchange earner in 1963/64, with products such as palm oil, palm kernels, cocoa, cotton, groundnut, grain, and forests serving as raw materials for various industries.
Although, following independence, a gradual migration to cities in search of white-collar jobs hampered the agricultural sector, resulting in a significant decline in agricultural produce. Compounding this problem is the oil euphoria,
which added more impetus to population drift and neglect, resulting in Nigeria’s loss of agricultural manpower. Nigeria quickly transitioned from a food exporting country, with the bill accounting for 18% of the total in 1979 to more than 26% in 1983. The overall import bill at this rate, compared to 8.5% in 1971, indicated the agriculture sector’s total collapse.
Realising the importance of agriculture in overall economic growth and development of any nation, various Nigerian governments (military and civilian) decided to take a bold and realistic step to restore agriculture’s prominence in the national economy. The government has played important roles in agricultural financing by implementing various risk-management techniques. Some of these roles include:
1. SUBSIDIES: Subsidies are intended to encourage farmers to produce more. Subsidies lower producers’ output costs because they must pay less per unit of farm inputs (fertilisers, seeds, and palm oil).
Additionally, producers can purchase more of these subsidised inputs, which, if employed extensively as indicated, will result in higher product. Prices would fall as a result if demand did not increase more than proportionally.
2. AGRICULTURAL RESEARCH INSTITUTE: The development of a research institute to develop disease-resistant seedlings and cattle. National Roots Research Institute, Ibadan, and Livestock Research Institute Von are examples of such research institutes.
3. FARM SETTLEMENT: This was founded in the early 1960s. It entails the government acquiring land for agricultural production and marketing. Farmers were able to obtain pieces of land from the government without having to pay for them in order to improve their agricultural output.
4. LAND USE DECREE OF 1978: In 1978, the government issued the Land Use Act, which attempted to give the government ownership of land. This act recognised the use of land for agricultural purposes in order to remove the customer restriction to mechanisation.
5. STRATEGIC GRAIN RESERVE: The federal government’s original goal was to establish up to 250,000 tonnes of strategic grain reserves capacity during the 1975-1980 development plan period. However, due to the poor state of the domestic market, virtually little was accomplished.
6. OPERATION FEED THE NATION (OFN): The launch of operation feed the nation was intended to enhance food production for the increasing nation and to encourage everyone, regardless of socioeconomic status, to get involved in farming, however this could not last long due to a change in government.
7. FINANCIAL INSTITUTION: Research findings indicate that agricultural finance is critical. Based on this, the federal government formed the Nigerian Agricultural Co-operative Bank (NACB) in 1973 to assist in agricultural production management and financing.
The federal government also granted commercial banks credit calling through the Central Bank of Nigeria (CBN) to contribute to agricultural financing and authorised the establishment of rural branches.
8. SCHEME OF AGRICULTURAL CREDIT GUARANTEE:
This 1977 No. 20 decree was founded with N100m, with the federal government contributing 60% and the Central Bank of Nigeria contributing 40%. This was intended to assist farmers in their need to raise agricultural output while also providing guarantee in respect of loans given by commercial and merchant banks for
agricultural purposes in order to increase the amount of bank credit to the agricultural sector. The responsibility to the guaranteed fund is 75% of the amount in default, subject to a maximum loan of N50,000 to an individual and N1 million to a co-operative or limited liability corporation.
Essentially, all of these programs/schemes are:
– Aiming to provide or mark available.
– Agriculture investment and development funds.
Unfortunately, for a variety of reasons, these restrictions had only a minor influence on the flow of credit to farmers, which is one of the key reasons for the death of credit to farmers in the risky character of agricultural lending.
The risk element in commercial and merchant bank lending to farmers is manifested not only in the compulsion to lend long terms and at concessionary interest rates, which contradicts commercial banks’ lending policy of short-term,
self-liquidation credit at discretionary interest rates negotiated by the loan contract’s parties. It is also reflected in the borrowers’ fear of default, since experience reports indicate a high default rate in agricultural credit in Nigeria.
The lack of advancement in agricultural sectors, according to OLUMRINDE ONI, is due to the risks involved with agriculture sector investments.
These risks are caused by factors such as natural risks (e.g., weather, pests, disasters, etc.), social risks (theft, embezzlement, strike, ware change in social structures and technological change), economic risks (price fluctuation, loss or unexpected depreciation of investment change, in farm requisite price) and personal risks.
(For example, death, old age, illness, maternity, accidents, employee liability, and incapacity to sell power). The effect of these factors makes risk management in agricultural investment not only important, but also inevitable and urgent for the success of lenders and suppliers of agricultural finance.
Furthermore, the effect of middlemen in the disposition of agricultural produce to western countries has contributed to the risk encountered in agricultural finance in the sense that most of these farmers do not get the actual value of their products at the end of the day because t This demands the formation of the boards, yet they have little or no effect because they divert from their work plan.
