This study examined access to agro-credit by farmers in Kaduna state. This study employed survey research methodology which covered the three agricultural zones in the study area. To achieve the objective of the study, five research questions guided the study and one hypothesis was formulated. Hypothesis was tested using Chow test model. The data generated were analyzed using multiple regression and 4-point likert scale rating. A reliability coefficient of 0.78 was obtained using Cronbach Alpha to establish internal consistency. It was shown that, majority of the respondents (40%) were aged between 31 and 40 years, 32.5% where aged between 41 and 50 years and 18.33% were between 21 and 30 years. About 41.20% of the respondents had no formal education, 34.2% attended primary education, 16.7% obtained secondary certificate while 7.5% attended tertiary institution. About 48.3% of the respondents had farming experience of 20 years and above, 19.2% had farming experience of between 10 to 14 years and 17.5% had 15 to 19 years. Majority of the respondents (41.67%) sourced a total amount of between N100,000 and N400,000 from either formal or informal sources, 25.83% sourced less than or equal to N100,000. Others, 10.83%, 15% and 6.67% have obtained credit to the tune of N400,001 – 700,000, N700,000 – N1,000,000 and more than N1,000,000 respectively. Age, marital status, level of education, interest rate and credit awareness were the major determinants of (p<0.05) credit sourced by the farmers in the study area. Sixty-five percent and 52.5% of the farmers obtained their credit from informal sources (personal savings and rotating savings respectively) while 42.5% of them obtained theirs from formal sources. Lack of trust to pay back the credit (2.89), inability to receive the amount applied for (2.93), risk of repaying the credit because of crop failure (2.84), difficulty before getting the credit (2.63) and problem of getting guarantors (3.00) were the major problems under informal sources. For formal sources, time spent on getting the credit (2.58), complicated procedures (2.71), high interest rate (2.80), inadequate collateral security (3.00), repayment time is short (2.55), illiteracy (2.98), lack of good information about agro-credit (2.81) and lack of presence of banks in the rural areas (2.68) were the major problems encountered by farmers.


Title page                                                i                                         

Certification                                            ii

Dedication                                            iii

Acknowledgement                                        iv

Abstract                                                                                                                            v

Table of contents                                        vi

List of tables                                            vii                                   


1.1     Background information                                                                                       1

1.2     Statement of the problem                                                                                       4

1.3     Objectives of the study                                                                                         7

1.4     Research hypothesis                                                                                               7

1.5     Justification of the study          8                                                     CHAPTER TWO: LITERATURE REVIEW

2.1    Socio-Economic Characteristics of Farmers in Kaduna State            10

2.2       The concept of interest rate                                11

2.3      Agricultural Credit                                    13

3.4      Sources of Credit Used by the Farmers                        13

2.5    Effects of Interest Rate on Sources and Volume of Credit Received by Farmer 16

2.6       Problems Encountered in Obtaining Loans from Formal and Informal Sources     18

2.7    Agricultural Sector Policies in Nigeria                        19

2.8    Theoretical Framework                                21

2.9     Analytical Framework                                 24

2.9.1    Descriptive Statistics                                    24

2.9.2    Likert rating scale                                     24

2.9.3    Linear multiple regression model                            25


3.1     The Study Area                                    27

3.2     Sampling Procedure                                    28

3.3       Method of Data Collection                                   28

3.4       Data Analysis                                      28

3.4.1     Model Specification                                    29

3.4.2     Likert Scale Rating                                    29

3.4.3   Linear multiple regression model                            29


4.1.     Socio-economic characteristics of the farmers.                    31

4.2:     Sources of credit used and amount of credit obtained by farmers             34

4.2.1:     Sources of credit used by farmers                            34

4.2.2.     Amount of credit obtained by farmers                        36

4.3.     Factors affecting the volume of credit sourced by farmers.                37

4.4     Problems encountered by farmers in obtaining credit from formal and informal financial institutions.                       40

4.4.1:     Problems encountered by farmers through formal financial sources            40

4.4.2:     Problems encountered by farmers through informal financial sources.        41

4.2:     Test of hypothesis on the socio-economic attributes on the volume of

credit sourced                                        42


Summary                                            43

Conclusion                                            44

Recommendations                                        45

REFERENCES                                        46

APPENDIX                                             53


Tables 4.1    Distribution of respondents according to their socio-economic of the respondents                                     31

Tables 4.2     Distribution of respondents according to the sources of credit used.        35

Table 4.3.     Distribution of respondent according to the amount of credit obtained.    36

Table 4.4    Determinants of credit volume sourced by farmer                 37

Table 4.5.   Distribution of respondents according to problems encountered in obtaining credit from formal sources.       40

