Access To Credit and Performance of Small Scale Farmers in Nigeria

ACCESS TO CREDIT AND PERFORMANCE OF SMALL SCALE
FARMERS IN NIGERIA
BY
ABOCHI, SHADRACH IKECHUKWU
PG/MSC/14/68429
AN M.SC. PROJECT SUBMITTED TO THE DEPARTMENT OF

ECONOMICS, FACULTY OF THE SOCIAL SCIENCES, UNIVERSITY
OF NIGERIA, NSUKKA, IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE AWARD OF MASTER OF SCIENCE
(M.SC.) DEGREE IN ECONOMICS
SUPERVISOR:
REV. FR. PROFESSOR H.E. ICHOKU
NOVEMBER, 2016
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APPROVAL
This research work has been approved to have met the requirement for the award of the
Master of Science Degree in Economics, University of Nigeria, Nsukka, Enugu State,
Nigeria.
By
........................................................................ Date......................................
Supervisor
......................................................................... Date.......................................
PROFESSOR (MRS). I.S. MADUEME
Head of Department
........................................................................... Date..........................................
REV. FR. PROFESSOR H.C. ACHUNIKE
Dean, Faculty of the Social Sciences
.......................................................................... Date...........................................
EXTERNAL EXAMINER
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CERTIFICATION
This is to certify that Abochi, Shadrach Ikechukwu, a postgraduate student of the
Department of Economics, University of Nigeria, Nsukka, with registration number
PG/M.Sc./14/68429 has satisfactorily completed the requirements for the degree of Master of
Science (M.Sc.) in Economics. The work embodied is original and has not been submitted in
part or full for any other Diploma or Degree of this or any other University.
..................................................................... Date....................................
Student
.................................................................... Date.....................................
Supervisor
.................................................................... Date.....................................
PROF. (MRS). I.S. MADUEME
Head of Department
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DEDICATION
This research work is dedicated to God almighty and to my father, Elder Camillus
Okoronnaya Abochi as well as my mother, Mrs. Christiana Ugwoakunnaya Abochi.
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ACKNOWLEDGEMENT
It is my pleasure to thank Rev. Fr. Prof. Hyacinth Eme Ichoku for supervising this thesis. I
greatly benefited from my discussions with Dr Emmanuel Nwosu, Dr Nathaniel Urama, Dr
Tony Orji and Mr Ekene Aguaghoh. Furthermore, I thank my classmates and the entire
Department of Economics, University of Nigeria, Nsukka for creating such an enjoyable and
inspiring atmosphere. Finally, I am deeply grateful to my family and friends.

(11/11/2016).
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ABSTRACT
In spite of the attempts made by some studies to explore access to credit and its effect on
output of small scale farmers in Nigeria, most of these studies did not apply the widely
accepted impact assessment methodologies and therefore, may be subject to serious problems
due to sample selection bias. This problem inspired this study which seeks to find the
demographic and socio-economic features of small scale farmers in Nigeria which
significantly determine their access to credit and the effect of credit access on the output of
theses farmers, and a further attempt was made to check whether or not the poverty and
marital statuses of small scale farmers who accessed credit caused a significant difference in
their output using Instrumental Variable(IV) and Heckman Two-Step Estimation Techniques
to correct for endogeneity and sample selection biases. Both the first stage of IV and first step
of Heckman approach revealed that value of land, household size and the highest level of
education of small scale farmers were, at 5% level, the significant determinants of their
access to credit. Both techniques agree that household size, acreage cultivated, age in years,
years of experience, sex and total annual income of the small scale farmers were the
variables that significantly influence their output at 5% level. However, they disagree on the
effects of the highest level of education and marital status of these farmers on their outputs.
While Heckman estimated them to have significant effect on small scale farmers’ output, the
generalized method of moments showed they are not significant, even at 10% level, at
determining the output of theses farmers. They also agreed that credit access, which has a
negative significant effect on output at only 10% level, does not significantly impact output of
small scale farmers at 5% level of significance. Again, among the small scale farmers who
accessed credit, there were significant differences in their outputs due to their poverty and
marital statuses. This study suggests that government and private financial institutions
should consider improving their (financial) services to small scale farmers to boost their
performance.
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LIST OF TABLES Pages
Table 1: Descriptive Statistics 60
Table 2: The Presence of Sample Selection Bias 62
Table 3: Results for the First Stage Instrumental Variable and Heckman Selection
Equation Estimates 65
Table 4: Results of Ordinary Least Squares Estimates 66- 67
Table 5: Results of OLS and GMM Estimates 68
Table 6: Estimates of Ordinary Least Squares and Step-Two of Heckman Model 71
Table 7: Heckman Step-Two Estimates with GMM Estimates 74-75
Table 8: OLS Estimates of Small Scale Farmers’ Poverty Status Effect on Their Output 77
Table 9: OLS Estimates of the Effect of Small Scale Farmers’ Marital Status on
Output of Those Who Accessed Credit 78
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LIST OF FIGURES Pages
Fig.1: Contribution of Agriculture to the Gross Domestic Product from 1981 To 2013 2
Fig.2: Distribution of Commercial Banks’ Loans and Advances to Some Sectors In 3

Nigeria
.
Fig.3: Index of Credit Access from 2009 Quarter 1 To 2014 Quarter 4 3
Fig.4: Micro Finance Banks Loans and Advances to Agricultural Sector 4
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LIST OF ABBREVIATIONS
2SLS Two-stage Least Squares

ACGS Agricultural Credit Guarantee Scheme
ACGSF Agricultural Credit Guarantee Scheme

ADB African Development Bank
ADF Augmented Dickey-Fuller
ADF Agricultural Development Fund
ADPs Agricultural Development Projects
AGRA Alliance for a Green Revolution in Africa

APT Agricultural Policy Trust
ASI Agricultural Schemes Initiatives
BLUE Best Linear Unbiased Estimator

BoI Bank of Industry
CACS Commercial Agriculture Credit Scheme
CBN Central Bank of Nigeria
CSAF Council on Smallholder Agricultural Finance
CVM Contingent Valuation Method
DFID Department For International Development
DFRRI Directorate of Food Roads And Rural Infrastructure
EA Enumeration Area
EXIM Export Import
FAFIN Fund for Agricultural Finance In Nigeria
FAO Food and Agriculture Organization
FEAP Family Economic Advancement Programme
FIML Full Information Maximum Likelihood
FMARD Federal Ministry of Agriculture and Rural Development
FSC Farm Service Centres
GDP Gross Domestic Product

GMM Generalized Method of Moment
GRP Green Revolution Programme
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HUs Housing Units
IFAD International Fund for Agricultural Development
IITA International Institute for Tropical Agriculture
ISPO Irrevocable Standing Payment Order
IV Instrumental Variable
LACS Large Scale Agricultural Credit Scheme
LATE Local Average Treatment Effect
LIMLE Limited Information Maximum Likelihood Estimator

MFIs Micro Finance Institutions
M.SC. Master of Science
MSAP Multi-Stage Agricultural Development Project
MSME Micro Small and Medium Enterprises

NAPEP National Poverty Eradication Programme
NACB Nigerian Agricultural and Cooperative Bank
NACRDB The Nigerian Agricultural Cooperative and Rural Development Bank
NAFPP National Accelerated Food Production Project
NALDA National Agricultural Land Development Authority
NCRI National Cereal Research Institute

NFDP National Fadama Development Project
NGOs Non-Governmental Organizations

NGF National Guarantee Fund
NIRSAL Nigeria Incentive-Based Risk Sharing System for Agricultural
Lending
NISH National Integrated Survey of Household
NLSS Nigeria Living Standards Survey
NSIA Nigeria Sovereign Investment Authority
OFN Operation Feed the Nation
OLS Ordinary Least Sqaures

PBN Peoples Bank of Nigeria
PP Philips Perron
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RBDAs River Basin Development Authorities
RBS Rural Banking Scheme
RESAKSS Regional Strategic Analysis and Knowledge Support System
RRF Refinancing and Rediscounting Facility
RTEP Root and Tuber Expansion Programme

