Management Of Risk In Agricultural Financing (A Case Study Of Nigeria Agricultural & Commerce Bank Plc, Enugu Branch)

Project and Seminar Material for Agricultural Engineering AE

Management Of Risk In Agricultural Financing (A Case Study Of Nigeria Agricultural & Commerce Bank Plc, Enugu Branch)


Abstract


The objective of this study is to examine the management of risk in agricultural financing using the Agricultural and Commerce Bank Plc, Enugu as a case study. The study is based on a cross-sectional study in which the research was carried out with the aim of examining the risk management of agricultural financing in Nigeria. The research was conducted using a multidisciplinary approach with a focus on risk management in agriculture financing. The results of the study were compared with those of a rural bank in the study area. The findings show that agriculture is pirotal to economic development in Nigeria and efforts should gear towards using that to revive the economy and reduce significantly the level of property in the country. It is therefore the thrust of this studying to examine risk management with particular reference to Agricultural And Commerce Bank plc. This study will unvent the problem associated with granting not only loans but also other credit facilities to famers in Nigeria through credit facilities by banks and other financial institutions. It will also generate data on how to collaborate with the development banks in order to achieve result particularly those in the agricultural sector whose trades are regarded as non-insurable ventures. The researcher randomly selects 200 staff of selected insurance company as the population of the research. The end being the use of the required data to understand the various situations it is with the view to making valuable recommendations and contributions.


Chapter One


Introduction

1.1 Background of the Study

There is no contention to the fact that the purpose of any business-outfit is not only to make profit but also to ensure that the business-out fit expands through investment. However, because the benefits or returns from investments are not known with certainty and hence are not guaranteed, every investment proposal involves risk. Onwuchekwa (2009:p.22) conceptualized risk as the probability or like hood that the actual return from holding an investment will deviate from that which was expected. Thus, the unpredictability of an outcome on investment suggests the need to properly analyze every investment proposal before investment is made so that the expected risk and return could be determined using appropriate skills and techniques.

Agriculture is the oldest industry known to mankind and it is the source of food and raw materials. It could equally be referred to as the worldโ€™s primary industry (Lot 1985:1).

Oni (2008:16) affirmed that in Nigeria, there are several sectors that contribute to the total output of the economy. In practice these are grouped into four major sectors namely agricultural, manufacturing oil, petroleum and service.
Oni however observed that the agricultural sector is considered to hold the key to economic development of the country. According to the central Bank of Nigeria report (1981-2003) agriculture remained the highest contributor to the Gross Domestic Product (GDP) with an average of 39.8 percent over the period with petroleum contributing 13 percent. This foregoing suggests that Nigeria agriculture is pirotal to economic development and efforts should gear towards using that to revive the economy and reduce significantly the level of property in the country.

Inspite of the enormity of the contributions agriculture is making in the Nigeria economy, the sector is unable to fulfill its most basic and traditional role of being the source of food for the nation. However, several policies and programmes have been designed by government to ensure that this all important sector is brought to the economic front bunner in Nigeria.

Prominent among which is the establishment of development banks. Auforo (2007:46) contended that the functions of the development banks include:

  1. Provision of major source or channel for medium and longer term finance through granting of direct loan and through equity participation in public and private enterprise.
  2. Provision of technical service to enterprise in various forms including managerial guidance, feasibility studies of investment projects.

The agricultural and commerce bank fall within the framework and policy track of the Nigeria government for establishing the development banks. Staking risk involves tacts and skill by management of organizations. The understanding of the end point of a particular business venture or stake suggests that management should be up to the task of protecting the investment. Dinsale and Murdie (197 II) observed that the major undertaker of the risk are the insurance firms, losses that occur from flood, earthquake, nuclear explosions and riot damages are uninsurable. Agricultural produce fall within this category. Thus, undertaking to engage in financing a business by banks presupposes enormous risk which is not taken by the insurance firms but by management of the agricultural and commerce banks. It is therefore the thrust of this studying to investigate the management of risk in agricultural financing with particular reference to Agricultural and Commerce Bank Plc, Enugu.


1.2 Statement of the Problem

The Nigeria Agricultural and Commerce Bank was established in 1973 and it derives its capital from the Federal Government of Nigeria and the Central Bank if Nigeria, the capital market and exchequer grants and loans (Unochukum 2009:7) for Unochukwum, the bank provides finance for agriculture either at the production level or for storage or marketing of agricultural products. In realization of the fact that no organization would venture into any business without providing safe landing incase of any eventuality the credit guarantee scheme for the agricultural sector referred to as Agricultural Credit Guarantee Scheme (ACGS) was established in Nigeria in 1977 (Mohammed 2007).

According to him, the scheme was designed to provide guarantee in respect of loans granted by banks for agricultural purposes with the aim of increasing credit to the sector. Mohammed further noted that before loans are given out under the scheme, there are some basic principles of tending expected of the banks to observe. Such principles among others include the source of repayment, the profitability of the transaction and the security offered. Inspite of these provision, Agu (1983) observed that the inadequate and frequent death of loans for financing agriculture has been a major impediment to agricultural development in most developing countries, including Nigeria.

Since agricultural loss is classified as catastrophic loss; it suggests that it cannot be insured. (Disindale in Obayi 2009) The managerial competence of the bank executives in managing the risk involved in undertaking to grant bank loan becomes very pertinent. Thus given the fact that Nigeria is making frantic efforts to ensure that agriculture comes to lime light in the over all economic indices in Nigeria through credit facilities by banks and other financial institutions, it becomes very important to examine the management of risk in agricultural financing using the Agricultural and Commerce Bank Plc, Enugu as a case study. This indeed is what this study is posed to achieve.


