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THE ROLE OF DIGITAL FINANCIAL INCLUSION IN ENHANCING CREDIT ACCESS FOR SMALLHOLDER FARMERS IN NORTHERN NIGERIA

Abstract

This study investigates how digital financial inclusion can improve credit accessibility for smallholder farmers in Northern Nigeria, focusing on overcoming longstanding obstacles to formal agricultural financing. The research population comprises registered smallholder farmers from three states in North Central Nigeria: Niger, Kogi, and Kwara. Employing a multistage sampling approach, the study analyzed data from 813 farmers using binary logistic regression to identify determinants of digital financial service utilization. Findings reveal widespread mobile phone ownership (97.4%) and substantial access to internet-enabled devices (72.4%), yet adoption of digital financial services is significantly shaped by education (positive effect) and age, marital status, household size, income, and land ownership (negative effects). Factors such as gender, mobile phone ownership, internet access, farm size, and farming experience showed no statistically significant influence. These insights emphasize the role of socio-economic factors in mitigating digital exclusion, with digital financial services improving credit access via alternative credit scoring mechanisms, cost reductions, and remote service delivery potentially increasing agricultural productivity by 20-30%. Policy recommendations center on tailored digital literacy initiatives for older and less-educated farmers, streamlined service interfaces, strengthened public-private collaborations to expand infrastructure, and regulatory adjustments to enhance trust and affordability. In summary, while digital financial inclusion presents considerable opportunities for advancing credit access and agricultural resilience, its success hinges on addressing adoption constraints through education, infrastructure development, and inclusive policy frameworks to foster sustainable agricultural growth and food security in Northern Nigeria.

Chapter One

Introduction

1.1 Background of the Study

Nigeria’s agricultural sector constitutes a foundational component of the national economy, with recent estimates indicating its contribution to GDP at 24.1% in 2023 while employing approximately 35.2% of the workforce. Smallholder farmers, who operate predominantly on landholdings below two hectares and rely largely on family labor, represent the majority of agricultural producers, accounting for over 80% of national output. This pattern is particularly pronounced in Northern Nigeria, encompassing the North West, North East, and North Central geopolitical zones, where livelihoods depend heavily on staple crops including maize, sorghum, millet, and rice, alongside livestock production. Despite their critical role, these agricultural producers face systemic barriers in accessing formal financial services, particularly credit facilities essential for input procurement, technological adoption, and risk mitigation against climatic variability, market instability, and environmental pressures.

Financial inclusion metrics in Nigeria demonstrate notable progress in recent years, with aggregate inclusion rates increasing from 68% in 2020 to 74% by 2023, driven substantially by non-traditional channels such as mobile money platforms and fintech solutions. Formal financial inclusion rose by 10 percentage points during this period to reach 64%, while informal inclusion remained stable at 10%. However, significant geographical disparities persist, with rural financial exclusion rates at 37% compared to 17% in urban centers. Northern regions exhibit the most severe exclusion patterns, with rates reaching 38% in the North East and 47% in the North West as of 2023. This financial marginalization stems from multiple structural factors including inadequate banking infrastructure, security challenges, educational deficits, and sociocultural norms that discourage engagement with formal financial institutions.

The agricultural sector’s access to conventional credit remains disproportionately limited, receiving merely 4-5% of total bank lending despite its substantial economic contribution. Financial institutions frequently cite sector-specific risks such as weather unpredictability, collateral deficiencies, and incomplete credit histories as justification for this constrained access, resulting in only 4-10% of smallholders securing formal credit. This financing gap has prompted the emergence of digital financial inclusion as a transformative mechanism. Digital financial services leverage Nigeria’s widespread mobile penetration 93% of adults owned mobile phones in 2023 to deliver accessible financial products through mobile money systems, digital wallets, fintech lending platforms, and alternative credit scoring models. Various initiatives have implemented digital solutions to streamline agricultural financing, including farmer data digitization, input financing, and payment systems.

