EFFECT OF MICROFINANCE SERVICES ON PERFORMANCE OF SMALL HOLDER RICE FARMERS

EFFECT OF MICROFINANCE SERVICES ON PERFORMANCE OF SMALL HOLDER RICE FARMERS

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The performance of the agricultural sector in developing countries is important to fight food security and poverty reduction efforts since a large number of poor people live in rural areas and they depend on agriculture for their economic activities. They are also the source of food for the urban populace and the supplier of raw materials for industries. In developed countries; small agricultural producers are entrepreneurs, traders, investors, and manufacturers (Gashayie & Singh, 2015). In all these roles, small agricultural households constantly seek to use available financial instruments to improve their performance and secure the best possible investment choices. In many African countries including Nigeria, the agricultural sector is dominated by small holder farmers. They engage in subsistence agriculture and accounts for more than 90% of the nation‟s agricultural output; they cultivate less than 2 hectares of farm land (World Bank, 2008 in Kuye, 2015).

Rice is the most strategic food crop in West Africa because of its contribution to food security of the populations and its impact on the economy of households and countries (AkwaaSeck, 2013; FAO, 2011). Rice farming is predominately done by small holder farmers across Nigeria in small production quantity that usually lack financial capacity to produce in larger quantity. Indeed, studies have shown that financial services play a crucial role in agricultural production (Honlonkou, Acclassato, & Kokou, 2005; Simtowe, Diagne, & Zeller, 2009; Asfaw, Kassie, Simtowe, & Lipper 2012). However, Small holder farmers have continued to face inadequate access to financial services, and where these services are made available, they are often at very 1 2 high cost (Philip, Nkonya, Pender & Oni 2009; Okojie, Monye, Eghafona, Osaghae & Ehiakhamen 2010). According to Abebe (2005) the lack of financial resources tailored for small holder farming has limited their capacity to produce. This has led to high food import bills, lingering food insecurity, escalating social vices of insustainability of the national resource base (Mbah, 2001). According to Jirgi, Usman, Tanko and Ibrahim (2007), Nigeria government has initiated more encompassing credit and non-credit programs for small holder rice farmers. For instance, the Presidential Initiative on Increased Rice Production, the Nigerian National Rice Development Strategy. However, despite agricultural schemes introduced by the government in the country in a bid to boost rice production, this dream has remained elusive (Okoronkwo & Anozie 2007). Small holder rice farmers still lack proper financial and non financial facilities to increase their performance in terms of output in yield, farm profit, income, growth and standard of living. The inadequacy to meet the country‟s rice consumption demand has created a huge demand supply problem (Monitoring African Food and Agriculture Policy, 2013). The consumption of rice in Nigeria has grown rapidly over the past decade. According to Nkwazema (2016), Nigeria consumes 7 million metric tonnes of rice annually. More so, only 2.7 million metric tonnes is produced by farmers annually in Nigeria, which leaves a supply demand gap of 4.3 million metric tonnes to be cushioned by importing (Nkwazema 2016). Nigeria has a 49 percentage self sufficiency ratio (Monitoring African Food and Agriculture Policy, 2013). Rice is the most consumed staple food by Nigeria‟s over 174 million people across states and geo-political zones (Terungwa & Yuguda, 2014). At this rate per capita consumption rate of rice is 27 killogrammes per year at 460 dollars per metric tonnes. This has lead to increase in rice importation annually to fill demand gap which arose as the inability of rice farmers to meet 3 demand. Studies have shown that formal financial institutions located in rural areas for small farmers help increase agricultural production (Myer, 2007; Ayegba & Ikani, 2013).

Providing cheap financial service to poor small holder farmers through microfinance institutions (MFIs) has been considered as a tool for improving the performance of small holder farmers. MFIs provide small amount of financial capital to certain target groups with a loose condition (Bhatt & Tang 2002). MFIs also provide various complementary programs, including training and guidance, entrepreneurship and self-motivation for the development of the target cooperative groups through economic activity (McKernan, 2002). There is a renewed interest, from MFIs in cooperative producer organizations as an institutional vehicle to improve small holder agricultural performance (Bernard & Spielman, 2009; Fischer & Qaim, 2012a; 2012b).Cooperative producer are beneficial to small holder farmers by reducing transaction costs in input and output markets and improving bargaining power vis-à-vis buyers (Markelova, Meinzen-Dick, Hellin, Dohrn 2009; Bernard & Taffesse, 2012). When small holder farmers organize themselves in cooperatives, they gain group access to microcredit and other financial services and engage them in entrepreneurial activities. Microcredit as a financial service may enable small marginal farmers purchase inputs like fertilizers, pesticides, tractors among others they need to improve their performance as well as financing a range of activities adding value to agricultural products (Menon, Noonari, Sharh, Peerzado, Panhwar, Sethar, Kalwar, Bhatti & Jamro 2015). Microcredit availability encourages diversified agriculture which stabilizes and increases size of farm operations and resource productivity (Odiase 2004). 4 Access to savings facilities also plays a key part in allowing small farmers smoothen their consumption expenditures and in financing investments which improves their performance. Small holder farmers usually depend on seasonal rainfall for plantations. The vagaries of weather sometimes make them loose their crops before harvesting. Microsavings usually serve as insurance cover for small farmers as they could plough back their savings into their farm in case of natural disasters. Entrepreneurial Skills means knowledge in practice. It refers to the practical application of knowledge in performing function. It offers opportunity to learn basic skills related to earning, spending, budgeting, saving, risk taking, innovativeness and borrowing (Cohen & Sebstad, 2003).

