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ACCESS TO CREDIT AND PERFORMANCE OF SMALL SCALE FARMERS IN NIGERIA

ABSTRACT
In spite of the attempts made by some studies to explore access to credit and its effect on
output of small scale 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 small scale farmers in Nigeria which
significantly determine their access to credit 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 small scale 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 small scale farmers were, at 5% level, the significant determinants of their
access to credit. 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 small scale 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
small scale farmers at 5% level of significance. Again, among the small scale 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 small scale farmers to boost their
performance.

CHAPTER ONE
INTRODUCTION
1.1 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 small scale
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
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majority of low-income households in Nigeria. Despite these significant roles played by the
sector, the small scale 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.
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
400.00
Output in Billions of Naira
Year
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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, access to credit 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.
-25
-20
-15
-10
-5
0
5
10
15
2009
2009
2010
2010
2011
2011
2012
2012
2013
2013
2014
2014
Credit Access Index(%)
Year
credit access index
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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
Source: Author’s Plot Using Excel and Data From CBN Statistical Bulletin, 2014.
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 access to credit 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

2,000.0
4,000.0
6,000.0
8,000.0
10,000.0
12,000.0
Loans and Advances in Millions of Naira
Years
Micro Finance Banks Loans and
Advances to Agric Sector in
Millions of Naira
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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 smallscale
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 small scale 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 small scale farmers’ output significantly is one area researchers have not
adequately investigated. This may be because increasing access to credit 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
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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 socioeconomic
features of the small scale farmers which significantly determine their access to
credit, if there is significant effect of credit access on the output of small scale 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 small scale farmers who accessed
credit and if marital status has any significant difference in the output of small scale farmers
who accessed credit, employing the proper econometric tools which correct for endogeneity
and sample selection bias.
1.2 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 small scale 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 access to credit 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 small scale farmers’
output for self-sufficiency, no doubt, requires more use of inputs such as improved seedlings,
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fertilizers, pesticides, land and labour and they all necessitate the use of credit (Odoemenem
and Obinne, 2010). However, small scale 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 small scale 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 small scale farmers’ access to credit 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 small scale 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 small scale farmers who accessed credit. This prompts me to
delve into ascertaining if the demographic and socio-economic features of the small scale
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farmers significantly determine their access to credit, if there is significant effect of credit use
on the output of small scale farmers in Nigerian, whether the poverty levels of small scale
farmers who have credit access have significant impact on their output relative to their peers
who are non poor and if the outputs of small scale 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:
1.3 RESEARCH QUESTIONS
1. What are the demographic and socio-economic features of the small scale farmers in
Nigeria that significantly determine their access to credit?
2. Has access to credit by small scale farmers in Nigeria any significant effect on their
output?
3. Does the poverty status of small scale 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 small scale
farmers who accessed credit?
1.4 OBJECTIVES OF THE STUDY
The broad objectives of this study is to know the demographic and socio-economic
characteristics of the small scale 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 small scale
farmers significantly influence their access to credit.
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2. To ascertain the effect of credit access on the output of small scale farmers in
Nigeria.
3. To know if poverty status of small scale farmers who used credit has any
significant effect on their output.
4. To estimate the difference in output, due to marital status, of small scale farmers
who accessed credit.
1.5 RESEARCH HYPOTHESES
HO1 : The demographic and socio-economic status of small scale farmers do not
significantly determine their access to credit.
HO2: Credit access by small-scale farmers has no significant effect on their output.
HO3: The influence of credit use on output of small scale farmers is the same irrespective
of their poverty statuses.
HO4: The effect of credit access on output of small scale farmers is the same for both the
married and single small scale farmers.
1.6 SCOPE OF THE STUDY
This research will look at the demographic and social-economic features of small scale
farmers which determine their access to credit and the effect of their credit access on their
output. It will consider the credit obtained from both formal and informal credit sources by
small scale farmers in Nigeria. The analyses will be on national level. Output will be used to
measure performance of small scale 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.
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1.7 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 small scale 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.

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