SAP Structural Adjustment Programme
salevalequip Sales Values of Equipment

SMEs Small and Medium Enterprises
SMEEIS Small and Medium Enterprises Investment Scheme
USD United States of American Dollar
valland Market Value of Land
VAR Vector Autoregressive
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TABLE OF CONTENTS
Title Page……………………………………………………………………. i
Approval……………………………………………………………………... ii
Certification …………………………………………………………………. iii
Dedication …………………………………………………………………… iv
Acknowledgement… ………………………………………………………... v
Abstract………………………………………………………………………. vi
List of Tables..……………………………………………………………….. vii
List of Figures………………………………………………………………… viii
List of Abbreviations…………………………………………………………. ix– xi
Table of Contents ……………………………………………………………. xii – xvii
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study…………………………………….………......... 1–6
1.2 Statement of the Problem………………………………………………....... 6 – 8
1.3 Research Questions……………………………………………………........ 8
1.4 Objectives of the Study ……………………………………………………. 8-9
1.5 Research Hypotheses …………………………………………………......... 9
1.6 Scope of the Study………………………………………………………..... 9
1.7 Significance of the Study……………………………….….......................... 10
CHAPTER TWO: SOCIO-ECONOMIC ENVIRONMENT AND POLICY CONTEXT
OF THE STUDY
2.1 Introduction……………………………………………………….……....... 11
2.2 Some Relevant Agricultural Credit Policies and Programs in Nigeria........... 11
2.2.1 The National Accelerated Food Production Project (NAFPP).....…….......... 11-12
2.2.2 The Nigeria Agricultural and Cooperative Bank (NACB)..…….................. 12
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2.2.3 The River Basin Development Authority (RBDA)..………....….......... 12-13
2.2.4 The Agricultural Development Projects (ADPs)……………….……... 14
2.2.5 Operation Feed The Nation (OFN)...........................…......................... 15
2.2.6 The Agricultural Credit Guarantee Scheme (ACGS)..………….……. 15-16
2.2.7 The Land Degcree Of 1978…………………………………................ 16
2.2.8 The Rural Banking Scheme (RBS)..………………………………….. 16-17
2.2.9 The Green Revolution Programme (GRP).……………………………. 17
2.2.10 The Structural Adjustment Programme (SAP).…………………….... 18
2.2.11 The National Land Development Authority (NALDA)..……………. 18-19
2.2.12 National Fadama Development Project (NFDP)...…………............... 19
2.2.13 Family Advancement Programme (FEAP)…………………………. . 19
2.2.14 Root and tuber expansion programme (RTEP)……………….…….... 19
2.2.15 Agricultural Schemes Initiatives (ASI)....................………….…….... 20
2.2.16 Small and Medium enterprises investment scheme (SMEIS)..……..... 20
2.2.17 Refinancing and Rediscounting Facility (RRF)....………................... 20
2.2.18 National Poverty Eradication Programme (NAPEP).......………….... 20-21
2.3 Reasons for the Failure of The Policies and Programmes..................... 21-22
2.4 President Yar’aua’s 7 Point Agenda .....................……………………. 22-23
2.5 The Agricultural Transformation Agenda of President Goodluck Ebele
Jonathan’s Administration...................................................................... 23-24
2.6 Recent Initiatives for Funding Agriculture..............................………... 24-26
CHAPTER THREE: REVIEW OF RELEVANT LITERATURE
3.1 Introduction……………………………………………………….…... 27
3.2 Conceptual Framework……………………………………….………. 27
3.2.1 The Concept of Credit……………………………………………….. 27-28
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3.2.2 Credit Demand…………………………………………………............. 28
3.2.3 Access to Credit and Credit Use...………………………………....….... 28
3.2.4 Loan Repayment And Loan Default..…………………………….…….. 29
3.2.5 Definition of a Small Scale Farmers.………………………..….............. 29– 30
3.2.6 Performance of a Small Scale Farmer..................…………………........ 30
3.3 Theoretical Literature………………………………………………….... 30
3.3.1 Theory of Agricultural Finance By Jungale…………………………...... 31
3.3.2 Risk and Uncertainty Theory of Agricultural Finance...……………….. 31 – 32
3.3.3 The Theory of Change..................………….………………………….... 32
3.3.4 Reservation Demand and the Rates of Interest By H.J. Davenport......…. 32-33
3.3.5 Theoretical Argument on Loan Sources ……………………………….. 33-34
3.4 The Nature and Role of Credit Market......……………………………... 34
3.5 The Link Between Finance, Agriculture and Economic Growth..……... 35
3.6 Empirical Literature................................................................................. 35
3.6.1 Empirical Evidence from International Literature......…………………. 35-38
3.6.2 Empirical Evidence from Nigeria..………….…………………………. 38-41
3.6.7 Limitations of Previous Works and Value Addition............................... 41-42
CHAPTER FOUR: RESEARCH METHODOLOGY AND DATA
4.1 Introduction.............................................................................................. 43-44
4.2 Theoretical Framework..................…………………….………….......... 44
4.3 Model Specification..............…………………….……………………... 44
4.3.1 Heckman Two-Step Model Specification...............................…………. 44-46
4.3.1a Estimation Procedure......………………………………………………. 46- 48
4.3.1b Definition of Variables......……………………………………………. 48- 49
4.3.1c Model Justification.............………………………………………….... 50- 51
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4.3.2 Instrumental Variable Technique…………………………………….. 51- 52
4.3.2a Ordinary Least Squares (OLS) ....…………………………………….. 53- 54
4.3.2b Selection of Instruments.......................................................…………. 54
4.3.2c Test for Endogeneity ...........………………………………………….. 54- 55
4.3.2d Test For Heterosckedasticity...............................………………………. 55
4.3.2e Tset For Overidentification Restriction and Relevance Of Instruments... 55
4.3.2f Model Justification ……………………………………………….......... 55- 56
4.3.3 Model Three: Ordinary Least Squares For Objective Four...................... 56
4.3.4 Model Four: Ordinary Least Squares For Objective Five…………….... 56- 57
4.4 Data Sources and Description................................................................... 57- 56
4.5 Sampling Design.......................................................................................... 58
4.6 Sample Size................................................................................................. 58
4.7 Software to Be Employed........................................................................... 58
4.8 Limitations of the Survey Data................................................................... 58- 59
CHAPTER FIVE: PRESENTATION AND ANALYSIS OF RESULTS
5.1 Descriptive Statistics........................................................................................... 60- 61
5.2 The Presence of Sample Selection Bias...............................…………..... 62
5.3 Presentation and the Interpretation of Preliminary Results For The
Instrumental Variable Technique Application.......................................... 62
5.3.1 Test Of Endogeneity (Orthogonality Conditions) For Access To Credit
(Loanuse).................................................................................................. 62- 63
5.3.2 Result of the Test For Heteroscedasticity.............................................. 63
5.3.3 Interpretation of Results For Tests of Overidentifying Restrictions...... 63- 64
5.3.4 Interpretation of the Results of the Test For Identification of The
Model and the Relevance or Redundancy of the Instrument................ 64
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5.3.5 Interpretation of Results for Model Underidentification Tests................. 64
5.4 Interpretation of Results for the First Stage Instrumental Variable and
Heckman Selection Estimations (For Objective One).............................. 65- 66
5.5. Interpretation of the Results for Ordinary Least Squares (OLS) Estimation
For Objective Two (The Reference Model).............................................. 66- 68
5.6 Interpretation of the Results of the Generalized Method of Moments (GMM)
Estimation for Objective Three and Its Comparison to OLS Estimates......... 68- 70
5.7 Interpretation of the Results for the Heckman Step Two Estimation for Objective
Three and Its Comparison with Ordinary Least Square (OLS) Estimates...... 71
5.7.1 Interpretation of the Results for the Heckman Step Two (Heckman)
Estimation for Objective Three................................................................. 71- 72
5.7.2 Comparison of the Heckman Step-Two Estimates With Ordinary Least
Squares (OLS) Estimates.......................................................................... 73- 74
5.8 Comparison of Heckman Step-Two Estimates with GMM Estimates...... 74- 76
5.9 Interpretation of the Ordinary Least Squares Estimates Of the Effects Of
Poverty Status on The Output of Small Scale Farmers Who Accessed
Credit (Objective Three)............................................................................ 77- 78
5.10 Interpretation of the Ordinary Least Squares Estimates Of the Effects
of Marital Status on the Output Of Small Scale Farmers Who Accessed
Credit (Objective Four).............................................................................. 78
5.11 Discussion of Results and Evaluation of Research Hypotheses............... 78- 79
CHAPTER SIX: SUMMARY, CONCLUSION AND RECOMMENDATIONS
6.1 Summary................................................................................................... 80- 82
6.2 Conclusion............................................................................................... 82- 83
6.3 Policy Implication................................................................................... 84- 85
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6.4 Suggestions for Further Research........................................................... 85
REFERENCES….......……………………………………………………….. 86- 94
APPENDICES…....………………………………………………………...... 95- 110
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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Agriculture is the mainstay of most developing nations’ economies. It accounts for about 70
percent of full-time employment, 33 percent of national income and about 40 percent of
African countries’ total export earnings (Otsuka, Larson & Hazel, 2013). Agricultural sector
is fundamental to the provision of food for human development and raw materials for
industries. In Nigeria, agriculture has great potential for growth. This comes from the
country’s abundant natural resources, particularly land, and the large yield gap that we can
explore to increase food security and reduce poverty (AGRA, 2013). The proportion of rural
poverty is the highest in Sub-Saharan Africa and it also has the greatest potential for
smallholder agriculture-led poverty reduction (Christiaensen, Demery & Kuhl, 2011).
Christiaensen et al. (2011), also found that a 1% increase in agricultural per capita Gross
Domestic Product (GDP) reduced the poverty gap five times more than a 1% increase in GDP
per capita in other sectors, mainly among the poorest people who, mainly, are small scale
farmers. Since agriculture employs a large number of people in Nigeria, increasing
productivity is essential to eradicating extreme hunger, poverty reduction and ensuring food
security (Chigbu, 2004). The Sub-Saharan Africa countries (Nigeria inclusive) invest, on
average, only 5-7% of public expenditure in agriculture, compared to 8-10% in Asia
(RESAKSS, 2010), whereas in the 2003 Maputo Declaration, African Heads of State
committed to increasing expenditures on agriculture to 10 percent of their national budgets
(Diao, Thurlow, Benin & Fan, 2012).
However, small scale farming contributes to the national objective of employment
opportunities creation and income generation by providing a source of livelihood for the
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majority of low-income households in Nigeria. Despite these significant roles played by the
sector, the small scale farmers have, over the years, experienced many constraints that have
limited the achievement of their full potentials. The figure 1 below shows clearly, that the
contribution of agriculture to the Gross Domestic Product has been less than N400 Billion
since 1981.
FIGURE 1: Contribution of Agriculture to Gross Domestic Product
400.00
350.00
Output in Billions of Naira
300.00
250.00
200.00
150.00
100.00
50.00
0.00
Year
Source: Author’s Plot Using Excel and Data From CBN Statistical Bulletin, 2014.
From the figure 2 on the next page, agricultural sector has always received the least from the
commercial banks since 2008.
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Figure 2: Distribution of Commercial Banks' Loans and Advances To Some Sectors In
Nigeria (In Billions of Naira)
Also, access to credit index by farmers rose from 1% in 2010 to 13.3% in 2011 but fell to
3.1% in the third quarter of 2014, as shown in the figure 3 below.
FIGURE 3: Index of Credit Access Between 2009 Quarter 1 To 2014 Quarter 4.
15
10
5
Credit Access Index(%)
0
2009
2009
2010
2010
2011
2011
2012
2012
2013
2013
2014
2014
-5
credit access index
-10
-15
-20
-25
Year
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The microfinance banks loans and advances to the sector (shown in figure 4 below) fell from
its peak (9,704.9 million) in 2005 to (7,735.7 million) in 2014.
Figure 4: Micro Finance Banks Loans and Advances to Agric. Sector
12,000.0
Loans and Advances in Millions of Naira
10,000.0
8,000.0
6,000.0
Micro Finance Banks Loans and
4,000.0 Advances to Agric Sector in
Millions of Naira
2,000.0
Years
These figures, however, are discouraging for the sector that sustains about 70 percent of our
population (CBN, 2014).
The major challenge facing these farmers is lack of and limited access to credit as we saw in
the figures 2, 3 and 4 above. Credit is, no doubt, the important instruments that can enable
small-scale farmers overcome their liquidity constraint, but lack of acceptable collateral and
procedural bureaucracies of credit borrowing that also affects the timing of the credit are
some of the constraints the smallholder farmers face in accessing credit from the formal
institutions. These problems have led to majority of small scale farmers limiting themselves
to subsistence activities. Illiteracy also affects the small scale farmers’ access to credit and
the success of the agricultural development efforts in Nigeria. The farmers who have no basic
education are denied credit access and this reduces their output by keeping them in
subsistence farming (Chigbu, 2004). This type of subsistence farming is characterized by low
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output, income and savings, poor access to inputs, and very importantly, lack of access to
credit financing (Diagne, 2002). In fact, lack of credit to agricultural sector has been
identified as the major cause of high rate of exit from agricultural businesses and the poor
performance of the sector (Okurut, Schoombee & Berg, 2004).
These constraints induced successive Nigerian governments to initiate policies and
programmes that would ensure adequate availability of cheap and accessible credit to small-
scale farmers (Nwanze,2011). Some of these programmes introduced over the years include:
The Agricultural Credit Guarantee Scheme Fund (ACGSF), established in April, 1978,
mainly to cushion the effect of lack of collateral of the small scale farmers in Nigeria; The
Rural Banking Scheme (RBS), which established about 300 branches in rural areas between
1980 and 1989; The Community Bank of Nigeria (1990); The Family Economic
Advancement Programme (FEAP), established in 1997; and recently, The Nigerian
Agricultural Cooperative and Rural Development Bank (NACRDB) renamed Bank of
Agriculture (BoI) in October, 2000. A complete list of the policies and programmes
established to improve agriculture, alongside their aims, achievements and reasons for their
failures, are in chapter two (the policy context of this study).
Whether these programs and policies of the government have succeeded in terms of
improving the small scale farmers’ output significantly is one area researchers have not
adequately investigated. This may be because increasing access to credit by small scale
farmers has never formed a major goal of the policies and programs of the government and
even when it is listed as part of her development objectives, realities may prove otherwise. It
may also be that most of the research works in this area did not use the acceptable research
methodologies which account for sample selection bias and endogeneity. Interestingly,
empirical evidences of the effect of credit use by smallholder farmers on their output can be
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used as a reliable guide to design agricultural policy and program necessary to achieve
efficient allocation of scarce resources among the sectors of the economy.
In the light of the above premise, this study seeks to ascertain the demographic and socio-
economic features of the small scale farmers which significantly determine their access to
credit, if there is significant effect of credit access on the output of small scale farmers who
accessed credit, whether the poverty levels of small scale farmers who have credit access
have significant effect on their output relative to non poor small scale farmers who accessed
credit and if marital status has any significant difference in the output of small scale farmers
who accessed credit, employing the proper econometric tools which correct for endogeneity
and sample selection bias.
1.2 STATEMENT OF THE PROBLEM
Notwithstanding that the agricultural sector employs nearly three-quarter of the Nigerian
work force (Ugbaja & Ugwumba, 2013), it has been observed to be performing poorly. In
Nigeria, however, agriculture is dominated by small scale farmers (as can be seen in their
small-scale farming activities) most of whom are rural-based, with low level of education;
poor access to useful information and market and lack access to credit finance. Inaccessibility
of credit by these farmers hinders their acquisition of the required inputs to increase their
output. Lack of these required inputs limit agricultural development by reducing farmers’
output, expected income, savings (needed for investment) and overall welfare of the small
scale farmers in Nigeria(Daveze, 2000). Again, the enduring lack of credit access faced by
these farmers have significant consequences for their household-level outcomes, as well as,
technology adoption, agricultural productivity, food security, nutrition, health and overall
welfare of the smallholder farmers’ households (Eyo, 2008). Increasing small scale farmers’
output for self-sufficiency, no doubt, requires more use of inputs such as improved seedlings,
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fertilizers, pesticides, land and labour and they all necessitate the use of credit (Odoemenem
and Obinne, 2010). However, small scale farmers in Nigeria need tangible financial resources
to enable them cope with the increasing cost of inputs (Diagne, 2002). Therefore, credit is the
main solution to the low savings capacity of the small scale farmers in Nigeria due to its role
in enabling farmers take care of the expenses/investments associated with increase in their
output. Thus, solving the problem of small scale farmers’ access to credit is very important in
improving their performance and, as a result, will lead to economic development through its
role in agricultural development.
The little efforts to encourage the farmers by the government, however, most times, do not
get to the grass root, and when they are channelled at the grass root, only the farmers with
political affiliation or loyalty get them. Sometimes, these credits get to false farmers who use
them for non agricultural activities, thereby making the effort of the government fruitless
(Nwaeze, 2001).
In addition, credit institutions are often constrained from serving the small scale farmers by
lack of property rights (acceptable collateral), high cost of transaction (cost to the financial
sector for giving the loans to these farmers), high risk and low returns from agricultural
businesses (Chigbu, 2004). Also, the methods (for example, loan rationing) and practice (high
interest rate charge) adopted by the financial institutions have not in any way attenuated the
yearnings of these smallholder farmers. The timing of the loan, however, is an issue also as
most of the loans granted were advanced to farmers later after they had finished their planting
(Okunmadewa, 2003).
Furthermore, the research efforts in this area have not adequately evaluated the effect of
credit access on the output of small scale farmers who accessed credit. This prompts me to
delve into ascertaining if the demographic and socio-economic features of the small scale
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farmers significantly determine their access to credit, if there is significant effect of credit use
on the output of small scale farmers in Nigerian, whether the poverty levels of small scale
farmers who have credit access have significant impact on their output relative to their peers
who are non poor and if the outputs of small scale farmers who accessed credit significantly
vary due to their marital status. To do this, this research work will attempt to answer the
following research questions:
1.3 RESEARCH QUESTIONS
1. What are the demographic and socio-economic features of the small scale farmers in
Nigeria that significantly determine their access to credit?
2. Has access to credit by small scale farmers in Nigeria any significant effect on their
output?
3. Does the poverty status of small scale farmers who accessed credit have any
significant effect on their output?
4. Is there any significant difference, due to marital status, in the output of small scale
farmers who accessed credit?
1.4 OBJECTIVES OF THE STUDY
The broad objectives of this study is to know the demographic and socio-economic
characteristics of the small scale farmers that significantly determine their access to credit
and to ascertain if credit access by small-scale farmers in Nigeria significantly influenced
their output, after correcting for endogeneity and selectivity bias. In particular, this research
work will seek:
1. To determine if demographic and socio-economic characteristics of small scale

