MICROFINANCE INSTITUTIONS AS A CATALYST FOR AGRICULTURAL DEVELOPMENT IN RURAL COMMUNITIES ( A CASE STUDY OF  LERE LOCAL GOVERNMENT AREA, KADUNA STATE

CHAPTER ONE

INTRODUCTION

Background Of The Study

Nigeria is endowed with an extensive and fertile landmass, as well as marshes, grasslands, rivers, and lakes. Notwithstanding this copious endowment, the agricultural industry has witnessed a decline in productivity. Agriculture's share of the gross domestic product decreased from 58.2% in 1960 to 41.3% in 1970 to 40.4% in 1999. Despite this, agriculture continued to be the backbone of the national economy, contributing an average of $34.90 to the GDP between 1970 and 1978. Nevertheless, despite this, productivity, which increased by an average of 84% from 1971 to 1995, has declined to a mere 2.3% from 1991 to 1998. (Ofanson et al. 2020)

The principal cause can be attributed to the comparatively rapid growth of oil's value, which compelled a reallocation of resources and attention from the agricultural sector to the oil industry. Furthermore, the agricultural sector in Nigeria can be described as dualistic, encompassing both traditional peasant farming and contemporary large-scale farming. (Goetz & Gupta, 2023)

Development countries have been unable to achieve sustainable development for decades as a result of their persistent failure to integrate all sectors of society. The majority of impoverished individuals have not been granted secured access to credit through the system in order to invest in agriculturally productive sectors. Numerous initiatives by the government to address the agricultural crisis, including rural finance and development programmes, have been rendered ineffective. This was due to the absence of a mechanism that simultaneously facilitated the distribution of funds via advances and loans and promoted the mobilisation of savings among the general populace (Khandker, 2018). The central bank implemented the rural banking initiative in 1997 as a response to this issue. These rural branches were unable to provide the populace with the credit they required and continued to accept more deposits. 

While the commercial bank was established with the intention of offering loans, its short-term funding sources prevented it from fulfilling long-term investment requirements. The primary objective behind the establishment of the merchant bank was to facilitate long-term and medium-term financing. This failed to fulfil the financial requirements of the populace due to the concentration of banking services on particular domains, such as short-term loans and deposit acceptance. In order to extend banking services to individuals of all socioeconomic backgrounds, development banks were established as specialised financial institutions that offered long-term credit to foster the growth and establishment of productive enterprises in specific sectors of the economy (agricultural industry and commerce). However, despite these institutions' efforts, the credit requirements of low-income earners remained unfulfilled.  (Morduch, 2020)

In an effort to rectify the situation and harness the agricultural development and growth potential of these segments of society, the Central Bank of Nigeria established the microfinance regulatory and supervisory framework for Nigeria in December 2005. The objective of the policy is to create a sustainable and viable private microfinance market, wherein the government establishes an institutional framework and supportive policy environment to facilitate the microfinance subsector's orderly growth.  (Morduch, 2020)

More than 700 established community banks are required to transition to microfinance banks (MFBS) by December 2005, in accordance with the microfinance policy. Non-governmental organisations are transitioning to microfinance institutions. In order to accommodate the unique financial services needs of the lower socioeconomic class, the policy adopted a two-tiered licencing system for MPIS. This system serves as a complementary measure to the ongoing reforms in the banking sector and has consequently brought about a significant transformation in Nigeria's financial environment. (Cole et al., 2019).

Microfinance institutions have emerged as a response to the deficiencies in the Nigerian financial system. In contrast, development and commercial banks operate within the formal credit delivery system, which is limited to a privileged population comprising a negligible portion of the country's total population. 

The operations of contemporary financial institutions have little positive impact on the livelihoods of the majority of Nigerians, who reside in rural areas and earn modest incomes. Therefore, microfinance institutions were founded to facilitate the provision of credit mechanisms to individuals and the mobilisation of funds through modern banking. Microfinance, according to the United Nations Capital Development Fund (UNCDF) (2018), serves three crucial functions in the realm of development. It aids economically disadvantaged households in meeting fundamental necessities and safeguarding against potential hazards; it is correlated with enhancements in the economic well-being of households; and it promotes gender equality by empowering women through their support of economic engagement.