Table 4.6:   Distribution of respondents according to the problems encountered in obtaining credit from informal source 41   

Table 4.7.   Chow test result showing the significant relationship between the socio-economic characteristics of the farmers and the volume of credit sourced.                                    42   



1.1    Background Information

    With an estimated 140 million inhabitants and a population growth rate of 2.5% annually, Nigeria is the most populated country in sub-Saharan Africa and the 10th most populated country in the World (National Population Commission [NPC], 2006). Approximately, 49 percent of the population engages in agriculture as their major occupation. The agricultural sector is the mainstay of the majority of Nigerian rural poor, with over 70 percent of the active labour force in rural areas employed in agriculture and the sector contributing over 23 percent of the GDP in 2006 (World Bank, 2007).

    Agricultural credit plays a critical role in agricultural development (Duong & Izumida, 2002). Farm credit has for long been identified as a major input in the development of the agricultural sector in Nigeria. The decline in the contribution of the sector to the Nigeria economy has been attributed to the lack of a formal national credit policy and paucity of credit institutions. The provision of credit or loanable fund (capital) is viewed as more than just another resource such as labour, land, equipment and raw materials (Rahji, 2010). It determines access to all of the other resources which farmers require (Shephard, 1979). Agricultural practice requires money for the purchase of various factors of production including land. There are two main sources of agricultural financing; formal and informal sources. According to Nchouji (2007), the

formal sources are organized and guided by law with effort on the part of the government, examples are Bank of Agriculture (BOA), commercial banks, supervised agricultural credit, cooperative societies and government agencies. Informal sources include friends, relatives, money leaders, saving societies and traditional groups. These sources are meant to facilitate and increase agricultural production. Though farmers may patronize these sources, but the implication involved is the provision of collaterals and other necessary requirement before obtaining those credit facilities. Oladeebo (2003), reported that years of farming experience with credit use and level of education were the major factors that positively and significantly influenced the amount of loan obtained by farmers.

    Agricultural credit access has particular salience in the context of agricultural and rural development in Nigeria. Some 70% approximately of the population live in the rural areas with their main source of livelihood being agriculture. Recent studies showed that the growth rate of investment in the agricultural sector is less than that of the other economic sector. Therefore, financing agriculture is one of the most important factors to develop rural areas in developing countries (Kohansal and Mansoori, 2009). Credit accessibility is important for improvement of quality and quantity of farm products, so that it can increase farmer’s income and reduce rural migration. Credit constraints to farm households thus impose high cost on the society. This is in terms of rural unemployment, rural poverty, and distortion of production and liquidation of assets. Governments in both developed and developing countries attempt to overcome these problems by subsidizing credit, setting up Agricultural Credit Guarantee Fund Schemes (e.g. ACGFS in Nigeria, 1977) and specialized Agricultural Credit Bank (e. g NACB, 1973 now BOA, 2010) and stimulating institutional innovations in the financial system (e.g. People’s Bank, Community Bank, Rural Banking Schemes, etc) (Rahji, 2010).

The Nigerian agricultural sector is among the most heavily regulated sector of the Nigerian economy. The special interest of government in the agricultural sector is due to its relevance in the provision of raw materials for industries and most importantly the provision of food for the teaming Nigerian population and also serving as a source of foreign exchange for the economy (Adofu, Abula & Audu, 2010). The Nigerian agricultural sector is not alone in government intervention in terms of regulation, Akiri and Adofu (2007), opined that the banking industry owing to the nature of the activities and functions it performs in the economy, is also one of the widely and heavily regulated sector in both developing and developed countries of the world.

    Anyanwu, Oyefusi, Oaikhanan, and Dimowo, (1997) opined that, commercial banks encourage savings. Since investments are made out of savings, the establishment of commercial banks especially in the rural areas makes savings possible hence economic development is accelerated. The government most often may think it’s necessary to intervene in the operation of the banking system with the intention of correcting the short comings of the price fixing mechanism to ensure that what is commercially rational for an individual bank is approximately rational for all (Adofu, et al., 2010). Socially, interest rate charged by banks could be regulated to encourage savings mobilization, ensure and foster adequate investment for rapid growth and development, bearing in mind the view of Goldsmith (1969) that the financial superstructure of an economy accelerates economic performance to the extent that it facilitates the migration of funds to the best user i.e. to the place in the economic system where the funds yield the highest social return.

