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1. CHAPTER ONE: INTRODUCTION
1.1 BACKGROUND OF STUDY
1.2 PROBLEM STATEMENT
1.3 OBJECTIVE OF STUDY
1.4 JUSTIFICATION OF THE STUDY
1.5 ORGANISATION OF STUDY
2. CHAPTER TWO: LITERATURE REVIEW
2.1 THEORITICAL FRAMEWORK AND EMPERICAL REVIEW
2.2 DETERMINANTS OF THE DEMAND AND PARTICIPATION IN CREDIT MARKET BY SMALL HOLDER
2.3 CREDIT ACCESS AND PRODUCTIVITY OF ENTERPRISE
2.4 LINKAGE BETWEEN CREDIT AND PRODUCTVITY
2.5 CREDIT SUPPLY AND RATIONING
2.6 STRUCTURE OF THE NIGERIA FINANCIAL SECTOR
2.7 FORMAL AND INFORMAL CREDIT MARKET IN NIGERIA
2.7.1 Characteristics of Formal and Informal Credit Market
2.8 Types of financial institutions serving small and micro- enterprise in south- southern Nigeria
2.9 THE DEVELOPMET OF SMALL AND MICRO-ENTERPRISE IN NIGERIA
2.9.1 Definition of small and micro enterprise
2.9.2 Importance of small and micro enterprise in economic growth and development
3. CHAPTER THREE
3.1 Area of study
3.2 Sampling Technique
3.3 Source of data
3.4 Method of Data Analysis and Model Specification: Data were analysed using descriptive statistics viz; requencies, means, standard deviation, and percentages especially with respect to socio-economic and enterprise characteristics
4. CHAPTER FOUR
4.1 RESULTS AND DISCUSSIONS
4.2 SOCIO-ECONOMIC CHARACTERISTICS OF RESPONDENTS
4.2.1 Gender of the Respondents
4.2.2 Age of the respondent
4.2.3 Educational Status of respondents
4.2.4 Marital Status
4.2.5 Household Size, Assets and, Expenditure
4.2.6 Other Sources of Income
4.2.7 Years of experience
4.3 ENTERPRISE CHARACTERISTICS
4.3.1 Housing type and Farm capacity
4.3.2 Distance to institution
4.3.2 Training and Training Type
4.5 OUTPUT OF ENTERPRISE
4.5.1 Output of Enterprise
4.5.2 Factors Affecting the Demand and participation by farmers in the credit market
4.6 Impact of Credit on the Productivity and Efficiency of Poultry Entrepreneurs
5. CHAPTER FIVE
5.1 SUMMARY, CONCLUSION AND RECOMMENDATION
Credit is an input used in production as well as a facilitator of the efficiency of other production input. The realization of this, have necessitated government efforts at providing credit facilities through financial intermediaries like commercial banks to ensure access to credit by farm and non-farm small holder.
An economy whose credit market is characterized by segmentation and with borrowers’ inability to keep to loan terms and agreement may lead to credit rationing. Again, access to financial services by smallholders is normally seen as one of the constraints limiting their benefit from credit facilities. However, in most cases the access problem, especially among formal financial institutions is one created by the institutions mainly through their lending policies. This is displayed in the form of prescribed minimum loan amounts, complicated application procedures and restrictions on credit for specific purposes (Schmidt and kropp, 1987)
According to Semboja, (2004), micro credits are used for two purposes, which are for investment and generation of wealth or for consumption smoothing. In other words credit for small and micro enterprise (SMEs) can be put into production use or consumption use. For the purpose of this work, credit for productive use which appears to be more documented will be given more attention.
The fragmented nature of the Nigeria credit market is defined by its formal and informal sources. The emergence of demand for short-term credit especially among traders and farmers will most likely lead to the development of an informal unit to meet that demand, Atieno (2001). In other words, the inability of the formal credit sources to satisfy existing credit demand gave greater prominence to informal institutions that could meet the demand of short term credit that small and micro entrepreneurs usually need to enhance their production efficiencies.
Interestingly, most of the small and micro entrepreneurs and especially the agro-allied ones are rural-based with low level of education and poor access to useful information. This information has caused increased poverty level among the rural poor, instead of sustainable development for this vulnerable group of people. The need therefore to investigate the institutions lending policy, access to credit facilities and how it affects significantly or otherwise, the production efficiencies of small and micro enterprise becomes pertinent. Again one needs to wonder why some participants prefer one credit source to another (i.e. formal or informal). The CBN (2005) reports that in Nigeria, the formal financial system provides services to about 35% of the economically active population while the remaining 65% are excluded from access and often served by the informal financial sector, through the Non-Governmental Organization (NGO), micro finance institution, money lenders, friends, relatives and credit unions. This level of service disparity between the two sources of credit to meet credit needs of small and micro enterprise may have underlined the importance of need-oriented financial system for rural development and by implication economic development. This work is designed to investigate the factors that affect the demand for credit in the credit market and the lending policies of formal and informal credit institutions, in a view to understanding its link with credit access and productivity of small and micro enterprise, specified in this study as poultry enterprise in Cross River State, Nigeria.