farmers significantly influence their access to credit.
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2. To ascertain the effect of credit access on the output of small scale farmers in
Nigeria.
3. To know if poverty status of small scale farmers who used credit has any
significant effect on their output.
4. To estimate the difference in output, due to marital status, of small scale farmers
who accessed credit.
1.5 RESEARCH HYPOTHESES
HO1 : The demographic and socio-economic status of small scale farmers do not
significantly determine their access to credit.
HO2: Credit access by small-scale farmers has no significant effect on their output.
HO3: The influence of credit use on output of small scale farmers is the same irrespective
of their poverty statuses.
HO4: The effect of credit access on output of small scale farmers is the same for both the
married and single small scale farmers.
1.6 SCOPE OF THE STUDY
This research will look at the demographic and social-economic features of small scale
farmers which determine their access to credit and the effect of their credit access on their
output. It will consider the credit obtained from both formal and informal credit sources by
small scale farmers in Nigeria. The analyses will be on national level. Output will be used to
measure performance of small scale farmers in Nigeria. It will use data from the agricultural
section of the Nigeria Living Standard Survey, 2009 and the Harmonized Nigeria Living
Standard Survey, 2012, Version 1.0.
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1.7 SIGNIFICANCE OF THE STUDY
This research will be significant to the government, ministry of agriculture and policy makers
--as empirical revelations from the effect of credit access on the output of small scale farmers
can be used as a reliable guide in designing agricultural policies and programs needed to
bring about efficient allocation of scarce resources among the sectors of the country. The
research will also be relevant to farmers --to enable them know the areas they need
improvement on and researchers (both students and non-students) to know the appropriate
research methodologies to adopt when researching in this area.
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CHAPTER TWO
SOCIO-ECONOMIC ENVIRONMENT AND POLICY CONTEXT OF THE STUDY
2.1 INTRODUCTION
Over the years, credit policies and programs were introduced to make sufficient investment
funds available to the agricultural sector. The main objectives of these policies were to
increase the volume of credit in rural areas and create enabling environment, so that the
small-scale farmers can have access to agricultural credit to finance their production and
enhance their performance. The rationale for these targeted assistance to the small scale
farmers are that they, as a group, represent a very large percentage of population, creating
most of the jobs, sustaining the rural populace and provide a large percentage of the private
sector payroll. Given that lack of and limited access to finance is identified as one of the
greatest limitations for the operation and growth of the small scale farming, policies that are
directed to efficiently lift these credit constraints for the small scale farmers would
consequently be expected to impact directly on their growth and hence, the growth of the
economy as a whole. In this light, the socio-economic environment and policy context of this
study will tow the following lines:
2.2 SOME RELEVANT AGRICULTURAL CREDIT POLICIES AND PROGRAMMES IN

