ASSESSMENT OF THE PERFORMANCE OF COMMUNITY BANKS IN
AGRICULTURE IN KWARA STATE . NIGERIA.
Fakayode ,S.B1*, Adewumi, M.O1, Jenyo G.K+ Ekundayo ,O.O1 and Orebiyi,J.S2
1Department
of Agricultural Economics and Farm Management, University of Ilorin,
Ilorin. e-mail: Segun_fakayode@yahoo.com
2Department
of Agricultural Economics. Federal University of Technology. Owerri.
Abstract
This study examines the performance of community banks in financing agriculture in Kwara
State, Nigeria. From the responses of 120 loan beneficiaries drawn from six community banks
across the study area, it was found that a least proportion of the loans from community banks
goes to the agricultural sector .Trading secured the highest loan sum of N95.608million. When
ranked by loan repayment rates, the agricultural sector was first. This was followed by the
manufacturing sector, the civil service, the trading and transport sectors. However, our analysis
revealed an incremental rate of 11.8% to agricultural sector after loans were taken by the
farmers. Similar rate of returns margins for loan invested into trading, transport, manufacturing
and the civil service were 23.9%, 20.1%.17.1% and 19.5% respectively. The study therefore
recommends amongst others that community banks should intensify their efforts on monitoring
the loan beneficiaries. Government on its part should grant operational autonomy to community
banks as this will remove the long duration of passing loan cheques through commercial banks
before they can be processed.
Key words; assessment, performance, community, rate of returns margins.
Introduction
Over the years, the rural sector of the Nigerian economy has continued to earn very low income
from production activities. This low income translates into a vicious financial cycle in which the
farmer is persistently trapped in. Due to poverty in the agricultural sector (FOS, 1999) equity
capital is insufficient to meet the expenditure requirements for increased productivity. This
explains the need for readily available financial assistance to farmers who constitute the bulk of
* Correspondent Author
+ Dr G.K. Jenyo, is the Manager of Community Bank, Offa, Kwara State.
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the rural poor. Recognizing the need for credit by the rural farmer, government established
various credit programmes and schemes in the 1970s.These include the Nigerian Agricultural
and Cooperative Bank (NACB) established in 1973 which was later renamed the Nigerian
Agricultural Rural Development and Cooperative Bank (NARDCB) in 2000, the Rural Banking
Scheme (RBS) initiated in 1977 and the People’s Bank in 1989. All these were aimed at
extending credit facilities to farmers at the grass-root levels. However, these programmes did not
yield the expected results(Palmer and Ojo,1981; Moro,1988; Omotesho and Ladele,1988;
Babalola,1991).The difficulty of getting commercial banks to serve the credit needs of the small
scale farmers has paralysed
the productive capacities of rural dwellers(Mabogunje,1992).
Government also noted that these institution’s sophisticated mode of operation were incapable
of dealing with the peasant rural dwellers .Consequent upon this ,government in 1990 introduced
the community bank schemes as one of the institutions designed to correct the malfunctioning of
the rural banking scheme (CBN 1992).
The community banks like all the other credit programmes that preceded it were mostly
designed to take care of objectives such as employment generation, enhancing agricultural output
and income and stemming the rural-urban migration tide, which greatly contributed to rising
poverty levels (Garba,2006). Between 1990 and 1991 community banks were licensed to operate
both in the rural and urban areas to complement the activities and programmes of people’s bank
of Nigeria. Unlike the people’s bank, the community banks were community based and entirely
funded by the communities themselves, groups of people or cooperative societies. The
community banks mobilized rural savings and granted credit to the communities where they are
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based (Ajeribigbe ,2006). As at 1991, various communities all over Nigeria established
community banks,. Barely two weeks after the inauguration over 880 community banks were
established in Nigeria with the urban centers dominating the scene. Between 1991-2000,
community banks in Nigeria gave out loans and advances amounting to N14,621million
(CBN,2002).
