Finances for farmers

Backgrounder

Introduction
Why is this subject important to listeners?

It is important because farmers should be financially literate. In other words, they should possess the skills and knowledge to make informed and effective decisions regarding finances related to the following issues:

• Available agricultural support funds.
• Available financial institutions, both government and non-governmental organizations.
• How to access agricultural finances and financial assistance.
• How to make good decisions about the various types of loan products.
• Charges related to loans.
• Requirements for access to finances.
• How to manage agricultural finances.
• The requirements and benefits of agricultural financial service providers.
• The kinds of behaviour and practices that can increase their chances of accessing agricultural finances.

What are some key facts on finances for farmers?

• Agriculture is the largest employer in Nigeria and, according to the National Bureau of Statistics, accounts for about 23% of Nigerian Gross Domestic Product–8.99 trillion Nigerian naira, and employs 70% of the Nigerian labour force.
• There are many challenges to the growth and development of agriculture in Nigeria and chief among these is agriculture financing.
• The World Bank forecasts that by 2030, the food market in Africa will grow to be a US$1 trillion industry. Nigeria will need to intensify its investments in improving crop yields and integrating the value chain, which includes investing a wide range of activities:
  • developing and distributing improved seeds and hybrid livestock,
  • support farmers with agricultural modernized tools,
  • encourage, train, and retrain farmers on modern agricultural skills through farmer organizations,
  • educate farmers on post-harvest handling and improve the local processing and storage of harvested crops, and the best means of transportation,
  • provide finances for farmers; and
  • collate feedback from the markets over the next decade to capture a significant share of this trillion-dollar market.
    All this is possible with the support of partners such as the bank of agriculture, commercial and microfinance banks, farmers’ associations, non-profit/non-governmental agencies, and efforts by federal and state governments to provide farmers with education, subsidies on chemical fertilizers and pesticides, and improved seeds.
• Enhancing agricultural productivity through adaptation of new technologies and innovations is necessary to ensure food security and nutrition.
• According to the Alliance for a Green Revolution in Africa (AGRA), Africa requires over US$300 billion in public and private investments in agriculture over the next decade.
• By 2050, demand for food will increase by 70% globally. To meet this demand, at least $80 billion in annual agricultural financing will be needed to enable farmers to increase their food production to feed nine billion people.
• Financing for farmers enable them to use newly developed seeds, combined with inputs such as fertilizers, appropriate levels of plant protection chemicals (pesticides), feed mills, grain storage silos, water pumps, new boreholes, and SMS-mediated booking platforms such as Hello Tractor and Probity Farms.
• Effective financing for farmers will increase food security and lower the high cost of importing food.
• The rise in global population and a change in middle-class dietary preferences in developing countries towards higher-valued agricultural products such as poultry products (egg and meat), wheat flour, well-processed rice, and Irish potatoes means that there is an increasing need to invest in agriculture. Finances for farmers will help strengthen agro-businesses and boost the productivity of scarce resources. This will result in increased productivity and affordability of food crops such as rice, yam, Irish potato, and poultry products, which have become scarce and almost unaffordable for low-income earners.
• Developing and commercializing agriculture requires financial services that can deliver large investments in agriculture and agriculture-related infrastructure over the long term.

What are the big challenges of finances for farmers?

• The process of receiving financing for agricultural activities in Nigeria is complicated and lengthy. For example, the AGSMEIS (Agri-Business, Small and Medium Enterprises Investment Scheme) and NIRSAL (Nigeria Incentive-based Risk Sharing System for Agricultural Lending) schemes were launched over two years ago, but farmers have only recently started receiving funds.
• The process of receiving funds is complicated and burdensome. For example, busy farmers must take 3-4 weeks off to attend courses on entrepreneurship so that they can present an entrepreneurship certificate to obtain funding.
• Farmers must obtain reference letters from pastors, imams, or traditional rulers, even if they don’t attend church or mosque or know any traditional rulers.

Other barriers to receiving financing include:

• Financial institutions are only slowly reaching out into agriculture, and continue to perceive smallholder farmers as high risk.
• Banks require collateral, which smallholder farmers may not have.
• Interest rates and transaction costs can be high, especially for remote rural populations.
• Failure to repay loans can result in dire consequences as money lenders may adopt harsh collection methods.
• Financial service providers may discriminate on the basis of gender as a result of cultural beliefs about the inability of women to own land that can be used as collateral.
• Inadequate or ineffective and changing government agricultural policies.

Gender aspects of finances for farmers

Women farmers continue to face barriers that limit their access to finances.

