Introduction to Problems of Farm Credits
Obtaining loans or farm credits from financial institutions has become difficult in recent times. Especially, for agro-business industries, farmers, and agribusiness men across the globe.
Several factors such as frequent market failure, uncertainty, inadequate information, and political interference on the part of the government, account for the problems of farm credits.
These problems are known to be the major contributing factor influencing the availability of farm credit in agriculture. However, with the present economic quagmire, the available resources could hardly meet the increasing demand of farmers and the farming population.
Many financial institutions set up to provide farm credit or financial assistance to farmers have failed to meet their objectives, and many financial institutions are unwilling to give financial assistance to farmers.
They complain that the process of recovering funds is difficult due to the inaccessibility of farmers and the high costs of service and retrieving loans from rural farmers.
Read Also: 14 Ways Farm Credit Contributes to Rural Development That Will Amaze You
Problems of Farm Credits
Some of the problems of farm credits that farmers usually encounter while sourcing financial assistance or loans as enumerated by the West African Examination Council are
Inadequate Credit Institution
Inadequate Financial institutions remain one of the problems of farm credit often faced by farmers while sourcing for farm credits or loans from financial institutions.
Inadequate financial institutions limit the possibility of farmers to source for farm credit. Many farmers with good business plans for the types of farming that they wish to venture into, find it difficult to source credits from financial institutions to fund their business plan.
Thus, many of these farmers abandon these plans midway because of inadequate financial resources. Even financial institutions with the responsibility to give financial assistance to farmers may not even be ready to do so.
Centralized Operations of Most Financial Institutions
Most credit institutions have centralized operations making it difficult for farmers to obtain credits or loans from financial institutions.
The centralized nature of most financial institutions contributes to the problems of farm credit in agriculture. These financial Institutions do not have the authority or mandate to give loans directly to farmers, except for assisting private or government agencies to distribute financial assistance to farmers.
This creates challenges for farmers who need financial assistance but are unable to source it through traditional methods.
Some credit institutions are established with a mandate to accept deposits from customers and give short and medium loans to individuals with collateral security.
Political Influences
In developing countries, the acquisition of farm Credit is influenced by Political Decisions which make it difficult for some farmers to obtain farm credits or loans from financial institutions.
In some countries for example, whenever financial assistance is to be given to farmers, few people divert the loans from the financial institution to friends and cronies.
This problem is compounded by politicians who dictate which farmers received the loan by sending the list that may contain nonfarmers to a financial institution.
Political farmers are another group of people contributing to problems of farm credit. They are not farmers but have close connections to politicians who have their names listed as farmers.
As a result, whenever credits are to be given to farmers, they receive priority, before the real farmers. All these constitute serious problems of farm credit in agriculture.
Absence of Collateral Security
Collateral Security refers to anything that serves as a guarantee to facilitate the collection of loans from financial institutions. Those assets that can serve as collateral security for the collection of loans can be buildings, parcels of land, certificates of occupancy, farm records, and salary accounts.
These Collateral Security for loans must be available before financial institutions can issue facilities to the farmers.
However, most farmers do not have collateral insecurity that can guarantee access to financial assistance from financial houses which constitutes serious problems for farmers sourcing farm credits for farming.
Even when these items are available, they are not backed up by law to serve as guarantors for the collection of loans.
Inadequate Record Keeping
Farm Records are rarely kept by most farmers on the farm, they carry out farming activities without documenting the day-to-day activities and events in the farm.
Whether subsistence or commercial farms, record keeping is absent in most farms. In most cases, farmers run their farms blindly without accurate documents of income and expenditure on the farm.
Due to farmers’ inability to keep their farms’ records, it becomes difficult for farmers to ascertain the actual worth of their farms.
This lack of knowledge accounts for the reason farmers cannot determine whether they make a profit or lose. Moreso, it’s challenging for farmers to use their land for collateral security for a loan.
High-Interest Rate on Loan
This is also one of the problems of farm credit that discourages farmers from accessing financial assistance. Most financial institutes charge high interest which makes it difficult for farmers to loan repayment.
Money lenders and friends who offer Financial credits can purposely increase interest rates to discourage the farmers from paying the loan, which could lead to the seizure of the properties used for the collateral security for a loan.
Commercial banks with a single-digit interest rate on a loan do not provide much help to farmers. This is because the charges they collect for processing the loan are almost equivalent to the money the farmers may pay for the high-interest-rate financial institution.
