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How Agricultural Financing Works

Agricultural credit and finance can simply be defined as the act of acquisition and the use of capital in agriculture. In other words, it deals with the supply of and demand for funds to invest in agriculture from the Agricultural sector of the economy. However, agricultural credit are loan obtained by the farmer to start or expand his farming business. Note that this money will be paid back with interest after using it for over a period of time, the interest depends on the source of the loan.

Agricultural Financing

Types of Farm Credit

There are three main type of credit.These are:

1. Short term Credit - This is a productive agricultural credits which the borrower is expected to refund in a year or less. This funds maybe used to purchase livestock feed, fertilizers, seeds, fuel, or to pay for hired labour.

2. Medium Term Credit - This is the type of agricultural credit to be repaid within a two to five years. This funds maybe used to purchase farm machinery, breeding of livestock and housing livestock.

3. Long term Credit - This usually involves huge amount of money which is expected to be paid in five to twenty years. This credit may be used to purchase costly fixed assets such as land, building of farm building, dams and doing some irrigation.

Agricultural Subsidy

Agricultural Subsidy can be defined to as the non-refundable aid granted to the farmers. Examples include the reduction in price of inputs, fertilizers, improved seeds and chemicals.

Agricultural Subsidy could includes giving farmers information which includes weather forecast, new technology, market sources  etc.

Agricultural Credit Interest 

Meaning of Interest

This is the amount to be paid on borrowed capital or an amount earned above the cost of a goods. Whenever a farmer borrows a credit, he will pay back the money with interest.

For example if a farmers get a Agricultural credit of #500,000 and to pay 10% interest on it, it means the amount he will pay as interest is #50,000 per annum  making him pay #550,000.

Let's calculate how to get the interest

You will be divide thr interest by 100 then multiply by the capital.

Difference between agricultural credit and agricultural subsidy

1. Agricultural credit will be paid back with interest but subsidy will not be paid back.

2. Credit has a time to return it while subsidy is given and never to be returned.

3. Credit is always cash while subsidy can be inform of information ,cash or land.

4. Government doesn't not bear part burden of a loan while government bears part of the burden in subsidy.

Importance of Agricultural Credit and Finance

1. It increases the efficiency of the farmers.

2. It enables the farmers to increase the size of his farm.

3. Agricultural credit enables farmers to acquire more farm inputs for increase production.

4. It enables to farmers to meet the seasonal fluctuations in income akd expenditure.

Sources of Agricultural Credit

Farmers can get credit or loan to finance their business through the following ways.

1. Agricultural Bank : There are many agricultural banks win the world which farmers can obtain a loan .Only farmers can obtain a loan from these banks.It can also be be called farmers bank. Agricultural bank will throughly inspect the business before giving farmers credit.

2. Commercial Bank : Commercial banks are the major sources of lending to farmers. Banks like Zenith Banks , First banks have agricultural department where farmers can obtain loan.

3. Money Lender : These are people who lend out their money to farmers to enable them to produce.However, the money lender will charge a very high interest rates and demand collateral for loans.

4. Self finance : This refers to the money that the farmer has saved which will be used to finance farm activities.

5. Supervised agriculture credit scheme : This scheme is set up for the purpose of granting farmers loan.The scheme is supervised by the Central of Bank.

6. Co-operative Societies: These are group of people who come out and pull their resources together so that members can easily obtain loan. Commercial gives money to co-operative societies than individual farmers.

7. Thrift and Saving societies: Members contribute money daily, weekly as agreed by the society .At the end of an agreed period, the money is going to be paid back to the members.

8. Individual: Farmers can also borrow money from their friends and relatives.

Problems Farmers May Encounter From Some Agricultural Credit Sources

1. Commercial Banks : Commercial banks are always biased of large scale farmers only.There may be problem of high interest rate.They demand collateral which farmers cannot provide.

2. Community Banks : The amount of they usually give out is relatively small and inadequate to meet the needs of farmers.They always insist farmers to come open an account with them.

3. Money Lender : They always give short term loan which might not be the needs of the farmers.The interest rates is grossly high.

4. Family Sources : They always insist of short term credit and and provide small and inadequate credit.

Implications of Agricultural Credit

Farmers finds it difficult to get loans from banks because of the following reason;

1. Interest Rate: The high interest rate discourage farmers from borrowing from banks while the low interest rate encourages farmers. However , farmers cannot borrow when the interest rate is too high.

2. Collateral Security: Collateral is what bank will want the farmers to present before granting them a loan which may not be available and which will make farmer not be able to able to loan.Such collateral includes landed property, building etc that worth the value of the credit.

3. Long gestation period of some crops: Some crops like rubber,cocoa, oil palm etc need a very long time to mature.Bank will therefore find it difficult to grant the loan out to farmers.

4. Lack of farm records: Some farmers lack farm records of all their activities which banks can use to access their credit worthiness.

5. Lack of insurance: Farmers do not take insurance of their farm

6. Unpredictable climate : Unpredictable climate can lead to crop failures.A good rainfall encourages the productivity of agriculture and lack of rainfall doom the productivity.Banks are always scared to borrow farmers credit because of the unpredictable climate conditions.

7. High level of credit defaulters: Farmers may not be able to obtain to repay the principal, not talk of interest, in case of natural disasters.

How Agricultural Financing Works How Agricultural Financing Works Reviewed by Soundlordz on September 29, 2022 Rating: 5

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