Topic Description

CHAPTER ONE
INTRODUCTION
1.1 Background Information
With an estimated 140 million inhabitants and a population growth rate of 2.5% annually,
Nigeria is the most populated country in sub-Saharan Africa and the 10th most populated
country in the World (National Population Commission [NPC], 2006). Approximately, 49
percent of the population engages in agriculture as their major occupation. The agricultural
sector is the mainstay of the majority of Nigerian rural poor, with over 70 percent of the active
labour force in rural areas employed in agriculture and the sector contributing over 23 percent of
the GDP in 2006 (World Bank, 2007).
Agricultural credit plays a critical role in agricultural development (Duong & Izumida,
2002). Farm credit has for long been identified as a major input in the development of the
agricultural sector in Nigeria. The decline in the contribution of the sector to the Nigeria
economy has been attributed to the lack of a formal national credit policy and paucity of credit
institutions. The provision of credit or loanable fund (capital) is viewed as more than just another
resource such as labour, land, equipment and raw materials (Rahji, 2010). It determines access to
all of the other resources which farmers require (Shephard, 1979). Agricultural practice requires
money for the purchase of various factors of production including land. There are two main
sources of agricultural financing; formal and informal sources. According to Nchouji (2007), the
formal sources are organized and guided by law with effort on the part of the government,
examples are Bank of Agriculture (BOA), commercial banks, supervised agricultural credit,
cooperative societies and government agencies. Informal sources include friends, relatives,
money leaders, saving societies and traditional groups. These sources are meant to facilitate and
increase agricultural production. Though farmers may patronize these sources, but the
implication involved is the provision of collaterals and other necessary requirement before

obtaining those credit facilities. Oladeebo (2003), reported that years of farming experience with
credit use and level of education were the major factors that positively and significantly
influenced the amount of loan obtained by farmers.
Agricultural credit access has particular salience in the context of agricultural and rural
development in Nigeria. Some 70% approximately of the population live in the rural areas with
their main source of livelihood being agriculture. Recent studies showed that the growth rate of
investment in the agricultural sector is less than that of the other economic sector. Therefore,
financing agriculture is one of the most important factors to develop rural areas in developing
countries (Kohansal and Mansoori, 2009). Credit accessibility is important for improvement of
quality and quantity of farm products, so that it can increase farmer’s income and reduce rural
migration. Credit constraints to farm households thus impose high cost on the society. This is in
terms of rural unemployment, rural poverty, and distortion of production and liquidation of
assets. Governments in both developed and developing countries attempt to overcome these
problems by subsidizing credit, setting up Agricultural Credit Guarantee Fund Schemes (e.g.
ACGFS in Nigeria, 1977) and specialized Agricultural Credit Bank (e. g NACB, 1973 now
BOA, 2010) and stimulating institutional innovations in the financial system (e.g. People’s Bank,
Community Bank, Rural Banking Schemes, etc) (Rahji, 2010).
The Nigerian agricultural sector is among the most heavily regulated sector of the
Nigerian economy. The special interest of government in the agricultural sector is due to its
relevance in the provision of raw materials for industries and most importantly the provision of
food for the teaming Nigerian population and also serving as a source of foreign exchange for
the economy (Adofu, Abula & Audu, 2010). The Nigerian agricultural sector is not alone in
government intervention in terms of regulation, Akiri and Adofu (2007), opined that the banking
industry owing to the nature of the activities and