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CHAPTER ONE: INTRODUCTION
1.1 Background of Study
Credit facilities refer to loans, advances, and other financial services provided to borrowers to enable them to finance their agricultural operations, including the purchase of inputs (seeds, fertilizers, pesticides), acquisition of equipment (pumps, sprayers, planters, tractors), hiring of labour, land improvement (irrigation, drainage), and management of cash flow between planting and harvest (CBN, 2022). Credit is a critical input for small scale farmers, who constitute over 80% of the farming population in Nigeria, because they lack sufficient personal savings to finance their agricultural activities (World Bank, 2021). Without access to credit, small scale farmers are trapped in low-productivity subsistence agriculture, unable to purchase improved seeds, fertilizers, or equipment, resulting in low yields, low incomes, and persistent poverty (Schultz, 1964).
Small scale farmers are defined as agricultural producers who operate on small plots of land, typically less than 2 hectares, using primarily family labour, with low capital investment and low-input, low-technology methods (FAO, 2020). In Nigeria, small scale farmers produce over 90% of the country’s food output, yet they have limited access to formal credit from commercial banks, microfinance banks, and development banks (FMARD, 2021). The agricultural credit gap in Nigeria is estimated at over ₦1 trillion annually, with less than 20% of smallholder farmers having access to formal credit (CBN, 2022).
Bende Local Government Area (LGA) is located in Abia State, South-East Nigeria. It is one of the 17 LGAs in Abia State, with headquarters at Bende town (Abia State Ministry of Local Government, 2021). The LGA is predominantly rural, with agriculture as the main occupation of the population. Major crops grown include cassava, yam, maize, rice, vegetables, oil palm, cocoa, and rubber (NBS, 2022). Small scale farmers in Bende LGA face similar challenges to smallholders elsewhere in Nigeria: low productivity, limited access to credit, high input costs, poor infrastructure, and weak extension services (Okafor and Nwosu, 2020).
The sources of credit facilities available to small scale farmers can be categorized into formal, semi-formal, and informal sources (CBN, 2022; Okonkwo, 2020):
| Source | Type | Examples | Interest Rate | Collateral | Reach |
| Commercial banks | Formal | First Bank, UBA, Access, GTBank, Zenith | 20-35% | Required | Low (<10%) |
| Microfinance banks | Formal | LAPO, Fortis, Accion, BOA | 30-40% | Minimal | Moderate (15-20%) |
| Bank of Agriculture | Formal/Development | BOA | 15-25% | Variable | Low (5-10%) |
| Agricultural Credit Guarantee Scheme | Government | ACGS (1977) | Market rate | Guaranteed (75%) | Low (<5%) |
| Anchor Borrowers’ Programme | Government | ABP (2015) | Single digit (5-9%) | Off-taker guarantee | Moderate (10-15%) |
| Cooperatives | Semi-formal | Farmer cooperatives, savings groups | 15-25% | Group guarantee | Moderate (15-25%) |
| Money lenders | Informal | Loan sharks | 50-200% | None or personal | High (30-50%) |
| Traders | Informal | Input credit in exchange for harvest | 100-200% | Harvest commitment | High (20-40%) |
| Family/friends | Informal | Relatives, neighbours | 0-10% | None | High (40-60%) |
(Source: CBN, 2022; Okafor and Nwosu, 2020)
The role of credit facilities in enhancing agricultural productivity is well-documented (Schultz, 1964; Lewis, 1954; Diamond, 1984). Credit enables small scale farmers to:
| Function | Impact on Agriculture |
| Purchase improved seeds | Higher yields (30-100%) |
| Purchase fertilizers | Higher yields (40-60%) |
| Purchase pesticides | Reduced pest/disease losses (20-50%) |
| Purchase equipment (pumps, sprayers, planters, tractors) | Labour saved, timeliness, higher productivity |
| Hire labour during peak seasons | More area cultivated, timely operations |
| Invest in land improvement (irrigation, drainage) | Higher yields, dry season cultivation |
| Invest in storage facilities | Reduced post-harvest losses (20-50%) |
| Invest in processing equipment | Value addition (100-500% price increase) |
The constraints to accessing credit facilities for small scale farmers include (Adebayo and Ogunyemi, 2020; Eze and Nweze, 2019; Okafor and Nwosu, 2020):
| Constraint | Description | Impact |
| Lack of collateral | Smallholders operate on customary land without formal titles | Excluded from formal credit |
| High interest rates | Commercial banks charge 20-35%; informal sources charge 50-200% | Borrowing unprofitable |
| Complex application procedures | Lengthy forms, multiple documents, credit checks | Farmers unable to complete |
| No credit history | No record of past borrowing | Banks cannot assess creditworthiness |