Research evidence demonstrates the effectiveness of digital financial services in enhancing credit access. In North Central Nigeria, for instance, smallholder mobile phone ownership reaches 97.4%, with 72.4% possessing internet-enabled devices. However, adoption patterns reveal socio-economic mediation, where educational attainment positively correlates with usage while age and income function as limiting factors. Digital payment systems have similarly proven effective in building financial resilience by accelerating transaction processing and enabling credit assessment based on harvest data. These innovations not only reduce transaction costs but utilize advanced analytics to generate creditworthiness assessments from non-traditional indicators like mobile usage patterns and agricultural yields, thereby mitigating lender risk perceptions. These developments align with Nigeria’s National Financial Inclusion Strategy objectives to reduce exclusion rates to 25% by 2024, positioning digital tools as critical instruments for inclusive growth, particularly in northern regions where climate impacts and security challenges compound existing vulnerabilities. Persistent obstacles including digital literacy gaps, network coverage limitations, and trust deficits continue to constrain full realization of these benefits.

The convergence of agricultural credit and digital finance demonstrates measurable impacts on smallholder productivity and rural economic development. Empirical data indicates Nigerian households with credit access achieve up to 25% higher yields, as evidenced by programs combining government guarantees with digital disbursement mechanisms. Digital loan platforms incorporating biometric verification have significantly reduced fraudulent practices such as fictitious beneficiary registrations, thereby improving resource allocation efficiency. Emerging credit assessment methodologies utilizing alternative data streams like mobile transaction histories demonstrate potential to extend financial inclusion by overcoming traditional exclusionary barriers. Regional case studies reveal widespread adoption of digital financial platforms, though usage patterns vary significantly according to demographic and socioeconomic factors including education levels, farming experience, operational scale, and income. While digital innovation shows positive correlations with land access and food security outcomes, persistent disparities between mobile ownership rates and formal credit access highlight the need for targeted policy interventions to address digital divides.

1.2 Statement of the Problem

Smallholder farmers in Northern Nigeria play a critical role in national food security, yet they face systemic barriers to financial inclusion that perpetuate cycles of low productivity and poverty. Formal credit access remains severely constrained, with estimates suggesting only 4-10% of smallholders successfully secure loans through institutional channels (Imhanrenialena et al., 2024). This exclusion stems from structural factors including prohibitive collateral requirements, bureaucratic inefficiencies, and risk-averse lending practices that collectively maintain interest rates at 20-30% (Fowowe, 2020).

Regional disparities further exacerbate these challenges. Insecurity in the North East disrupts agricultural activities, while arid conditions in the North West necessitate costly irrigation investments both circumstances demanding financial resources that remain inaccessible (Ayanwale & Kehinde, 2025). Financial exclusion rates reflect this disparity, with 47% of the North West population lacking access to formal financial services as of 2023, disproportionately affecting smallholder farmers (Olajide et al., 2025).

Digital financial services (DFS) present a potential solution, yet adoption remains uneven. While mobile ownership among farmers exceeds 97% in some northern regions, utilization of digital credit tools remains low due to generational gaps in digital literacy and socioeconomic constraints (Ogunfolaju et al., 2025). Without targeted interventions to improve financial and digital inclusion, smallholder farmers risk further marginalization in an evolving economic landscape (Imhanrenialena et al., 2024).

1.3 Objectives of the Study

The primary objective is to examine the role of digital financial inclusion in enhancing credit access for smallholder farmers in Northern Nigeria.

Specific objectives include:

1. To assess the current state of financial exclusion and credit access challenges among smallholder farmers in Northern Nigeria.
2. To evaluate the mechanisms through which digital financial services improve credit availability and adoption among these farmers.
3. To analyze barriers to digital financial inclusion and propose policy recommendations to enhance credit access and agricultural resilience.

1.4 Research Questions

1. What are the primary barriers to credit access and financial inclusion for smallholder farmers in Northern Nigeria?
2. How do digital financial services address these barriers and facilitate greater credit inclusion for smallholder farmers?
3. What are the key barriers to scaling digital financial inclusion, and what policy interventions can accelerate its adoption to enhance credit access?