1.3 Research Objective

The research objectives for the study include:

  1. To examine the involvement of the agriculture and commerce banks in the investment made by farmers.
  2. To investigate the extent to which government provides funds to stablise agriculture and commerce banks in case of eventuality.
  3. To investigate the factors responsible for poor lending of money by agriculture and commerce banks to farmers.
  4. To explore factors that would enhance positive lending behavior of agriculture and commerce banks.

1.4 Significance of the Study

The study when completed will unvent the problem associated with granting not only loans but other credit facilities to famers in Nigeria.

It would equally spell out the involvements made with the facility granted did meet the target expectation.

The study would equally provide a guide on how best government would be involved in granting loan and other credits to those involved in agriculture.

The study will generate data on how to collaborate with the development banks in order to achieve result particularly those in the agricultural sector whose trades are regarded as non insurable ventures.


1.5 Research Questions

For the purpose of this study the following research questions are posed.

  1. What is the involvement of the agricultural and commerce Bank in investment made by farmers?
  2. Does the government provide enough fund to stabilize agricultural and commerce banks in case of eventuality?
  3. What are the factors responsible for poor lending rate by the agriculture and commerce banks?
  4. What are the factors that would enhance positive lending behaviour by the agriculture and commerce banks.

1.6 Scope / Delimitation of the Study

The study is limited to the management of risk in agricultural financing. It discussed the managerial competence of agricultural and commerce bank executives in ensuring that the risk factors in agricultural reduced.


1.7 Definition of Terms

The following terms have been defined within the context of their usage in the study.

Agriculture:

This refers to the cultivation of crops and rearing of animals for the benefit of mankind.

Catastrophic Loss:

This refers to the type of loss emanating from natural disaster like erosion, earthquake occurring on agricultural produce.

Development:

It is the growth and positive change in an organization which occurs as a result of the introduction of one or more variables.

Developing Countries:

These are countries characterized by the production of raw materials, very high rate of unemployment and general poverty.

Financing:

This refers to the process of bringing out money and other forms of credit in order to carry out certain project or programmes.

Insurance:

This refers to the act of undertaking to indemnity the insured or the policy holder against the occurance of insured risks.

Insurable Risk:

This is the types of risk that is undertaking to cover by the insurance policy and regulation.

Loan:

This refers to the amount of money and or other forms of credit granted by a bank to the customers. Most times such facility attracts interest to the lender.

Management:

This is the process of controlling organizing, supervising, planning and directing human and material resources to achieve the organizational goal.

Risk:

This refers to the probability that the return made on an investment may deviate.


1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows.

  1. Chapter one is concern with the introduction, which consist of the (background of the study), statement of the problem, objectives of the study, research questions, research hypotheses, significance of the study, scope of the study etc.
  2. Chapter two being the review of the related literature presents the theoretical framework, conceptual framework and other areas concerning the subject matter.
  3. Chapter three is a research methodology covers deals on the research design and methods adopted in the study.
  4. Chapter four concentrate on the data collection and analysis and presentation of finding.
  5. Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to evaluate risk management in agricultural financing.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of risk management in agricultural financing.


5.2 Summary

Rural banks face important challenges in terms of risk management. Many of them are inherited from their specific charter (sometimes government-sponsored) to support the development of the agricultural sector. In theory, they are specialized institutions, unlike commercial banks. The reality is that each agricultural project supported by a loan is sensitive to many risk factors (e.g., price of inputs, demand, weather conditions, uncertainty of spot price of produce). We use this fact to create a risk map and design a portfolio credit risk model that can be accommodated to the portfolio of an existing rural bank. In particular, our study is interested mainly in the effects of agricultural financing and risk management and the effect of climate variationon productivity and profitability.


5.3 Conclusion

Credit supply by banks to farmers in Nigeria was observed to be a risky investment since the awareness of availability of this loan, collection process and the required collateral makes it difficult for peasant farmers to access. However, with proper application of credit risk and default management techniques such as supervision, viability, collateral, sanctions, proper appraisal of loan and insurance banks are likely to reduce both risks and defaults associated with agricultural lending, hence increase banksโ€™ lending to agriculture in the study area. It is worthy to note therefore that sound lending is an act not a science and the success of the systems depends critically upon a positive risk management culture, which without data gathered in the screening process that are guided by well-articulated policies, responsible evaluation and disbursement of loans to agriculture will be virtually impossible


5.4 Recommendations

Haven completed the study, the researcher posit the following recommendations:

  1. Banks should put in place a comprehensive credit risk management process to identify measure, monitor and control credit risk and all material risks and where appropriate, hold capital against these risks to reduce risk of delinquencies and defaults.
  2. Establishment of a comprehensive credit risk management system in banks should be a prerequisite as it contributes to the overall risk management system of the bank and recruit well trained and motivated staff as they are the cutting edge of rural credit programs.
  3. There should be strict enforcement of loan repayment obligations by credit officers. Farmers should understand terms and conditions of the loans, disbursement phases and repayment schedules, and should be reminded a month before commencement of repayment.
  4. Proper education of the borrowers, particularly the farmers is necessary for the farmers to learn to use credit for productivity and development in order to enhance timely repayment and create bright conditions for future loans. Banks should not be mere disbursement windows.
  5. Prospective borrowers should be farmers with other business links with the bank such as owners of current or deposit accounts.

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