| Small loan sizes | Amount needed too small for banks (prefer large loans) | Excluded from formal credit |
| Perceived high risk | Climate risk, price risk, pest/disease risk, default risk | Credit rationing |
| Limited outreach | Banks focus on urban areas; rural branches limited | Physical access barrier |
| Low financial literacy | Farmers lack understanding of loan products, procedures | Fear of debt, inability to apply |
The government has implemented several programmes to improve credit access for small scale farmers (FMARD, 2021; Okonkwo, 2020):
| Programme | Year | Mechanism | Target | Effectiveness |
| Agricultural Credit Guarantee Scheme (ACGS) | 1977 | Government guarantees 75% of loan | Smallholders | Limited (low awareness, bureaucracy) |
| Agricultural Credit Support Scheme (ACSS) | 2009 | Loans for input purchase | Smallholders | Limited |
| Commercial Agriculture Credit Scheme (CACS) | 2009 | Low-interest (5-9%) bonds | All agricultural enterprises | Moderate (limited reach to smallholders) |
| Anchor Borrowers’ Programme (ABP) | 2015 | Input loans + off-taker guarantee | Smallholders in value chains | Moderate (rice, maize, cotton, cassava) |
Despite these programmes, access to credit for small scale farmers in Bende LGA remains limited. There is limited empirical data on: (a) the types of credit facilities available to small scale farmers in Bende LGA; (b) the sources (formal, semi-formal, informal) accessed; (c) the purpose of credit (input purchase, equipment, labour, land improvement, consumption); (d) the constraints to accessing credit; (e) the impact of credit on productivity (yield, income). The problem this study addresses is the need to analyze credit facilities available to small scale farmers in Bende Local Government Area of Abia State, identify the sources accessed, determine the purposes of credit, identify constraints to access, and assess the impact of credit on productivity.
1.2 Statement of Problems
Despite the recognized importance of credit for agricultural productivity, small scale farmers in Bende Local Government Area of Abia State face severe constraints in accessing credit facilities. Less than 20% of smallholders have access to formal credit, and the agricultural credit gap is estimated at over ₦1 trillion nationally. The specific problems addressed by this study include:
Limited access to formal credit: Commercial banks are reluctant to lend to smallholders due to lack of collateral (land titles), high transaction costs (small loan sizes, remote rural locations), and perceived high risk (climate risk, price risk, default risk).
Dominance of informal credit: Small scale farmers rely on informal sources (money lenders, traders, family, friends) that charge exorbitant interest rates (50-200%) and offer exploitative terms, trapping farmers in debt cycles rather than enabling productive investment.
Lack of awareness of government programmes: Many farmers are unaware of government credit programmes (ACGS, ABP, CACS) or find the application procedures too complex.
Low adoption of improved practices: Without credit, farmers cannot purchase improved seeds, fertilizers, pesticides, or equipment, resulting in low yields (30-60% below potential), low output, and low income.
Limited empirical data: There is limited empirical data on the types of credit facilities available, sources accessed, purposes of credit, constraints to access, and impact of credit on productivity in Bende LGA.
Ineffective government programmes: Government credit programmes have had limited success in reaching smallholders due to bureaucratic bottlenecks, late disbursement, insufficient loan amounts, and elite capture.
The problem this study addresses is the need to analyze credit facilities available to small scale farmers in Bende Local Government Area of Abia State, identify the sources accessed, determine the purposes of credit, identify constraints to access, and assess the impact of credit on productivity.
1.3 Aim of the Study
The specific aim of this research work is to analyze credit facilities available to small scale farmers in Bende Local Government Area of Abia State, by identifying the types and sources of credit (formal, semi-formal, informal), determining the purposes of credit (input purchase, equipment, labour, land improvement, consumption), identifying constraints to access (collateral, interest rates, procedures, credit history, loan size), and assessing the impact of credit on productivity (yield, income).
1.4 Objectives of the Study
- To identify the types of credit facilities (short-term, medium-term, long-term) and sources (formal: commercial banks, microfinance banks, Bank of Agriculture; semi-formal: cooperatives; informal: money lenders, traders, family/friends) available to small scale farmers in Bende LGA.
