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ROLE OF INFORMAL SECTOR IN AGRICULTURE IN PRODUCTIVITY IN IMO, STATE

ABSTRACT

The informal finance has been a major source of finance from ages long even before the introduction of modern banking system. But its major function is in the provision of informal finance to agricultural sector. The study examines the problems and prospects of informal financial institutions in financing agricultural sector Imo state using Imo State, Nigeria as case study. This study examines the role of informal sector in improving the agricultural productivity in Imo state. The methodology employed was descriptive and data were collected using personal oral interviews and questionnaires which were distributed to the respondents. The data collected were presented and analyzed using percentages and tables. The use of chi-square was also employed for better understanding. The findings from the study revealed that informal financial institutions’ activities have a significant role in financing agriculture. It also revealed that financial constraint is not the major constraint faced by informal financial institutions in financing agricultural sector. Other problems include lack of storage facilities and the use of crude tools, just to mention but a few. Despite these problems, it is noted that the informal financial institutions if properly monitored have many goodies to offer for improved productivity of the agricultural sector of the country. As a result of the problems faced by the informal financial institutions in financing agriculture, it is recommended among others that there should be more of governmental and financial support to the agricultural sector so as to enhance development, create enabling environment and there is a need for informal financial institutions to improve in their financing function to the sector. It is concluded that informal finance is the “life wire” of agricultural sector.

The objective of this research is to investigate whether agricultural cooperatives can facilitate smallholder farmer access to input and product markets. Farmers in two case study communal areas of Owerri North L.G.A face high transaction costs as reflected primarily in their low levels of education and literacy, lack of market information, insecure property rights, poor road and communication infrastructure, and long distances to markets. Analysis of the reasons why cooperatives were originally established in various parts of the world suggests that most of the causes (such as poverty, market failure and high transaction costs) also apply to the study farmers, as do the seven international principles of cooperation. Smallholder farmers in both case study regions have the potential to grow high-value crops such as vegetables, fruit and cut flowers. In the supply chain from farm to market, the optimum boundary for each organization involved in the chain (e.g. cooperative and investor-oriented firm) depends on the minimum operational and transaction costs for each business.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The contribution of formal lending organizations to credit availability to small farmers is negligible. Yet these farmers cannot do without credit. To fill the lacuna, many of these farmers patronize informal credit associations. Ajetomobi and Olagunju (2000) report that 54% of farmers obtain credit from esusu (credit) cooperatives against 3% who obtain same from commercial banks in South-western Nigeria. Reasons adduced to this reliance are many. They include dearth of rural banks, distance from loan office, low farm income and time lag between loan application and disbursement from formal sources.

Nweze (1994) remarks that objectives of cooperative associations are to pool capital resources, labour for farm work, provision of financial assistance to members in need and community development. In these associations, information assymetrics between borrowers and lenders are unimportant, and their institutional consequences, the use of collateral and interlinked contracts, are absent. Through credit, households pool risk through the use of contracts in which the repayment owed by the borrower depends on the realisation of random production and consumption shocks by both the borrower and the lender (Udry, 1990). In appreciating the role of informal associations in the mobilisation of rural savings and in economic development Imo state, Jerome (1991) posits that these roles are not officially appreciated because of the rudimentary nature of their operations and the lack of legislation guiding and standardising their operations. The gaps unfilled by informal associations are taken over by moneylenders. These charge high interest rates but are willing to lend money at great risk. Eboh et al (1991) attributes this willingness to collateral undervaluation. They recommend channeling of money to individual borrowers through farmers’ groups and increased availability of loanable funds in rural areas as a means of reducing these high interest rates.

Okoria (1986) identified some factors that have effect on loan repayment. These are nature and time of disbursement, profitability of loan receiving enterprise and the number of supervision visits by credit officers after disbursement. Other factors found to influence loan recovery by both institutional and non-institutional lenders are type of lending institution, amount and type of credit and the socio-political environment in which the institution operates (Okorie and Iheanacho, 1992). The Nigeria Agricultural Cooperative Bank (NACB), now the Nigeria Agricultural Cooperative and Rural Development Bank (NACRDB), was established in 1973 to reduce incidence of credit paucity in the agricultural sector. That the shortage persists reveals that the task is greater than the capacity of the NACRDB, This can be partly attributed to the difference between agricultural sector budgetary requirements and the actual amounts allocated to the sector. Although large farms are better able to obtain credit as they have an edge over small-scale farmers in terms of literacy, size of holding, capital assets and annual income, they repaid only 1% of loans obtained against small farmers who paid back about 34% (Pandey and Yaki, 1989).