    According to Akiri and Adofu (2007), the existence of externalities and imperfection in the financial markets of most developing economies has often called for intervention by the government through its appropriate agent (the Central Bank of Nigeria in the case of Nigeria) to encourage investment and to re-channel credit to those economic units with high social rate of returns but low commercial rate of returns. Under the deregulated interest rate system, the market forces of demand and supply play a very prominent role in the determination of interest i.e. banks and their customers are free to negotiate to arrive at a suitable interest rate on both deposit and loans. Kohansal and Mansoori, (2009), noted that the main part of financial resources of agricultural bank come through recovery of overdue granted credits while lending activity for banking system is accompanied with some risks and problem. In the other hand, Awoke, (2004), stated that inspite of the importance of loan in agricultural production, its acquisition and repayment are fraught with a number of problems especially in the smallholder farming. Therefore, most of the problem arose from poor management procedure, loan diversion and unwillingness to repay. Thus, lending is a risky enterprise because repayment of loans can seldom be fully quaranteed.

1.2    Problem Statement

    The prolonged crisis pervading the Nigerian economy has risen to an unexpected point. The present condition of the Nigerian economy is indeed unprecedented in the history of global economic downturn. All macroeconomic indices that spell a nation’s economic well being at a given point in time portray a rather pitiable and gloomy outlook for the nation. Pointing to an economy trapped in the vicious cycle of stagnation, declining productivity, rising unemployment, and mounting foreign debt, widening inequality gap at a magnitude without antecedent (Usman, 2000).

    In response to the problems, the government deregulated interest rate in 1987 as part of the Structural Adjustment Programme (SAP) policy package. The official position then was that interest rate liberalization would, especially help manufacturers who are considered to be the prime agents and by implication promoters of economic growth. However, in a policy reversal, the government in January 1994 outrightly introduced some measures of regulation into interest rate management. It was claimed that there were “wide variations and unnecessarily high rates” under the complete deregulation of interest (Usman, 2000).

    Moreover, interest rate rose over the years following the lifting of the partial controls on the interest rate regime of the preceding year. A noticeable feature during the year was the incidence of wide variations in interest rates among the commercial banks as a group. Furthermore, despite the sharp increase in nominal rates, the prevailing average realized rates on both deposits and loans were generally negatives in real terms, in the light of high rate of inflation. This is to say that since deregulation, interest rates have been rising almost uninterruptedly (Usman, 2000). This then raises the question of how increases in interest rate has affected farmers’ access to agro-credits.

    In Nigeria there is a wide gap between owned and required capital for financing most agricultural activities of farmers due to increase in the cost of borrowing (Iroh, 2012). The lack of access to capital due to high level of interest rate is one of the major factors which hinder the development of agriculture (Tefera, 2004). One of the major problems responsible for inadequate credit facilities required by farmers for their agricultural activities is constant and persistent increase in the cost of borrowing, despite the fact that these farmers produce the bulk of the food consumed in the country (Ojo, 1998). In order to design appropriate financial policies that will bring about an efficient financial sector in the country there is need to investigate the effects of the present interest rate regime in the country especially in the agricultural sector.

    Considering the efforts being made by the Federal Government through the Central Bank of Nigeria in providing agricultural credit to farmers through various avenues it is necessary also to assess the effects of these credit facilities on rural farmers. Notable among such programmes include; Agricultural Credit Guarantee Scheme Fund (ACGSF) where the Federal Government holds 60% and the Central Bank of Nigeria, 40% of the shares. The Fund guarantees credit facilities extended to farmers by banks up to 75% of the amount in default net of any security realized. The Fund is managed by the Central Bank of Nigeria, which handles the day-to-day operations of the Scheme.  Agricultural Credit Support Scheme (ACSS) was also introduced to enable farmers exploit the untapped potentials of Nigeria’s agricultural sector, reduce inflation, lower the cost of agricultural production (i. e. food items), generate surplus for export, increase Nigeria’s foreign earnings as well as diversify its revenue base.  Agricultural Credit Support Scheme are disbursed to farmers and agro-allied entrepreneurs at a single-digit interest rate of 8.0 percent. At the commencement of the project support, banks granted loans to qualified applicants at 14.0 percent interest rate. Applicants who paid back their facilities on schedule were to enjoy a rebate of 6.0 per cent, thus reducing the effective rate of interest to be paid by farmers to 8.0 percent. As part of its developmental role, the Central Bank of Nigeria (CBN) in collaboration with the Federal Ministry of Agriculture and Water Resources (FMA&WR) also established the Commercial Agriculture Credit Scheme (CACS) in 2009 to provide finance for the country’s agricultural value chain (production, processing, storage and marketing).  Loans to eligible entities under the Scheme are disbursed at a maximum interest of nine percent. The subsidy arising from this stipulated rate and the market rate on all loans granted, and the administrative expenses of the Scheme are borne by the Central Bank of Nigeria (CBN, 2012).

