Sustainability Of Financial Inclusion To Rural Dwellers In Nigeria:Problems And Way Forward

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SUSTAINABILITY OF FINANCIAL INCLUSION TO RURAL DWELLERS IN NIGERIA:PROBLEMS AND WAY FORWARD

ABSTRACT

 

In spite of the attempts made by some studies to explore Financial Inclusion and its effect  on  output of rural farmers in Nigeria, most of these studies did not apply the  widely accepted impact assessment methodologies and therefore, may be subject to serious problems due to sample selection bias. This problem inspired this study which seeks to find the demographic and socio-economic features of rural farmers in Nigeria  which  significantly determine their Financial Inclusion and the effect of credit access on the output of theses farmers, and a further attempt was made to check whether or not the poverty  and marital statuses of rural farmers who accessed credit caused a significant difference in their output using Instrumental Variable(IV) and Heckman Two-Step  Estimation  Techniques  to correct for endogeneity and sample selection biases. Both the first stage of IV and first step of Heckman approach revealed that value of land, household size and the highest level of education of rural farmers were, at 5% level, the significant  determinants  of  their Financial Inclusion. Both techniques agree that household size, acreage cultivated, age in years, years of experience, sex and total annual income of the small scale  farmers  were  the  variables that significantly influence their output at 5% level. However, they disagree on the effects of the highest level of education and marital status of these farmers on their outputs. While Heckman estimated them to have significant effect on rural farmers’ output, the generalized method of moments showed they are not significant, even at 10% level, at determining the output of theses farmers. They also agreed that credit access, which has a negative significant effect on output at only 10% level, does not significantly impact output of rural farmers at 5% level of significance. Again, among the rural farmers who accessed credit, there were significant differences in their outputs due to their poverty and marital statuses. This study suggests that government and  private  financial  institutions  should consider improving their (financial) services to rural farmers to boost their performance.

 

CHAPTER ONE INTRODUCTION

                   BACKGROUND TO THE STUDY

 

Agriculture is the mainstay of most developing nations’ economies. It accounts for about 70 percent of full-time employment, 33 percent of national income and about 40 percent  of African countries’ total  export earnings  (Otsuka,  Larson & Hazel,  2013). Agricultural sector is fundamental to the provision of food for human development and raw materials for  industries. In Nigeria, agriculture has great potential for growth. This  comes  from  the country’s abundant natural resources, particularly land, and the large yield gap that we can explore to increase food security and reduce poverty (AGRA, 2013). The proportion of rural poverty is the highest in Sub-Saharan Africa and it also has the greatest potential for smallholder agriculture-led poverty reduction (Christiaensen, Demery & Kuhl, 2011). Christiaensen et al. (2011), also found that a 1% increase in agricultural per capita Gross Domestic Product (GDP) reduced the poverty gap five times more than a 1% increase in GDP per capita in other sectors, mainly among the poorest people who, mainly, are rural farmers. Since agriculture employs a large number of people in  Nigeria,  increasing productivity is essential to eradicating extreme hunger, poverty reduction and ensuring food security (Chigbu, 2004). The Sub-Saharan Africa countries (Nigeria inclusive) invest, on average, only 5-7% of public expenditure in agriculture, compared to 8-10% in Asia (RESAKSS, 2010), whereas in the 2003 Maputo Declaration, African Heads of  State committed to increasing expenditures on agriculture to 10 percent of their national budgets (Diao, Thurlow, Benin & Fan, 2012).

However, small scale farming contributes to the national objective of  employment opportunities creation and income generation by providing a source of livelihood for the

 

majority of low-income households in Nigeria. Despite these significant roles played by the sector, the rural farmers have, over the years, experienced many constraints that have limited the achievement of their full potentials. The figure 1 below shows clearly, that the contribution of agriculture to the Gross Domestic Product has been less  than N400  Billion since 1981.

FIGURE 1: Contribution of Agriculture to Gross Domestic Product

Source: Author’s Plot Using Excel and Data From CBN Statistical Bulletin, 2014.

 

From the figure 2 on the next page, agricultural sector has always received the least from the commercial banks since 2008.

 

Figure 2: Distribution of Commercial Banks’ Loans and Advances To Some Sectors In Nigeria (In Billions of Naira)

Source: Author’s Plot Using Excel and Data From CBN Statistical Bulletin, 2014.

 

 

Also, Financial Inclusion index by farmers rose from 1% in 2010 to 13.3% in 2011 but  fell  to  3.1% in the third quarter of 2014, as shown in the figure 3 below.

FIGURE 3: Index of Credit Access Between 2009 Quarter 1 To 2014 Quarter 4.

