Management of risk in agricultural financing

Thesis Overview

<p> </p><p><b>INTRODUCTION</b></p><p><b>1.1 &nbsp; &nbsp; <br></b><b>Background<br>of the study</b></p><p>The<br>There is no contention to the fact that the purpose of any business-outfit is<br>not only to make profit but also to ensure that the business-out fit expands<br>through investment. However, because the benefits or returns from investments<br>are not known with certainty and hence are not guaranteed, every investment<br>proposal involves risk. Onwuchekwa (2009:p.22) conceptualized risk as the<br>probability or like hood that the actual return from holding an investment will<br>deviate from that which was expected. Thus, the unpredictability of an outcome<br>on investment suggests the need to properly analyze every investment proposal<br>before investment is made so that the expected risk and return could be<br>determined using appropriate skills and techniques.Agriculture is the oldest<br>industry known to mankind and it is the source of food and raw materials. It<br>could equally be referred to as the world’s primary industry (Lot 1985:1).</p><p>Oni<br>(2008:16) affirmed that in Nigeria, there are several sectors that contribute<br>to the total output of the economy. In practice these are grouped into four<br>major sectors namely agricultural, manufacturing oil, petroleum and service.Oni<br>however observed that the agricultural sector is considered to hold the key to<br>economic development of the country. According to the central Bank of Nigeria<br>report (1981-2003) agriculture remained the highest contributor to the Gross<br>Domestic Product (GDP) with an average of 39.8 percent over the period with<br>petroleum contributing 13 percent. This foregoing suggests that Nigeria<br>agriculture is pirotal to economic development and efforts should gear towards<br>using that to revive the economy and reduce significantly the level of property<br>in the country.<br>Inspite of the enormity of the contributions agriculture is making in the Nigeria<br>economy, the sector is unable to fulfill its most basic and traditional role of<br>being the source of food for the nation. However, several policies and<br>programmes have been designed by government to ensure that this all important<br>sector is brought to the economic front bunner in Nigeria.<br>Prominent among which is the establishment of development banks. Auforo<br>(2007:46) contended that the functions of the development banks include:<br>i. Provision of major source or channel for medium and longer term finance<br>through granting of direct loan and through equity participation in public and<br>private enterprise.</p><p>ii.<br>Provision of technical service to enterprise in various forms including<br>managerial guidance, feasibility studies of investment projects.<br>The agricultural and commerce bank fall within the framework and policy track<br>of the Nigeria government for establishing the development banks. Staking risk<br>involves tacts and skill by management of organizations. The understanding of<br>the end point of a particular business venture or stake suggests that<br>management should be up to the task of protecting the investment. Dinsale and<br>Murdie (197 II) observed that the major undertaker of the risk are the<br>insurance firms, losses that occur from flood, earthquake, nuclear explosions<br>and riot damages are uninsurable. Agricultural produce fall within this<br>category. Thus, undertaking to engage in financing a business by banks<br>presupposes enormous risk which is not taken by the insurance firms but by<br>management of the agricultural and commerce banks. It is therefore the thrust<br>of this studying to investigate the management of risk in agricultural<br>financing with particular reference to Agricultural and Commerce Bank Plc,<br>Enugu.</p><p><b>Statement<br>of the Problem</b></p><p>The<br>Nigeria Agricultural and Commerce Bank was established in 1973 and it derives<br>its capital from the Federal Government of Nigeria and the Central Bank if<br>Nigeria, the capital market and exchequer grants and loans (Unochukum 2009:7)<br>for Unochukwum, the bank provides finance for agriculture either at the<br>production level or for storage or marketing of agricultural products. In<br>realization of the fact that no organization would venture into any business<br>without providing safe landing incase of any eventuality the credit guarantee<br>scheme for the agricultural sector referred to as Agricultural Credit Guarantee<br>Scheme (ACGS) was established in Nigeria in 1977 (Mohammed 2007). According to<br>him, the scheme was designed to provide guarantee in respect of loans granted<br>by banks for agricultural purposes with the aim of increasing credit to the<br>sector. Mohammed further noted that before loans are given out under the<br>scheme, there are some basic principles of tending expected of the banks to<br>observe. Such principles among others include the source of repayment, the<br>profitability of the transaction and the security offered. Inspite of these<br>provision, Agu (1983) observed that the inadequate and frequent death of loans<br>for financing agriculture has been a major impediment to agricultural<br>development in most developing countries, including Nigeria.