Data on loan repayment performance is inconsistent and varies from location to location. Njoku and Odii (1991) report repayment performance of 27% in Southeastern Nigeria. They attribute this to low enterprise returns, diversion of loans to non-agricultural enterprises and political consideration in loan approval. In Southwestern Nigeria, Ewuola and Williams (1992) recorded a loan recovery rate of 67%. Enterprise profitability and loan percentage given in kind were significantly and positively correlated to percent of loan recovered.

In the mid-1980s, a programme of economic liberalisation was initiated. This involved interest rate deregulation and it was expected that this would make agricultural lending more attractive to rural banks. It did indeed lead to an increase in loan volume and ratio to the agricultural sector (Oyejide, 1991; Olomola, 1994). This increase has however not been sustained (Council for the Development of Social Science Research in Africa, 1998; Ukoha, 1999). Among the reasons given for the unsustainability are poor policy implementation, lack of complementary policy measures to support core policy initiatives and an imprecise agricultural development strategy during the period of reforms. It was also felt that the Structural Adjustment Programme over-emphasised the divestment of the government from agriculture to the detriment of the takeover of the sector by the private sector, thus making the sector compete unfairly with more developed, but less strategic, sectors.

Several recommendations have been made in respite of increasing credit availability to farmers. These include disbursement of loans in kind, the adoption of informal agencies’ loan recovery strategies and the involvement of credit agencies in marketing of farm produce (Olomola, 1989; Okorie and Iheanacho, 1992). It is also advocated that formal institutions target their borrowers properly as this would ensure that credit gets to the most needy borrowers (International Livestock Research Institute, 1998). Jabbar et al (2002) also recommend inventory finance for community level input suppliers and service provides.

1.2 PROBLEM OF THE STUDY

Agricultural development has been beset by lack of fund. Source of fund were noted by popular study to be scarce. Where source of credit are available, farmers do not have security for loan. (NACRDB) introduces its small holders scheme (SHS) to avert the issue of security to the rural farmers.

Illiteracy has also proved to be a cancan worm in the smooth organization of the agricultural development Imo state. As a result of this, most farmers that are not opportune to attain basic education suffers from and agricultural development face off and this lead to gracefully below standardize of agro – business. But NACRDB staff training as it is its primary function to meet the training and development need of the bank staff and those of other institution and interested individuals especially in the area of agriculture and agric financial has help to cope this situation. Poor repayment also is one of the set back to (NACRDB)

The extent of repayment is considered by the performance of credit organization. Those who made all repayment of loan attribute it to lateness of loan and lose incurred form loan (NACRDB) give help to farmers who have such problem. Majority of farmers has benefited form all holders loan scheme (SHLS). The problem is on the critical evaluation of the impact of the scheme in rural farmers viz-vas rural development. Unfortunately, rural development structure Imo state is a limiting factor to the full realization of the (NACRDB) credit scheme.

In specific term, poor infrastructure facility such as rose, hospital, communication system, transportation and marketing of agricultural product are glossy below standard. Also this research will address the inherent problem of credit use are regard to socio-economic characteristics like education qualification, size of family and farm size, and income are critically factors in credit acquisition and uses. The research will examine the role of this factor in enhancing and improving the living standard of the farmers

Farm credit is an important means of improving capital investment in the agricultural sector to fulfill its expected role (Chidubelu and Ezike 1995) it is important in easing seasonal fluctuations in rural household incomes, promoting commercialization of farm enterprises and breaking the vicious circle of poverty among rural farming populace.

According to Osakwe and Ojo (1980), farm credit according to CBN report (1981), the only way to develop agriculture to achieve the self-sufficiency in food production is to invest massively in the sector.

Government response to this situation led to the establishment of the Agricultural Banks (AB) and other formal institutions who disburse agricultural credit to small holders farmers but it seems that most of the loans disbursed to the farmers are not repaid as at when due.

It is on this that the study tends to evaluate the loan repayment performance of smallholders farmers under the scheme of Agricultural Bank with a view to finding a solution to them.

Therefore answers to these questions are relevant to this study. What are the socio-economic characteristics of the respondents? Do the socioeconomic characteristics of the famers affect their repayment ability? How much of the agricultural loan was disbursed to farmers within the year under review?