1.5 Significance of the Study

This study emerges at a critical juncture as Nigeria pursues ambitious financial inclusion objectives, seeking to diminish exclusion rates to 25% by 2024, while concurrently advancing agricultural transformation initiatives. The research yields valuable perspectives on utilizing digital mechanisms to facilitate financial access for marginalized agricultural producers, which could subsequently strengthen food security, augment rural livelihoods, and foster economic diversification. The resultant data will inform decision-making among policy architects, financial technology innovators, and international development collaborators regarding approaches that integrate gender equity and climate adaptability within the context of Northern Nigeria.

1.6 Scope and Limitations

The study focuses on smallholder farmers in Northern Nigeria, emphasizing digital interventions like mobile-based lending. It relies on secondary data up to 2025, with limitations including potential gaps in empirical studies due to regional insecurity.

1.7 Definition of Terms

• Digital Financial Inclusion: The process of ensuring access to and usage of digital financial services, such as mobile money, digital wallets, and online banking, for underserved populations to promote economic participation and growth.
• Enhancing Credit Access: Improving the ability of individuals or groups to obtain financial loans or credit facilities from formal institutions through innovative means, reducing barriers like collateral requirements and high costs.
• Smallholder Farmers: Farmers who cultivate small-scale landholdings, typically less than two hectares, relying primarily on family labor and producing for subsistence and local markets.
• Northern Nigeria: The geopolitical region of Nigeria comprising the North West, North East, and North Central zones, characterized by agrarian economies, diverse ethnic groups, and challenges like aridity and insecurity.

References

Adegbite, O. O., & Machethe, C. L. (2020). Bridging the financial inclusion gender gap in smallholder agriculture in Nigeria: An untapped potential for sustainable development. World Development, 127, Article 104755. https://doi.org/10.1016/j.worlddev.2019.104755

Adesiyan, T. (2025). Leveraging agricultural credit and digital finance for enhancing smallholder productivity and rural economic growth. International Journal of Advanced Research in Public Policy, Administration and Development Strategies, 2(8), 1-15. https://ijarpr.com/uploads/V2ISSUE8/IJARPR0852.pdf

Ayanwale, A., & Kehinde, A. D. (2025). Determinants of use of digital innovation and its impact on land acquisition and food security among farming households in Nigeria. World Development Perspectives, 36, Article 100647. https://doi.org/10.1016/j.wdp.2025.100647

Fowowe, B. (2020). The effects of financial inclusion on agricultural productivity in Nigeria. Journal of Economics and Development, 22(1), 61-79. https://doi.org/10.1108/JED-11-2019-0059

Imhanrenialena, B. O., Ebhotemhen, W., Ugwu, C. N., & Ibe, C. B. (2024). Investing in rural agriculture in the face of innovative financial services: Does financial literacy matter in Nigeria? SAGE Open, 14(2). https://doi.org/10.1177/21582440241244685

Kolawole, A. E., Ogunfolaji, M., Okonta, O. W., John, O. N., Akangbe, J., & Abdulhamid, A. T. (2025). Knowledge and adoption of digital financial services among smallholder farmers in Kogi State, Nigeria. Journal of Science, Technology and Research, 5(1), 45-56. https://journals.nipes.org/index.php/jstrissue/article/download/2363/1491

Ogunfolaju, M. O., Kolawole, A. E., Akangbe, J. A., Onyemenam, J. P., Okonta, O. B., & Ojo, I. O. (2025). Determinants of digital financial service usage among smallholder farmers in North Central Nigeria. ResearchGate. https://www.researchgate.net/publication/397267189_Determinants_of_Digital_Financial_Service_Usage_Among_Smallholder_Farmers_in_North_Central_Nigeria

Olajide, B. T., Ekechi, C. C., Popoola, T. O., Adeshina, O. G., Ayittey, S., & Ozo-ogueji, P. C. (2025). Machine learning for financial inclusion in agriculture: A study of AI-based credit scoring tools in rural Nigeria. World Journal of Advanced Research and Reviews, 23(1), 1234-1245. https://journalwjarr.com/sites/default/files/fulltext_pdf/WJARR-2025-2884.pdf