Agricultural Finance | Agricultural Credit, Farm Credits, Agricultural Subsidy & Capital Market

Definition of Agricultural Finance:

Agricultural finance refers to the process of acquiring and utilizing capital within the realm of agribusiness. It involves managing the demand for and supply of funds to carry out various agricultural projects. The primary objective of agricultural financing is to increase the availability of resources, such as capital and productive factors, to farmers, thereby expanding agricultural production.

Meaning of Agricultural Credit:

Agricultural credit pertains to a repayable loan provided to farmers to enhance their farming activities. It can also be defined as a loan granted by credit lending agencies specifically for agricultural purposes.

Types of Farm Credit:

There are three main categories of farm credit:

Short-term credit: This type of credit is expected to be repaid within a year. It is utilized for purchasing perishable items that are quickly consumed and contribute to the optimal output. Examples include improved seeds, fertilizers, chemicals, and fuel.
Medium-term credit: This credit is meant to be repaid within a period of two to five years. It is utilized for acquiring assets that can be utilized or turned around within this timeframe and generate high profits. Examples include purchasing light machinery or simple farm implements, breeding livestock, constructing livestock housing units, and erecting farm structures.
Long-term credit: This productive credit is repayable within a period of five to twenty years and involves the highest amount of money compared to short and medium-term credit. It is utilized for purchasing expensive fixed assets such as farm buildings, land, heavy machinery, and equipment.

Importance or Significance of Agricultural Credit:

Facilitates farmers in acquiring modern farm inputs to improve and enhance their efficiency.
Enables farmers to maintain and cultivate larger land areas.
Allows farmers to acquire storage and processing facilities.
Improves the economic status and standard of living for farmers.
Assists farmers in addressing prevailing farm conditions, such as pest and disease control.
Helps farmers insure their farms against potential hazards related to farming activities.

Agricultural Subsidy:

Agricultural subsidy refers to non-refundable assistance provided to farmers to support and encourage their production. It also encompasses discounts given to farmers by government or agency institutions when purchasing agricultural inputs like chemicals, fertilizers, and improved seeds.

Sources of Agricultural Financing or Farm Credits:

Agricultural banks: For instance, the Nigerian Agricultural and Co-operative Bank (NACB), which focuses on providing loans to prospective farmers.
Commercial banks: These banks have specialized departments that cater to loans for farmers. Examples include United Bank of Africa (UBA), Union Bank PLC, and Wema Bank PLC.
Cooperative societies: Members pool their resources together, allowing individuals interested in obtaining loans to access them through the society.
Credit and thrift societies: Members contribute funds that are utilized for financing their farming businesses.
Self-financing: Individual savings used to finance agricultural ventures.
Individuals: Borrowing money from friends, relatives, or acquaintances to finance agricultural activities.
Money lenders: Individuals who lend money to farmers, usually at high-interest rates, enabling them to carry out their production activities.
Government agencies and governments: Departments within governmental establishments or ministries responsible for providing credit to potential farmers.
Non-governmental organizations (NGOs): Independent organizations established by individuals or groups to offer services or financial assistance to farmers.

Problems Associated with Farm Credits:

Farmers face difficulties in securing loans from banks due to various reasons, including:

High-interest rates: Banks often charge high percentages of interest on the principal sum, discouraging borrowing.
Lack of collateral security: Many farmers lack valuable assets that can be presented as collateral to secure loans from financial institutions.
High level of loan defaulters: Farmers frequently fail to repay loans within the agreed timeframe.
Diversion of loan: Some farmers misuse the loan funds for purposes other than those intended.
Lack of proper farm records and accounts: Many farmers lack accurate and comprehensive farm records and accounts, which are essential for evaluating their creditworthiness.
Unpredictable climate and crop failure: Climate factors can lead to crop failure, causing farmers to invest significant resources in their farms with low yields.
Lack of insurance policies: Many farmers do not have insurance coverage for unforeseen events such as fire outbreaks.
Long gestation period for plantation crops: Plantation crops often have extended timeframes before they generate income, making it challenging to meet loan repayment obligations.

Meaning of Capital Market Institution for Agricultural Business:

A capital market institution that deals with medium and long-term loans for agricultural businesses refers to financial entities that facilitate the borrowing and lending of funds for agricultural projects over an extended period. In the context of agriculture, which often requires significant investments and time for returns, these institutions provide access to funds that are not intended for short-term needs. These funds can be used for activities such as acquiring agricultural land, purchasing equipment, implementing irrigation systems, or expanding farm operations.

Institutions Involved in the Capital Market:

The capital market involves a range of institutions that facilitate the trading of financial instruments, raising capital, and allocating resources. Some key institutions include:

Stock Exchanges: Platforms where shares of publicly listed companies are bought and sold.
Bond Markets: Where government and corporate bonds are issued and traded.
Financial Intermediaries: Entities like banks, investment firms, and insurance companies that provide services related to capital investment and management.
Mutual Funds: Investment funds that pool money from various investors to invest in a diversified portfolio of securities.
Pension Funds: Funds managed on behalf of employees for their retirement benefits.
Venture Capital and Private Equity Firms: Invest in private companies or startups with growth potential.
Securities Regulators: Authorities that oversee and regulate capital market activities to ensure transparency and fairness.

Sources of Funds for the Capital Markets:

Capital markets raise funds through various means, including:

Equity Issuance: Companies issue shares of stock to raise capital from investors in exchange for ownership.
Debt Issuance: Governments and corporations issue bonds to borrow money from investors, promising to repay the principal amount plus interest.
Institutional Investors: Entities like pension funds, insurance companies, and mutual funds invest large amounts of money in the capital markets.
Individual Investors: Retail investors, including individuals, also participate by buying stocks, bonds, and other securities.
Foreign Investors: Capital markets attract investment from abroad, contributing to cross-border flows of funds.

Roles of Capital Markets:

Capital markets play several important roles in the economy:

Capital Allocation: They efficiently allocate financial resources to companies, governments, and projects that need funding for growth and development.
Price Discovery: Capital markets provide a platform where the prices of financial instruments are determined based on supply and demand.
Risk Management: Investors can diversify their portfolios to manage risk and achieve a balance between risk and return.
Facilitating Investment: Capital markets encourage savings by offering investment opportunities that can potentially yield returns higher than traditional savings accounts.
Economic Growth: By providing funding for productive projects, capital markets contribute to economic growth and job creation.
Wealth Creation: Capital market investments can lead to capital appreciation and income generation for investors.

Overall, capital markets play a crucial role in facilitating the movement of funds between savers and borrowers, promoting economic development, and supporting various sectors, including agriculture.