This study examines risk management tools to mitigate agricultural financing risks. The study analyses risks that lenders face, tools for managing the risks and the correlation between agricultural lending and risk mitigation tools. The used data come from a sample of 55 employees from three selected banks, which is analysed using frequency tables and Chi-square. The findings show that banks face production risks in terms of variability in outputs due to drought and diseases. Tools for managing the risks include collateral, appraisal techniques, diversification of agricultural activities, group liability, guarantee/cash deposits, loan structuring and warehouse receipts. The Chi-square test finds a correlation between risk mitigation tools and agricultural lending; hence, mitigation tools enhance lending to the agricultural sector. Therefore, to manage agricultural risks, banks should deploy these tools optimally. Additionally, exposing farmers to free market practices will enable them to cover costs of their operations, and to repay the loans.

Key words: risk management practices, agricultural financing, mitigation tools

Agriculture has been the main stay of Nigerian economy before the Nigeria independence until the era of oil boom. Statistics show that in 1963/64 agriculture provided about 50% of the Gross National Product (GNP) and 88% of the country’s basic foreign exchange earner of crops like palm oil, palm kernels, cocoa, cotton, groundnut, cereal, woods as raw material for their industries.

Although after independence a gradual drift in cities in search of white-collar jobs began and this handicapped the agricultural sector, which lead to a serious decline in agricultural produce, compounding this problem is the oil euphoria, which added more impetus to population drift and neglect thereby leading to Nigeria’s loss of agricultural manpower. Nigeria quickly turned from a food exporting country with bill accounting for 18% in 1979 and more than 26% in 1983. Total import bill at this rate compared with 8.5% in 1971 was a sign of total collapse of the agricultural sector.

It is in realization of the importance of agriculture in overall economic growth and development of any nation that various Nigerian governments (military and civilian administration) decided to take a bold and realistic step to bring agriculture back to its position of prominence in the national economy. Government has played significant roles in Agriculture financing with several strategies towards risk management. Some of these role are:

1. SUBSIDIES: Aimed at encouraging farmers to produce more. The effect of subsidy reduces the cost of production for the producers since they will be required to pay less per unit of farm inputs (fertilizers seeds palm). Also the producers are able to purchase more of these subsidy inputs, which if used intensively as recommended will lead to increased product. The resultant effect would be fall in prices if demand does not increase more than proportionately.

2. AGRICULTURAL RESEARCH INSTITUTE: The establishment of the research institute to develop high yielding and the disease resistant seedlings and livestocks. Such research institutes are National Roots Research Institute, Ibadan and Livestock Research Institute Von etc.

3. FARM SETTLEMENT: This was established in early 60’s. It involves the government in the acquisition of land for agricultural production and marketing. By this means farmers were able to get parcels of land from the government without actually paying for the lands in order to enhance their agricultural products.

4. LAND USE DECREE OF 1978: In this year the government promulgated the Land Use Act which sought to vest ownership of land on government. The use of land for agricultural purpose was recognized under this act with a view to eliminating the customers impediment to mechanization.

5. STRATEGIC GRAIN RESERVE: The original target of the federal government was to build up to 250,000 tonnes strategic grain reserves capacity during the 1975 – 80 development plan period. But very unfortunately very little was achieved because of the light domestic market situation.

6. OPERATION FEED THE NATION (OFN): The take-off of operation feed the nation was aimed at boosting food production for the growing nation and to encourage everybody to be involved in farming irrespective of social status but unfortunately this could not live long due to change of government.

7. FINANCIAL INSTITUTION: Research finding has shown that agricultural finance is very important. Based on this the federal government established Nigerian Agricultural Co-operative Bank (NACB) in 1973 to help in managing and financing agricultural production. Commercial banks were also given credit calling by the federal government through the Central Bank of Nigeria (CBN) to contribute towards agricultural financing and also authorized to open up rural branches.

This decree of 1977 No. 20 was established with N100m which 60% of the subscription was made up of the federal government and 40% by Central Bank of Nigeria. This was meant to help farmers in their need necessary to boost agricultural produce and on the other hand to provide guarantee in respect of loans granted by commercial and merchant banks for agricultural purpose with the aim of increasing the level of bank credit to the agricultural sector. The liability to the guaranteed fund is 75% of the amount in default subject to a loan to an individual of N50,000 maximum and co-operative or limited liability company a maximum of N1 million.

Basically, all these programmed/scheme are:

- Aimed towards providing or marking available.

- Investment funds for and improvement of agriculture.

Unfortunately, for various reasons, these measures made only marginal impact on the flow of credit to farmers the main factors on which this death of credit to farmers in the risky nature of agricultural lending. The risks element in commercial and merchant bank lending to farmers is manifested not only in the compulsion to lend long terms and concessionary interest rates which contradict commercial banks lending policy of short terms, self liquidation credit at discretionary rates of interest negotiated by the parties to the loan contract. It is also shown in their fear of default by the borrowers as experience reports points to the existence of a high default rate in rate agricultural credit in Nigeria.

According to OLUMRINDE ONI, the lack of progress achieved in agricultural sectors is because of the risks associated with the agricultural sectors investments.

These risks result from factors such as natural risks (e.g. weather, pest, disasters etc) and social risk (theft, embezzlement, strike, ware change in social structures and technological change) economic risks (price fluctuation, loss or unexpected depreciation of investment change, in price of farm requisite) and personal risks. (e.g. death, old age, sickness, maternity, accidents, employees liability, inability to sell power). The effect of these factors make risk management in agricultural investment not just important but inevitable and indeed very urgent for the success of lenders and suppliers of agricultural finances, also the effect of middle men in the disposition of agricultural produce to the western country has contributed to the risk encountered in agricultural finance in the sense that most of these farmers at their end of the day do not get actual worth of their products because the middle men cut them short as they had to make their own gain from their negotiation of selling of these agricultural products. This necessitates the formation of the boards that amount to this but still they had little or no effect as themselves deviate from their scheme of work.

Upon all the efforts of the government to ease the availability and the use of agricultural credit as enumerated in the foreign section, the average farmer has continued to complain and grumble and his inability to obtain financial assistance in the farm of credit facility while the bank on the other hand have over the years sneered at the use of force to make them lend to farmers. The banks unwillingness to lend for agriculture purpose is the result of the belief that agriculture is considered a high risk and low yield venture for banks financing.

As it is well known, the development of agriculture and self-sufficiency in food production coupled with the provision of raw materials for the growing industries is among the top priorities of the present government in the country. Furthermore, every well meaningful Nigeria is concerned with the continuous escalation of our food input bill. It is really a very dangerous situation for a developing economy like ours to heavily rely on other countries for food supplies. There is need for all hands to be on deck to put through these ideas which can be used to formulate meaningful policies that will stimulate a positive take off of our agricultural sectors, and how the imminent risks could be managed to ensure an optimum realization of our agricultural sectors, it is such idea that this research aims to put across at the end.

Agricultural development is old and closely associated with the creation of mankind since food is one of the essentials of life. The researcher identifies the risk in agricultural financing and recommends some management strategies in the case of Nigerian agricultural development because its one of the factors of production, while management of the finance and risk is also among manor factors similarity management of agriculture by NACB as part and parcel of total financing input in agricultural develop.

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Item Type: Project Material  |  Size: 52 pages  |  Chapters: 1-5
Format: MS Word   Delivery: Within 30Mins.


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