• Women farmers play a central role in reducing poverty and food insecurity, and building resilience to climate change. On average, women farmers account for 43% of agricultural labour in developing countries, and the majority in some countries. However, they produce 20–30% less than male farmers because they often face barriers accessing farm inputs, markets, technical assistance, extension services, and finances. It has been estimated that equalizing this gender gap could boost agricultural output and decrease global undernourishment by up to 17%.
• In Nigeria, policy guidance in the agricultural sector included recommendations on gender but was limited to encouraging women’s participation in agricultural activities. However, the new national agricultural resilience framework promotes women’s ownership of motorized pumps to improve water management, as well as providing cash transfers and programs to support women and children. But implementation of this framework is not well-monitored.
• Limited access to hired labour, equipment, technology, training, finance, and markets.
• Restrictions on land ownership and tenure that limit women’s capacity to operate or expand farming businesses and lead investors to deal primarily with men.
• Sexual harassment and violence.
• Household, community, and other care responsibilities that are essential to well-being but have an important impact on women’s availability for agricultural activities.

Key information about finances for farmers

Agricultural finance is all about:

• Acquiring and using capital (finances).
• Procuring and managing the other factors related to production. These include physical assets such as land, buildings, seeds and seedlings, machinery, and other equipment, as well as labour, capital, and management/entrepreneurial assets.
• Financial management and the financial institutions serving the agricultural sector.

Understanding capital

There are two types of capital:

• Physical capital: Physical assets (land, buildings, seeds and seedlings, machinery and equipment) used to produce goods and services, in this case agricultural produce.
• Financial capital: Used to purchase physical assets and to operate and manage the physical assets to ensure continuous production.

Why do farmers need access to credit?

The following are some common reasons why borrowing money is important for farmers and other agribusiness owners:

• Credit can be used to hire labourers, or hire tractors to clear and prepare a site for planting.
• To obtain inputs for planting, including seeds, fertilizers, and pest management products.
• To increase production, move towards production for sale, and grow their businesses.
• To solve cash flow problems. For instance, farmers might not have enough cash to bring in a big harvest, though their produce has a ready market. Accessing credit allows farmers to hire labour for harvesting and post-harvest activities.
• To buy machinery and equipment, including ready-made storage facilities, drip irrigation equipment, wheelbarrows, produce sorters, water pumps, tractors, and tractor implements such as ridgers, harrowers, planters, and rice harvesters.
• To address personal and family needs such as paying school fees.
• To deal with emergencies such as medical emergencies or the death of loved ones, as well as climate-related emergencies such as flash floods.

Keys to successfully accessing credit

To receive credit from financial institutions, farmers should:

• Be able to demonstrate and document at least two years of experience in agriculture. This gives financers more confidence.
• Show that they are capable of saving. Farmers can demonstrate this by documenting other sources of income, for example, a poultry business or a small retail shop, that can contribute to repaying loans.
• Show that they are capable of working hard. If a farmer wants a loan to, for example, expand the farm, he or she must demonstrate the ability to work hard.
• As a small-scale farmer, it is important to consider joining a farmers’ group or co-operative. This provides several advantages, including the following:
  • Members of the group can co-guarantee each other, so individual farmers do not need security such as a land title to access loans.
  • It is easier for group members to collectively market produce. When a farmer has easy access to markets, the financer has more confidence to lend.
  • Group members can access valuable training and support from development agencies, farmer associations, and lending institutions. This training is very useful in managing loans effectively.
  • Group members can monitor borrowed money to make sure that the funds are used for the purpose for which they were borrowed.

Important questions to consider before accessing credit

To ensure that you are ready and able to borrow, ask yourself the questions below. If you can answer yes to most of them, then you are ready to borrow.

• Do I have a clear business need for the loan?
• Do I have a clear work or business plan?
• Do I have a ready market for my produce?
• Do I have experience in the activity for which I intend to take out a loan?
• Am I a hard worker?
• Do I have collateral to back up the loan?
• Do I belong to a group through which members can jointly access agricultural loans?
• Is my group registered?
• Do my fellow group members feel that I have the capacity to manage a loan?

Your rights and responsibilities when accessing credit/finance as a farmer

It is your right:

• To receive enough information about the various loan products available to you to make the best decision.
• To be given all relevant information, including all financial charges relating to your loan.
• For the bank to keep all your information private and confidential.
• If you open a savings account, it is your right to access your savings any time you need them.
• To receive guidance on all procedures and processes.

In exchange, you have a responsibility to:

• Provide information accurately and honestly to the financial institution.
• Respect the loan contract and make timely payments as per your loan schedule.
• Not use a loan for purposes other than investing in your farm/agribusiness.
• Not take out a loan to service a different loan. This will only increase your debt and damage your name, making it more difficult for you to receive a loan in the future.

