Researcher 2010;2(2) Nwosu et al. Agricultural Credit Guarantee Scheme

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THE AGRICULTURAL CREDIT GUARANTEE SCHEME: ITS

ROLES, PROBLEMS AND PROSPECTS IN NIGERIA’S QUEST

FOR AGRICULTURAL DEVELOPMENT

NWOSU, F. O; N.N.O. OGUOMA; N.G. BEN-CHENDO; A. HENRI-UKOHA

. Department of Agricultural Economics,

Federal University of Technology

Owerri, Imo state

ABSTRACT: The Agricultural Credit Guarantee Scheme Fund (ACGSF) is a policy instrument of the Federal

Government of Nigeria on Agricultural Credit. The Scheme was established by Decree Number 20 of 1977 but

started effectively in 1978. The Scheme was established to provide guarantee on loans granted by banks to

farmers for agricultural production and agro-allied processing. This paper, therefore, tried to review the scheme,

its roles since inception, problems and prospects in contributing towards the nation’s agricultural development. It

was concluded that since credit is needed for enhanced productivity and agricultural development, the three tiers

of government in Nigeria should give the scheme the necessary support and publicity so that farmers ( particularly

small farmers) can benefit from its laudable objectives. This will go a long way in ameliorating the seemingly

dismal output of our farmers. [Researcher.2009;2(2):87-90].(ISSN:1553-9865).

KEYWORDS: Agricultural Development; Credit Guarantee; Farm Productivity, Food insecurity.

INTRODUCTION

Agricultural development is a process that

involves adoption by farmers (particularly small

farmers) of new and better practices (Garba, 1987;

Orebiyi, 1999). This is due to the fact that most of

the new practices have to be purchased but few

farmers have the financial resources to finance it. It

was in recognition of this fact that the Federal

Government at various periods put in place credit

polices and established credit institutions and

schemes that could facilitate the flow of agricultural

credit to farmers. (Adegeye and Dittoh, 1985). One

of such laudable Schemes has been the Agricultural

Credit Guarantee Scheme Fund (ACGSF). The

ACGSF is not the first credit scheme that the

Federal Government put in place to encourage

agricultural development. According to CBN

(1986), other farm credit schemes included the

i. Nigerian Agricultural and Co-operative

bank (now known as the Nigerian

Agricultural Co-operative and Rural

Development Bank) established in

November, 1972;

ii. Establishment of rural branches of

Commercial banks throughout the country

following a mandatory Federal

Government policy directive in 1976;

iii. Creation of the River Basin Authorities in

1979 throughout the Country;

iv. Establishment of both enclave and state

wide. Agricultural Development Projects

throughout the Country between 1972 and

1980 to facilitate among other things the

provision of agricultural credit to farmers;

v. Development of State Ministry operated

and other government sponsored

agricultural credit programmes in the

second half of the 1970s;

vi. Development of technical support and agro

service establishments that would facilitate

the supply of Credit to farmers throughout

the country between 1976 and 1980.

However, the persistent failure of the above

institutions and conventional banks to adequately

finance agricultural activities in the mid 1970s was

a clear evidence that the country was in need of

further financial and institutional reforms that would

revitalize the agricultural sector by encouraging the

flow of institutional credit into it. Also, the

unpredictable and risky nature of agricultural

production, the importance of agriculture to our

national economy, the urge to provide additional

incentives to further enhance the development of

agriculture to solve the problem of food insecurity,

and the increasing demand by lending institutions

for appropriate risk aversion measures in

agricultural lending provided justifications for the

establishment of the Nigerian Agricultural Credit

Fund (ACGSF) by the Federal Government of

Nigeria in 1977 (Mafimisebi et al, 2009).