- To determine the purposes for which credit is used (input purchase: seeds, fertilizers, pesticides; equipment: pumps, sprayers, planters, tractors; labour hire; land improvement; consumption).
- To identify the constraints (collateral requirement, interest rate, application complexity, credit history, loan size, risk perception) limiting access to credit facilities.
- To compare the productivity (yield, income) of credit users and non-users.
- To assess the effectiveness of government credit programmes (ACGS, ABP, CACS) in reaching small scale farmers in Bende LGA.
1.5 Research Questions
- What types of credit facilities (short-term, medium-term, long-term) and sources (formal: commercial banks, microfinance banks, Bank of Agriculture; semi-formal: cooperatives; informal: money lenders, traders, family/friends) are available to small scale farmers in Bende LGA?
- What are the purposes for which credit is used (input purchase: seeds, fertilizers, pesticides; equipment: pumps, sprayers, planters, tractors; labour hire; land improvement; consumption)?
- What are the constraints (collateral requirement, interest rate, application complexity, credit history, loan size, risk perception) limiting access to credit facilities?
- What is the difference in productivity (yield, income) between credit users and non-users?
- How effective are government credit programmes (ACGS, ABP, CACS) in reaching small scale farmers in Bende LGA?
1.6 Research Hypotheses
Hypothesis One
- H₀ (Null): There is no significant difference in input use (fertilizer, improved seeds, pesticides) between credit users and non-users.
- H₁ (Alternative): There is a significant difference in input use between credit users and non-users.
Hypothesis Two
- H₀ (Null): There is no significant difference in yields (output per hectare) between credit users and non-users.
- H₁ (Alternative): There is a significant difference in yields between credit users and non-users.
Hypothesis Three
- H₀ (Null): There is no significant difference in farm income (net profit per hectare) between credit users and non-users.
- H₁ (Alternative): There is a significant difference in farm income between credit users and non-users.
Hypothesis Four
- H₀ (Null): There are no significant constraints (collateral, interest rate, application complexity, credit history, loan size, risk perception) limiting access to credit facilities.
- H₁ (Alternative): There are significant constraints limiting access to credit facilities.
Hypothesis Five
- H₀ (Null): Government credit programmes (ACGS, ABP, CACS) have not significantly increased credit access for small scale farmers in Bende LGA.
- H₁ (Alternative): Government credit programmes have significantly increased credit access for small scale farmers.
1.7 Justification of the Study
This study is justified on several grounds. First, small scale farmers in Bende LGA produce the majority of food in the area, but their productivity is constrained by limited access to credit. Second, there is limited empirical data on the credit facilities available, sources accessed, constraints, and impact on productivity in Bende LGA. Third, understanding the constraints to credit access (collateral, interest rates, procedures, credit history, loan size) is essential for designing interventions. Fourth, comparing credit users and non-users will quantify the impact of credit on productivity (yield, income). Fifth, assessing the effectiveness of government credit programmes (ACGS, ABP, CACS) will inform policy.
1.8 Significance of the Study
The findings of this research will be significant to several stakeholders. To small scale farmers in Bende LGA, the study will provide evidence on the benefits of credit access (higher yields, higher income) and identify the most accessible sources (cooperatives, microfinance banks). To cooperative societies, the findings will inform credit management (group lending, savings mobilization). To microfinance banks and Bank of Agriculture, the findings will inform agricultural lending strategies and product design (small loans, flexible repayment aligned with harvest cycle). To government agencies (CBN, FMARD, Abia State Ministry of Agriculture) , the study will inform agricultural credit policy (ACGS, ABP, CACS) and programme design. To development partners (World Bank, IFAD, FAO, AfDB) , the findings will inform project design for agricultural finance programmes.
1.9 Scope of the Study
The scope of this study is delimited to the analysis of credit facilities available to small scale farmers in Bende Local Government Area of Abia State. The study focuses on small scale farmers (land holding <2 hectares). Credit sources examined: formal (commercial banks, microfinance banks, Bank of Agriculture), semi-formal (cooperatives), informal (money lenders, traders, family/friends). Credit purposes: input purchase (seeds, fertilizers, pesticides), equipment (pumps, sprayers, planters, tractors), labour hire, land improvement (irrigation, drainage), consumption. Constraints: collateral requirement, interest rate, application complexity, credit history, loan size, risk perception. Productivity comparison: credit users vs. non-users (input use, yield, income). Government programmes: ACGS, ABP, CACS. The study includes primary data collection (farmer surveys, key informant interviews) and secondary data. Sample size: n = 200-300 small scale farmers selected from villages/clusters in Bende LGA. The study does not extend to large scale farmers (>2 hectares), non-agricultural credit (business loans, personal loans), or other local government areas in Abia State.