Conceptually, a community bank is a unit bank owned and managed by the rural dwellers or
group of rural dwellers for providing deposit credit, banking and other financial services to the
members on the basis of self recognition and credit worthiness. .In Nigeria, the community banks
were established to mobilise rural savings, stimulate productive activities through the
establishment of micro-enterprises and to maintain correspondence relations with conventional
commercial banks in cheque clearing as well as facilitate the investment of adequate funds,
enhance other banking and non-banking activities that promote grass-root development
(CBN,2001). This study attempts an assessment of the role of community banks in agriculture
with particular reference to Kwara State. Nigeria. The study specifically seeks to assess
agricultural and non-agricultural loans from community banks. It also examines the rate of loan
recovered from each sector, and determines the effect of loan given out on investment output in
these sectors
Methodology
Forty community banks were established in Kwara State, between 1991 and 1996, the first being
the Omu-Aran Bank. Of this number, only 25 were adjudged to perform well, five are at the
verge of collapse while 10 have closed shops (NBCB Report,1995, Jenyo,2002). Based on the
spread and sampling frame of community banks within the study area., six community banks
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from Omu-Aran, Ajasse-ipo, Iludun-Oro, Iyeru-Okin, Ilofa and Offa were randomly selected.
One hundred and twenty loan beneficiaries of the six community banks were then interviewed
using an interview schedule.
Data Analysis
Data
were analysed using the descriptive tools such as the measures of central tendency, and
ratio, etc. The paired mean comparison test was used to compare the loans from community
banks to agriculture and other sectors. The Duncan multiple range test was also used to compare
the returns to agricultural investment before and after securing loans from community banks.
Results and Discussions
Community Bank Loans
The analysis on community bank loans revealed that between years 1988-2000, agriculture was
allocated a meager sum of N34.325million constituting 12.79% of a total loan of
N268.342million granted by the community banks in the area. Trading received the largest share
(about 35.62%), transportation sector was granted 35.62% of the total loan. This was followed
by transportation, manufacturing and the civil service (Table1).
One probable factor that
explained the meager allocation of Community bank loans to farming as reported by the farmers
was their inability to produce collaterals as security for loans. However, the loan repayment
compliance rankings for sectors revealed that the agricultural sector ranked first amongst other
sectors, followed by the manufacturing sector, the civil-service, trading and the transport sectors
respectively (Table 1.). It was also revealed that loans for agricultural purposes attracted a
minimal interest rate of between 11-20%.
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Table 1: Analysis of Community Bank Loan Allocation to Different Sectors 1998-2000
________________________________________________________________________
Amount in N’Million
Community
Civil
Bank
Trading
Agriculture
Transport Manufacturing
Service
Omu-Aran
1.40
4.67
2.57
3.06
3.65ce
Ajasse-Ipo
2.67
16.64
2.63
3.86
3.08
Iludun-Oro
0.12
3.12
0.93
0.91
1.45
Iyeru-Okin
3.78
3.38
1.32
2.90
3.50
Iloffa
-
2.70
-
-
0.40
Ibolo
89.82
3.82
44.19
29.64
-
Total loan
95.61
(35.64)
34.33
(12.79)
49.85
(18.58)
35.31
(13.17)
53.25
(19.84)
% Out of Total
loan Recovered
94.97
81.50
96.54
% Out of Total
loan Defaulted
18.5
5.03
3.46
87.47
12.53
97.83
2.17
Source : Field Survey,2003.
The result of our paired mean comparison test indicates that there is a significant difference
between the loans to agricultural and non-agricultural sectors,
Table 2: Comparison Between Loan for Agricultural and Non-agricultural Sectors
Variables
Standard
Compared
Means
Deviation
t-value
F-value
Implication
Loan to
Agricultural
3.929
9.74
Investment (Nm)
0.1082
16.91*
Significant
Loan to NonAgricultural
19.6
Investments (Nm)
*Significant at 5% Level
Source :Field Survey,2003.
23.4
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Since our calculated F of 16.91 is greater than the tabulated f-value at 0.05% level (Table 2), our
null hypothesis is rejected while the alternate hypothesis is accepted.
Table 3: Results of Duncan Multiple Range Test for Different Uses of Sampled Community
Bank Loans
Civil
Trading Agric
Transport
Manufacturing Service
Mean
39.78
3.929
17.22
13.45
18.14
Duncan!s
Grouping
C
A
BB
BB
*Means with the same alphabet are not significantly different
Source;Field Survey,2003.