NIGERIA
2.2.1 The National Accelerated Food Production Project (NAFPP)
The NAFPP was established in 1973 with the main objective of accelerating the production
of the six major crops in Nigeria namely; rice, maize, wheat, cassava, sorghum and millet. It
had three components― research, extension and agro-services―and was separated into three
phases namely; the Minikit, Production kit and Mass production phase (Anyanwu, 1997). The
International Institute for Tropical Agriculture (IITA), Ibadan was the national coordinator of
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NAFPP. The National Cereal Research Institute (NCRI) Ibadan coordinates the activities of
the NAFPP for rice and maize while National Root Crop Research Institute, Umudike
coordinated the cassava section. The NAFPP centre at Samaru, Zaria took charge of sorghum,
millet and wheat (Anyanwu, 1997). Although a substantial number of farmers gained from
the programme, it lacked adequate financing, publicity, commitment from government, in
addition to poor infrastructural facilities that bedevilled it. It also introduced seed varieties
that did not meet the traditional preferences of farmers. Shortage of extension service workers
also contributed to its failure.
2.2.2 The Nigerian Agricultural and Cooperative Bank (NACB)
The NACB was established in 1973 with the aim of fostering growth in the quantity and
quality of credit given to all aspects and levels of farmers for agricultural production and to
improve the storage facilities for agricultural products including the promotion of agricultural
products marketing. The Central Bank of Nigeria had 40% equity contribution valued at
N150 million in 1984. The bank provided direct loan to farmers and through the state
institutions and cooperative societies on-lend to third parties (the members of the organized
rural cooperatives). Inadequacy of the loan amount granted the farmers thwarted the aim of
the bank. It was later merged with the Peoples Bank of Nigeria (PBN) and Family Economic
Advancement Programme (FEAP) to form the Nigerian Agricultural Cooperative and Rural
Development Bank (NACRDB). The NACRDB was renamed the Bank of Agriculture in
October, 2000. Over 300,000 small-scale farmers have benefited from the bank.
2.2.3 The River Basin Development Authorities (RBDA)
Conceived in 1963 and established in 1973 with the creation of the Sokoto-Rima and the
Chad Basin Development Authorities in 1976 and 1977, respectively. They were later
increased to eleven RBDAs. The eleven branches of River Basin Development Authorities
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established were Sokoto-Rima for Sokoto; Hadejia-Jamare for Kano; the Chad for Borno; the
Upper Benue for Gongola; the Lower Benue for Benue and Plateau; the Cross River for Cross
River; the Anambra-Imo for Anambra and Imo; the Nigeria for Kaduna, Niger and Kwara; the
Ogun-Oshun for Ogun and Lagos; the Benin-Owena for Bendel and Ondo; and Niger-Delta
for Rivers. In June 1984, the number of the River Basin was increased to 18 by the Buhari-
Idiagbor regime under the new name River Basin In River Development Authorities. The aim
was to decentralize the activities of the authorities and bring her functions and activities closer
to the rural people. Each state had RBDA with the exception of Lagos and Abuja, which
joined other states. The RBDAs was launched to cater for the development of land and water
resources potentials of Nigeria for agricultural purposes and general rural development. The
rural development aspects were emphasized more under the new name. According Anyanwu
(1997), good achievements were made as regards to surface water development and
exploration of ground water resources in Sokoto, Kano and Borno states. By 1987, the
number of RBDAs was returned to eleven by the Ibrahim Badamosi Babangida (IBB) regime.
In IBB regime, the RBDAs developed 51,558 hectares of land, irrigated about 12,540
hectares, constructed 443 kilometres of roads, and provided for about 136,514 households. It
also drilled about 58 boreholes. Its fund stood at N589.3 million with 96.1% coming from
federal government (CBN, 2005).
The success of the RBDAs was short-lived by inadequate planning data, lack of spare parts
and lubricants, difficulty faced in securing land for development in the southern parts of the
country, and shortages of qualified and experienced technical, professional and managerial
manpower.
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2.2.4 The Agricultural Development Projects (ADPs)
The World Bank Agricultural Development Projects (ADPs) are based primarily on
investment in physical and institutional infrastructure. Physical infrastructure included rural
feeder roads, wells, dams, ponds, buildings and soil conservation embankments and the
institutional infrastructure had to do with the erection of farm service centres. All the ADPs
had a key objective of increasing food production and consequently farm incomes for a great
number of rural households within the defined project regions, thus improving the standard of
living and welfare conditions of the farmers generally. The ADPs started with three projects
in the northern part of Nigeria in 1974. These projects were Funtua, Gusau and Gombe ADPs.
They focussed on how to improve the major food crops such as maize, sorghum and millet
including improvement of extension services, input supply system, rural road network and
village water supply. The success recorded by the first ADPs led to their expansion by the
federal government, with the support of the World Bank, to other states of the country. Their
aims were the provision of infrastructure, farm services centres, supply of farm inputs such as
fertilizers, root and tuber crops, agro-chemicals(especially herbicides and pesticides),
extension services and the establishment of special plots for extension and training of farmers.
According to Ike (1986), the number of projects was in 1980 increased from three to nine.
With this expansion, the first Multi-Stage Agricultural Development Project (MSAP-1) was,
in 1986, established to care for seven states namely, Anambra, Imo, Bendel, Benue, Cross
Rivers, Ogun and Plateau states. The second phase was introduced in 1988 to ensure that all
the states were catered for. As a result of this expansion, the benefits of the projects reached
all the local governments. At the maturity of the first nation-wide ADPs loans in August,
1990, all the state ADPs were terminated and an Agricultural Development Fund (ADF) Loan
was initiated for the other projects.
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2.2.5 Operation Feed The Nation (OFN)
OFN was launched in May, 1976 by the President Obasanjo regime to increase, mainly, food
production and consequently attain self-sufficiency in food supply. Farmers, under this
programme, were encouraged and assisted with technical advice and essential farm input, like
improved seedlings, fertilizers, pesticides, farm implements and live stocks and their feeds
sold to them at subsidized prices. Minimum prices were set per metric ton for farm products.
But it was observed that the minimum prices were not adhered to in the markets. Farm outputs
were sold at prices less than the set minimum prices. Faulty campaigns and administrative
system led to the collapse of the programme.
2.2.6 The Agricultural Credit Guarantee Scheme (ACGS)
Formed in 1977 under the Agricultural Credit Guarantee Fund Act of 1977 through the joint
effort of the Central Bank of Nigeria and the commercial banks to remove the hitches
experienced in extending credit to the agricultural sector, the ACGS provided N100 million,
60% of which the Central Bank subscribed to. The scheme started operation in 1978 to
increase the number and amount of credit granted to the agricultural sector by guaranteeing
the loans granted for agricultural purposes by the banks in line with the principles of the ACT
that formed the scheme. The areas guaranteed here were those relating to the establishment
and management of plantations for the production of rubber, oil palm and similar crops, the
cultivation of cereal crops, animal husbandry and cattle rearing, poultry and fish farming. This
scheme offered 75% guarantee backed by the Central Bank against any agricultural credit
default, less the amount realised from the disposal of the collateral used by the farmers to
obtain the credit. The interest rate was market determined. When a loan was duly repaid, the
CBN offered 40% rebate on the interest paid on the loan. About 70% of the individual loans
given to farmers were less than N50,000. About 11% of the farmers got N100,000 and above
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(CBN, 2009). However, the scheme experienced some challenges which include delays faced
by farmers in ensuring that their loan applications are processed by the banks. The supplies of
fertilizers were erratic largely due to centralised government control of the purchase. The
distributions of the subsidized fertilizers did not get to all the rural farmers as only the ones
who were connected to the government benefited from it.
2.2.7 The Land Decree Of 1978
Launched in March, 1978, with the aim to reform the land tenure system that had been a
strong obstacle to the development of agriculture, the decree secured a better security of
tenure and also encouraged consolidation of holdings and large-scale farm operation. This
made it possible to attract foreign entrepreneurs and capital into agricultural production
(Anyanwu, 1997). The control of land was vested on federal government and held in trust by
the state governments. The decree also transferred the land allocation powers from the rural
chiefs to the local government authorities. It also established a land allocation committee in
each state to advice the government on effective management of land. However, the decree
was conceived as unnecessary interference with the property rights of the people and was
resisted in the southern parts of Nigeria.
2.2.8 The Rural Banking Scheme (RBS)
According to Anyanwu, 1997, The Rural Banking Scheme aimed at the penetration of rural
areas by the banks by spreading the branches of the banks to the rural areas. The reason for
this dispersal was to mobilise rural savings and invest 50% of the deposits in the agricultural
sector. The first period of the scheme ended in 1983 with the establishment of 200 bank
branches across the country. The phase II of the scheme, from 1980 to 1983 built 266 rural
branches of the banks nationwide, while the third phase lasted from 1985 to 1989 with 300
branches present in the rural areas. The scheme established a total of 756 rural branches
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across the country and was abandoned in 1990. It succeeded in transforming the rural
economy and restraining the drift of rural dwellers (rural farmers) to the cities in search of
greener pastures. The issue of ineligibility on the side of the rural farmers to access loan
hindered the smooth sail of the scheme, as farmers still lacked acceptable collateral by the
banks.
2.2.9 The Green Revolution Programme (GRP)
The GRP was established in 1980 by the Shehu Shagari administration with the aim of
providing improved seedlings, fertilizers, pesticides, herbicides, irrigation, credit, appropriate
mechanization, agro-service centres, improved marketing system and pricing policy as well as
other incentives necessary for farming. The target was to make the country self-sufficient in
basic food production within 5 years and to rehabilitate and restore export promotion
activities. In short, to attain self-reliance in the production of food by removing all constraints
to increased agricultural production and to diversify the country’s source of foreign exchange
earnings were the main goals of the programme. Huge funds were allocated to construct rural
physical infrastructure and input procurement and distribution system introduced. The cost of
inputs were subsidised. The program covered all areas of agricultural production, including
food and export crops, livestock, fisheries and forestry. The program succeeded in increasing
the hectares of land cultivated, livestock production and funds earmarked for forestry. It was
challenged by poor research and extension services, problems of land acquisition, inadequate
data and capacity of executives of the programme and lack of infrastructural facilities
(Anyanwu,1997).
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2.2.10 The Structural Adjustment Programme (SAP)
In 1986, the Ibrahim Babangida regime launched the SAP as a result of the crises that erupted
due to the fall in oil price. The main objective of introducing the Structural Adjustment
Programme in the agricultural sector was to increase agricultural production and export of
agricultural products to enhance the growth of the economy. Leonard Wantchekon (2002),
listed the SAP policy measures to include the following: the removal of all government
subsidies on food and other agricultural products, the production and promotion of non-
traditional agricultural products for exports and import restrictive measures on food and other
locally produced agricultural products used as raw materials (that is, the manufacturers were
forced to use locally produced raw materials). The SAP was criticised heavily for bringing
about economic hardship on the people. It was actually imposed to ensure debt repayment and
economic restructuring and to achieve this, Nigeria had to reduce spending on things like
health, education, and infrastructural development, reduce consumption and decrease
financial regulations. It also prescribed export-oriented open markets as part of the structural
adjustment. Domestic industry protection was also reduced. Other adjustment policies of the
programme include currency devaluation, increase in interest rates (which affected farmers
negatively), labour market flexibility, and subsidy removal, including subsidies on farm
implements.
2.2.11. The National Agricultural Land Development Authority (NALDA)
In 1991, NALDA was introduced to moderate the severe problem of low utilization of the
country’s vast farm land which affected greatly agricultural production. Its major objective
was to develop between 30 to 50 hectares of land in each state by 1994. Farmers were also to
be placed within 3 to 5 kilometres to their farmlands. About N300 million was allocated
annually by the federal government to fund the programme, while states and local
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governments were to allocate suitable tracts of land to the authority in addition to the amount
they contributed in funding its programmes. Before the end of 1995, NALDA had a total of
sixteen thousand hectares of land out of which 81.1% was cultivated with crops
(Anyanwu,1997). Notwithstanding, the performance of NALDA was constrained by
inadequate and untimely release of funds and shortages of farm machinery and equipments.
2.4.12 The National Fadama Development Project (NFDP)
The National Fadama Development Project (NFDP) was formed in 1992 to provide funds for
irrigation (with the use of ground water in already cultivated Fadamas) and to assist farmers in
technology adoption. This project succeeded in improving extension services, built project
offices and staff houses, ensured a more efficient means of input procurement and
distributions, especially fertilizers. It also provided feeder roads and constructed farm service
centres (FSC) for input supplies in the rural areas.
2.4.13 Family Economic Advancement Programme (FEAP)
FEAP was established in 1997 to serve the credit needs of the less privileged families in their
daily economic activities through input supplies, cash loans and capacity building. It failed
due to poor funding by the government.
2.4.14 Root and Tuber Expansion Programme (RTEP)
The programme was established in 2000 with the aim of commercialising root and tuber crops
production and to increase the living conditions, income, food security and nutritional health
of the poorest smallholder rural farmers. The programme could not be sustained by the
government as a result of inadequate funding.
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2.2.15 Agricultural Schemes Initiatives (ASI)
The aim of the scheme was to encourage banks to lend to the agricultural sector regardless of
the high risk and uncertainty associated with the sector. The government provided the banks
with low cost funds for onward lending to farmers. This initiative also covered the risk
exposure of banks by backing their loans with instruments, hence enhanced farmers’ access to
credit.
2.2.16 Small and Medium Enterprises Investment Scheme (SMEEIS)
This was introduced by the Bankers’ Committee in 2001 to support the efforts of the federal
government on agro and agro-allied businesses. It got its finance from a couple of ways: by
debt financing with interest at a rate less than 10% and by equity financing.
2.2.17 Refinancing and Rediscounting Facility (RRF)
The main aim of this facility was to assist the banks that are in need of liquid asset as a result
of long-term credit they gave to farmers. The banks were availed a certain percentage of the
outstanding debt portfolio to long-term agricultural finance by the CBN at reduced rates at the
discount windows.
2.2.18 National Poverty Eradication Programme (NAPEP)
The programme was established to eradicate extreme poverty and provide subsidized credit to
farmers. the programme has four schemes namely Social Welfare Service Scheme, which
ensures high quality education, primary healthcare, farmers’ employment and provision of
social services, provision of agricultural input and credit delivery to rural farmers; Rural
Infrastructure Development Scheme which provided portable water, ensure rural
electrification, transportation and communication development; Youth Employment Scheme,
which contains capacity acquisition, mandatory attachment and credit delivery; Natural
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Resource Development and Conservation Scheme, which had programmes for environmental
protection via conservation of land and space, development of agricultural resources, solid
minerals and water resources.
2.3 REASONS FOR THE FAILURE OF THE POLICIES AND PROGRAMMES
These programmes failed due to lack of adequate manpower and skill to deliver services to
the farmers effectively. The credit institutions went into lending to agricultural sector not
employing the services of trained agricultural credit officers with good knowledge of the
business. Some of the programmes also failed due to the poor repayment performance. Again,
the farmers lack the basic skills required to manage farm, such as record keeping which is a
necessary requirement for credit access.
Secondly, the unwillingness on the part of banks to lend to the farmers is also a factor.
Notwithstanding the mandatory preferred sector lending, guarantees for banks exposure to
risk and subsidized fund scheme, most banks chose not to give credit to farmers as a result of
high risk involved in dealing with the farmers.
Thirdly, poor funding was also a factor that contributed to the failure of these policies and
programmes. For instance, the NACRDB had a capital base of N50 billion to be funded
through a 60:40 ratio by the federal government and the CBN. However, only about N23
billion were paid up. The DFRRI and other non-bank institutions were also not well funded.
These institutions could not effectively deliver their objectives in the face of poor funding.
Again, some of the policies and programmes like the Agricultural Credit Support Scheme
were anti-small scale farmers due to the requirements and documentations needed for them to
access credit. Apart from the refinancing and rediscounting facility, most policies did not
favour long maturity periods that is necessary for some agricultural crops. This simply implies
that major agricultural products that had long gestation periods like cocoa and palm oil
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suffered. Other limitations were that the infrastructure for processing and storage, land tenure
systems, legal systems for registrations and perfection of collateral, judicial systems for the
enforcement of loan contracts and foreclosure of collateral were very weak. These
discouraged private sector participation and commitment to agricultural policies as regards to
financing.
2.4 PRESIDENT YAR’ADUA’S 7 POINT AGENDA
President Umar Musa Yar’adua’s agenda on agriculture mobilized N200 billion worth of
bond for development of commercial agriculture in the country. The bond, through the
National Economic Council, chaired by the Vice President (Namadi Sambo) and managed by
the CBN, was flouted by the Federal Government to provide credit facilities to farmers. The
main intention was to enhance food security in the nation and create three million jobs. The
agenda also revived the Commodity Boards and their licensed buying agents to enhance the
marketing prospects of farm products. It also provided counterpart funding for FADAMA III,
International Fund for Agricultural Development (IFAD) and African Development Bank
(ADB) projects in the country. It rehabilitated and constructed dams, irrigation infrastructures
which provided 220,000 hectares of land with irrigation, increased under water cultivation
annually by 5%, increased the production of fish by 230% from 650,000 metric tonnes to 1.5
million metric tonnes yearly, rural infrastructures (roads, water, electricity and housing) were
upgraded and there was increase in agricultural sector’s contribution to GDP by at least 8%.
The Agricultural Policy Trust was also part of the seven-point agenda of President Yar’adua’s
regime in 2007. The main objectives of the agenda were: the creation of conducive macro-
economic environment to stimulate greater private sector participation in the agricultural
sector; to increase agricultural production by increasing budgetary allocation and promotion
of the necessary developmental, supportive and service-oriented activities to enhance
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production, productivity and marketing opportunities; review of import waiver anomalies with
appropriate tariffs on agricultural imports.
Notwithstanding all these achievement, the death of the president ushered in the President
Goodluck E. Jonathan’s administration.
2.5 AGRICULTURAL TRANSFORMATION AGENDA OF PRESIDENT
GOODLUCK EBELE JONATHAN’S ADMINISTRATION.
According to the Vanguard Newspaper of February 1, 2015, the aim was to, through the
Ministry Of Agriculture And Rural Development, ensure food security, reduce the foreign
exchange lost on food imports, diversify the economy and create new jobs. In his regime,
agriculture was treated as a business and not just as a developmental program like the
previous administrations before him did. Major policy reforms were undertaken to improve
rural infrastructure and farmers’ access to financial services and markets, eliminate corruption
in the distribution of seedlings and fertilizers to the farmers, improve the working of the
market institutions, established stable crops processing zones to attract private sector
participation into high production areas to reduce post-harvest losses suffered by farmers, add
value to locally produced crops and foster rural economic growth. The transformation agenda
planned to create 3.5 million jobs in the agricultural sector, especially, from rice, cassava,
sorghum, cocoa and cotton production. The agenda was also to generate over 60 billion naira
by introducing cassava flour as a substitute to wheat flour. In fact, the agenda aimed to add 20
million tonnes of domestic food supply by 2015, with rice, cassava and sorghum contributing
2 million, 17 million and 1 million metric tonnes, respectively.
The Transformation Agenda of the National Economic management Team of President
Jonathan ended corruption in the fertilizer distribution by eliminating the middle men, that is,
the government and rent seekers from the distribution chain, to benefit genuine farmers. Data
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base of 4.5 million farmers were developed. Growth enhancement programmes were
introduced to provide targeted support for seeds and fertilizers to 5 million farmers yearly. An
Electronic Wallet System was developed using mobile phones to deliver subsidized fertilizers
and seeds to farmers, a first of its kind in Africa, and it provided subsidized farm inputs to
farmers. N30 billion was also leveraged using guarantees, from commercial banks, to finance
