Agricultural finance is the act of acquiring and use of capital in agribusiness. It deals with the demand for and supply of funds in order to carry out various projects in the field of agriculture.
The main objective of financing is to increase other productive factors, stocks available to farmers, so as to expand production.
Meaning of Agricultural Credit
Agricultural credit refers to a refundable loan granted to a farmer to enable him to improve his farming activities. It can also be defined as a loan granted to a farmer by credit lending agencies for agricultural purposes.
Types of Farm Credit
There are three major classes of farm credit:
- Short-term credit: This is a productive credit which the borrower is expected to pay back within a year. It may be used to purchase items that can be easily used up with optimum output. Examples are improved seeds, fertilisers, chemicals, fuel, etc.
- Medium-term credit: This is the type of credit which the borrower is expected to pay back within a period of two to five years. It can be used to purchase items that can be turned around or used within the time frame and yield high profit. Examples: purchase a light-duty machine or a simple farm implement, breeding livestock, building housing units for livestock, erecting farm structures, etc.
- Long-term credit: This is a productive credit which is repayable within a period of five to twenty years. It attracts the highest amount of money compared to short and medium-term credit. It can be used to purchase costly fixed assets such as farm buildings, land, heavy-duty machines, etc.
Importance of Agricultural Credit
- It enables the farmer to acquire the necessary modern farm inputs to improve and increase their efficiency.
- It helps farmers to maintain a large land area.
- It enables farmers to acquire storage and processing facilities.
- It improves the standard of farmers.
- It helps farmers to take care of any prevailing conditions on the farm, such as pest and disease control.
- It helps the farmer to insure their farms against hazards surrounding farming.
AGRICULTURAL SUBSIDY
This is a non-refundable aid granted to farmers to enable and encourage them in their production.
It also refers to a discount given to farmers by agencies, usually government agencies, in the course of farmers purchasing agricultural inputs such as chemicals, fertilisers, and improved seeds.
SOURCES OF AGRICULTURAL FINANCING OR FARM CREDITS
- Agricultural banks: Example Nigerian Agricultural and Co-operative Bank (NACB), established solely to grant loans to potential farmers.
- Commercial Bank: Has departments that take care of loans given to farmers. Examples of such banks are United Bank of Africa (UBA), Union Bank PLC, Wema Bank PLC, etc
- Cooperative society: Members pool their resources together, and whoever is interested in getting loans can obtain them from the society.
- Credit and thrift society: Members contribute money, which they use to finance their farming business.
- Self-financing: Money saved by an individual to finance an agricultural business.
- Individuals: Money borrowed from friends, relatives, etc, to finance agricultural business.
- Moneylenders: People who lend money to farmers to enable them to produce. They charge a high interest rate.
- Government agencies and government: These are departments in government establishments or ministries responsible for granting credit to potential farmers.
- Non-governmental organisation: These are bodies set up by individuals or groups of people with the aim of rendering services or financial assistance to farmers.
Problems associated with farm credits
The reason why farmers find it difficult to procure loans from banks include the following:
- High interest rate: The percentage of interest charged on the principal sum by banks is usually high, and this discourages borrowing.
- Lack of collateral security. Most farmers do not have items of value that they can present as collateral to secure loans from financial institutions
- High level of loan defaulters. Farmers default in paying back the loan as due.
- Diversion of loan. Some farmers divert the loan to areas for which the loans are not originally meant.
- Lack of proper farm records and Accounts. Most farmers lack accurate farm records and accounts that can be used to assess their creditworthiness.
- Unpredictable climate, which can lead to crop failure. Due to various climate factors, farmers may invest so much in their farms and have very low yields.
- Lack of insurance policy. Most farmers do not insure their farms against unforeseen occurrences such as a fire outbreak.
- Long Gestation period of plantation crops.
EVALUATION
- What is agricultural finance?
- What is agricultural credit?
- State three types of farm credit.
- Outline the 5 significance of agricultural credit. What is of interest?
- Outline 5 reasons why farmers fail to procure loans from banks.
WEEKEND ASSIGNMENT
- Financial assistance from the government to the farmer is usually in the following forms except (a) loan, (b) credit, (c) tax (d) subsidy.
- The assistance given to a farmer by the government in the form of a reduction in price is an input, b, credit, c, loan, d, subsidy.
- The following are sources of agricultural credit except a) agricultural bank, b) cooperative society, c) commercial, d) mortgage bank.
- Short-term credit can be used to purchase the following, except a) improved seed, b) fertiliser, c) herbicides, d) a tractor.
- Investments with a long life span in agricultural economics are otherwise known as a) labour, b) capital, c) profit, d) savings deposit.
THEORY
- Explain the meaning of agricultural finance and agricultural credit
- Name six sources of agricultural credit available to small-scale farmers
- Mention six problems associated with agricultural credit, WASSCE 1990 question 10, 2014 question 10b
- Briefly explain each of the following types of credit in agricultural production
- Short-term credit
- Medium-term credit
- Long-term credit
- List four sources of agricultural credit
- Explain briefly four reasons why farmers find it difficult to obtain loans from banks (WASSCE 1997 question 9).
ONLINE ACTIVITY
- Briefly explain (a) Agricultural finance, (b) Agricultural credit
- Explain four important aspects of agricultural finance
- Mention one problem farmers encounter in obtaining credit from the following credit sources
- Commercial banks
- Community banks
Money lenders
- Family sources (WASSCE 2001 question 10).
- Explain the term farm credit
- List five sources of farm credit (WASSCE 2011 question 9a).
- Distinguish between the terms loan and subsidy as used in agricultural financing (WASSCE 2012 question 9a).
- A farmer borrowed 6kg of maize during the dry season at N150/kg. Six months later, he paid back with 8kg of maize at N125/kg. What will be the interest charged on the maize borrowed by the farmer? (NECO 2018 question 10a)
See also