1.2    Statement Of The Problem

Agriculture is an essential component of the economies of developing nations due to its critical functions, which include supplying raw materials for the production of products and services and ensuring that the population has access to food (Food and Agriculture Organisation, 2019). Agriculture holds significant prominence as a sector of the Nigerian economy, exerting substantial influence on industrial advancement and poverty alleviation via the provision of inputs. An increase in output originating from a farmer's personal property or herds contributes to improved household food security and accessibility to food, thereby enhancing the nutritional requirements of communities (Ministry of Food and Agriculture, 2018). An increase in food production typically results in reduced food prices, which grants consumers the ability to acquire a larger quantity of food within their financial means. 

To better the circumstances of farmers, it is necessary to increase the output of agricultural products on their farms. The demand for inputs will increase in tandem with agricultural production, but the majority of producers lack the financial means to implement agricultural innovations. Rural credit, which may take the form of currency, loans, or commodities, is the sole remaining option for the advancement of farmers. A variety of institutions are extending agricultural credit. Commercial banks, microfinance banks, and other provincial cooperative societies are examples of such establishments. 

Notwithstanding the significant contribution of microfinance in addressing the myriad challenges plaguing the agricultural sector, the majority of farmers are unable to capitalise on economies of scale due to their small-scale production, which consequently leads to high per capita costs and generally low levels of output. Insufficient financial resources or capital have been recognised as impediments to the expansion of production in the sector, particularly for small-scale producers or individuals with low incomes (MoFA, 2018). Hence,this study tends to examine microfinance institutions as a catalyst for agricultural development in rural communities using Lere Local Government Area, Kaduna State as case study.

1.3 Objectives Of The Study

The primary objective of this study is to examine microfinance institutions as a catalyst for agricultural development in rural communities using Lere Local Government Area, Kaduna State as case study. Other objectives of this study are:

Determine the extent to which microfinance institutions promotes community agricultural development in Lere Local Government Area, Kaduna State.

Examine the role of microfinance institutions in promoting community agricultural development in Lere Local Government Area, Kaduna State.

To investigate the constraints faced by microfinance institutions in promoting community agricultural development in Lere Local Government Area, Kaduna State.

1.4 Research Questions

The following questions have been prepared for the study.

What is the extent to which microfinance institutions promotes community agricultural development in Lere Local Government Area, Kaduna State?

What are the role of microfinance institutions in promoting community agricultural development in Lere Local Government Area, Kaduna State?

What are the constraints faced by microfinance institutions in promoting community agricultural development in Lere Local Government Area, Kaduna State?

1.5 Research Hypothesis

Ho:  Microfinance institutions has no significant impact on community agricultural development in Lere Local Government Area, Kaduna State. 

Ha:  Microfinance institutions has a significant impact on community agricultural development in Lere Local Government Area, Kaduna State. 

1.6 Significance Of The Study

The information gathered will offer evidence-based findings that can inform policymakers about the effectiveness of MFIs in promoting agricultural development. It will guide the formulation of policies aimed at fostering financial inclusion, supporting smallholder farmers, and advancing sustainable agricultural practices.

The findings of this study will enable microfinance institutions to refine their strategies and offerings. They can tailor their financial products and services to better meet the specific needs of farmers, thereby maximizing their positive impact on agricultural productivity and rural livelihoods.

Lastly the study will serve as a reference material to scholars who would likely carry out similar topic.

1.7 Scope Of The Study

This study will focus on microfinance institutions as a catalyst for agricultural development in rural communities using Lere Local Government Area, Kaduna State as case study. Hence, this study will be delimited to Barnawa Microfinance Bank Limited in Lere Local Government Area, Kaduna State.

1.8  Limitation of the study

This study was constrained by a number of factors which are as follows:

Just like any other research, ranging from unavailability of needed accurate materials on the topic under study, inability to get data

Financial constraint , was faced by  the researcher ,in getting relevant materials  and  in printing and collation of questionnaires

Time factor: time factor pose another constraint since having to shuttle between writing of the research and also engaging in other academic work making it uneasy for the researcher.

1.9 Definition of terms

Financial institution: They are institutions viewed and established to provide financial services that fuel and move economic activities in an economy.

Microfinance bank (MFBs): These are financial institutions established to provide financial services to perceived section of the economy that cannot get access to the commercial banks.

Agriculture: This is the act of practicing farming, including cultivation of the soil for the growing of crops and the rearing of animals to provide food, wool, and other products.