the seed and fertilizer supply in the country, without government spending any amount.
To ensure the successful implementation of the Agricultural Transformation Agenda, some
institutions were established and rearrangements made. They include: the Agricultural
Transformation Implementation Council formed to see to the transformation agenda of the
president on agriculture, the decentralization of the Ministry of Agriculture and Rural
Development for greater effectiveness, the attraction of 500 million USD from World Bank,
US$80 million from IFAD with US$ 500,000 as grant, $1.5 billion from the China Export and
Import (EXIM) bank, US$125 million from the African Development Bank (ADB), £130,000
from Department For International Development (DFID) and US$750,000 from Ford
Foundation.
2.6 RECENT INITIATIVES FOR FUNDING AGRICULTURE
In 2009, according to CBN Economic Report of February 2014, CBN in collaboration with
Federal Ministry of Agriculture and Rural Development (FMARD) established Commercial
Agricultural Credit Scheme (CACS) to enhance the development of the agricultural sector by
providing credit facilities at a single digit interest rate to farmers. Under CACS, ₦200 billion
was earmarked for lending at 9% to the so called agricultural value chains: production,
processing, storage and inputs. CACS was originally intended to have ended in 2015;
however, was recently extended by 10 years to September 2025. As at February 2014, the
total amount disbursed by CBN under CACS to participating banks was ₦228.2 billion for
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307 projects. In 2011, the Central Bank of Nigeria, Federal Ministry of Agriculture and Rural
Development, and Bankers Committee initiated The Nigeria Incentive-Based Risk Sharing
System for Agricultural Lending (NIRSAL) with the aim of encouraging the growth of credit
in the agricultural sector by increasing bank lending via increased incentives and technical
assistance. The CBN partnered with the Alliance for a Green Revolution in Africa (AGRA)
and committed N75 Billion (500 million USD by then) to stimulate lending by banks to
agricultural sector. In this amount, 300 million USD was committed to agricultural credit risk
sharing, 30 Million USD was for insurance facility, 60 million USD for technical assistance
and 10 million and 100 million USD were earmarked for Holistic Bank Rating Mechanism
and Bank Incentive Mechanism, respectively. In Nigeria, as we all know, a major limitation
to bank lending to agricultural sector has always been high perceived risk, and NIRSAL has
reduced this through its risk sharing avenue (vehicle). It guaranteed up to 75 percent of
agricultural loans, pays up to 50% of losses incurred by lending to large scale farmers and
75% of bank losses as a result of their lending to small scale farmers. In August, 16, 2013,
₦220 billion Micro Small and Medium Enterprises (MSME) fund was launched CBN to
provide capital to entrepreneurs in various sectors of the economy. Its specific objectives were
to enhance access to finance by MSME by proving wholesale financing windows for
participating financial institutions (PFIs); improve the capacity of the Participating Financial
Institutions to meet the credit needs of MSMEs; provide funds at reduced cost to PFIs;
enhance access of women entrepreneurs by allocating 60% of the FUND to them; improve
access of Non Governmental Organizations (NGOs) or Micro Finance Institutions (MFIs) to
finance. Specific to agriculture, the fund aims to address post-harvest losses among small-
scale farmers. This loan was given to farmers at 9% interest rate and at much longer term than
what deposit money banks were offering. ₦132 billion (60%) of the fund was assigned
specifically for women entrepreneurs. As at May 2014, the MSME funds were yet to be
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disbursed to their target group as a result of the CBN’s plan to establish a Special Purpose
Vehicle to manage it. Since the governors were not allowed to be directly involved in the
disbursement of the fund in line with the funding framework and to ensure that payments are
made directly to entrepreneurs and governors are to only get the approvals of the state
assemblies as well as to sign an irrevocable standing payment orders (ISPOs) to guarantee the
repayments of the facility on behalf of their beneficiaries. The governors frustrated the fund
adding that the N2B for each state was not enough and the bottleneck involved in the process
of disbursement were much. N4B per state was advocated by former governor Akpobio of
Akwaibom state (CBN Economic Report, February 2014).
The fund for agricultural finance in Nigeria(FAFIN) had a target fund size of US$100 million
and was launched in January 2014 with a First Close of US$34 million from three fund
sponsors: FMARD, the German government via KfW Development Bank, and the Nigeria
Sovereign Investment Authority (NSIA). FAFIN was the only Nigerian private equity fund
focused exclusively on agriculture. The Fund’s vision was to catalyse agriculture-led
inclusive economic growth in Nigeria by increasing the amount of private capital available for
agriculture (CBN Economic Report, February 2014). FAFIN focused on providing long-term,
tailored finance and associated technical assistance to high-growth agricultural SMEs, and has
a preference for investment opportunities that enable import substitution, increase food
security, or bridge gaps and fix inefficiencies along supply chains. FAFIN had an associated
US$2 million Technical Assistance Facility that supported the success and sustainability of
the Fund by providing technical services to investees in order to promote their growth and
development.
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CHAPTER THREE
REVIEW OF RELEVANT LITERATURE
3.1 INTRODUCTION
This chapter has three major parts. The first part provides the conceptual framework which
provides the analytical concepts of the work by trying to address the key conceptual issues in
literature. The second will stipulate the theoretical literature which provides the economic
theoretical framework for my research work. The third part attempts to make a
comprehensive review of relevant empirical research that has been carried out in both
international and local works. In general, the aim of this chapter is to place this research work
squarely in the context of existing literature, and thus, highlight the value this current
research will add.
3.2 CONCEPTUAL FRAMEWORK
3.2.1 The Concept of Credit
Agricultural credit, according to Okorji (1987), is assistance given to farmers in either cash or
kind or both for the purpose of agricultural production, the payment of which the
beneficiaries are expected to make at a future date with or without interest rate. Agricultural
credit could also be seen as any of the several credit vehicles used to finance agricultural
transactions, including loans, notes, bills of exchange (a non-interest-yielding written order,
used primarily in international trade that binds one party to pay a fixed agreed sum of money
to another party at a predetermined future date), and bankers’ acceptances (a promised future
payment which is accepted and guaranteed by a bank and drawn on a deposit at a bank)
(Advanced Learners Dictionary, 4th edition). Agricultural credit includes all loans and
advances granted borrowers to finance and service production activities relating to
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agriculture, fisheries and forestry (Food and Agriculture Organization (FAO), 1995 cited in
Oyeyinka (2002). Credit also means the ability to command the capital of another in return
for a promise to pay at some specified time in the future (Oyeyinka, 2002).
3.2.2 Credit Demand
The demand for credit according to Aryeetey (1996) is the amount of credit applied for at the
prevailing interest rate. Wampfler (2001) defined credit demand in a similar way, but added
that it varies with the type of agribusiness, duration of the credit, amount applied for,
repayment rates, and the type of guarantee available.
3.2.3 Access to Credit and Credit Use
A farmer can be said to have access to a particular credit source if he/she is able to obtain
loan from that source (Diagne, 1999). The extent of the access a farmer has from a given
source of credit is assessed by the maximum amount the farmer can borrow from the source.
The access to borrow depends on the confidence the lender has on the borrower. In addition
to the confidence, the borrower must be prepared to tender an acceptable collateral which is
the evidence and guarantee he (the borrower) has to show the capacity and willingness to
repay the loan when obtained, at when due. The borrowing capacity and access to credit are
dependent on the ability to bear risk on the side of the lender (Ellis and Bahiigwa,2003).
In reality, credit given in cash is fungible. They can be used by the farmers for reasons other
than that for which the credit is advanced. These other reasons are personal needs like food,
medical fees, school fees and funeral expenses. Access to credit, therefore, may not
necessarily mean that the credit accessed is used for agricultural purposes. Farmers, if not
monitored, may divert them for other private pressing needs as listed above.
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3.2.4 Loan Repayment and Loan Default
When the amount of a loan and the interest on that loan is duly amortized it is said to have
been repaid. Poor loan repayment discourages lenders from further lending and this affects
the credit market negatively. This happens, most times, when loan obtained is used for non
agricultural or productive purposes. To forestall this, accurate information about the
repayment capacity of the borrower is necessary. This will help lenders to grant loans to
borrowers with adequate repayment capacity. According to Maldonado (2003), if borrowers’
current assets are not enough to cover their current liabilities, a loan repayment delinquency
is likely to occur. Loan repayment delinquency is the inability or unwillingness to repay some
or substantial part of a loan at the agreed date. This takes the form of default in meeting
installmental repayments and inconsistency in repayments. Loan default happens, according
to Maldonado, 2003, when a debtor fails to meet his/her legal obligation stated in the loan
contract for example, when the borrower has not made a scheduled repayment or has violated
the debt agreement. Two types of loan repayment default are voluntary and involuntary
defaults. Involuntary default in loan repayment occurs when natural disasters such as floods
or drought can make repayment impossible in the locations and seasons they occur (Ellis and
Bahiigwa,2003), while voluntary or strategic default occurs when the borrower can repay the
loan but simply does not find it in his/her interest to repay the loan and thus decides to default
(Maldonado, 2003).
3.2.5 Definition of a Small Scale Farmer
According to Ugbaja and Chidebelu (2012), a small scale farmer is defined as one who has a
meagre means of sustenance or livelihood and whose total income in a year, both from farm
output and other sources, is less than the minimum taxable limit set out in the law relating to
income tax. Poor households or small scale farmers typically spend 50-80 % of their income
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on food. It is also defined as the farmers with 2 hecters or less (less than or equal to 5 acres)
(Wiggins, 2009; Wiggins and Sharada, 2013).
3.2.6 Performance of a Small Scale Farmer
Performance can be measured in various ways which includes output, income and welfare of
small scale farmers. This study will measure performance using output of small scale farmers
in Nigeria.
This research will adopt a definition of agricultural credit as defined by Ozowa (2007).
According to him, “agricultural credit encompasses all loans and advances granted to
borrowers to finance and service production activities relating to agriculture, fisheries and
forestry and also for processing, marketing, storage and distribution of products resulting
from these activities’’. The study also adopts the definition of a small-scale farmer as defined
by Kirsten & Van Zyl (1998) and Wiggins & Sharada, 2013): “A small-scale farmer is one
whose scale of operation is too small to attract the provision of the services he/she needs to
be able to significantly increase his/her productivity and has 2 hecters or less (that is, less
than or equal to 5 acres) (Wiggins and Sharada, 2013).
3.3 THEORETICAL LITERATURE
With the objectives in mind, it becomes important to examine critically the various
development and approaches towards the theory of agricultural finance. The theoretical
literature will review among other works, the theory of agriculture finance by Jugale, risk and
uncertainty theory of agricultural finance by Moschini and Hennessy, the theory of change by
the Council On Smallholder Agricultural Finance (CSAF), reservation demand and the rates
of interest by Herbert J. Davenport, and theoretical argument on loan sources by Larson,
Laque, & Graham (1994).
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3.3.1 The Theory of Agricultural Finance By Jugale (1991).
According to the theory, credit to any sector is additional oxygen to breathe better for
improved health of the economy. Credit to agriculture is an essential input for farm
development. In fact, the common goal of credit is to cause higher production. It is also a
source of fund for investment in capital goods. The problem of low productivity can be
solved through credit use. The theory also asserts that agricultural credit will help in
extending the existing areas of land for cultivation and help in making structural changes in
relation to the available area of land that can be cultivated. He also added that credit to
agriculture is required for efficient farm functioning because of the following reasons: (a)
meagre resources of the poor (small scale farmers inclusive), (b) purchase of major inputs
(which includes agricultural inputs) and (c) lengthy production periods causing higher credit
needs. Agricultural credit is a problem when it cannot be obtained. It is also a problem when
it can be obtained but in such a form and quantity that, on the whole, it leads nowhere.
3.3.2 Risk and Uncertainty Theory of Agricultural Finance
This theory proposed by Moschini and Hennessy (2001) advances the view that the
operations of farm enterprises are not as protected as in the case of commercial and industrial
enterprises. Forecasting in non-agricultural enterprises is possible, but not in agriculture.
Agriculture is faced with diverse risks from natural disasters such as floods, earthquakes,
drought; damage of crops due to insects, pests and diseases; and sudden and wide fluctuations
in prices of farm products. All these pose risk to the agricultural sector. Credit risk is faced by
both lenders and borrowers. Credit risk is the risk of default on a debt that may arise from a
borrower failing or not being able to make required repayments. This risk is usually that of
the lender and it includes lost of principal and interest, disruption to cash flows, and increased
collection costs. It is also the probability of loss from a debtor’s default. The theory measured
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credit risk as the actually credit difficulties recorded after delinquencies (debt that is overdue
for payment), foreclosures and losses. A prospective risk looks ahead to the future probability
of credit difficulties and is often measured by the movement of those loans and borrowers
characteristics that are known to be related to credit difficulties. These characteristics are
repayment to income ratio (the loan repayment amount divided by the income of the
farmers), maturities and loan to value ratio (the ratio of the unpaid principal amount of the
loan to current appraisal value).
3.3.3 The Theory of Change
The theory was put forward by the Council on Smallholder Agricultural Finance (CSAF) on
December, 2014 and holds that providing enough financial products to farmers will
encourage them to build more productive and larger farms. Advancing credit and providing
inputs to producers of agricultural products will enable them build better agricultural markets
to serve the farmers better. Financial institutions, when provided with capital, are empowered
to on-lend to farmers. The theory also noted that the provision of technical assistance to
farmers will enable them build a more productive and viable farms. Also, providing storage
and transport infrastructure to agribusinesses encourages them to establish better and stronger
agricultural markets that will serve the farmers better and lead to improved output. Increase
in output will lead to more income for the farmers, job creation and poverty alleviation.
3.3.4 Reservation Demand and the Rates of Interest by Herbert J. Davenport
Davenport's use of the reservation demand idea in 1914 had a profound effect on his
approach to interest rates. In a continuing or growing market economy, individuals may use
the market interest rate in making appraisals. However, the market interest rate is not fixed. It
changes constantly and does not vary across individual households. The interest rate is a
price, determined simultaneously with other prices. Although appraisement may require the
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appraiser to use an interest rate in his/her calculation(s), the interest rate he/she uses may turn
out to differ from the rate that he/she would have used if he/she had more information about
future economic conditions. The market rate, therefore, refers only to the money that can be
earned through lending and that must be paid for borrowing. Davenport compared this view
with what he called the current doctrine. The currently held doctrine maintains that there is "a
market rental and a market rate of discount" (Davenport, 1914). Davenport differentiated his
doctrine from the current doctrine in two ways. He maintains ‘‘that not one market earning
power, but the different earning powers to the different individuals, most motivate the
respective individual price offers; and (2) that not the market rate of interest, but the different
rates of discount for the different individuals must be the rates -- if any rates there are -- by
which the respective earning powers are discounted in the different individual price offers’’.
Davenport's view is concerned with ‘‘the processes of the ultimate investor or consumer’’.
The currently accepted doctrine "adopts the attitude of the broker or speculator." In short, he
concluded that the popular view that ultimate savers capitalize their assets by using the
current equilibrium market interest rate(s) is not the proper starting point for economic
analysis.
3.3.5 Theoretical Argument on Loan Sources
This argument according to Larson, Zaque, & Graham (1994), holds that the market for credit
may be either formal or informal. Small scale businesses in developing countries source their
finance mainly through the informal source (that is, from friends and family members).
According to the theory, the informal market is better because the probability of default of
small scale businesses from the informal credit sources is low due to informal financial
markets are much closer to their clients and potential customers, and through gossip and daily
contact informal markets are much more aware of their activities than formal markets (like
banks) would ever be. Larson, Zaque, & Graham, (1994), argued that borrowers choose
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informal financial services due to easy access, variable loan size, flexible repayment
schedule, personal guarantees, convenience and very short period required to get loan
approval. However, the small scale credit scheme for formal financial markets has
experienced a high rate of default in many developing countries. Banks in the developing
countries have been concluded to hold a truly alarming volume of non-performing loans (Fry,
1995).
3.4 The Nature and Role of Credit Market
The establishment and operation of every productive activity is anchored on finance. The link
between credit and economic development has been discussed severally by economists for a
long time (Schumpeter, 1954). Financial intermediation enhances savings mobilization by
providing safe financial instruments to savers and ensuring tangible returns on savings
(Schumpeter, 1954). The financial sector contributes to the efficiency of the entire economy
by spreading information about expectations and allocation of resources to investors. In
addition to credit creation, in line with Gylfason (2000) thought, the banking system’s
capacity to supply initiative and entrepreneurship enables it to transfer resources from less
productive uses to more economically rewarding uses by bridging the gap between the
owners of wealth and those who have productive investment ideas. Financial theorists like
Schumpeter also argued that if economic units relied completely on self-finance, investment
will be constrained by the ability and willingness of each unit to save, as well as by its
capacity and readiness to invest. According to Philip, Nkonya, Pender and Oni (2009),
agricultural credit will lead to enlarging the net cultivable land by bringing waste and fallow
land under cultivation, providing mature and chemical fertilizers, protection of land,
provision of irrigation, making large amounts of fixed and working capital available for
agricultural use, changing farm organisation, enlarging agricultural share of the Gross
Domestic Product and increasing labour return on agriculture.
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3.5 The Link between Finance, Agriculture and Economic Growth
The link between financing, agriculture and economic growth as seen in literature shows that
in economic development, agricultural surpluses are relevant for structural changes that will
induce economic growth. The agricultural sector is expected to shift, to the industrial sector,
the excess of the investible goods produced from agriculture (Kuznets, 1961; Mody,1981). In
order words, resources from agriculture (raw materials) are necessary for industrial
development. According to Mody, 1981, resource flow into agricultural sector is required for
enhancement in techniques to improve agricultural performance. That is, growth in
agriculture requires substantial capital investment. He added that capital is needed for the
clearing and cultivation of land, drainage, fencing, equipment, roads and so on. Therefore,
financing of agriculture eliminates the restrictions to the development of agriculture,
promotes investment and use of technology needed to induce the required economic growth
and development.
3.6 EMPIRICAL LITERATURE
3.6.1 Empirical Evidence from International Literature
Anang, Sipilainen, Backman & Kola (2015), used household survey data to explore factors
determining access to loan and the determinants of loan size among smallholder farmers in
Ghana. They used the Probit model in their data analyses. The socioeconomic features of
farmers they considered were gender, household income, farm capital, improved technology
adoption, contact with extension services provider, farm location, and awareness of the
existence of lending institution in the area. They found that gender, household size, farm
capital, cattle ownership and improved technology adoption were the significant factors
determining the size of loan collected by a smallholder farmer. They also found that eighty-
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one percent of borrowers used the loans to buy farm inputs, while about 31% of farmers who
borrowed in the Northern Region of Ghana used the loan for farm expansion.
Abdelateif and Siegfried (2012) analyzed the impact of microcredit on farm profits among
households’ beneficiaries that are (credit users and non-users) in North Kordofan State of
Sudan. Heckman selection model (two- step estimates) was employed for data analyses. The
results of the impact of credit on farm profits in the agricultural activities show that although
access to credit has positive signs, it has limited effect on farm profits. The Wald ratio test of
separate equation rejected the null hypothesis assumption that the correlation between the
error terms is equal to zero. Again, the Mill’s ratio term was statistical significance,
confirming the appropriateness of the use of Heckman selection model and also shows that
