New Publication: Loan Demand and Rationing among Small-Scale Farmers in Nigeria

The Nigeria Strategy Support Program (NSSP) is pleased to announce the publication of Loan Demand and Rationing among Small-Scale Farmers in Nigeria by Aderibigbe Olomola and Kwabena Gyimah-Brempong as the 1403th publication in the IFPRI Discussion Paper Series. The IFPRI Discussion Paper was published on December 19, 2014.

Abstract: The credit market serving agriculture in Nigeria is encumbered by operational and administrative inadequacies and the discriminatory tendencies of financial institutions. The government has implemented policies to redress the situation, but small-scale farmers have not benefitted from these incentives to any reasonable degree. This makes it imperative to examine the factors circumscribing loan demand and the various rationing mechanisms. To this end, this study seeks to (1) examine the nature of risks facing small-scale farmer-borrowers in Nigeria, (2) analyze the demand for agricultural credit by farmers and highlight the key determinants of this demand, (3) ascertain the extent to which farmers are credit rationed and the factors influencing the emerging rationing scenarios, and (4) suggest policy measures to address the problem of agricultural credit rationing and enhance the demand for credit. The study employs primary data obtained from 1,200 small-scale farmers through a survey conducted in 2013 across the six geopolitical zones of the country. Methodologically, the study extends the analysis of credit rationing beyond quantity rationing and presents explicit econometric models for analyzing the determinants of three types of credit rationing:quantity rationing, risk rationing, and price rationing. The seemingly unrelated regression model is employed to ascertain the determinants of credit rationing. The results show that there is a higher probability that farmers will be rejected than that they will be given a loan amount lower than what was requested. We find that gender, geographical location, and marital status have no statistically significant effect on the probability that farmers will be quantity rationed. To address the credit rationing challenges and improve demand for loans by small-scale farmers, we urge banks to mobilize their resources to train potential borrowers and establish loan-monitoring committees at the grassroots level to serve as insurance against the risk of loan default.