Agricultural Financing – SS3 Agricultural Science Lesson Note (First Term)

Agricultural finance is the sourcing and management of the funds used in agricultural business.

Behavioural objectives

1. Define agricultural finance and the key terms used with it.
2. State the importance of agricultural finance.
3. Describe the sources of agricultural finance.
4. Classify agricultural credit by length of repayment.
5. State the problems of agricultural financing.
6. Suggest ways of solving the problems of agricultural financing.

What is agricultural finance?

Agricultural finance is the study of how funds for farming are supplied and demanded for production, processing and marketing.

• Supply of funds: money made available to farmers by banks, government, societies and individuals.
• Demand for funds: the money farmers need for production, processing and marketing.
• Production: growing crops and rearing animals, which needs seeds, feed, labour and land.
• Processing: turning farm produce into other forms, such as cassava into garri.
• Marketing: moving and selling farm produce, which needs transport, storage and packaging.

What are the key terms used in agricultural finance?

Five key terms are credit, loan, interest, security and thrift.

• Credit: money or goods obtained now with a promise to pay later.
• Loan: money borrowed and paid back, usually with interest.
• Interest: the extra amount the borrower pays for using the lender’s money.
• Security (collateral): property a borrower pledges to the lender, to be lost if the loan is not repaid.
• Thrift: the habit of saving money regularly.

Why is agricultural finance important?

Agricultural finance gives farmers the money to buy inputs, pay workers and grow their farms.

1. It enables farmers to adjust to changing economic conditions.
2. It increases efficiency.
3. It encourages farmers to take up new farming innovations.
4. It ensures the timeliness of farm operations.
5. It helps farmers buy inputs such as seeds, fertilizers, agrochemicals and feed.
6. It helps farmers pay for labour and buy tools and machinery.
7. It allows farmers to expand the size of the farm.
8. It supports processing, storage and marketing of produce.

What are the sources of agricultural finance?

There are three groups of sources of agricultural finance: institutional, group, and personal and informal.

Institutional sources

• Agricultural bank: a bank set up to lend to farmers. The Nigerian Agricultural and Cooperative Bank (N.A.C.B) began in 1973 as the Nigerian Agricultural Bank. Only farmers can borrow from it, so it is called the “Farmers’ Bank”.
• Commercial banks: major sources of lending to agriculture. Banks like First Bank, U.B.A and Union Bank have agricultural departments where farmers can get loans for their farming activities.
• Supervised Agricultural Credit Scheme: a scheme set up to grant loans to farmers. It is supervised by the Central Bank of Nigeria (C.B.N).
• Government agencies: farmers can get loans from certain agencies, such as the National Directorate of Employment (N.D.E) and Agricultural Development Projects (A.D.P).

Group sources

• Cooperative societies: groups of people who pool their money to produce. Members can easily get loans from the society.
• Why banks prefer cooperatives: commercial banks prefer to lend to cooperative societies rather than to individual farmers.
• Thrift and savings societies: members contribute money daily, weekly or monthly. At the end of an agreed period, the money is paid back to the members, who can use it for farming.

Personal and informal sources

• Money lenders: people who lend their money to farmers to enable them to produce. They charge high interest rates and demand security for the loans.
• Self-finance: money saved by an individual, which is used to finance their own farming activities.
• Individuals: farmers can borrow from friends and relatives to finance a project.

Summary of sources

How is agricultural credit classified?

There are three types of agricultural credit by length of repayment: short-term, medium-term and long-term.

• Short-term credit: repaid within one year or less, for seeds, feed, fertilizer and labour.
• Medium-term credit: repaid over more than one year, for equipment, machinery and small farm buildings.
• Long-term credit: repaid over many years, for buying land, building large structures and starting plantations.

What are the problems of agricultural financing?

The problems of agricultural financing are the factors that stop farmers from getting or repaying loans.

• Lack of security: many small farmers have no property to offer as collateral.
• High interest rates: money lenders especially charge rates that farmers struggle to pay.
• Delay in loan approval: money may arrive after the planting season.
• Risk in farming: pests, disease, drought and flood can cause losses, so lenders hesitate.
• Diversion of loans: some farmers spend farm loans on non-farm needs and cannot repay.
• Small, scattered farms: lenders see them as costly to supervise.
• Poor record keeping: farmers cannot show lenders their income and expenses.

How can the problems of agricultural financing be reduced?

The problems can be reduced by matching each problem with a practical remedy.

Evaluation

1. Define agricultural finance.
2. State four reasons why agricultural finance is important.
3. Describe any four sources of agricultural finance.
4. Why do commercial banks prefer to lend to cooperative societies?
5. Name the three types of agricultural credit and give one use of each.

Assignment

List any five sources of agricultural finance and state one feature of each.