The Role of Commercial Banks in Financing Agricultural Projects
The Meaning of Agricultural Finance
According to Adegeye and Dittojh (1980) , “Agricultural finance is concerned with Agricultural contribution and share of the national or state resources as well as the role of individual banks and other financial institution played in the financing of Agriculture as a sector of the economy. This can be in the form, of providing fund for the farmers or providing farmers input such as seedlings, machinery’s storage facilities etc, intended by both the farmer and the lender to either increase the wealth of the farmers, to provide agricultural export and consequently foreign exchange, it is equally meant to supply food and raw materials for the teeming population and agro – allied industries respectively. FINANCING OF AGRICULTURAL PROJECTS IN DEVELOPED COUNTRIES
In the developed countries of the world, like United States of America (U.S.A) Britain and Germany, Agricultural finance means more than we think here in Africa Agricultural Financing involves the economic study of financing the farm business. The developed economic see it as involving both farmers and non farmers use a fund as well as determination of the sector or place to use funds in the farm business. Murray and Ndson (1960) Went on the attribute the phenomenal growth in capital requirements in agriculture and as steadily declining number of farms that resulted from tremendous strides in technology. According to them, few commercial banks, farmers operated with finance and this made it possible for these farmers to take advantage of new include, good seeds, fertilizer livestock and labours, all of which contributed greatly to the success of the farmers.
They mentioned that agriculture has very few numbers of farmers, and that they are all in mechanized farming. This enables them to invest in research which consequently will produce high yield.
They however observed, that inspire of the advantages of finance, some farmers still failed , due to the ways such finance had been used in areas of high risk in this of high prices and with its abuse in individual cases. According to them, the filed of agricultural finance extends beyond the shares of providing funds but should include assistance and supervision of farm projects for which they were sought. They equally argued that agricultural finance includes the institutional of credit. They went further to ascertain that agricultural finance concerned with the make – ups and the characteristics of lending institutions as they are related to obtaining the use of credit in agricultural financing. Murray has it that developed countries the supply of loanable funds come from two major sources.
(b) Commercial bank finance.
In his own contribution, he argued that savings provides a negligible percentage of finance to Agricultural sector. He went on to emphasis that the commercial banks have the problems of creating most funds which they lend, which consequently led to their having problem in lending of the farmers at the rate at which the farmers require them. This is because lending capacity of commercial banks are limited by two primary factors.
(b) Bank Capital
According to him, reserves limit the aggregate volume of finance and investments a bank can carry whereas bank capital limits the size of individuals finance.
Concluding therein, the writers stated that survivals in the agricultural economy of the future depends largely upon the farmer‘s management ability that is whether he has sufficient finance of right type. Blake J.O. (1995: 43) Observed that the determination of who need agriculture finance in U.S.A depends principally on the objectives. According to him, if objective is the increase total agriculture output in the short run, finance will be provided First to mechanized and successful farmers.
These in his opinion will then purchase more labour saving equipment more feed and fertilizer to enlarge their lands and own buy more land . Rober Bross in his contribution stated that need for agricultural finance is determined in part by characteristics, are the seasonal nature of production susceptibility to unusual hazards high financial needs in relation to gross income relatively small business unto and small size finance, long distances between the farmers and lending agency wide fluctuations in press of products, close relationship between the farm business and farm home and the aspiration towards farm ownership.
Because of the characteristics, types of finance developed for industrial use have often been poorly adopted to farmers use hence the demand for special kinds of agricultural finance. He observed that finance as applied to farmers may b classify in many ways or classification.
For consumption and farm business purposes. Consumption finance applied to cases in which the return is measured in personal enjoyment and standard of living rather than its direct import upon the farm income. The use of finance for consumption purpose is often questioned because it can be misused like any other kind of finance; the real text is whether there will be enough funds to pay the finance when it becomes due.
AGRICULTURAL FINANCE IN NIGERIA AS A DEVELOPING COUNTRY
In developing countries like Nigeria, Ghana, Senegal and a host of other, they find it difficult to feed their teeming population due to geometrical population growth, their industries which have recorded a significant growth within the last decade is faced with the problem of raw materials and other agricultural product to feed their citizenry and their growing agro – allied industries. This is turn sap them of their foreign exchange and finally deficit balance of payment.. As a result most government in developing country has resorted to supporting agricultural finance as a means to stop these problems.
In one the united Nations, food Agricultural Organization (FAO) studies conducted by Belshaw how the use of finance to improve economic development agriculture output and improve the economic well being of rural population in the less developed countries. Belshaw observed that agricultural finance had been static in the great majority of under – developed countries . By static, he meant that at the end of the credit period, there had been no net increase in output , income of the peasant farmer or his assets. He pointed out that the future of agricultural finance across from the unavailability of a market for the farmers product .
Eric L. Trness (1995) argued that, due to the prevalence of substance farming in Nigeria, it has posed a lot of problems to substantial enlargement of bank finance to agriculture. Nwake (1996) stated that the government’s agricultural finance programmes would ultimately make a greater impact on domestic food production than at present on the group of farmers who needed and could afford such finance such as export and industrial crop producer. He also note that as farm income improves as a result of increased effective demand for food crops and improved marketing facilities, it would become necessary and feasible to reach small scale food crops farmers with farm credit.
Navlyn (1965) argued that the level of food production in the country has failed to keep pace with the population growth due to use of simple manually operated tools, how filled, decreasing side fertility, unimproved processing system, crops varieties and death of farm management .