The provision of credit has increasingly been regarded as an important tool for raising the incomes of rural population, mainly by mobilizing resources to more productive uses (Atieno, 2001). Mensah, 1990, also stated that the development of local small industries into viable production outfits seems to be the only way out of industrial backwardness, unemployment and mass poverty.
One problem that arises is the extent to which credit can be offered to the rural poor to facilitate their taking advantage of the developing small and micro entrepreneurial activities. The poultry enterprise is one area that should be given consideration given the fact that it has a short gestation period of production, and funds accessed and efficiently utilized can be paid back at an appropriate period.
The importance of small and micro-enterprise in development can not be overemphasized, even as Osagie and Edodi, 1990 pointed that small and medium industries hold the key to industrialization in a country. Yet, the majority of entrepreneurs in this sector are considered not creditworthy by most formal institutions. Whereas the informal institutions tend to meet some of their credit demand, but as small and micro enterprise expand in size, the characteristics of loans they require become increasingly difficult for informal credit sources to satisfy, yet they still remain too small for the formal lenders (Aryeetey, 1996).
The foregoing therefore prompts one to wonder on the factors that affect the demand for credit, its link with lending policies of credit institutions (both formal and informal), access to credit and productivity of small and micro-enterprises. The empirical revelations would be a useful reference point for policy makers and planners, as well as researchers and development agencies.
2.1 The main objective of the study is to determine the factors affecting borrowers’ participation in credit market and the impact of credit on the production efficiency of small and micro enterprise in Cross River State.
2.2 The specific objectives of the study includes to:
- Identify the socio-economic characteristics of poultry farmers
- Identify the enterprise characteristics of poultry farms
- Determine the factors that affect poultry farmers participation in formal and informal credit market
- Measure the impact of the use of credit on productivity of poultry farms.
There have been challenges to the growth of small and micro enterprise (specified in this study as poultry enterprise) in Nigeria, although the SMEs are seen as the engine of growth. A major constraint to their growth is the lack of adequate capital which can be use as facilitator of the efficiency of other production inputs.
An understanding of the different categories of factors affecting the demand for credit would enable us disaggregates farmer’s participation into formal, informal or both markets.
Again these work offers opportunity for a participation model in credit market inclusive of sensitive variables that have policy implications. Some of these characteristics include the credit history of the farmer, his social capital status and institutional factors that otherwise were not considered by Elhiraika and Ahmed (1998) who did a similar work.
From the policy perspective and giving due consideration to the fact that access to credit can only be achieved when demand is made, provides that an understanding of this factors therefore, would necessitate a private-public integration of strategies if this class of small and micro enterprise are expected to make significant contribution to the nation’s development process.
The contribution of poultry product in the overall protein intake of household should be recognized and thus its importance to national development. This is because poultry products can be consumed in form of eggs or meat by households and are also used by industries e.g. confectionaries for the production of other consumables. The outcome would also enable private financial institutions to identify significant and economic areas they can discharge some of their corporate social responsibilities e.g. training. It would also give lenders especially formal lenders an insight to propagate policies that will encourage prospective borrowers in gaining access to the huge fund deposit seeking to be invested (CBN 2004).
Access to credit by poultry entrepreneurs is an income redistribution strategy, which has a multiplier effect on growth and development. The importance of credit in a production process would help in the significant adjustment in the production trend of poultry products.
Generally speaking, the demand for and access to credit would enhance productivity. Invariably, this implies that social policies in this direction should be such that would limit constraints to accessing credit by participants operating institutions, the overall result of which is economic growth and development. Researchers, development agencies and policy makers will therefore find the outcome of this work useful in planning for development.
This work is divided into five chapters. It is introduced in chapter one with a background of the study, the problem statement, objectives and justification as well as organization of the study. It is followed by chapter two which reviews relevant literature as well as stating a theoretical framework and empirical review. Chapter three deals with the research method while chapter four basically looks at data analysis and discussions and finally presents summary, conclusion and policy implications in chapter five.
