Management of risk in agricultural financing

Project Abstract

Managing risk in agricultural financing is crucial for promoting sustainable agricultural development and ensuring the financial stability of farmers and financial institutions. This research project aims to explore the different types of risks associated with agricultural financing and to identify effective risk management strategies that can be adopted by financial institutions and policymakers. The agricultural sector is inherently risky due to factors such as weather volatility, fluctuating market prices, and production risks. These risks can significantly impact the financial performance of farmers and lenders, making it essential to implement robust risk management practices. By understanding the specific risks faced by farmers, financial institutions can tailor their financing products and services to mitigate these risks effectively. This research project will review existing literature on risk management in agricultural financing to identify best practices and key challenges in this area. It will also involve case studies and interviews with farmers, financial institutions, and policymakers to gain insights into the practical implementation of risk management strategies. By analyzing real-world examples, this research aims to provide valuable recommendations for improving risk management practices in agricultural financing. Furthermore, the project will assess the role of financial technology (fintech) in enhancing risk management in agricultural financing. Fintech solutions such as digital lending platforms and crop insurance technologies can help streamline the loan application process, improve risk assessment, and provide innovative risk mitigation tools for farmers and lenders. Understanding the potential benefits and challenges of fintech adoption in agricultural financing is essential for driving financial inclusion and resilience in the agricultural sector. In conclusion, effective risk management in agricultural financing is essential for sustainable agricultural development and financial stability. By identifying and addressing the specific risks faced by farmers, financial institutions can improve the availability and affordability of agricultural credit, ultimately supporting the growth and resilience of the agricultural sector. This research project aims to contribute valuable insights and recommendations to enhance risk management practices in agricultural financing, with a focus on leveraging fintech solutions for sustainable development.

Project 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>