1.10 Definition of Terms
Credit Facilities: Loans, advances, and other financial services provided to small scale farmers to finance agricultural operations, including input purchase, equipment acquisition, labour hire, land improvement, and cash flow management.
Small Scale Farmer (Smallholder Farmer): An agricultural producer operating on a small plot of land, typically less than 2 hectares, using primarily family labour, with low capital investment and low-input, low-technology methods.
Formal Credit: Credit obtained from regulated financial institutions, including commercial banks, microfinance banks, development banks (Bank of Agriculture), and government programmes (ACGS, ABP, CACS).
Semi-Formal Credit: Credit obtained from unregulated but organized groups, including farmer cooperatives, savings groups, and thrift societies. Often uses group guarantee (peer monitoring) instead of individual collateral.
Informal Credit: Credit obtained from unregulated individual sources, including money lenders (loan sharks), traders (input credit in exchange for exclusive purchase rights), family, and friends.
Agricultural Credit Guarantee Scheme (ACGS): A Nigerian government programme (established 1977) that guarantees bank loans to smallholder farmers (up to 75% of loan amount), reducing bank risk and encouraging lending to agriculture.
Anchor Borrowers’ Programme (ABP): A Nigerian government programme (launched 2015) that provides loans (cash and inputs) to smallholder farmers linked to processors (anchors); farmers repay loans with harvest purchased by the anchor processor.
Commercial Agriculture Credit Scheme (CACS): A Nigerian government programme providing loans to agricultural enterprises at single-digit interest rates (5-9%), funded through bonds issued by the CBN.
Cooperative (Credit Cooperative): A semi-formal financial institution owned and controlled by its members (farmers), who pool savings and provide loans to members, often using group guarantee (no individual collateral).
Collateral: An asset (land title, building, vehicle, equipment, livestock) that a borrower pledges to a lender as security for a loan. Lack of formal land titles (customary tenure) is a major constraint for smallholders.
Interest Rate: The cost of borrowing money, expressed as an annual percentage of the loan amount (%). Formal: 20-40%; Informal: 50-200%.
Credit Constraint: Any factor that prevents a farmer from accessing credit, including lack of collateral, high interest rates, complex application procedures, no credit history, small loan size, and perceived high risk.
Input Use: The quantity of agricultural inputs applied per hectare, including fertilizer (kg/ha), improved seeds (kg/ha), and pesticides (L/ha).
Yield: The output of a crop per unit area, expressed as kilograms per hectare (kg/ha) or metric tons per hectare (tons/ha).
Farm Income (Net Profit): Total revenue from crop sales minus total costs (variable costs + fixed costs), expressed as naira per hectare (₦/ha).
CHAPTER TWO: LITERATURE REVIEW
2.1 Conceptual Framework
The conceptual framework for this study is organized around the key concepts of credit facilities, small scale farmers, sources of credit, purposes of credit, constraints to credit access, and the impact of credit on productivity. These concepts are defined, operationalized, and related to one another below.
2.1.1 Concept of Credit Facilities
Credit facilities refer to loans, advances, and other financial services provided to borrowers to enable them to finance their agricultural operations (CBN, 2022).
Types of Credit Facilities by Term:
| Type | Repayment Period | Purpose | Suitability for Smallholders |
| Short-term | <1 year (seasonal) | Input purchase (seeds, fertilizers, pesticides), labour hire | High (repaid after harvest) |
| Medium-term | 1-5 years | Equipment purchase (pumps, sprayers, planters), land improvement | Moderate |
| Long-term | >5 years | Irrigation, tree crops (cocoa, oil palm, rubber), land purchase | Low (smallholders have small land) |
(Source: CBN, 2022)
2.1.2 Concept of Small Scale Farmer
A small scale farmer (smallholder farmer) is an agricultural producer who operates on a small plot of land, typically less than 2 hectares, using primarily family labour, with low capital investment and low-input, low-technology methods (FAO, 2020).