Eve further stated that farming in a developing country is typically organist in an extremely small scale basis and communication with Urban centres are difficult and time consuming. Peasant farmers rarely value clear titles to land and may have no security of tenure and that their techniques of production are arduous primitive and out dated and hence low yield.
PROBLEMS FACING AGRICULTURAL PROJECT FINANCE IN NIGERIA’S COMMERCIAL BANK (FIRST BANK NIGERIA PLC )
The Agricultural sectary of the economy funds it difficult to secure credit in first Bank because of the following :
(a) Illiteracy in the part of farmers.
(b) Predominant subsistence farming system
(c) Competition from other sectors of the economy for available commercial bank credit.
(d) Lack of management skills and trained manpower in the sector.
(e) Absences of feasibility studies and sound proposes are unacceptable to banks
(f) Lack of adequate collateral security by farmers.
(g) Risk of diversion of funds by farmers
(h) Red tapism involved in loan application, processing and granted of credit.
(i) The diametrical position of the farmers, and the modern banking.
(j) Limited resources of branch net work and skilled manpower at the disposal of the banks to monitor and control lending in the agricultural sector..
(k) Inadequate financial resource at the disposal; of First bank
(l) The problem of timing in giving loans.
Most of the farmers in Enugu state are illiterate consequently thy are not in position to indicate or understand the name, locations and types of existing credit sources or much less the importance of interest rates which apply to farm loan.
A survey carried out by the agricultural finance department of the Central Bank of Nigeria (CBN) in 1978 revealed that mere completion of loan application forms by many farmers was considered as an impediments to then to produce loan from their bankers under the agricultural credit alarmed scheme.
Agricultural sector funds it difficult to secure commercial banks (First bank) loan due to the fact that they are mostly illiterate and in addition lacks most of the re –requisite that determines granting of credit (Like the capital capacity and collateral ) by commercial banks.
The sector is equally faced with staff competition from other sectors of the economy like the manufacturing industries, firms etc.
The sector can afford to pay back the loan and interest rate more then agricultural sector and since the commercial banks are project oriented they will issue loans to that sector. Adewummi and Adeniyi (1983) state that agricultural sector backs skilled personnel’s that can prepare a proposal for loan and because of the subsistence level and illiteracy of farmers in the state, they cannot afford to pay such personnel’s and do not even care whether sector equally lacks skilled personal who would diagnoses any given project on the basis of the given situation. The banks are inadequately staffed and does not have an assistance and supervision department and this can hamper the like hihold of success for the typical peasant farmer, this many not inspirit the farmers to carry out the project.
In banking industry, it is a sound principle of banking for the borrower and the lender to ascertain the visibility and profitability of proposed project especially one requiring a large financial outlay . The feasibility studies provides such , but the list of procuring the feasibility repots and delay invloved in its preparation. Most farmers, find it difficult to comply with and subsequently hampers their chances of securing loan.
In addition to this, the farmers have no clear title land due to commercial land tenure system in Enugu and they are mostly poor farmers around. They most often do not have any tangible assets they can present as collateral securities for which the finance could be charged upon. The banks on I the other hands cannot go against their principles to grant without adequate or no security.
In Nigeria and other developing countries, it is cognomen for people to seek for agricultural loan because they will b granted especially at a very low interest rate to avoid themselves of this opportunity they well seek such loan and later divert it to other activities which more often do not yield anything. At the end of such period, they will be unable to pay back success loan, let alone the interest, and this increase the bad debts of the bank.
The farmers in Enugu state which are predominantly illiterate growth discouraged by the delay in procuring loans and may subsequently seek refuge to local money lenders who lend at a very exorbitant interest rate when compared to very available commercial bank (First bank) rate Eric Turnees (1975) in his contribution state that the bankers and the farmers comes from two different areas of social status and the modern banker consequently, h no understanding of the farmers need.
Eric further went on to show that local farmers in the state lives in the tenor or rural areas while the commercial banks are situated in the Urban areas while the commercial banks are situated in the Urban areas in addition to this long distances, the peasant farmers are scattered all over the rural areas. This poses commercial problem between the farmers and the commercial banks which is equally enough reason to discourage the farmers from seeking loan from the commercial banks.
Murrary and Nelson pointed out that the lending capacity of commercial banks is limited by their reserves and bank capital, and for the fact that they create most of the money to farmers at the rate the farmers desire them. They said that reserves limit the aggregate volume of finance and investment, a bank can carry. While bank capital limits the size of individual financing. Concluding, they stated that survival in the agricultural economy of the future depends upon the framers managerial skill to secure the right loan. Some other studies carried out on the past showed the enormous short comings in agricultural credit system like the diversion of fund by politician. Money not given to farmers when needed and lack of proper planning and effective use of funs by farmers.
Dre (1986) Highlighted that cooperative bank of Easterm policy on lending in 1963 required farmers policy on lending in 1963 required farmers to have a minimum of 5 acres (202 lecture) of land for food productions before they can avail themselves of credit facilities. Less than 5% of the total farming population could avail themselves of such facilities.
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This article was extracted from a Project Research Work Topic
“AN EXAMINATION OF THE ROLE OF COMMERCIAL BANKS IN FINANCING AGRICULTURAL PROJECTS IN ENUGU STATE ( A CASE STUDY OF FIRST BANK NIGERIA PLC)”
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The Role of Commercial Banks in Financing Agricultural Projects