1.2 Statement of the Problem

Agriculture plays a cardinal role in Nigeria’s economy contributing the greatest share to the nation’s gross domestic product (GDP). For instance, 2016 agriculture’s contribution to total real GDP was 42.07 percent with crop, livestock, forestry and fishery accounting for 37.52, 2.65, 5 1.37 and 0.53 percent respectively (National Bureau of Statistics, 2016). This implies that the crop sub-sector contributed 83.67 percent of agriculture GDP. Further, agriculture generates employment for over 70 percent of the total labour force, accounts for about 60 percent of the non-oil exports and, perhaps most important, provides over 80 percent of the food needs of the country (Adegboye, 2004; Onwuemenyi, 2008; CBN, 2015). Despite these indicators, rice production in recent times remains inadequate and indeed far less than its demand. Rice demand exceeds the supply thus leading to large importation of rice, which further erodes the economies foreign exchange. According to Federal Ministry of Agriculture and Rural Development, Nigeria spends 365 billion naira on rice importation annually (FMARD 2014). Emefiele in Adekunle (2015) reiterated that Nigeria spent 2.4 billion dollars on rice importation in 3 years from 2012 to 2015 Nigeria is importing what it can produce in abundance and import dependency is impoverishing Nigerian rice farmers, displacing local production and creating rising unemployment (Emefiele in Adekunle, 2015).

Import dependency is neither acceptable, nor sustainable fiscally, economically or politically. It is however worrisome that with large arable land and determined small holder rice farmers Nigeria small holder farmers are still performing poorly at subsistence level. The limited capacity of the Nigerian small holder rice farmers to match the domestic demand raises a number of pertinent questions both in the policy circle and amongst researchers. For instance, what factors explain why domestic rice production lags behind the demand for the commodity in Nigeria? To bridge the demand-supply gap, effort has to be channeled towards increasing farmer‟s performance. Theoretically, increasing farmer‟s performance requires either increased input use especially land expansion, improvement in resource use efficiency and or 6 technological change derived from use of new technologies (Andrew & Aye 2014). Given the constant population pressure and other social and economic constraints in Nigeria, farm land expansion as a source of increased performance has little application (Onoja, Ibrahim, and Achike 2009). Hence, the country is left with the option of improving performance of farmers by improving on their condition through financial services. Microfinance services aim to help the poor generate income and are very popular which has become the favorite intervention for development in rural areas. In line with this development, Federal Government of Nigeria in 2005 gave licenses for the establishment of several micro finance institutions that offer micro-credit, micro saving and other financial and non financial services to the rural farmers, entrepreneurs, artisans (CBN 2005).

However, Ibrahim and Bauer (2013), argued that despite agricultural credit schemes and licensing micro finance institutions by the government in the country in a bid to boost agricultural performance in rural areas, this dream has remained elusive. Studies such as Myer, (2007); Adams (2010) identified lack of microfinance services as a cause of low performance by rural farmers. While rice production has being an area of policy and research debate, studies on performance of farmers have focused more on larger farmers leaving small holder farmers (Ihegboro 2014; Ayola & Oboh, 2014). Attention has been on how larger farmers can increase production output. However, studies and reports like fair-trade, 2013; IFAD and UNEP 2013; Akinsuyi 2011 have shown that small holder farmers hold the largest production propensity than the large scale farmers. Although microfinance services were generally assumed to have positive relationship with farmer‟s performance, some evidence showed that this is not true. Studies aimed at establishing 7 the direction of relationship between microfinance and performance of farmers reported conflicting results. While Nosiru (2010); Tanko, Ajani and Adeniji (2012); Girabi and Mwakaje (2013); Nzomo and Muturi (2014) reported positive relationship, in contrast, Hulme and Mosley (1996); Diagne & Zeller (2001); Karnani (2007) showed that microfinance services have negative impact on farmers performance.

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