Sources of financing for farmers

Farmers can source finances from both formal and informal sources, including the following:

• Commercial banks
  • Banks can offer loans, a good option for farmers seeking expensive farm equipment.
  • Banks also offer agricultural products such as facilitating the leasing of lands and farm machines such as tractors and their coupling implements to registered farmers.
  • Banks are only slowly reaching out into agriculture, and still perceive small-scale farmers as high risk.
  • Banks require collateral, which small-scale farmers might not have.
• Microfinance institutions
  • Are closer to small-scale farmers since they are normally in villages.
  • Can provide small loans, more suited to small-scale farmers.
  • Through long experience of local farmers’ needs, many micro-finance institutions have developed products that are tailored to farmers’ specific needs.
  • Credit is normally guaranteed through farmers’ groups or co-operatives, so small-scale farmers can access financing without collateral.
  • Interest rates can be high.
• VSLAs (Village Savings and Loans Associations)
  • Lower interest rates.
  • Easy to access if part of a farmers’ group/co-operative.
  • Loans are usually awarded on a rotating basis so cannot be accessed on demand.
  • Often, only small amounts are loaned out.
• Family and friends
  • Easy to access.
  • Generally a low rate of interest.
  • Broken relationships and social/family conflicts if you fail to pay back.
  • Not always available, especially not in the amounts required.
  • Usually short-term.
• Money lenders
  • Easy to access.
  • Very high interest rates.
  • Short repayment periods.
  • Heavy penalties if loan not repaid.
  • No customer protection.

Risk management and insurance

To manage the risks associated with investing in farms and receiving finances, farmers should consider insurance schemes that safeguard specific future events. For example, insurance schemes can include the following:

• Health insurance
• Property insurance
• Life insurance
• Crops and other types of agricultural insurance.

Steps for getting insurance

• Contact a broker, agent, or insurance company.
• Explain your insurance needs, including what you need to insure (e.g., crops, livestock). Explore the different options, including each policy’s premium and coverage. Work with a company that is reliable and experienced.
• Complete an insurance contract by submitting truthful information about yourself and your farm. If you do not give correct information, the insurance company may refuse to pay your claim later.
• Carefully read the contract. Ensure that someone you trust (a family member or close friend) reads it and ensures that you understand it. Ask questions where you do not understand. Only sign when you are satisfied with everything in the contract.
• Pay the premium before receiving the insurance policy and receive coverage.

Things to consider before taking insurance

The first things you should consider before buying insurance are how to:

• Increase your productivity by investing in quality seeds, inputs, and best practices.
• Obtain weather index insurance to protect your crops from extreme weather conditions.
• Obtain other crop insurance products to protect your crops from pests, diseases, and other damage.
• Obtain livestock insurance to protect your animals from death and illness.

Agricultural insurance

This protects farmers against loss of or damage to crops, livestock, and farm equipment/machinery.

• Crop insurance:
  • Weather index insurance: This insurance is based on satellite imagery and historic rainfall data and protects farmers from the impacts of extreme weather events such as floods and droughts.
  • Other crop insurance: This insurance covers farmers in case of fire, pests, diseases, and deliberate damage caused by other people. It can be used to protect any type of crop the farmer grows.
• Livestock insurance: This covers farmers in case of livestock death due to illness or accident. It can be used to protect any type of animal a farmer rears.
• Farm machinery/equipment insurance

Definitions

Claim: A document you submit to the insurance company, documenting the losses that you need to be compensated for.

Collateral: An item of value used to secure a loan

Insurance policy: The contract between you and the insurance company. It explains the terms and conditions of the insurance, including what types of losses it covers, the total sum insured, and the amount you must pay to receive the insurance, the premium.

Premium: The amount of money you pay to the insurance company to receive insurance coverage. The amount differs depending on the specific policy. You MUST pay this premium in order to get insurance.

Total sum insured: The value of your assets.

Where can I find other resources on this topic?

1. Agri-Profocus Uganda, 2011. A guide for small holder farmers on saving, accessing credit, and effectively managing money for improved livelihoods. https://www.fsnnetwork.org/sites/default/files/a_guide_for_small_holder_farmers_on_saving_accessing_credit_and_effectively_managing_money_for_improved_livelihoods.pdf
2. Eze, C. C., et al, 2010. Agricultural Financing Policies and Rural Development in Nigeria. Downloadable from https://ageconsearch.umn.edu/record/91677
3. Famogbiele, A., 2013. The challenges of agricultural finance in Nigeria: Constraints to sustainable agricultural and economic revival. International Journal of Business and Social Research, Volume 3, No.5. https://thejournalofbusiness.org/index.php/site/article/view/22/21
4. GIZ Global Project Promotion of Agricultural Finance for agri-based Enterprises in Rural Areas 2019. Farmer’s Financial Cycle Participant’s Workbook.
5. International Finance Corporation, 2016.Investing in Women along Agribusiness Value Chains. https://www.ifc.org/wps/wcm/connect/02c5b53e-420f-4bf4-82bb-6f488ff75810/Women+in+Agric+VC_Report_FINAL.pdf
6. Oladiran, J.A., 2010. Striving For Food Security In Nigeria – The Role Of A Viable And Vibrant Seed Industry. https://thejournalofbusiness.org/index.php/site/article/view/22/21
7. Oxfam, 2017. Financing Women Farmers: The need to increase and redirect agriculture and climate adaptation resources. https://www-cdn.oxfam.org/s3fs-public/file_attachments/bp-financing-women-farmers-131017-summ-en.pdf
8. World Bank, 2020. Agricultural Finance and Agricultural Insurance. http://www.worldbank.org/en/topic/financialsector/brief/agriculture-finance