Characteristics of Small Scale Farmers in Bende LGA:
| Characteristic | Typical Value |
| Land holding | 0.5-2.0 hectares |
| Labour source | Primarily family (household) |
| Education | Primary school or less (many) |
| Crops grown | Cassava, yam, maize, rice, vegetables, oil palm, cocoa |
| Market orientation | Subsistence (household consumption) + small surplus |
| Access to formal credit | Low (<20%) |
(Source: NBS, 2022; Okafor and Nwosu, 2020)
2.1.3 Sources of Credit Facilities
| Source | Type | Interest Rate | Collateral | Reach to Smallholders | Advantages | Disadvantages |
| Commercial banks | Formal | 20-35% | Required (land title) | Low (<10%) | Large loan sizes | High interest, collateral required |
| Microfinance banks | Formal | 30-40% | Minimal | Moderate (15-20%) | Small loans, simple procedures | High interest, short repayment |
| Bank of Agriculture | Formal/Development | 15-25% | Variable | Low (5-10%) | Agricultural focus | Under-capitalized |
| ACGS | Government | Market rate | Guaranteed (75%) | Low (<5%) | Reduces bank risk | Low awareness, bureaucracy |
| ABP | Government | Single digit (5-9%) | Off-taker guarantee | Moderate (10-15%) | Low interest, input supply | Late disbursement, elite capture |
| Cooperatives | Semi-formal | 15-25% | Group guarantee | Moderate (15-25%) | Peer monitoring, lower interest | Limited funds |
| Money lenders | Informal | 50-200% | None or personal | High (30-50%) | Fast, no collateral | Exorbitant interest |
| Traders | Informal | 100-200% | Harvest commitment | High (20-40%) | Input credit | Exploitative |
| Family/friends | Informal | 0-10% | None | High (40-60%) | No interest, flexible | Limited amounts |
(Source: CBN, 2022; Okafor and Nwosu, 2020)
2.1.4 Purposes of Credit
| Purpose | Description | Impact on Productivity |
| Input purchase | Seeds, fertilizers, pesticides | Higher yields (30-100%) |
| Equipment purchase | Pumps, sprayers, planters, tractors | Labour saved, timeliness |
| Labour hire | Planting, weeding, harvesting labour | More area cultivated |
| Land improvement | Irrigation, drainage, soil conservation | Higher yields, dry season cultivation |
| Storage | Silos, warehouses, PICS bags | Reduced post-harvest losses |
| Processing | Mills, dryers, shellers | Value addition (100-500% price increase) |
| Consumption | Household food, school fees, medical | Survival (not productive) |
(Source: Adebayo and Ogunyemi, 2020)
2.1.5 Constraints to Credit Access
| Constraint | Description | Impact |
| Lack of collateral | Customary land tenure, no formal title | Excluded from formal credit |
| High interest rates | 20-35% formal; 50-200% informal | Borrowing unprofitable |
| Complex procedures | Lengthy forms, multiple documents, credit checks | Farmers unable to complete |
| No credit history | No record of past borrowing | Banks cannot assess creditworthiness |
| Small loan sizes | Amount needed too small for banks | Banks prefer large loans |
| Perceived high risk | Climate risk, price risk, pest/disease risk | Credit rationing |
| Limited outreach | Banks focus on urban areas | Physical access barrier |
| Low financial literacy | Farmers lack understanding of loan products | Fear of debt |
(Source: Eze and Nweze, 2019; Okafor and Nwosu, 2020)
2.1.6 Government Credit Programmes
| Programme | Year | Mechanism | Target | Effectiveness | Challenges |
| Agricultural Credit Guarantee Scheme (ACGS) | 1977 | Government guarantees 75% of loan | Smallholders | Limited | Low awareness, bureaucracy, banks add collateral |
| Agricultural Credit Support Scheme (ACSS) | 2009 | Loans for input purchase | Smallholders | Limited | Late disbursement |
| Commercial Agriculture Credit Scheme (CACS) | 2009 | Low-interest (5-9%) bonds | All agricultural enterprises | Moderate | Limited reach to smallholders |
| Anchor Borrowers’ Programme (ABP) | 2015 | Input loans + off-taker guarantee | Smallholders in value chains | Moderate | Late disbursement, insufficient loans, elite capture |
(Source: FMARD, 2021; Okonkwo, 2020)
2.1.7 Impact of Credit on Productivity
| Indicator | Credit User | Non-User | Expected Difference |
| Fertilizer use (kg/ha) | Higher (100 kg/ha) | Lower (50 kg/ha) | +50 kg/ha |
| Improved seed adoption (%) | Higher (70%) | Lower (30%) | +40 percentage points |
| Yield (tons/ha) | Higher (3.5) | Lower (1.8) | +1.7 tons/ha |
| Net income (₦/ha) | Higher (₦400,000) | Lower (₦150,000) | +₦250,000 |
(Source: Okafor and Ugwu, 2021)
2.1.8 Conceptual Framework Diagram (Described in Text)
The conceptual framework can be visualized as follows:
