CREDIT ACCESS AND THE PERFORMANCE OF SMALL SCALE AGRO-BASED ENTERPRISES IN THE NIGER DELTA REGION OF NIGERIA

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ABSTRACT

The study was designed to analyze credit access and performance of small scale agro-based enterprises in the Niger Delta region of Nigeria. A multi-stage sampling technique was adopted in selecting 264 and 96 agro-based enterprises that accessed informal and formal credit respectively, through the use of structured questionnaire and oral interview. A total of 360 respondents were selected and used for the study.  Socio-economic characteristics of the enterprises were described using descriptive statistical tools such as percentages, means and frequencies. The logit model was used to examine enterprise characteristics that had significant influence on informal and formal credit access by small scale agro-based enterprises. The Heckman model was used to examine the factors affecting informal and formal credit amount accessed. The Poisson regression model was employed to examine the factors affecting frequency of informal or formal credit access by the enterprises. Current ratio and return on capital were employed to examine the performance of enterprises that borrowed from informal and formal credit markets in the area. Separate treatment of Informal and Formal Credit served to identify the similarities and differences between the credit source concerning the determinants of credit access, amount of credit accessed, frequency of access, credit default and financial performance of the enterprises. The results showed that 60.13% of small scale agro-based enterprises had access to the informal credit market, whereas only 21.86% had access to formal credit market. Enterprise age (p<0.10) and social capital (p<0.01) had significant and positive influences on informal credit access, while gender (p<0.01) had a negative influence on informal credit access. Formal credit access was positively influenced by enterprise age (p<0.05), enterprise size (p<0.05), collateral (p<0.05) and education (p<0.10). Informal credit amount received was positively influenced by enterprise size (p<0.10), guarantor (p<0.05) and social capital (p<0.01), and negatively influenced by gender (p<0.05) and income of enterprise (0<0.01). Formal credit amount received was positively influenced by age of enterprise (p<0.10), size of enterprise (p<0.05), collateral (p<0.01) and social capital (p<0.05). However, influence on income of enterprise (p<0.01) had a negative effect. Frequency of informal credit access had a significant positive influence on experience in borrowing (p<0.01) and social capital (p<0.01), while it had a significant negative influence on income of enterprise (p<0.01) and non-agro-based income (p<0.01). Frequency of formal credit access was positively influenced by education (p<0.10) and collateral (p<0.01), and negatively influenced by interest amount (p<0.01) and non-agro-based income (p<0.01). Furthermore, income of enterprise (p<0.01) had a significant positive effect on informal credit default, whereas, gross profit margin (p<0.01), interest amount (p<0.05) and shock (p<0.01) had a significant negative effect on informal credit default. Also, formal credit default was negatively influenced by gender (p<0.01), education (p<0.05), gross profit margin (p<0.01) and shock (p<0.05). There was a significant difference between mean return on capital employed by enterprises that borrowed from formal and informal credit institutions, hence their performances varied.  It was recommended that Government and development partners in the region should realize these changing realities and designed appropriate credit packagesfor the enterprises in the region. This will go a long way in complementing the amnesty programme of the Federal Government of Nigeria in the region.

CHAPTER ONE

INTRODUCTION

1.1       Background Information

Studies on developing economies have considered financial development vital for economic growth and poverty reduction. Strong financial systems have helped delivered rapid growth as well as direct and indirect benefits, across income distributions (Honohan and Beck, 2007). Beck and Demirguc-Kunt, (2005) indicate that financial development reduces inequality by disproportionately boosting the income growth of the poor. Hence across Africa, access to finance is rightly seen as a key to unlocking the income growth for poor families, as much as for expanding trade (Honohan and Beck, 2007).

In this regard, policy makers have held the conception that micro and small scale firms in developing countries lack access to adequate financial services for efficient inter-temporal transfers of resources and risk coping (Besley, 1995). Without well-functioning financial markets, small scale firms may lack much prospects for increasing their productivity in many significant and sustainable ways (Nwaru, 2004). Based on these reasons, and the fact that traditional commercial banks typically have minimum interest in lending to small firms due to their lack of viable collateral and high transaction costs associated with the small loans that suit them, most developing country governments, have set up credit programs aimed at improving access to credit (Arene, 1993; CBN, 2010).

Efforts targeted at small businesses are based on the premises that they are the engine of economic development, but market and institutional failures impede their growth, thus justifying government interventions (Gomez, 2008). However, the failure of government supported financial institutions is a convincing evidence of the need for a better understanding of how these firm in the Niger Delta, often operating in highly risky environment insure against risk and conduct their inter-temporal trade in the absence of well-functioning financial markets (Ministry of Niger Delta Affairs, 2011). In response to these failures and in recognition of the critical role that credit can play in alleviating poverty in a sustainable way, innovative credit systems are being developed and promoted in Nigeria as a more efficient mechanism of improving micro and small scale firms’ access to credit (CBN, 2010)

A little over four decades, the issues confronting the Niger Delta region of Nigeria have caused increasing national and international concern. The region produces immense oil wealth and has become the engine of Nigeria’s economy, but it also portrays a paradox as the vast oil revenues barely touch Niger Delta own pervasive poverty, hence giving birth to formidable challenges to sustainable human development in the region UNDP, 2006). People are more volatile, resulting in youth restiveness, conflicts between youths and community leaders, youths and government agencies, youths and multinational companies (UNDP, 2006). These propagated negative nominal and real shocks in every sector of the economy, including small business sector, with the economy operating under atmosphere of politically unstable environment, eroded productivity and declined private investments (Ministry of Niger Delta Affair, 2011).

With respect to indicators on disposable income or ability to fulfill basic needs, much of  Niger Delta population fall into the ‘very poor’ category; monthly  income levels of the people recorded as ’employed’ in 2003 were, Less than N5,000 (US$ 38) for 46% of all Employees; N5,001 to 10,000 (US$ 75) for 20% of all employees; N10,001 to 15,000 (US$ 113) for 10.6% of all employees; N15,001 to 20,000 (US$ 151) for 9.1% of all employees; N20,000 and more (over US$ 151) for 14.3% of all employees (Ministry of Niger Delta Affairs, 2011).

Further, according to Niger Delta Affairs (2011), income levels were found to be higher in Local Government Areas and senatorial districts of the individual NDDC States where there are larger settlements and lower still in the rural areas. At present, some 70% of the population of people living in the Niger Delta Region live below the poverty line as measured by the following indicators; disposable income, access to health care, access to safe water, educational attainment, access to shelter and access to gainful employment (Ministry of Niger Delta Affairs, 2011).