Source: Author’s Plot Using Excel and Data From CBN Statistical Bulletin, 2014.

 

The microfinance banks loans and advances to the  sector (shown in figure 4  below) fell from its peak (9,704.9 million) in 2005 to (7,735.7 million) in 2014.

Figure 4: Micro Finance Banks Loans and Advances to Agric. Sector

These figures, however, are discouraging for the sector that sustains about 70 percent of our population (CBN, 2014).

The major challenge facing these farmers is lack of and limited Financial Inclusion as we saw in  the figures 2, 3 and 4 above. Credit is, no doubt, the important instruments that can enable small-scale farmers overcome their liquidity constraint, but lack of acceptable collateral and procedural bureaucracies of credit borrowing that also affects the timing of  the  credit  are some of the constraints the smallholder farmers face in accessing credit from the formal institutions. These problems have led  to majority of small scale  farmers  limiting themselves  to subsistence activities. Illiteracy also affects the  small scale  farmers’ access to  credit  and  the success of the agricultural development efforts in Nigeria. The farmers who have no basic education are denied credit access and this reduces their output by keeping  them  in  subsistence farming (Chigbu, 2004). This type of subsistence farming is characterized by low

 

output, income and savings, poor access to inputs, and very importantly,  lack of access  to credit financing (Diagne, 2002). In fact, lack of credit to  agricultural  sector  has  been identified as the major cause of high rate of exit from agricultural businesses and the poor performance of the sector (Okurut, Schoombee & Berg, 2004).

These constraints induced successive Nigerian governments to initiate policies and  programmes that would ensure adequate availability of cheap and accessible credit to small- scale farmers (Nwanze,2011). Some of these programmes introduced over the years include: The Agricultural Credit Guarantee Scheme Fund (ACGSF), established  in  April,  1978,  mainly to cushion the effect of lack of collateral of the rural farmers in Nigeria; The Rural Banking Scheme (RBS), which established about 300 branches in rural areas between 1980 and 1989; The Community Bank of Nigeria (1990); The  Family  Economic  Advancement Programme (FEAP), established in 1997; and recently, The  Nigerian Agricultural Cooperative and Rural Development Bank (NACRDB) renamed Bank of Agriculture (BoI) in October, 2000. A complete list of the policies  and  programmes established to improve agriculture, alongside their aims, achievements and reasons for their failures, are in chapter two (the policy context of this study).

Whether these programs and policies of the government have  succeeded  in  terms  of improving the rural farmers’ output significantly is one area researchers have not adequately investigated. This may be because increasing Financial Inclusion by small  scale  farmers has never formed a major goal of the policies and programs of the government and  even when it is listed as part of her development objectives, realities may prove otherwise. It may also be that most of the research works in this area did not use the acceptable research methodologies which account for sample selection bias and endogeneity. Interestingly, empirical evidences of the effect of credit use by smallholder farmers on their output can be

 

used as a reliable guide to design agricultural policy and program necessary to  achieve  efficient allocation of scarce resources among the sectors of the economy.

In the light of the above premise, this study seeks to ascertain the demographic and socio- economic features of the rural farmers which significantly determine their Financial Inclusion, if there is significant effect of credit access on the output of rural farmers who accessed credit, whether the poverty levels of small scale  farmers who  have credit  access  have significant effect on their output relative to non poor rural farmers who accessed credit and if marital status has any significant difference in the output of rural farmers who accessed credit, employing the proper econometric tools which correct for endogeneity  and sample selection bias.

                   STATEMENT OF THE PROBLEM

 

Notwithstanding that the agricultural sector employs nearly three-quarter  of  the  Nigerian  work force (Ugbaja & Ugwumba, 2013), it has been observed to be performing poorly. In Nigeria, however, agriculture is dominated by rural farmers (as can be seen in their small-scale farming activities) most of whom are rural-based, with  low level of education;  poor access to useful information and market and lack Financial Inclusion finance. Inaccessibility  of credit by these farmers hinders their acquisition of the required inputs to increase their output. Lack of these required inputs limit agricultural development by reducing farmers’ output, expected income, savings (needed for investment) and overall welfare of the  small  scale farmers in Nigeria(Daveze, 2000). Again, the enduring lack of credit access faced by these farmers have significant consequences for their household-level outcomes, as well as, technology adoption, agricultural productivity, food security, nutrition, health and overall welfare of the smallholder farmers’ households (Eyo, 2008). Increasing rural farmers’ output for self-sufficiency, no doubt, requires more use of inputs such as improved seedlings,

 

fertilizers, pesticides, land and labour and they all necessitate the use of credit (Odoemenem  and Obinne, 2010). However, rural farmers in Nigeria need tangible financial resources  to enable them cope with the increasing cost of inputs (Diagne, 2002). Therefore, credit is the main solution to the  low savings capacity of the rural farmers in Nigeria due to its role in enabling farmers take care of the expenses/investments associated with increase in their output. Thus, solving the problem of rural farmers’ Financial Inclusion is very important in improving their performance and, as a result, will lead to economic development through its role in agricultural development.