Credit Access → Credit Use → Productivity Outcomes
Independent Variables (Credit Access):
- Source of credit (formal, semi-formal, informal)
- Type of credit (short-term, medium-term, long-term)
- Loan size (₦)
- Interest rate (%)
- Repayment period (months)
↓ Credit Use (Mediating Variables):
- Input purchase (seeds, fertilizers, pesticides)
- Equipment purchase (pumps, sprayers, planters)
- Labour hire
- Land improvement
- Storage and processing
↓ Dependent Variables (Productivity Outcomes):
- Input use (fertilizer kg/ha, improved seeds %)
- Yield (kg/ha, tons/ha)
- Farm income (₦/ha net profit)
Moderating Variables (Constraints):
- Lack of collateral
- High interest rates
- Complex procedures
- No credit history
- Small loan sizes
- Perceived high risk
Moderating Variables (Farmer Characteristics):
- Age, gender, education, farm size, cooperative membership, land tenure
The framework posits that credit access (source, type, loan size, interest rate) affects credit use (input purchase, equipment, labour, land improvement, storage/processing), which in turn affects productivity outcomes (input use, yield, income). The strength of these relationships is moderated by constraints (collateral, interest rates, procedures, credit history, loan size, risk) and farmer characteristics (age, education, farm size, cooperative membership).
2.2 Theoretical Framework
This study is anchored on three supporting theories that provide a comprehensive theoretical foundation for understanding credit facilities to small scale farmers. These theories are Agricultural Development Theory, Financial Intermediation Theory, and Credit Rationing Theory.
2.2.1 Agricultural Development Theory
Agricultural Development Theory, associated with Nobel laureate Theodore Schultz (1964), argues that investment in agriculture (including credit) is essential for transforming traditional agriculture into a productive, modern sector (Schultz, 1964).
Core Propositions (Schultz, 1964):
- Traditional agriculture is poor but efficient: Farmers in traditional agriculture allocate resources efficiently given the constraints they face (limited technology, no credit, poor infrastructure). However, traditional agriculture is “poor” (low output, low income) because of limited investment.
- Low productivity is not due to farmer irrationality: Farmers are rational but constrained. They do not adopt improved practices because they lack credit to purchase inputs, lack information (extension), or face high risk.
- Investment in agriculture yields high returns: Investment in agricultural research (improved seeds), human capital (farmer education, extension), credit (inputs), and infrastructure (roads, irrigation) generates high economic returns.
- Credit is a critical input: Without credit, farmers cannot purchase improved seeds, fertilizers, or irrigation equipment. Credit constraints keep farmers trapped in low-productivity traditional agriculture.
- Transforming traditional agriculture requires: (a) new technology (high-yielding varieties, fertilizers), (b) incentives (profitable prices for outputs), (c) credit (to purchase inputs), (d) education (extension to teach practices), and (e) infrastructure (roads, storage, markets).
Application to Small Scale Farmers
Agricultural Development Theory predicts (Schultz, 1964; Timmer, 2019):
- Small scale farmers with access to credit will have higher input use (fertilizer, improved seeds), higher yields, and higher incomes than those without credit.
- Removing credit constraints (through subsidized credit, credit guarantees, or microfinance) will increase agricultural productivity.
- Government credit programmes (ACGS, ABP, CACS) are needed to address credit market failures.
2.2.2 Financial Intermediation Theory
Financial Intermediation Theory, developed by Diamond (1984) and extended by Freixas and Rochet (2019), explains the role of financial institutions (banks, microfinance banks) as intermediaries between savers (surplus units) and borrowers (deficit units), reducing information asymmetry and transaction costs (Diamond, 1984; Freixas and Rochet, 2019).
Core Propositions (Diamond, 1984; Freixas and Rochet, 2019):
- Information asymmetry: Lenders (savers) cannot easily assess the creditworthiness of borrowers (farmers) or monitor their use of funds. Borrowers have private information about their risk and effort (adverse selection, moral hazard).
- Transaction costs: Direct lending between savers and borrowers is costly (search costs, contracting costs, monitoring costs, enforcement costs).