BB
This implies that the N3.929million loan sum allocated to agricultural investments is not the
same as that allocated to the non-agricultural investments. The non-agricultural investments
comprise trading, transport, manufacturing, and the civil service. From our Duncan Multiple
Range test, there is a significant difference between the loans disbursed for agricultural purpose
and other purposes. However, the result revealed a significant difference between loan to trading
and that disbursed to the other sectors (Table 3)
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Table 4 : Effect of Loans on Investment Output
Amount N ‘ Million
Community
Bank
Agric
Trading
Transport
Manufacturing Civil -Service
B4
After
B4
After
B4
After
B4
After
Omu-Aran
4.67
6.0
15.3
21.0
8.56
11.1
10.2
Ajasse-ipo
10.11 13.2
55.5
83.2
8.8
12.5
Iludun-Oro
0.4
0.51
10.4
14.0
3.0
Iyeru-Okin
12.6
16.9
18.7
Illofa
-
-
Ibolo
72.7
Total Rate of
Return
Average
Rate of Return
88.1
14.4
22.0
29.0
B4
After
13.0
12.2
17.7
12.9
17.8
10.2
14.9
4.3
3.03
4.1
5.0
6.7
4.4
5.63
9.7
12.5
11.6
15.4
-
-
-
-
31.3
41.4
299.4 443.1 147.3 198.8
98.8
38.3
111.15 144.4
100.48 123.91 417.2 609.0 172.06 232.33 134.63 185.7 181.45 240.5
50.2
62.0
Incremental
Rate of Return
11.8
Source: Field Survey, 2003.
52.2
-
76.1
23.9
57.3
77.4
44.9
-
20.1
-
62.0
17.1
60.5
80.0
-
19.5
The result of our analysis revealed that the average rates of returns before and after loans were
secured by beneficiary farmers were 50.2% and 62.0% respectively. This implies that
community bank loans in the study area assisted the beneficiaries to secure an additional rate of
return of 11.1%. However similar additional rate of returns to other investments such as trading,
transport, manufacturing and the civil service were 23.9% , 20.1%, 17.1% and 19.5%
respectively which were all higher than the values for agriculture (Table 4). Further analysis on
the rate of returns confirms a possible significant difference between the rate of returns to
agricultural investments before and after loans were secured by the farmers.
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The t-test reveals significant difference between the rate of return to agricultural investment before
and after loan is granted to the farmers (Table 5).
Table 5: Comparison Between Rate of Return Before and After Loan is Acquired by Farmers
using t-test
______________________________________________________________________________
Variables
Compared
Means
Rate of Return
To Agricultural
53.02
Investment Before
Loan
Rate of Return
To Agricultural
Investment After
Loan is Acquired
71.5
Standard
Deviation
t-value
F-value
1.16
2.072*
______
5.45
7.86
__________________
*Significant at 5% Level
Finally, the sampled community banks highlighted some problems emanating from the low
educational status of their farmer customers. The banks reported that these customers had little or
no formal education. This problem posed a lot of difficulties ranging from time wasting when
filling loan application, as well as filling forms wrongly. Another problem reported was the low
interest rate charge on agricultural loans which was between 20-30%. The community banks
viewed this rate as very low, insufficient to sustain their operational costs for servicing loans.
The community banks reported that their operations were also constrained by insufficient
loanable funds in their vaults. Cases of loan diversion by customers were also reported.
Recommendations and Conclusion
Based on the findings of this study, the following recommendations are made to improve the
efficiency with which farmers use their loans. Proper project appraisal by banks should include
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feasibility studies on their loanees’ anticipated projects. Follow-ups in addition to financial
advice should also be undertaken by these institutions. Financial advice should be focussed on
enlightening the farmers on the importance of loan and the dividends of paying loans promptly.
.Such actions if taken will enhance better returns to agricultural loans thereby stimulate more
investments into agriculture.
On its part, government and private financiers should advance adequate loanable funds to
community banks. Interest rate regime on agricultural loans by the banks should be adjusted and
kept at reasonable levels. Such interest rate should cover the administrative
as well as the
management activities of the banks. Government should also grant autonomy to community
banks as this will help halt the delays in bank operations. Community bank autonomy will
remove the long processing period of having to pass loan cheques through commercial banks
.Such delays usually have adverse effects on agricultural activities which are usually production
season bound. There is also the need for the community banks to liaise with farmers cooperative
societies, who could then apply for and secure loans on behalf of their members. Such onward
lending to members will help the Nigerian community banks to de-emphasize the demand for
collateral securities before loans are granted. An outstanding distinguishing feature of
community banks in some Third World Countries like India and China is that loans are usually
given to farmers without stringent demands for collaterals by these banks
In conclusion, since the future of the Nigerian agriculture will be determined by the availability
of loanable funds in the sector, the establishment and proper targeting of community banks’
activities on agriculture is a crucial factor to actualizing this noble objective.
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