What percentage of the actual Agricultural Bank was disbursed for a given period (2000-2010) as at when due? Is there any significant difference between the amount disbursed and that repaid within the year under review?

Do farmers utilize the loan disbursed to them for the intended and stipulated purpose? What factors influences and contains farmer in the repayment of loan in the area?

1.3 OBJECTIVES OF THE STUDY

1. To evaluate the roles of informal sector in improving Agricultural productivity in Imo state.

2. To evaluate the loan repayment performance of farmers under the smallholder Agricultural scheme of the Agricultural Bank in Imo state.

3. To describe the socio-economic characteristics of farmers’ beneficiaries.

iv. analyze the factors that influence the repayment of agricultural loan by farmers in the study area.

4. To know the challenges of informal sectors in agricultural production.

5. To suggest possible ways of solving the problem.

1.4 RESEARCH QUESTION

1. What the roles of informal sector in improving Agricultural productivity in Imo state?

2. What are the loan repayment performance of farmers under the smallholder Agricultural scheme of the Agricultural Bank in Imo state?

3. What are the socio-economic characteristics of farmers’ beneficiaries?

4. What are the challenges of informal sectors in agricultural production?

5. Are there possible ways of solving the problem?

1.4 RESEARCH QUESTION

H0: There is no significant relationship between informal sector and improve Agricultural productivity in Imo state.

H1: There is a significant relationship between informal sector and improve Agricultural productivity in Imo state.

H0: It is impossible to evaluate the loan repayment performance of farmers under the smallholder Agricultural scheme of the Agricultural Bank in Imo state.

H1: It is possible to evaluate the loan repayment performance of farmers under the smallholder Agricultural scheme of the Agricultural Bank in Imo state.

H0: There are no challenges of informal sectors in agricultural production.

H1: There are challenges of informal sectors in agricultural production.

1.6 SIGNIFICANCES OF THE STUDY

This study will be of an immeasurable benefit both to the lending informal lending institutions in Imo state on one hand and the farmers (borrowers) on the other hand. This is because the lending institution will be able to know and ascertain the credit need of the farmers, the period of loan recovery and the rate of default on loan. Farmers on the other hand will be in position to estimate the amount of credit available for each period. Its adequacy or otherwise or with a view for looking for other source of fund. It will also guide them on how to tackle the various agricultural credit-financing problems facing them. To the economy at large, the research work will be good to help since agricultural production has in the recent past being a national problem that need urgent attention. It will help the federal and the state government in formulation future agricultural credit policy for the country

Last but not the least, the work will be a useful Addison to the existing research work carried out in the area of agricultural credit financing Imo state and therefore will serve as a reference to future researcher.

1.7 JUSTIFICATION FOR THE STUDY

This study on Agricultural bank will be an immeasurable benefit to the continual efficient performance or contributions of the Agricultural Bank and most importantly to the smallholder farmers. This is because, the Agricultural Bank will be able to know and ascertain the period of loan recovery and the rate of loan default on the other hand, the small holder farmers will be in a position to estimate the amount of credit available for each period, it’s adequacy with a view for looking for other sources of fund for supplementary purpose.

It will also guide them on to tackle the various agricultural credit financing problems facing them. To the economy at large, this study will be good help since agricultural production has in the needs urgent attention it will help the federal and state government in formulating future agricultural credit policies.

1.8 SCOPE AND LIMITATION OF THE STUDY

This study covers the role of informal sector in agriculture in productivity in Imo, state

. As a student research time and money were my greatest problem, therefore there is no doubt that this two factors will have some limiting impact on my ability to run around for data collection. Apart from this two factor, (NACRDB) like every other business organization with its requirement of secrecy in handling its official document could not provide enough data as required by the researcher. For instance, the staff of (NACRDB) could not give any information on the level of default cases of their loan. It was also difficult to obtain information from the individual borrowers loan amount each year. This could have help to work the researcher determine how it deviated from the loan approved in a particular year. Faced with this situation, the researcher has to make use of the little information provided by the (NACRDB). Also because of the time factor and inadequate data, only one out of (NACRDB) numerical scheme will be treated in this work. That is the (NACRDB) small-scale holder direct lending scheme.

The researcher work involve but qualitative and quantitative analysis of data and other information which were obtain from the primary and secondary source in the form of passed data and faced interview, such data include the (NACRDB) role in financing agriculture for the period of 1991 to 2000. Data from stationeries, textbook, magazines, newspapers, presented in seminar etc.

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