the use of Ordinary Least Squares would have yielded spurious or biased estimates. The
estimates of the Heckman’s first step estimation technique indicated that increases in the
amount of savings and assets value will reduce the probability of household being credit
constrained. It implies that higher households’ income would be expected to increase the
credit supply rather than credit demand. The outcome of the second step estimation showed
that most of the variables that influenced the profits of the farmers are statistically significant
at 5% level, with the signs of the coefficients consistent with expectations. However, the
statistically significant factors are not the same as those in the first stage of the Heckman’s
Two-Stage model, indicating that there are differences in the determinants of credit
constrained condition and the amount of the farm profits obtained.
Nimoh, Kwasi and Tham-Agyekum (2011), used net income to measure the effect of formal
credit on the performance of the poultry farmers. Multiple regression was employed for the
analysis. The outcome of their study showed that there was a remarked difference between
the net income of those farmers that used credit and those who did not.
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Kinkingninhoun-Medagbe, Diagne & Biaou (2014), studied the impact of the use of credit in
rice farming on productivity and income of farmers in Benin. They applied the Potential
Outcomes Framework to data collected from 342 rice farmers in Benin Republic to analyze
the Local Average Treatment Effect (LATE). Their results show a positive significant impact
of credit use on rice yield, income, per capital rice income, household income and per capita
household income. Access to credit enabled credit user in rice production to improve enhance
their inputs utilization (rice lands, fertilizer and labour).
In examining sources of efficiency differentials among Basmati rice producers in the Punjab
province of Pakistan, Ali and Flinn (1989), used Binary Probit model in their research
analyses and discovered significant effects of farmers’ access to credit on rice production.
Binswanger and Khandker, 1995; Khandker and Faruqee (2003), used multiple regression
analysis and found that formal credit increased rural income and productivity. That is, formal
credit has a positive impact on household income and that the overall benefits of credit
exceeded its costs by about 13 percent in India.
Mukwevho and Anim (2014), investigated the factors that affect small scale cabbage farmers
in accessing credit markets. They used discriminant analysis to determine whether there are
statistically significant differences between the average score profiles for farmers who have
access to credit markets and those who did not. The result showed that transactions costs,
agricultural extension education, farmers’ level of education, the distance of farmland to the
market where farmers sell their produce, and value of equipment own by farmers accounted
for the most difference between the two groups of farmers.
Awunyo-Victor, Al-Hassan, Sarpong & Egyir (2014), studied maize famers’ participation in
the formal credit market and its impact on their farm size and expenditure on variable farm
inputs in Ghana. They selected 595 maize farmers in Ghana using multi-stage sampling
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method. Propensity score matching technique was used to estimate the impact of the formal
financial market participation on farm size, expenditures on variable inputs and use of
improved technology by farmers. The outcome of the analysis showed that formal financial
market use can increase expenditure on variable inputs by farmers and hence their use of
improved technology.
3.6.2 Empirical Evidence from Nigeria
Oyeyinka and Bolarinwa (2009), studied the effect of the smallholders’ direct loan scheme of
the Nigeria Agricultural Cooperative and Rural Development Bank (NACRDB) on
agricultural productivity in Oyo State. The impact of NACRDB smallholder direct loan
scheme was studied with the use of descriptive analyses in order to empirically establish if
there is any difference between the performance of farmers who have access to credit and
those who do not have access to the loan facility. They discovered that the small-scale
farmers who benefited from the loan had higher output mean yield index than non-
beneficiaries. Beneficiaries’ access to credit increased their income as well as their use of
improved farm inputs and labour over non-beneficiaries.
Ugbaja and Ugwumba (2013), analysed how the socio-economic features of small-scale
farmers affect their access to credit and credit repayment. They employed multi-stage and
simple random sampling method to select 120 small scale farmers. They used primary data
collected with the use of questionnaire and 3-point Likert scale. They also employed non
parametric statistical tool to analyse the data they collected. Using descriptive analyses, they
found that about 65 percent of the smallholder farmers were females; 90 percent of them
were aware of the availability of microcredit facilities; 73 percent of them had above 11 years
experience in farming, about 51 percent of the farmers obtained less than N100,000.00, while
51.62 percent earned below N150,000.00 per annum in income. Applying multiple regression
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model, they found that marital status, educational level, years of experience in farming and
interest rate were found to be statistically significant factors influencing credit access, while
the size of a farmer’s family responsibilities determined if the loaned was repaid and on time.
Udensi, Orebiyi, Ohajianya, & Eze (2012), examined the macroeconomic variables that
influence agricultural production in Nigeria. He used Two-Stage Least Squares (TSLS) to
show that all the modelled determinants of the Index of Agricultural Production, such
government expenditure, were positively significant at 1 percent level excluding World
Agricultural Food Prices which was significant at 5 percent level and inversely correlated
with the Index of agricultural production.
Omojimite (2012) studied the impact of institutional support and macroeconomic policy on
the growth of the agricultural sector in Nigeria. He used the co-integration regression model
to examine the effects volume of credit to the agricultural sector, interest rate spread, dummy
for institutional reforms and deficit financing on agricultural production. The outcome shows
that the volume of credit to the agricultural sector, deficit financing and institutional reforms
positively and significantly accounted for the improvements in the agricultural output for the
periods studied. Interest rate spread has an inversely insignificant relationship with
agricultural output growth. Eyo (2008) applied structural response function in analysing the
macroeconomic environment and growth in agricultural sector in Nigeria. The results of his
study show that credit to the sector had no significant effect on growth in agricultural output.
He concluded that macroeconomic policies that reduce inflation make agricultural credit to
have significant growth effect on agricultural output.
Akinnagbe and Adonu ( 2014), studied the rural farmers’ sources and use of credit facilities
in Nsukka local government area of Enugu state, Nigeria. Data for the study were collected
from sixty rural farmers through the use of interview schedule. They used Multistate
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sampling technique to select respondents for the study. They employed descriptive statistic in
their data analysis. Result of the study shows that 53.3% of the respondents had no access to
credit, among those that had access to credit, majority got their credit through friends and
relations (89.3%) and cooperative society (78.6%).
According to Emecheta and Ibeh (2014), there is a significant positive relationship between
credits from the banks and economic growth. They employed the reduced form of Vector
Autoregressive (VAR) estimation technique using time series data from CBN 2013 statistical
bulletin to arrive at this result. The stationarity of the series after first difference were
ascertained using Augmented Dickey-Fuller (ADF) and Philips Perron (PP) unit root tests.
With current GDP as the dependent variable (also used as proxy for economic growth), credit
to private sector as a ratio of GDP and ratio of Broad Money to GDP were used as proxies,
respectively, for financial indicator and financial depth.
However, contradictory results are seen in the works of Modebe, Ugwuegbe and Ugwuoke
(2014), who studied bank credit impact on economic growth using time series data set of the
CBN statistical bulletin from 1986 to 2012. Ordinary Least Squares (OLS) estimation
technique was used in the estimation after the variables were found to be cointegrated of
order one from Johansen and Juselius co-integration test. The outcome of the analysis showed
a significantly negative relationship between the gross domestic product and total bank credit
to the private sector in the long-run, but total credit to private sector had an insignificant
negative impact on the GDP in the short-run. Also, Akpansung and Babalola (2009) looked at
the impact of bank loans on the growth of the economy from 1970 to 2008 employing the
Two Stage Least Squares estimation approach. The outcome indicated that bank credit
impacts negatively on economic growth and Granger causality test showed causality running
from GDP to bank credit.
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Awotide, Abdoulaye, Alene & Manyong(2015) studied the impact of access to credit on
agricultural productivity: evidence from smallholder cassava farmers in Nigeria using the
endogenous switching regression model (ESRM). The first stage of the ESRM revealed that
total livestock unit and farm size are positive and statistically significant in determining the
farmers’ access to credit. The second stage showed that total livestock unit and farm size are
negative and statistically significant in explaining the changes in cassava productivity among
the farmers who accessed credit, while household size, farm size, and access to information
are negative and statistically significant in explaining the variation in cassava productivity
among the farmers without access to credit. They also found that credit access has a
significant positive impact on cassava productivity.
3.7 LIMITATIONS OF PREVIOUS WORKS AND VALUE ADDITION
Other research works bordered on the amount of credit obtained from both formal and
informal credit sources in Nigeria; determinants of loan repayment; credit saving patterns of
resource-poor farmers and the functioning of the rural financial institutions; socio-economic
factors affecting farmers access to credit. There are very few studies on the effects of small
scale farmers’ demographic and socio-economic features on their credit access and if credit
access by small scale farmers significantly affects their outputs. In spite attempts made in the
past by some studies to evaluate the effect of credit access on output of small scale farmers in
Nigerian, many of these studies did not apply the widely accepted impact assessment
methodologies and are therefore subject to serious problems arising from endogeneity and sample
selection bias. In order to fill this gap in the literature and complement these studies, this study
aims to provide an insight into this less studied area in agricultural financing by bringing
forth and analysing smallholder farmers’ demographic and socio-economic characteristics
that significantly affect their access to credit, the effect of access to credit on their output and
the influence of their poverty and marital statuses on their output, when they have accessed
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credit, using Heckman two-step estimation and instrumental variable techniques. It will also
do a comparative analysis of the estimates of the techniques employed.
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CHAPTER FOUR
METHODOLOGY
4.1 INTRODUCTION
This work is based on the theoretical model of Igbal (1983), modified by Geron (1989).
Sample selection bias can occur when small scale farmers self-select themselves into groups
with or without access to credit. This type of sample selection may also be called incidental
truncation. The truncation here is whether or not a small scale farmer has access to credit. In
line with Heckman (1979), the problem of participation and non-participation in credit
scheme can be addressed as sample selection bias. That is, the grouping of small scale
farmers into credit and non- credit users can cause bias in the sample selection. According to
Antonakis, Bendahan, Jacquart & Lalive (2010), sample selection bias is a specific form of
endogeneity. However, we shall use the significance or otherwise of the Inverse Mill’s Ratio
(IMR) of the Heckman Two-Step Technique to check if there is bias in the selection of the
sample of small scale farmers who accessed credit from the entire population of small scale
farmers. The IMR is the correction due to the fact that we may not be dealing with a
representative sample as a result of selectivity bias. The first step of the Heckman model shall
capture the small scale farmers’ characteristics that affect their access to credit, while the
second step will estimate the effect of their credit access on their output. We shall compare
the effect of credit access on the output of small scale farmers from the Heckman model
(second step) with that of the instrumental variable (IV) method, since with good
instrument(s), the instrumental variable estimation method yields consistent parameter
estimates in the presence of endogeneity (Woodridge, 1999). While ordinary least squares
(OLS) estimates will be used as a reference to compare the estimates of the two models,
Heckman and IV models, the general methods of moments (GMM) technique will be used
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instead of IV Two stage least squares, in the presence of heteroschedasticity, to capture the
effect of credit access on the output of small scale farmers in Nigeria. OLS will be used to
estimate the effect of poverty levels on the output of small scale farmers who accessed credit
and to know if marital status significantly influenced the output of small scale farmers who
accessed credit.
4.2 THEORETICAL FRAMEWORK
This research work will adopt the theoretical model of Igbal (1983), modified by Geron
(1989). It is a microeconomic theory of the behaviour of farming households in the use of
loan for production and consumption. They used decretive statistics to examine the vertical
linkages between the formal and informal sectors in the Philippine financial market. They
assert that access to credit is influenced by demographic and social-economic factors of farm
households such as household size, acreage cultivated, level of education, age, experience,
sex, poverty status, sector, marital status and household income. Though it may affect the
demand for credit negatively, interest rate does not vary across households and thus have no
serious effect on our model.
4.3 MODEL SPECIFICATION
4.3.1 Heckman Two-Step Model Specification
Equation (4.1) is the selection equation. The selection equation captures the demographic and
socio-economic features of small scale farmers that determine their access to credit (objective
two). We shall estimate equation 4.1 using the Probit model. The Probit model for the
selection equation is usually specified in the form of a binary choice model, thus:
∗
= + + + ... (4.1)
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≈ (0, ) .... (4.2)
∗
= 1, if > 0
∗ ... (4.3)
= 0, if ≤ 0
∗
While is a latent binary dependent variable denoting access to credit, and depends on
constant term, C, exclusion criteria, -- the variable(s) that affects the selection equation
∗
but not the output equation, observed covariates, , and a random error, , it ( ) is only
observed when an associated variable, in equation 4.3, crosses a threshold (usually zero),
that is, when a small scale farmer has access to credit. Again, the dependent variable is not
observed if the observations are not in the sample. This also implies that the small scale
farmers can only use credit when they have access to it.
The selection equation (equation 4.1) is thus,
= + valland + hhsize + acrcult + hghlevel + ageyrs
+ experience + + sector + marstatus + ℎℎ
+ + … … … … … … … … … … … … … … … … … . … (4.1 )
The variables are defined on page 48 and 49.
However, model 4.4 below will be used to estimate the effect of credit access on the output of
small scale farmers (objective three). Simple OLS will be used to estimate equation 4.4
because the selection bias of access to credit will be controlled for by the inverse Mills’ ratio,
. In order to estimate the impact of credit access on the output of small scale farmers in
Nigeria (objective three), the following outcome equation is specified:
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= + + + (Û ) + ... (4.4)
≈ (0,1) ... (4.5)
The error terms in the equations 4.1a and 4.4 are assumed to have bivariate
normal distribution with zero means, variances and 1, respectively, and correlation
between the errors is . That is,
Corr ( , )= ... (4.6)
The variables are defined on page 48 and 49
4.3.1a Estimation Procedure
The problem of biasness can be resolved in two steps:
Step 1
After the selection equation (equation 4.1a) is estimated using Probit model and the predicted
values retained as estimates of , the inverse Mills’ ratio will then be estimated by
dividing the probability density function (∅) estimated at (Û ) by the cumulative
distribution function ( ) estimated at ( Û ) as specified in equation (4.7) below:
∅( Û )
Û = − ... (4.7)
(Û )
If the coefficient of the inverse Mill’s ratio (IMR), in the second step, is significant, it will
indicate that there is sample selection bias that was correct for by the ratio. If the IMR is not
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significant at less than 5% level, we conclude that there is no sample section bias in the
selection of small scale farmers who have access to credit or not and therefore no need for the
Heckman model.
Substituting equation 4.7 into equation 4.4, we have:
∅ Û
= + + + − + … 4.8
Û
∗ ∗ ∗
\ , > 0 = \ , = 1
∅Û
= + + − + ..(4.9)
1− Û
= 0 ... (4.10)
The output equation to be estimated will then be,
ℎ ℎ = + + hhsize + acrcult + hghlevel + ageyrs
+ experience + + sector + marstatus + ℎℎ
∅ Û
+ + − + … … … … … (4.11)
1− Û
If ≠ 0, ordinary least squares will produce inconsistent estimates of the vector of
parameters of the explanatory variables, . Also, applying a Probit model directly on the
selection equation will yield a biased result, and this bias will usually be downward in nature
(Goldberger, 1983). Heckman’s two-step estimation approach involves first estimating
(the parameters of the selection equation) by maximum likelihood in the probit model, then
estimating , in equation (4.4) by ordinary least squares regression of on
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and , in which in the inverse Mill’s ratio, , is estimated using the estimates from step
1. A significant inverse Mill’s ratio will show that there is selection bias, thereby justifying
the use of Heckman two-step approach. If the IMR is not statistically significant, we shall use
the IV method only to estimate the effect of access to credit on output of small scale farmers.
The Heckman two-step model will be estimated using STATA Version 13.
4.3.1b Definition and Measurement of Variables Used
= (ℎ ℎ ) is the total output of small scale farmers in kilograms
= Exclusion restriction --market value of land (valland) in the selection equation
= Vector of small scale farmers’ socio-economic and demographic
characteristics, (that is, = hhsize, acrcult , hghlevel, ageyrs, experience,
pov, sex, sector, marstatus , ℎℎ )
= Error term in the output equation
= 1 0 ℎ
hhsize = ℎ
acrcult =
hghlevel = ℎ
ageyrs = ,
experience = ,
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sex = ℎ ; = 1 for female and 0 for male,
sector = 1 for rural and 0 for urban,
marstatus = ℎ = 1 if married and 0 if single,
ℎℎ = ℎ ℎ ,
= ℎ ,= 1 ;0 ℎ
= the intercept of the output equation,
= The vector of parameters of the smallholder farmers’ demographic and socio-economic
characteristics in the selection equation,
= The vector of parameters of the smallholder farmers’ demographic and socio-economic
characteristics in the output/outcome equation,
= The parameter of the Mill’s ratio. A significant inverse Mill’s ratio indicates a sample
selection bias in the model and hence justifies the use of Heckman Two- Step model
which corrects the bias in sample selection.
4.2.1c Model Justification
When the dependent variable of interest is continuous (as output is), there are two main
choices of estimators – a maximum likelihood model called Full Information Maximum
Likelihood (FIML) and Limited Information Maximum Likelihood Estimator (LIMLE) for
example, Heckman Two-Step estimator. The FIML is a straight forward maximum likelihood
model, like the Probit and Logit models, that maximizes a specified likelihood function. By
49 | P a g e
definition, when the error assumptions are met (as usually not the case due to serial
correlation between the two error terms – the errors in the selection equation and the outcome
equations), the FIML will always be more efficient than Heckman two-step (Leung and Yu,
1996; Maddala, 1985 and Puhani, 2000). Since the assumption of independence of the error
terms cannot be met because of specification and sample selection problems, we cannot use
the Two Part Model (TPM) or Full Information Maximum Likelihood (FIML). The inclusion
of the inverse Mills ratio in FIML often results in multicollinearity that can have serious
consequences for the model estimates (Goldberger, 1983). The FIML relies heavily on the
normality assumption and is therefore less robust than the Heckman two-step to deviance
from this assumption. Again, the FIML would have difficulty converging to a solution, in the
absence of exclusion restrictions and normality assumption, while the Heckman two-step
model can always be estimated without the normality assumption and with or without
exclusion restriction (Heckman, 1979).
Because the inverse Mill’s ratio, in Heckman two-step model, is estimated by the non-linear
Probit model, the correlation term will not be perfectly correlated with the explanatory
variables in the outcome equation, even in the absence of exclusion restriction. In fact, the
non-linearity of the Probit model, in the first step, enables the generation of solution for the
Heckman two-step estimator.
Both the Heckman two-step model and Instrumental Variable (IV) models have same
objective: which is to remove endogeneity, via an exclusion restriction (that is, one or more
instruments, in the case of IV) or a variable that affects selection but not the outcome (in the
case of Heckman). But when the same variables are used to model both the selection and
outcome equations (as is the case here), meaning that exclusion restrictions may or may not
be applied, the model can be identified by the non-linearity inherent in the inverse Mill’s ratio
of the Heckman’s two-step estimator (Heckman, 1976, 1979).
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The article (The Usefulness of Sample Selection Models in Healthcare Contingent Valuation
Method (CVM) Studies: Empirical Evidence from Rural Cameroon) written by William M.
Fonta and Hyacinth. E. Ichoku, empirically evaluated the statistical performance of three
well-known estimators (that is, Ordinary Least Squares, Heckman's Two-Step model and
FIML) based on the sequential guidelines suggested by Strazzera, Genius, Scarpa, and
Hutchinson (2003) in addressing a problem in African health care service. The absence of
collinearity problems in the Heckman’s two-step model based on an OLS estimation of Mills
lambda against the covariates of the outcome equation warrants the use of estimates from the
Heckman two-step model as better alternative to OLS and FIML estimates thus remained the
approach of choice in many applied studies.
4.3.2 Intrumental Variable Technique (IV)
In order to estimate the impact of credit access on the output of small scale farmers in Nigeria
(objective two) using cross sectional data, the following model is specified:
ℎ ℎ = + + hhsize + acrcult + hghlevel + ageyrs