The Scheme was established by Decree 20 of

March, 1977 and as amended on 13th June, 1988. It

provides for a fund of N100 million subscribed to

by the Federal Government (60%) and Central Bank

Researcher 2010;2(2) Nwosu et al. Agricultural Credit Guarantee Scheme

88

of Nigeria (40%). The fund was enhanced to N1

billion on the 8th December, 1999 and later to the

present level of N4 billion as at early 2006 (CBN,

2007). All these are aimed at solving the problem of

inadequate funding of farm operators by banks and

to cushion these financial institutions against the

effects of high risks associated with investments in

farm enterprises as well as to raise the productivity

and earnings from farm investments so that the

incidence of loan repayment default among the

farmers will be minimized (CBN, 1977; Ogwuma,

1985; Eyo, 1985; Oguoma, 2002).

Role of the Scheme

Various Studies have shown that Credit plays

an important role In enhancing agricultural

productivity of the farmer (Okorji and Mejeha,

1993; Nweze, 1991; Mafimisebi et al, 2008). The

general purpose of the Nigerian Agricultural Credit

Guarantee Scheme Fund is to encourage banks to

lend to those engaged in agricultural production and

agro – processing activities. Thus, the specific

objectives of the scheme is the stimulation of total

agricultural production for both domestic

consumption and export; and the encouragement of

financial institutions to participate in increasing the

productive capacity of agriculture through a capital

lending programme. The scheme is expected to

provide guarantee on loans granted by financial

institutions to farmers for agricultural production

and agro-allied processing. The fund’s liability is

limited to 75% of the amount in default net of any

amount realized by the lending bank from the sale

of the security pledged by the borrower. Since the

inception of the scheme in 1978, there has been a

continuous aggregate increase in the number of

loans to agriculture from a paltry 341 loans

amounting to N11,28 million in 1978 to 3,571 loans

amounting to N218.60 million as at May, 2006.

Also, data at the Central Bank of Nigeria show that

a total number of 453,748 loans valued at N11.28

billion were guaranteed from the inception of the

scheme in 1978 to May, 2006. This translates to an

average of 16,205 loans valued at N402.86 million

per annum. The agricultural activities that can be

guaranteed under the scheme include the:

a. Establishment and / or management of

plantation for the production of rubber, oil

palm, cocoa, cotton, coffee, tea and other

cash crops.

b. Cultivation and production of cereals,

tubers, and root crops, fruits of all kinds,

beans, groundnuts, peanuts, beniseed,

vegetables, pineapples, bananas and

plantains;

c. Animal husbandry that covers poultry,

piggery, rabbitry, snail farming, rearing of

small ruminants like goats, sheep and large

ruminants like cattle.

The scope of (c) above was expanded in the

amendment decree of 1988 to include fish culture,

fish captures and storage. The scheme guarantees

loans to farmers from lending institutions up to the

tune of 5 million naira for individual farmers and 10

million Naira for group /cooperative farmers (CBN

2007). In the event of default in loan repayment, the

lending bank will serve the guarantor (the CBN), a

notice of default. Afterwards the lending bank is

expected to make further effort as it deems fit to

recover the amount in default from the borrower. If

any balance remains after the above steps and the

default persists after 6 months of notice of default,

the lending bank could realize the pledged security

and there after put a claim on the scheme fund so as

to realize 75% of the balance outstanding as at the

time of application for claim to the bank.

Problems of the scheme:

In the course of the fund’s operations, a

number of problems have been identified as

militating against its smooth performance.

According to Akinleye et al (2005), some of the

problems are:

(a) Increasing incidence of loan defaults. The

rate of loan repayment by ACGS

beneficiaries is very low. This view is also

held by Njoku (1986) and Ojo (1986).

Reasons adduced to this are natural

disasters, poor farm management, low

product prices, loan diversion, deliberate

refusal to pay and the inability of farmers

to assess loan requirements properly

leading to farmers receipt of inadequate or

excessive loans;

(b) Bank related problems:- Participatory

banks in the ACGS do not cooperate fully

in lending to farmers. Because of the high

cost of processing loans relative to the

actual loans and the high default rate of the

farmers, many banks prefer to pay penalty

to risk lending their funds to agriculture.