The little efforts to encourage the farmers by the  government,  however,  most times,  do not get to the grass root, and when they are channelled at the grass root, only the farmers with political affiliation or loyalty get them. Sometimes, these credits get to false farmers who use them for non agricultural activities, thereby making the effort of the government fruitless (Nwaeze, 2001).

In addition, credit institutions are often constrained from serving the rural farmers by lack of property rights (acceptable collateral), high cost of transaction (cost to the financial sector for giving the loans to these farmers), high risk and low returns from agricultural businesses (Chigbu, 2004). Also, the methods (for example, loan rationing) and practice (high interest rate charge) adopted by the financial institutions have not in any way attenuated the yearnings of these smallholder farmers. The timing of the loan, however, is an issue also as most of the loans granted were advanced to farmers later after they had finished their planting (Okunmadewa, 2003).

Furthermore, the research efforts in this area have not adequately  evaluated  the  effect  of credit access on the output of rural farmers who accessed credit. This prompts me to delve into ascertaining if the demographic and socio-economic features of the small scale

 

farmers significantly determine their Financial Inclusion, if there is significant effect of credit use on the output of rural farmers in Nigerian, whether the poverty levels of rural farmers who have credit access have significant impact on their output relative to their peers who are non poor and if the outputs of rural farmers who accessed credit significantly vary due to their marital status. To do this, this research work will attempt to answer the following research questions:

     RESEARCH QUESTIONS

 

  1. What are the demographic and socio-economic features of the rural farmers in Nigeria that significantly determine their Financial Inclusion?
  2. Has Financial Inclusion of the banking sector rural farmers in Nigeria any significant effect on their output?
  3. Does the poverty status of rural farmers who accessed credit have  any  significant effect on their output?
  4. Is there any significant difference, due to marital status, in the output of rural farmers who accessed credit?

     OBJECTIVES OF THE STUDY

 

The broad objectives of this study is to know the demographic and socio-economic characteristics of the rural farmers  that  significantly determine their  access  to  credit and to ascertain if credit access by small-scale farmers in  Nigeria  significantly  influenced their output, after correcting for endogeneity and selectivity bias. In particular, this research work will seek:

  1. To determine if demographic and socio-economic characteristics of rural farmers significantly influence their Financial Inclusion.

 

  1. To ascertain the effect of credit access on the output of rural farmers in Nigeria.
  2. To know if poverty status of rural farmers who used credit has  any  significant effect on their
  3. To estimate the difference in output, due to marital status, of rural farmers who accessed

     RESEARCH HYPOTHESES

 

HO1: The demographic and socio-economic status of rural farmers do not significantly determine their Financial Inclusion.

HO2: Credit access by small-scale farmers has no significant effect on their output.

 

HO3: The influence of credit use on output of rural farmers is the same irrespective of their poverty statuses.

HO4: The effect of credit access on output of rural farmers is the same for both the married and single rural farmers.

     SCOPE OF THE STUDY

 

This research will look at the demographic and social-economic features of  small  scale  farmers which determine their Financial Inclusion and the effect of their credit access on their output. It will consider the credit obtained from both formal and informal credit sources by rural farmers in Nigeria. The analyses will be on national level. Output will be used to measure performance of rural farmers in Nigeria. It will use data from the agricultural section of the Nigeria Living Standard Survey, 2009 and the Harmonized Nigeria Living Standard Survey, 2012, Version 1.0.

 

     SIGNIFICANCE OF THE STUDY

 

This research will be significant to the government, ministry of agriculture and policy makers

 

–as empirical revelations from the effect of credit access on the output of rural farmers can be used as a reliable guide in designing agricultural  policies and  programs  needed  to bring about efficient allocation of scarce resources among the sectors of the country. The research will also be relevant to farmers –to enable them know the areas they need improvement on and researchers (both students and non-students) to know the appropriate research methodologies to adopt when researching in this area.

 

SUSTAINABILITY OF FINANCIAL INCLUSION TO RURAL DWELLERS IN NIGERIA:PROBLEMS AND WAY FORWARD

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