+ experience + sex + sector + marstatus + ℎℎ
+ + +∋
.... (4.12)
Where
, ∋ ℎ
ℎ ℎ = , , = 1, … ,
= ,
hhsize = ℎ ℎ ,
acrcult = ,
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hghlevel = ℎ ℎ ,
ageyrs = ℎ ℎ ,
experience = ,
sex = ℎ ℎ ; = 1 for female and 0 for male,
sector = ℎ ℎ ; = 1 for rural and 0 for urban,
marstatus = ℎ ℎ ;
= 1 if married and 0 if single,
ℎℎ = ℎ ℎ ,
= ℎ ℎ ,= 1 ; 0 otherwise
= ℎ error term that captures the effects of the unobservables variables like the
managerial ability of the small scale farmer and other variables not included in the model.
4.3.2a Ordinary Least Squares (OLS)
Ordinary Least Square is the Best Linear Unbiased Estimator (BLUE) when the assumption
that all the right-hand side variables are strictly exogenous holds. If the regressors are
exogenous, OLS is said to be unbiased, consistent and with minimum variance. If the
parameters are normally distributed, OLS will be best linear unbiased estimator among both
linear and nonlinear estimators (that is, it will be BLUE) (Wooldridge, 1999). In this analysis,
OLS estimation technique will only be used as a reference benchmark for other estimators.
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In this analysis, access to credit ( ) only has direct influence on the output of the
small scale farmers through the coefficient on credit access. Where there is correlation
between the error term and the right-hand side variable(s), as it is the case with
where the error term contains all other factors that can affect credit access such as managerial
ability of the small scale farmer which can determine both output and the farmers’ access to
credit, it becomes unnecessary to use OLS to capture the true effect of credit access on output
of small-scale farmers in Nigeria. When this is the case ( is endogenous), and its
parameter will carry both the direct effect of credit access on output of these farmers and the
indirect effect coming from other factors like managerial ability in the error term. Where this
is the case, OLS results will be biased. That is, OLS will give spurious results because the
slopes and the constant term will not be correctly estimated in the presence of endogeneity.
The direction and size of this bias will be examined by comparing OLS outcomes with the
estimates of other estimators like Instrumental Variable (IV) --Two Stage Least Squares
(2SLS) or Generalized Method of Moments (GMM) and Heckman Two-Step which account
for endogeneity problem.
With the endogeneity of credit access ( ), OLS estimates are biased as long as small-
scale farmers’ output is affected by other unobservable factors which are correlated with
. With a good instrument, instrumental variables (IV) method can be implemented to
address the endogeneity problem of access to credit, hence ensuring consistent estimates. IV
estimation technique is preferred when the number of instruments exactly equals the number
of endogenous regressors. If the number of the instruments is greater than that of endogenous
regressor(s), as is the case here, Two-Stage Least Squares (2SLS) method will be adopted. In
the presence of heteroscedasticity, GMM estimation technique will be applied instead of
2SLS (Wooldridge, 1999).
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4.3.3b Selection of Instruments
Getting an instrument is the most difficult aspect in the application of IV estimator. A good
instrument, however, must be exogenous and relevant (not redundant). That is, the instrument
must be correlated (though not perfectly) with the endogenous variable ( ), and not be
influenced by the variables in the error term. It must also not influence the output of small-
scale farmers directly, but only indirectly through its influence on . The likely
instruments, as contained in the Nigeria Living Standards Survey (NLSS) data set are: the
kind of guarantee required by the lender, sales values of equipment (salevalequip), market
value of land (valland) and credit source. We shall use the sales value of equipment
(salevalequip) and market value of land (valland) as instruments in this study.
4.3.3c Test for Endogeneity
Durbin-Wu-Hausman test for endogeneity will be used to ascertain the endogeneity or
otherwise of the regressor ( ), with the null hypothesis that is exogenous. If
access to credit is not endogenous, we simply use OLS to estimate our regression as it will
ensure efficiency over other estimation techniques like IV, 2SLS or GMM and Heckman
Two-Step. When the explanatory variables are exogenous, the 2SLS estimates can have very
large standard errors which will affect the statistical significance of the variable under
investigation.
4.3.3d Test of Heteroscedasticity
Heteroscedasticity is a common problem found when dealing with cross-sectional data. Its
presence will be tested to know the best (efficient) estimation technique to be adopted. If we
discover that the errors are homoscedastic (the null hypothesis), Two Stage Least Squares
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estimation technique will be most appropriate and otherwise, GMM option will be preferred
in the presence of heteroscedasticity.
4.3.3e Test For Over-Identification Restriction And Relevance of Instruments.
We will use the Hansen J statistic to investigate the orthogonality condition of the
instrument(s). The Sargan’s tests statistic will be employed to test for overidentifying
restrictions. This test regresses the residuals from an IV or 2SLS regression on all instruments
with the null hypothesis that all instruments are uncorrelated with the error term, that is, that
they are exogenous. This test cannot be rejected if the instrument is to be valid.
4.3.3f Model Justification
In line with the views of Antonakis, Bendahan, Jacquart & Lalive (2010), the problem of
sample selection bias is a specific form of endogeneity. Multiple regression model estimated
with OLS technique is necessary in forming the basis for comparing the results of other
estimation methods, and to know the extent and direction, the OLS estimates deviate from the
true parameter estimates of the regressors. The inclusion of the IV model is as a result of its
ability to take care of endogeneity problem of the regressor (loanuse) which the OLS
estimator lacks. Using OLS to estimates the influence of credit access on the performance of
small-scale farmers will yield a spurious result since the main assumption of strict exogeneity
of regressors, necessary for OLS to be consistent, will definitely not hold. The perceived
endogeneity of access to credit will therefore lead to the inconsistency of the OLS estimates.
When this happens, Instrumental Variable estimation technique will be applied.
4.3.4 MODEL THREE: ORDINARY LEAST SQURES WILL BE USED TO

