How Agricultural Financing Works

Agricultural Financing

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 is a 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 some time, the interest depends on the source of the loan.

Types of Farm Credit

There are three main types of credit. These are:

  1. Short-term Credit: This is a productive agricultural credit that the borrower is expected to refund in a year or less. These funds may be used to purchase livestock feed, fertilizers, seeds, and fuel, or to pay for hired labor.
  2. Medium-Term Credit: This is the type of agricultural credit to be repaid within two to five years. These funds may be used to purchase farm machinery, breeding of livestock, and house livestock.
  3. Long-term Credit: This usually involves a 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, the building of farm buildings, dams, and some irrigation.

Agricultural Subsidy

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

Agricultural Subsidies could include giving farmers information which includes weather forecasts, 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 good. Whenever a farmer borrows a credit, he will pay back the money with interest.

For example, if a farmers get an Agricultural credit of #500,000 and 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 divide the 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 the subsidy will not be paid back.
  2. Credit has time to return while subsidy is given and never to be returned.
  3. Credit is always cash while subsidy can be in form of information, cash, or land.
  4. The government doesn't bear the part burden of a loan while government bears part of the burden in subsidies.

Importance of Agricultural Credit and Finance

  1. It increases the efficiency of the farmers.
  2. It enables the farmers to increase the size of their farms.
  3. Agricultural credit enables farmers to acquire more farm inputs to increased production.
  4. It enables farmers to meet seasonal fluctuations in income and expenditure.

Sources of Agricultural Credit

Farmers can get credit or loans to finance their businesses through the following ways.

  1. Agricultural Bank: There are many agricultural banks in the world from which farmers can obtain a loan. Only farmers can obtain a loan from these banks. It can also be called a farmers bank. The agricultural banks will thoroughly inspect the business before giving farmers credit.
  2. Commercial Bank: Commercial banks are the major sources of lending to farmers. Banks like Zenith Banks, and First banks have agricultural departments where farmers can obtain loans.
  3. Money Lenders: These are people who lend out their money to farmers to enable them to produce. However, the money lender will charge 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 to grant farmers loans. The scheme is supervised by the Central Bank.
  6. Co-operative Societies: These are groups of people who come out and pull their resources together so that members can easily obtain loans. The commercial gives more money to cooperative societies than individual farmers.
  7. Thrift and Saving societies: Members contribute money daily, and weekly as agreed by the society. At the end of an agreed period, the money will 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 toward large-scale farmers only. There may be a problem with the high-interest rates they demand collateral that farmers cannot provide.
  2. Community Banks: The amount they usually give out is relatively small and inadequate to meet the needs of farmers. They always insist farmers come to open an account with them.
  3. Money Lender: They always give short-term loans which might not be the needs of the farmers. The interest rates are grossly high.
  4. Family Sources: They always insist on short-term credit and provide small and inadequate credit.

Implications of Agricultural Credit

Farmers find 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 can only borrow when the interest rate is reasonable.
  2. Collateral Security: Collateral is what banks will want the farmers to present before granting them a loan which may not be available and will make farmers unable to loans. Such collateral includes landed property, buildings, etc that are worth the value of the credit.
  3. The 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 to farmers.
  4. Lack of farm records: Some farmers lack farm records of all their activities which banks can use to access their creditworthiness.
  5. Lack of insurance: Farmers do not take insurance on their farm
  6. Unpredictable climate: Unpredictable climate can lead to crop failures. Good rainfall encourages the productivity of agriculture and a lack of rainfall doom 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.

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