    The roles of interest rates emphasize their significance in the structure of basic agricultural productivity and indicate the need for study about their effect under a flexible regime. The speculative movement of funds into/out of agricultural activities depends on the level of interest rates. There is however an apparent lack of information regarding the effects of these variations in interest rates, that may help to determine to what degree government should modify her interest rate policy especially with respect to agro credit. There is also the need to understand the effects of interactions of high/low interest rates and how they affect credit supply to farmers. 

    Among the studies reviewed, none has successfully investigated the effects of interest rate on farmers’ access to agro credit. Few of these studies eg Onwumere (2012), and Jim (2002) concentrated on the impact of interest rate variability on the entire economy of Nigeria without any particular reference to agriculture. For instance, Wasser Allen and Kuoteiner (1994), Monteil (1991), Fahrer and Rohling (1990), Bono (1995) only used interest rate as one of the tools of monetary policy with no particular interest in agriculture.

    Interest rate affects the maximum amount one can borrow or ones request for credit. Available studies on the effects of interest rate on farmers’ access to agro credit in Kaduna State do not cover the general effects (increase/decrease) in interest rate. These gaps then raise the questions on the effects of interest rate on farmers’ access to agro credit in Kaduna State.  We also know that interest rate variability can determine the level of investment, consumption, production and the growth of output. In Nigeria over the years it has been difficult to determine the nature of government policies and/or reform(s) needed to achieve a desired level of interest rate. This study therefore, tends to deal with the following research questions;

i.    what are the socio-economic characteristics of farmers in Kaduna State

ii.    what are the sources of credit used and amount of credit sourced by the farmers in Kaduna State

iii.     what are the factors affecting the volume of credit sourced by farmers from financial     institution                                                                                                                                     

iv.      what are the problems encountered in obtaining loans from formal and informal source

1.3    Objectives of the Study

    The broad objective of the study was to determine the effects of interest rate on access to agro-credit by farmers in Kaduna State Nigeria. The specific objectives include to;

(i)    identify the socio-economic characteristics of farmers in Kaduna State

(ii)    determine the sources of credit used and amount of credit sourced by the farmers .

(iii)    determine the factors affecting the volume of credit sourced by farmers

(iv)       determine the problems encountered in obtaining loans from formal and informal sources

(v)        make useful recommendations from the study for macro economic policies.

1.4    Hypothesis of the Study

    The hypothesis was tested:  

HO1:    There is no significant relationship between socio-economic characteristics of farmers and the volume of credit sourced                                                    1.5    Justification of the Study   

    In order to design appropriate policies that will bring an efficient and effective accessibility and utilisation of credit facilities for optimum agricultural productivity, there is need to carry out a study on access to agro credit in Nigeria. This will greatly enable policy makers to identify constraints and potential areas for its improvement considering the need to enhance food security. The findings of this study will enable farmers to be aware of how appropriate interest rate effects can influence agricultural practices and assist in the fight against its negative effects. Increased knowledge of farmers’ access to credit facilities due to the prevailing and existing level of interest rate will enable international expertise trickle down to local levels. It is also expected that this study will help to widen the knowledge of farmers on the available and proper interest rate level that will enable them to achieve the best level of agricultural practices. It is hoped to help financial institutions to realise and charge interest suitable to meet the credit needs of farmers.

            In addition, this study will enable government bodies to identify problems faced by farmers in their bid to access credit facilities and be able to come up with interventions that will help bridge the gap between what is and what ought to be. Information from this study will also help the government to recognize, facilitate and support the development and use of suitable interest rates in both agricultural and commercial banks. Also, this study will be helpful in the sense that the negative effects of interest rate on farmers’ access to agro credit will be identified and appropriate recommendations made. Moreover, this study will help in formulating a future strategy for the realization and sustenance of a suitable interest rate that will enhance Nigerian farmers’ access to credit facilities.

          This research is directed at providing information that would assist in knowing these effects of interest rate regime on farmers’ access to agro credit in Kaduna State. It is expected that this study will expose the effects of interest rate which will help government/ financial institutions to formulate programmes in favour of a suitable interest rate for farmers’ for effective credit acquisition. This study will also serve as a guide to other researchers who wish to embark on related studies.

             Finally, it is hoped that the results of the study will be useful to researchers and farmers. Government and policy makers will also benefit from the findings of this study by utilizing information from the study to address the problems of interest rate fluctuations. This will be used as checks and balances by policy makers and academics in designing subsequent ways to make effective and efficient determination of agricultural interest rate.





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