1.2 STATEMENT OF THE PROBLEM:
Despite the government’s efforts to ease the availability and use of agricultural credit, as enumerated in the foreign section, the average farmer has continued to complain and grumble about his inability to obtain financial assistance in the farm of credit facility,
while banks, on the other hand, have sneered at the use of force to force them to lend to farmers over the years. Banks’ reluctance to lend for agricultural purposes stems from the perception that agriculture is a high-risk, low-yield business for bank funding.
As is well known, one of the current government’s top priorities in the country is the expansion of agriculture and self-sufficiency in food production, as well as the availability of raw materials for rising industries. Furthermore, every well-meaning Nigerian is concerned about the ever-increasing cost of our food inputs.
It is quite perilous for a developing economy like ours to rely significantly on other countries for food supplies. There is a need for all hands on deck to work through these ideas that can be used to formulate meaningful policies that will stimulate a positive take off of our agricultural sectors
and how the imminent risks can be managed to ensure an optimal realisation of our agricultural sectors, which is what this research aims to put across at the end.
Food is one of the necessities of existence, hence agricultural growth is ancient and directly related to the formation of mankind. The researcher identifies the risk in agricultural financing and suggests some management strategies in the case of Nigerian agricultural development because it is one of the factors of production,
while management of finance and risk is also one of the factors similarity management of agriculture by NACB as part and parcel of total financing input in agricultural development.
1.2.2 PROBLEMS RELATING TO AGRICULTURAL FINANCING:
For a better understanding, the challenges linked with agricultural funding in Nigeria are grouped into three groups, which are as follows:
(a) Problems that have been found in general
(a) Farming-related issues
(c) Issues with financial institutions.
(a) COMMONLY IDENTIFIED PROBLEMS:
(i) Expensive labour
(ii) A lack of infrastructure
(iii) A scarcity of incentives
(iv) Institutional limitations
(v) Technical limitations
(vi) Marketing issues
(vii) Inadequate rural development
(viii) Inadequate transportation
(ix) Environmental restrictions
(x) Insufficient planning
(c) PROBLEMS RELATED TO FARMERS:
(i)Delay in application form processing.
(ii) Inadequate appraisal prior to loan approval.
(iii) A financial institution makes an insufficient loan.
(iv) A lack of tangible assets and a manifest lack of borrowing capacity.
(v) Loan fragmentation issues
vi) Low level of output
(vii) Ignorance and illiteracy.
PROBLEM OF FINANCIAL INSTITUTIONS:
(i) The high level of risk inherent in agricultural production.
(ii) Redirecting loans intended for agricultural initiatives to other projects.
(iii) Misconception that loans are considered national cake.
(iv) Loanable funds are restricted, and so cannot meet the demand of thousands of farmers.
(v) Difficulties related to debt recovery.
(vi) An increase in the number of loan defaults due to farmers’ inability to furnish collateral.
(vii) Farmers’ failure to supply collateral
(viii) Farmers’ failure to present a feasibility assessment on the projects for which they are seeking funding.
(ix) Some agricultural enterprises have a very poor rate of return.
(x) Natural risks, such as bad weather, wind, draughts, pests, and so on.
(xi) A lack of agricultural exports officers in the processing of application forms for the release of funding, among other things.
The concerns stated above are among the most serious issues confronting agricultural production. It is also true that the latter prevents farmers from obtaining or obtaining needed finance as and when required.
For the reasons stated above, Nigeria Agricultural and Co-operative Bank (NACB) and other agricultural financial institutions refrain from granting loans even though they are intended for that purpose, and also because agricultural projects are dependent on so many external factors that can adversely affect investment in them.
They feel that you cannot discuss agriculture while also discussing fund safety, profitability speed, and ability to pay bank within stipulated time frame, all of which are critical loan concerns.
To summarise, our agricultural industry is plagued by high risks associated with an illiterate land tenure system, delays in obtaining financial assistance with its favourable interest rates in the absence of collaterals, a lack of an efficient making system, and a slew of other issues. All of this tends to make agricultural risk finance less appealing to financial institutions.
On this background, the researcher tends to examine the performance of the Nigerian Agricultural and Co-operative Bank (NACB) the measure adopted in financing agricultures and the achievement so far in increasing the level of agricultural output in Nigeria as a whole through adequate financing by the bank potential management of outputs by farmers and limitation or at least reduction of the magnitude of risks and, based on the findings and evolution, suggestions.
1.3 OBJECTIVES OF THE STUDY:
The fundamental goal of this study is to investigate the topic of risk management in agricultural financing. To put it another way, the goal of this study is to find a solution to the following.
1. To survey NACB’s numerous issues and limits in financing agriculture.
2. Determine the difficulty farmers have in obtaining loans from banks and other agricultural financing institutions.
3. To investigate the origins and nature of hazards in agricultural financing.
4. To detect potential variations in risks and the reasons for such variations among projects and lenders.
5. Suggest possibilities for successful agricultural management and correct solutions that would help to minimise or at least effectively manage the identified risks linked with agricultural financing.
