Agricultural Finance – SS3 Horticulture and Crop Production Lesson Note (Second Term)

Agricultural finance is the study of how farmers get money (capital), how they spend it and how they pay it back.

Behavioural objectives

By the end of the lesson, students should be able to:

1. Define agricultural finance, capital, credit and interest.
2. Distinguish short-term, medium-term and long-term credit.
3. List informal and formal sources of agricultural credit.
4. State the challenges farmers face in getting loans.
5. Explain the 5 C’s of credit and how to manage a loan well.

Why does a farmer need money?

A farmer needs money, called capital, to buy inputs, pay workers and grow the farm.

• Capital: the money and assets used to start and run a farm business.
• Inputs: money buys seeds, fertiliser, agrochemicals and feed.
• Labour: money pays workers, for example during harvest.
• Equipment and structures: money buys a tractor or water pump and builds a greenhouse or store.
• Growth: without finance a farm stays small, but with finance it can expand into a large business.

What is agricultural credit?

Agricultural credit is a loan a farmer borrows to farm today and repays later, usually with extra money called interest.

• Credit: money borrowed now, with a promise to pay it back later.
• Interest: the extra money paid to the lender on top of the amount borrowed.
• Collateral: something the borrower owns, such as a house, which the lender can take if the loan is not repaid.

What are the types of agricultural credit based on time?

There are three types of credit based on time: short-term, medium-term and long-term.

Short-term credit

• Period: less than one year.
• Uses: buying seeds and fertiliser, and paying daily workers.

Medium-term credit

• Period: 1 to 5 years.
• Uses: buying livestock such as cows, or small machines such as a water pump.

Long-term credit

• Period: more than 5 years.
• Uses: buying land, building a permanent warehouse, or planting permanent crops such as cocoa and oil palm.

What are the sources of agricultural credit?

There are two groups of sources: informal sources, which are people you know, and formal sources, which are registered institutions.

What are the informal sources of credit?

Informal sources are easy to reach, but they give small amounts.

• Personal savings: money kept at home or in a bank account from your last harvest.
• Friends and family: loans from a brother or neighbour, often with no interest but only in small amounts.
• Moneylenders: village lenders who often charge very high interest and may be harsh if repayment is late.
• Rotating savings (Ajo or Esusu): members contribute money regularly and each member takes the whole pot in turn.

What are the formal sources of credit?

Formal sources lend larger amounts, but they are harder to get.

• Commercial banks: big banks such as First Bank or Zenith Bank, which have a lot of money but ask for a good business plan.
• Bank of Agriculture (BOA): a bank owned by the Nigerian government to help farmers, often with lower interest than other lenders.
• Microfinance banks: smaller banks that serve small businesses and farmers in local communities.
• Cooperatives: groups of farmers who pool their money and, as a group, can often get larger loans than one farmer alone.

What is the difference between informal and formal sources?

What challenges do farmers face in getting a loan?

Farmers face five main challenges in getting a loan.

1. Lack of collateral: most small farmers own no house or car that the bank can hold as security.
2. High interest rates: if the interest is very high, for example 25%, a farmer may work all year only to pay the bank.
3. Long distance: banks are in big towns while farms are in villages, so repeated trips to sign papers cost time and money.
4. Weather risks: a flood or drought can destroy crops, so banks fear that the loan will not be repaid.
5. Complicated paperwork: many farmers grow crops well but find bank forms long and difficult.

What are the 5 C’s of credit?

The 5 C’s of credit are the five things a bank checks before giving a loan: character, capacity, capital, collateral and conditions.

• Character: are you honest, and do you have a record of paying back what you owe?
• Capacity: do you know how to farm, and can you earn enough profit to repay?
• Capital: how much of your own money are you putting into the farm?
• Collateral: what can you offer as security against the loan?
• Conditions: what is the state of the economy and the weather?

How should a farmer manage a loan well?

A farmer manages a loan well by using it only for its planned purpose, repaying on time and keeping records.

• Do not divert the funds: money borrowed for fertiliser must not be spent on a television or a party.
• Pay back on time: prompt repayment makes the bank trust you with more money later.
• Keep records: as learnt in Farm Management, records show the bank that you run the farm as a business.
• Join a cooperative or use a microfinance bank: this helps farmers who cannot meet the collateral demands of big banks.

A loan is not a gift, so it must be used carefully to create more wealth.

Evaluation

1. Define credit and interest.
2. State the difference between short-term, medium-term and long-term credit, with one use for each.
3. List two informal and two formal sources of credit.
4. Explain three challenges farmers face in getting a loan.
5. Name the 5 C’s of credit.

Assignment

Describe three ways a farmer can manage a loan well, and give a reason for each.