Also banks fault the farmers for submitting

incomplete application forms. In some

cases where loans are approved, it arrives

too late for it to fulfill the purpose for

which it was intended. This delay seems

more of administrative than any other.

Another problem that militates against the

smooth operation of the scheme is on “Personal

guarantee” as a security that may be offered to a

bank for the purpose of a loan. “Personal guarantee”

as a condition was not explained in the decree. This

therefore makes it almost nothing as its

interpretation rests on the bank officials. Also the

Researcher 2010;2(2) Nwosu et al. Agricultural Credit Guarantee Scheme

89

N20,000 loan which the scheme allowed to be

collected through “Personal guarantee” can not do

much for any farmer in his farming activities. Also,

the other securities recognized by the decree that

could be offered to the bank for the purpose of any

loan under the scheme pose problems in the smooth

operation of the scheme. The securities are legal

title to land, and a life assurance policy. It is a

common knowledge that most people especially in

the rural areas do not have clear titles to their land

which could serve as collateral for loan under the

scheme (Okorie, 1998).

Finally, the ACGSF has the problem of

publicity. Oguoma (2002) noted that there is a low

turn out of farmers in most states of the federation

in patronizing the scheme because of lack of

awareness.

Prospects of the Scheme

From various studies on the Agricultural Credit

Guarantee Scheme Fund in Nigeria, it is evident that

the scheme has increased the flow of funds to

agriculture. However, stakeholders in the scheme

viz: the farmers, lending institutions and

government must show greater commitment and

dedication for the scheme to achieve its laudable

objectives. Farmers should be encouraged to be

applying for loans form the participating banks to

enhance their agricultural activities and

productivity; and also to repay the loans as and at

when due.

The lending institutions should make efforts to

grant agricultural loans at the appropriate time to

farmers who met the conditions. Late release of loan

to a farmer leads to loan diversion / misuse which

has been established to be a major cause of poor

loan repayment. Secondly, it behooves on the

lending institution to ensure that the loan being

granted to a farmer is “quite adequate” for the

purpose, as granting of an inadequate loan for a

purpose is a prelude for loan diversion and its

consequence on the loan repayment ability. The

government should take a second look at the

securities that may be offered to the bank for the

purpose of a loan under the scheme. There is the

need for government to review the idea of a farmer

using a certificate of occupancy on a land as

“Security” before any amount above N20,000 is

approved. It is a common knowledge that small

farmers (especially in the rural areas) do not have

legal title on their farmlands. Therefore, there is the

need to review this subsection so that the traditional

ruler or President-General of the applicant’s

community or a civil servant of a particular category

could stand as surety for loans under the scheme.

The scheme still needs publicity as most farmers

especially in the rural areas are oblivious of the

scheme’s objectives. It therefore behooves on the

government (Federal, State and local Governments)

to use its agencies like National Orientation Agency

(NOA), Agricultural Development Programme

(ADP) extension officers and other relevant bodies

to organize lectures on the scheme in the farmers

locality.

Finally, government should ensure that bank

claims as a result of default and borrowers’ interest

draw backs are paid without delay. This will not

only motivate both participating banks and farmers

in the scheme but will also attract others who are

skeptical. The end result is the nation reaping the

dividend of adequate credit into our agricultural

sector and that is increased productivity, which is a

sine qua non in agricultural development

AUTHORS INFORMATION

1. F.O.NWOSU M.Sc

Lecturer/ Research Fellow

Department of Agricultural Economics,

Federal University Of Technology

Owerri, Nigeria

2. N.N.O OGUOMA Ph.D

Professor

Department of Agricultural Economics

Federal University of Technology

Owerri, Nigeria

3. N.G. Ben-Chendo M.Sc.

Lecturer/ Research Fellow

Department of Agricultural Economics,

Federal University of Technology,

Owerri, Nigeria

4. A. Henri-Ukoha M.Sc

Lecturer/Research Fellow

Department of Agricultural Economics

Federal University of Technology

Owerri, Nigeria

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