<br>Since agricultural loss is classified as catastrophic loss; it suggests that it<br>cannot be insured. (Disindale in Obayi 2009) The managerial competence of the<br>bank executives in managing the risk involved in undertaking to grant bank loan<br>becomes very pertinent. Thus given the fact that Nigeria is making frantic<br>efforts to ensure that agriculture comes to lime light in the over all economic<br>indices in Nigeria through credit facilities by banks and other financial<br>institutions, it becomes very important to examine the management of risk in<br>agricultural financing using the Agricultural and Commerce Bank Plc, Enugu as a<br>case study. This indeed is what this study is posed to achieve.</p><p><b>Research<br>Objective</b></p><p>The<br>research objectives for the study include:<br>(i) To examine the involvement of the agriculture and commerce banks in the<br>investment made by farmers.</p><p>(ii)<br>To investigate the extent to which government provides funds to stablise<br>agriculture and commerce banks in case of eventuality.<br>(iii) To investigate the factors responsible for poor lending of money by<br>agriculture and commerce banks to farmers.<br>(iv) To explore factors that would enhance positive lending behavior of<br>agriculture and commerce banks.</p><p><b>Significance<br>of the Study</b></p><p>The<br>study when completed will unvent the problem associated with granting not only<br>loans but other credit facilities to famers in Nigeria.<br>It would equally spell out the involvements made with the facility granted did<br>meet the target expectation.<br>The study would equally provide a guide on how best government would be<br>involved in granting loan and other credits to those involved in agriculture.<br>The study will generate data on how to collaborate with the development banks<br>in order to achieve result particularly those in the agricultural sector whose<br>trades are regarded as non-insurable ventures.</p><p><b>Research<br>Questions</b></p><p>For<br>the purpose of this study the following research questions are posed.<br>(i) What is the involvement of the agricultural and commerce Bank in investment<br>made by farmers?</p><p>(ii)<br>Does the government provide enough fund to stabilize agricultural and commerce<br>banks in case of eventuality?</p><p>(iii)<br>What are the factors responsible for poor lending rate by the agriculture and<br>commerce banks?</p><p>(iv)<br>What are the factors that would enhance positive lending behaviour by the<br>agriculture and commerce banks.</p><p><b>Scope/Delimitation<br>of the Study</b></p><p>The<br>scope of the study covers management of risk in agricultural financing in<br>Nigeria. The study is limited to the management of risk in agricultural<br>financing. It discussed the managerial competence of agricultural and commerce<br>bank executives in ensuring that the risk factors in agricultural reduced. But<br>there were other constrain which limited the scope of the study:</p><p><b>(a)Availability<br>of research material:</b>&nbsp;The<br>research material available to the researcher is insufficient, thereby limiting<br>the study. &nbsp; &nbsp; &nbsp;</p><p><b>(b)Time</b>: The time frame allocated to the study does<br>not enhance wider coverage as the researcher has to combine other academic<br>activities and examinations with the study. &nbsp; &nbsp; &nbsp;</p><p><b>(c)Finance:</b>&nbsp;The finance available for the research work<br>does not allow for wider coverage as resources are very limited as the<br>researcher has other academic bills to cover.</p><p><b>Definition<br>of Terms</b></p><p>The<br>following terms have been defined within the context of their usage in the<br>study.</p><p><b>Agriculture:</b><br>This refers to the cultivation of crops and rearing of animals for the benefit<br>of mankind.</p><p><b>Catastrophic Loss:</b><br>This refers to the type of loss emanating from natural disaster like erosion,<br>earthquake occurring on agricultural produce.<br><b>Development:</b>&nbsp;It is the growth and<br>positive change in an organization which occurs as a result of the introduction<br>of one or more variables.<br><b>Developing Countries:</b>&nbsp;These are<br>countries characterized by the production of raw materials, very high rate of<br>unemployment and general poverty.<br><b>Financing:</b>&nbsp;This refers to the<br>process of bringing out money and other forms of credit in order to carry out<br>certain project or programmes.<br><b>Insurance:</b>&nbsp;This refers to the act of<br>undertaking to indemnity the insured or the policy holder against the occurance<br>of insured risks.<br><b>Insurable Risk:</b>&nbsp;This is the types of<br>risk that is undertaking to cover by the insurance policy and regulation.</p><p><b>Loan:</b>&nbsp;This refers to the<br>amount of money and or other forms of credit granted by a bank to the<br>customers. Most times such facility attracts interest to the lender.</p><p><b>Management:</b><br>This is the process of controlling organizing, supervising, planning and<br>directing human and material resources to achieve the organizational goal.</p><p><b>Risk:</b>&nbsp;This refers to the<br>probability that the return made on an investment may deviate.</p> <br><p></p>