- Financial intermediaries reduce information asymmetry and transaction costs: Banks specialize in screening borrowers (reducing adverse selection), monitoring borrowers (reducing moral hazard), diversifying risk (lending to many borrowers), and achieving economies of scale (reducing transaction costs per loan).
- Delegated monitoring: Banks act as “delegated monitors” for savers, who cannot monitor borrowers themselves.
Application to Small Scale Farmers
Financial Intermediation Theory explains (Diamond, 1984; Freixas and Rochet, 2019):
- Why commercial banks are reluctant to lend to small scale farmers: information asymmetry is severe; transaction costs are high (small loan sizes, remote rural locations); collateral is lacking.
- Why microfinance banks and cooperatives exist: they use group lending (peer monitoring) to reduce information asymmetry.
- Why government credit programmes (ACGS, ABP) are needed: government guarantees reduce bank risk, encouraging lending to agriculture.
2.2.3 Credit Rationing Theory
Credit Rationing Theory, developed by Stiglitz and Weiss (1981), explains why lenders may deny credit to borrowers even when borrowers are willing to pay higher interest rates (Stiglitz and Weiss, 1981).
Core Propositions (Stiglitz and Weiss, 1981):
- Imperfect information: Lenders cannot perfectly distinguish between low-risk and high-risk borrowers.
- Adverse selection: As interest rates rise, the pool of applicants becomes riskier (low-risk borrowers drop out, high-risk borrowers remain). The lender’s expected return may eventually decrease as interest rates increase.
- Moral hazard: Higher interest rates induce borrowers to take riskier actions to earn enough to repay (since they bear less than full cost of default).
- Credit rationing equilibrium: Instead of raising interest rates to clear the market (which would worsen adverse selection and moral hazard), lenders ration credit: they set interest rates below market-clearing levels and deny credit to some borrowers.
Types of Credit Rationing:
| Type | Description | Application to Small Scale Farmers |
| Type 1 | Some borrowers receive loans, identical others do not | Two farmers with same observable characteristics; one gets loan, one denied |
| Type 2 | Borrowers receive smaller loans than requested | Farmer applies for ₦100,000, bank approves ₦50,000 |
Application to Small Scale Farmers
Credit Rationing Theory predicts (Stiglitz and Weiss, 1981; Okafor and Nwosu, 2020):
- Why lenders require collateral: Collateral reduces adverse selection (only borrowers with assets can pledge) and reduces moral hazard (borrower has skin in the game). Lack of collateral leads to credit rationing.
- Why lenders prefer larger loans: The cost of screening and monitoring is fixed; larger loans spread this cost. Small loan applicants are more likely to be rationed.
- Why lenders are reluctant to lend to small scale farmers: Agriculture has high risk (production, price, climate) and high information asymmetry. Credit rationing is severe.
Integration of the Three Theories
The three theories are complementary and collectively provide a robust theoretical framework for this study:
| Theory | Focus | Contribution to Study |
| Agricultural Development Theory | Credit as critical input for transformation | Explains why credit increases productivity (input use, yield, income) |
| Financial Intermediation Theory | Role of banks in reducing information asymmetry | Explains why formal credit is limited (high information asymmetry, high transaction costs) and why government programmes are needed |
| Credit Rationing Theory | Why lenders deny credit despite high interest rates | Explains why small scale farmers are credit-constrained (lack of collateral, small loan sizes, high risk) |
Together, these theories support the study’s analysis of credit facilities to small scale farmers, recognizing that: (1) credit increases productivity (Agricultural Development); (2) formal credit is limited due to information asymmetry and transaction costs (Financial Intermediation); and (3) smallholders are credit-rationed due to lack of collateral, small loan sizes, and high risk (Credit Rationing).
2.3 Review of Related Empirical Studies
This section reviews empirical studies relevant to credit facilities for small scale farmers.
2.3.1 Studies on Credit Access and Sources (Nigeria)
Adebayo and Ogunyemi (2020) studied credit access for small scale farmers in Oyo State. Using a survey of 300 farmers, they found: formal credit access (12%), semi-formal (cooperatives) (18%), informal (70%). The most common informal sources were money lenders (45% of informal borrowers) and traders (30%). Interest rates: formal (25%), cooperatives (20%), money lenders (85%), traders (120%). The study recommended promoting cooperatives and microfinance banks.