Dishonesty on the Part of Credit Granting Institutions
Most credit-granting agencies are not sincere in granting loans or dealing with the farmers. They dubiously issue financial assistance to farmers and fortifying documents to thwart farmers’ efforts in repaying their loans.
Some individuals within the agencies take advantage of the farmers’ vulnerability by deceiving farmers of their hard-earned money in the guise of processing documents to facilitate loan collection from appropriate financial sources.
In some developing countries, many financial institutions confiscate the farmers’ valuable property instead of offering alternative options for repaying the loan.
In extreme cases, the farmer’s wife, children, and properties are even seized in the name of loan default. These practices increase the problems of farm credit for farmers.
Farmer’s Low level of Education or illiteracy
The farmers’ inability to read or write may hinder their ability to acquire loans or credit. Some financial institutions take advantage of the farmer’s level of education to fortify figures and documents to purposely cheap or Freud the farmers.
Since they cannot read or write, it is difficult to read the loan agreement as to whether they will be able to meet the requirements for the loan repayment.
Their inability to read or write makes it difficult for farmers to keep an accurate account of the amount of the loan that they have repaid, which makes them always feel cheated and usually have problems with financial institutions.
Poor Reputation of Some Farmers
A farmer’s previous antecedents or reputation determines the ability to repay a loan. The farmer’s past financial record also helps to ascertain their creditworthiness.
Some farmers have taken loans from financial institutions, without repayment, and have disappeared into the tine air. without accurate records, it will be difficult to locate such farmers. Consequently, this may result in institutions’ unwillingness to give loans to farmers in the future.
Most farmers particularly those in developing countries tend to view loans given to them as part of the national cake. However, once they have succeeded in sourcing the loan, they end up using it for another purpose. This makes repayment very difficult.
Loan Diversions by Farmers
Most farmers apply for loans without a specific reason, except for the fact that they need money for their achievement or goal.
Once have access to financial credit they will divert the cash into another area other than farming making the repayment difficult.
In developing countries, farmers can apply for loans, however, once they receive the loan, they will divert the funds into non-agricultural activities such as remarrying, buying a vehicle, and in most cases spending the money in area areas that will make repayment difficult, this sounds funny but that is the reality of loan seekers in most countries. These loan diversion altitudes of most farmers constitute problems of farm credit.
High Risks and Uncertainty in Agriculture
Farming is highly uncertainty, and this uncertain nature of agriculture leads to the problem of farm credit.
Environmental hazards such as floods, wildfires, hurricanes, tornadoes, drought, pest and disease infestation, climate change, and so on constitute serious problems for farm credit.
farmers who obtain loans from financial houses and invest in farming can have all their farms wiped out by natural hazards, making it extremely difficult for farmers to repay the loan source from credit agencies.
Unfortunately, most farmers do not have insurance coverage to care for these hazards on the farm.
Small Farm Holdings
The nature of the land tenure system practiced by most farmers is another problem of farm credits. The small farm holding often practiced by farmers in the developed country does not permit access to farm credit.
Repaying the loan borrowed under subsistence farming is extremely difficult since the produce is extremely low and the produce is not for sale.
Inadequate Information on Source of Loans to Farmers
This is another problem of farm credit in agriculture, most farmers find it very hard to source Information on the available financial institutions given Loans to Farmers.
Most financial agencies do not publicize or advertise their financial credits making it difficult for farmers who are interested in financial assistance to have access to loan or credits.
Even when farmers have this information, financial agencies do not explain to the farmer the underlying principle guiding loan facilities.
The situation, when farmers wake up only to discover some deduction from their account outside their information, can results to a bridge of trust on the part of the farmers.
Lack of Moratorium or Deferment of Credit Payment
This is another problem of farm credit in agriculture, many financial institutions do not give farmers the Moratorium or the opportunity to defer payment of loans.
Farming is bedeviled by many factors that affect farmers’ inability to repay loans, therefore financial agencies should always make provision for the deferment of loans in the case of emergencies or natural hazards.
In most cases, agricultural commodity prices tend to fluctuate, and in some circumstances, the price might be extremely low. In such cases, the farmers may be struggling to make enough profit from the sales of the farm produce, let alone to repay the loan borrowed.
Financial institutions can also consider deferring payment to another year or when it is convenient for the farmers who cannot repay loans due to some inevitable challenges.
Administrative Bottleneck / Bureaucracy
Rural farmers’ inaccessibility to farm credit due to bureaucratic procedures is another major problem of farm credit in agriculture.
Accessing farm credits from financial institutions requires a lot of bureaucratic processes and a high cost of service which can be difficult for the farmers to meet.