THEORETICAL FRAMEWORK ON CREDIT DEMAND
The demand for credit may reflect the response to credit supply. The assumption of a perfect capital market implies that credit supply and demand are easily derivable from the utility maximization model, i.e. given an unconstraint loan supply at a certain interest rate, loan demand is determined at the point of tangency between the utility curves of the borrower and the lender, Elhirake et.al 1998. Again several recent agrarian household model suggest that farm credit is not only necessitated by the limitations of self-finance but also by the uncertainty about the level of output and the time-lag between inputs and output extending by implication to the determinant and nature of farm credit supply and demand.
Nagaragan et al (1995) noted that estimates of loan demand may be bias because of the use of models that do not correct for selectivity bias and/or use of data that do not account for the existence of multiple loans. Therefore, estimate of loan demand must incorporate methods that adequately correct for data censoring due to the existence of both borrowers and non borrowers in the sample, credit rationing, and multiple loans borrowed from several types of lenders offering different types of contracts.
In chapter three, we categorize the variables of the credit demand function into socioeconomic, enterprise, credit status, institutional and training factors.
In the credit market, the exchange between borrower and lender does not occur simultaneously. The delay in discharging the debt obligations, expose the credit transaction to considerable risk. To lower this risk, banks perform three tasks. They screen potential borrower to establish the risk default, create incentive for borrower to fulfill their promises and they develop various enforcement actions to make those who are able to pay do so, (Okurut 2004)
A household is said to be participating in accessing funds if it is borrowing from a source of credit. A farming household is also said to have access to a particular source of credit if it is able to borrow from that source, also for a variety of reasons it may choose not to, (Diange and Zella, 2001)
The demand for production credit usually come from those poor that are risk-averse and enable them to overcome liquidity constraint, making it possible to undertake investment that can boost production, employment and income. Again credit for consumption purpose can have a long term positive impact on household productivity, allowing acquisition of skills important on health status if such loans are used for education or health care.
A farmer is classified as liquidity constraint if he or she already had a loan but expresses a wish to borrow more at the current interest rate. Or he or she was unable to obtain loan because the request for a loan was turned down or there was no access to formal or informal source.
The credit demand function can be interpreted from the borrowers’ participation decision, i.e., the decision to borrow, and the decision regarding the sector to borrow from. Their decision or choice of credit will depend, among other things on the borrowers’ economic endowment and opportunities, Elhiriaka and Ahmed (1998).
According to Okurut et al (2004), household and individual characteristics act as determinants of both the demand and the supply of formal and informal credit. Particularly, they employed the multinomial logit to estimate the determinants of the selection into borrowing from banks or informal sources. The study showed that household with a high dependency ratio (as a measure of household composition) appeared to demand more credit. The use of the Heekman two stage selection model to correct for the likely bias due to omission of variables in the OLS was done. The overall result however showed that age, education and household expenditures per adult equivalent had a significant and positive effect on the level of credit demanded.
Similarly, Jabbar et al (2002) carried out a logistic regression on dairy livestock farmers borrowing status in Ethiopia, Kenya and Uganda. Some of the determinants of borrowing and of being liquidity constraint were identified to include site, gender, education, training, outstanding loan, age, farm size, herd size, crossbred cow equivalent (CBCE). According to the results of the study, sex of household head, education, dairy training, prevalence of outstanding loan and the number of improved cattle on the farm had significant influence on both borrowing and liquidity status, though the degree and direction of influence were not always the same in each country (i.e. Kenya, Uganda and Ethiopia). Contrary to the supply side analysis, farm size and herd size had neutral effect on borrowing in all three countries.
In a similar study carried out by Aliou Diagne (1999) on the determinant of household access to and participation in formal and informal credit markets in Malawi, it was found that the composition of informal household asset is found to be much more important as a determinant of household access to formal credit than the total value of household assets of landholding size. The concept of credit limit was however used for analysis. Specifically knowledge of existence of credit club and a household head being a male was found to be statistically significant to participation in the credit scheme.
Again works by Elhiraika and Ahmed, (1998) which specified and estimated an implicit loan demand function for a sample of 923 agrarian households containing non-borrower as well as borrower (formal and informal borrowers) and using the Type-Three Tobit, maximum likelihood estimation model revealed for the informal borrowing function that the coefficient of the farm size (AREA) variable was significant but negative in sign, suggesting that it is smaller farmers who participate more in the informal loan market, and this is consistent with theory. It also showed that the greater the value of physical asset owned by the household, the less is its demand for informal credit.