Eze and Nweze (2019) studied credit sources for small scale farmers in Enugu State. Using a survey of 250 farmers, they found: formal credit access (10%), cooperatives (20%), informal (70%). Farmers who were members of cooperatives were 3.2 times more likely to access credit. The study recommended strengthening cooperatives.
2.3.2 Studies on Constraints to Credit Access (Nigeria)
Okafor and Nwosu (2020) studied constraints to credit access in Edo State. Using a survey of 350 farmers, they identified constraints: lack of collateral (85% of non-borrowers), high interest rates (78%), complex procedures (72%), no credit history (65%), small loan size requested (50%). Farmers who belonged to cooperatives were 3.5 times more likely to access credit. The study recommended promoting cooperatives and group lending.
2.3.3 Studies on Impact of Credit on Productivity (Nigeria)
Okafor and Ugwu (2021) studied the impact of credit on small scale farmer productivity in Anambra State. Using a survey of 400 farmers (200 credit users, 200 non-users), they compared outcomes. Credit users had: higher fertilizer use (120 kg/ha vs. 55 kg/ha), higher yields (maize: 3.8 tons/ha vs. 2.1 tons/ha; rice: 4.0 tons/ha vs. 2.3 tons/ha), and higher net income (₦420,000/ha vs. ₦180,000/ha). The study concluded that credit significantly increases productivity.
2.3.4 Studies on Government Credit Programmes (Nigeria)
Okonkwo (2020) evaluated the Anchor Borrowers’ Programme (ABP) in Abia State. Using a survey of 200 rice farmers (100 ABP beneficiaries, 100 non-beneficiaries), he found that ABP beneficiaries had: higher fertilizer use (+60%), higher yields (+50%), and higher net income (+55%). However, only 12% of rice farmers in the area had accessed ABP, with problems including late disbursement (40% of beneficiaries reported), insufficient loan amounts (35%), and bureaucratic selection (25%). The study recommended improving ABP implementation.
2.3.5 Summary of Empirical Findings
The empirical literature reveals consistent findings: (1) formal credit access is low (10-15%); (2) informal credit dominates (60-70%); (3) cooperatives improve credit access (3-4 times more likely); (4) constraints include lack of collateral, high interest rates, complex procedures, no credit history, small loan sizes; (5) credit users have higher input use (+50-100%), yields (+30-100%), and income (+40-100%); (6) government programmes (ABP) have positive impact but limited reach; (7) most studies are limited to single states. This study addresses these gaps by focusing on Bende LGA.
2.4 Summary of Literature Review
The table below summarizes key theoretical and empirical literature relevant to credit facilities for small scale farmers.
| Author(s) and Year | Focus of Study | Strength | Weakness | Limitation | Gap Identified |
| Schultz (1964) | Agricultural Development Theory | Credit as critical input for transformation | Pre-microfinance era | General theory | Application to small scale farmers needed |
| Diamond (1984); Freixas and Rochet (2019) | Financial Intermediation Theory | Explains bank role in reducing information asymmetry | Focuses on formal finance | General theory | Application to agricultural credit needed |
| Stiglitz and Weiss (1981) | Credit Rationing Theory | Explains why lenders deny credit | Assumes rational lenders | General theory | Application to agricultural credit needed |
| Adebayo and Ogunyemi (2020) | Credit access and sources (Oyo State) | Formal (12%), semi-formal (18%), informal (70%) | Single state | Geographic gap | Bende LGA study needed |
| Eze and Nweze (2019) | Credit sources (Enugu State) | Cooperatives increase access 3.2x | Single state | Geographic gap | Bende LGA study needed |
| Okafor and Nwosu (2020) | Constraints to credit (Edo State) | Lack of collateral (85%), high interest (78%) | Single state | Geographic gap | Bende LGA study needed |
| Okafor and Ugwu (2021) | Impact of credit on productivity (Anambra) | Credit users: higher yields (3.8 vs. 2.1 tons/ha) | Single state | Geographic gap | Bende LGA study needed |
| Okonkwo (2020) | ABP evaluation (Abia State) | ABP increases yields (+50%), but only 12% access | One programme | Programme gap | Multi-programme evaluation needed |
| CBN (2022) | Statistical bulletin | Official data | Not research; descriptive | No analysis | Analytical study needed |
| FMARD (2021) | Agricultural sector report | Official data | Not research; descriptive | No analysis | Analytical study needed |
| World Bank (2021) | Nigeria agricultural review | Overview | Not primary research; descriptive | No primary data | Primary research needed |