1.4 SIGNIFICANCE OF THE STUDY:
Agriculture is a business, and it, like any other business, cannot be carried out effectively and successfully unless there is good managerial power to ensure the effective utilisation of all necessary inputs while reducing risks and uncertainty.
The recent problems of food scarcity and economic stagnation can be connected directly to a lack of farm input, which in turn is the result of a lack of farm loans. At a point in agricultural development when a guy with energy and initiative who lacks only the resources for greater and efficient output is able to erase the area block on his part of progress through the application of finance.
Today, more than ever, there is a dire need for not only finance to purchase all necessary factors, such as fertiliser feeds, lands, land improvement, and storage facilities, but also managerial capacity to control, direct, and manage the finance and inputs in order to reduce, if not eliminate, the risks involved in production.
It fits today’s requirements. It goes without saying that agricultural growth and self-sufficiency in food production, along with the availability of raw materials for rising industries, are among the top priorities of the current government.
It is the agricultural sector that will be assessed in order to avoid a perilous position of escalating import bills, high dependency on other countries for good suppliers, and the economy in general.
As a result, all eyes are on the agricultural sector’s operations and production, with a focus on the level of financial investment in the industry to achieve the stated goals.
Since credit is acknowledged to play essential roles in contemporary agriculture, finance to farmers is crucial empirical inquiry into the cause of its death for quick removal of such cause any such investigation will be significant to farmers, lenders, and the government.
The study is important for farmers because it aims to reduce the barrier that stands between them and access to agricultural loans, resulting in increased agricultural productivity. It is significant for banks that provide agricultural loans to farmers.
Finally, the research is timely and relevant to the government and the national economy. This is evident from the study’s significance in aiding the government’s long-held goal of enhancing agricultural production through the supply of farm financing.
1.5 STATEMENT OF HYPOTHESIS:
The following hypothesis has been developed for the purposes of this investigation.
ALTERNATIVE HYPOTHESIS ‘H’ NULL HYPOTHESIS ‘HO’
1 Agriculture in Nigeria does not pose a significant risk to agricultural financial institutions. Agriculture in Nigeria poses a significant risk to agricultural loan financing institutions.
2 Agriculture credit is sufficient to develop and modernise Nigerian agriculture Agriculture credit is insufficient to grow and modernise agriculture in Nigeria.
3 Agriculture credits are not redirected to other sectors of the economy Agriculture credits are diverted to other sectors of the economy
1.6 SCOPE AND LIMITATIONS OF THE STUDY:
This study aims to highlight the risks in agricultural production between financial institutions and farmers, as well as give recommendations for how these risks might be managed effectively.
The study examines the operations of the Nigerian Agricultural and Co-operative Bank (NACB) and the extent to which farmers have benefited from their financing for agricultural project development.
The study spans a ten-year period from 1980 to 1990. It is believed that this period will allow for an effective and complete investigation of problems, leading to recommendations that give effective risk management solutions and risk management strategies.
Concerning the study’s limitations, it would be incorrect to believe that a study of this sort, like any modern scientific effort, was without obstacles. Several issues arose during the course of this examination for the researchers.
One of the most major disadvantages of this study was a general lack of adequate data, which was required for the task. If these data had been available, the research’s quality would have improved.
Another issue was secrecy and information hoarding by both the lending institution and the farmers interviewed. Bank officials deliberately avoided interviews, although some accepted. They only disclosed information about their operation to the extent that it did not involve them, and they kept some vital data hidden.
The literacy level of the respondents, particularly the farmers, posed a significant threat because they did not understand what the whole idea of the research was all about; some were so illiterate that they would not read between the lines,
necessitating interpretation; and some half-baked farmers saw it from an entirely different perspective and refused to participate, deeming the entire study risky.
Another restraint of this task was time and money, because there was no time particularly set aside for it and it had to be organised with other schoolwork.
1.7 DEFINITION OF TERM:
RISK: Risk is the chance of losing money if funds are invested in agricultural ventures.
FINANCE: Government or financial institution money utilised to finance farm agriculture procedures.
GROSS NATIONAL PRODUCT (GNP): The total worth of goods and services generated in a country during a given year.
RURAL POPULATION: These are the people who live in villages and offer labour for agricultural production.
AGRICULTURAL MANPOWER: This term refers to skilled labour for agricultural management.
LEASE: Possession of certain goods, such as land, tractors, and so on, for agricultural output.
EXTENSION SERVICE: Trained agricultural officers who visit farms to assist farmers on farm management and agricultural input utilisation for bombard harvest.
FARM MACHINERY: Farm machinery includes tractors and other agricultural machines.
DEPRECIATION OF INVESTMENT: This is the decrease in the value of both cash and assets invested in agriculture.
NATURAL HAZARDS: This is a dangerous natural activity that occurs unintentionally and is not created by humans.
IRRIGATION: The delivery of water to a dry terrain via a man-made stream of other technological know-how.
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