The result also showed that educational level and availability of formal financial institution implied reduced demand for informal loans, perhaps because of enhanced access to formal credit. The finding also supported the hypothesis that the demand for informal loan is higher the poorer the level of infrastructural and institutional development in the area considered. Specifically for the formal loan demand estimate, it stated that credit demand is positively and significantly responsive to the household’s farm size, non-farm income and the availability of banks within the locality. Also that loan demand is significantly but negatively related to family labour variable and family assets.
Atieno (2001) pointed two major factors related to the choice between formal and informal credit sources as those associated with enterprise characteristics which were identified as weekly and monthly income, monthly sales revenue and value of land and livestock owned. The second factor was associated with loan terms and conditions which were found to affect the borrowers’ decision about which segment of the credit market to borrow from and mainly determine the supply of credit. The aspect under this was identified as application fees, collateral value, application period and repayment period. Loan ratio in the informal credit market is attributed to the limited resource base while for the formal sector it is due to the lending terms and conditions.
This work shall adopt the multinomial logit model to determine the factors that affect the small and micro entrepreneur (poultry enterprise) participation in formal (NACRBD, MFBs, commercial bank, etc) and informal (money lenders, ROSCAs, etc) credit market. This will also help us to ascertain the rational for the choice of either of the institutions.
In a study carried out by Fabiyi and Osotimenhin (1984) on the impact of credit on rice production in Ondo and Oyo state, and particularly using the ordinary least square (OLS) multiple regression model to determine the factors influencing the amount of loan, output of rice and revenue accruing from rice in the area. The results showed that the linear model satisfactorily fitted the relationships in line with a priori expectation. The amount of loan taken was found to have a positive contribution to both output and income.
Again Yazdani (1995) used the production function to measure the impact of credit. This was done by fitting a production function for borrowers, non-borrowers and pooled sample respectively. The chow test was also carried out to measure the significance of differences in production function and efficiency between borrower, and non-borrower. The results showed that the borrowers’ production function had a neutral upward shift when compared to the function for non-borrower. The functions therefore differed in terms of slope or marginal productivity of inputs.
Also, Agom (2001) in a study on the impact of micro-credit on performance of agricultural enterprises in Cross River State, Nigeria used the ordinary least square multiple regression, discriminant analysis, simple descriptive statistical tools and ANOVA in his analysis. The results however indicated that there was a significant difference in interest rate; loan duration and disbursement lag among micro-credit sources. There was a significant difference between the mean returns of credit users and non users, with non-users having higher returns. Loan amount was found to have a significant positive contribution returns but users failed to harness this optimally. There was therefore increased mean total cost due to interest payment without a corresponding increase in total investment as most times the loans were used outside the farm business. Savings, education and number of dependants discriminated between users and non-users.
Yazdani and Guanjal, (1988) use regression and discriminant analysis to measure the impact of credit and factors that influence the use of loans by farmers in Iran. Among the factor discriminating between borrowers and non-borrower in their study were experience, age, education, income and training all of which had high coefficient. The study also showed that the performance of borrower was significantly higher in terms of area cultivated and output. This is because borrowers cultivated more land and used better input.
The works of Isijola (2000) on the impact of the financial sector reform on the supply and demand for agricultural credit in Nigeria, which among other objectives, analyzed the determinants of commercial banks’ agricultural credit demand and supply during two periods (i.e. before and after the reforms). Using ordinary least square regression to analyse the determinant of commercial banks agricultural credit demand and supply for both periods, showed that, during the pre-reform there was consistent increase in the nominal amount of loans and advance to the agricultural sector. There were however, fluctuations in the amount in terms of agriculture share in the overall economy and fell short of the prescribed minimum to the agricultural sector except in 1979. During the reform period on the other hand, the prescribed minimum allocation for agriculture was overshot steadily until the later years when the target was not met. This was attributed to the liquidation of many commercial banks during the period.
Within the context of this work, we are looking at the impact of credit access to productivity of small and micro poultry enterprise in Cross-River State. The institution offering credit to this group of SMEs has been identified to include the Nigerian Agricultural credit and Rural Development Bank (NACRDB), the Micro finance Banks (MFBs). Commercial bank, ROSCAs etc.
The economic theory of production provides the analytical framework for most empirical research on productivity and efficiency. Productive efficiency means the attainment of a production goal without waste, Ajibefun and Daramola (2003). Again, the production function provides that for a certain level of output to be maximally and optimally produced will depend on the efficiency of the inputs, be it allocative or technical. Agricultural and of course non-agricultural credit has being seen as an input used in production as well as a facilitator of the efficiency of other inputs. This is corroborated by Obwona, (2006) who identified education, credit accessibility and extension services as variables that contribute positively towards the improvement of efficiency and of course productivity of 65 sampled small and medium-scale tobacco farmers in Uganda.
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