CAPTURE OBJECTIVE FOUR
To examine if poverty status of small scale farmers who used credit has any significant effect
on their output, we include interaction terms as follows:
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ℎ ℎ = + × hhsize + × acrcult + × hghlevel + × ageyrs + × experience
+× + × sexes + × marstatus + × ℎℎ + × loanmodpoors
+× loancorepoors + ∀ … … … … … … … … … … … … … … … . (4.13)
Base Category: Non-poor small scale farmers that accessed credit.
Where loanmodpoors represents credit access by small scale farmers who are moderately
poor and loancorepoors stands for core poor small scale farmers who accessed credit. Other
variables are the same as explained in model one. × , ...,
× , ℎ ℎ ∀ ℎ
( ).
4.3.5 MODEL FOUR: ORDINARY LEAST SQURES WILL ALSO BE USED TO

CAPTURE OBJECTIVE FIVE
To investigate if there is any significant difference in the output of small scale farmers who
accessed credit due to their marital status, the interaction term is included thus:
ℎ ℎ = + hhsize + acrcult + hghlevel + ageyrs + experience
+ + sexes + marstatus + ℎℎ
+ loanuse#marstatus + ∃ … … … … … … … … … … … … … … … (4.14)
Base Category: Single small scale farmers who accessed
Where loanuse#marstatus is the interaction of access to credit by and marital status of small
scale farmers. Other variables are the same as explained in model one.
ℎ ,∃ ℎ ,…, ℎ .
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4.4 DATA SOURCE AND DESCRIPTION
The data source is from the agriculture section of the Nigeria Living Standard Survey of the
National Bureau of Statistics (NBS), 2009 and the Harmonized Nigeria Living Standard
Survey published in 2012 by same NBS.
The questionnaire which is of interest to us provides information on demographics;
education; food and non-food expenditure; household nonfarm income generating activities;
food security and shocks; safety nets; assets; and other sources of household income. As an
additional aid to making sure the data were of desired quality, extensive monitoring was done
at the field work. Evaluation guidelines and formats for fieldwork were developed. The
process of data cleaning took place in two stages. The first stage involved the correction of
the errors that were found at the fieldwork stage based on re-visits to the household on the
instruction of the supervisor. The data that had gone through this first stage of cleaning was
then sent from the state to the head office of the then National Office of Statistics (Now,
National Bureau of Statistics) where a second stage of data cleaning was undertaken. At the
second stage, an overall review of the data to identify outliers and other errors on the
complete set of data was done. Special care was taken to see that the households included in
the data matched with the selected sample and where there were differences they were
properly assessed and documented.
4.5 SAMPLING DESIGN
Nigeria has since 1981 developed the National Integrated Survey of Household (NISH) as the
main vehicle for running household based surveys in a regular and integrated manner. The
NISH master sample was improved and initially used for the year 2003 Nigeria Living
Standard Survey (NLSS), thus, the sample design for the study was a two stage stratified
sample design. The first stage was a cluster of housing units called Enumeration Area (EA).
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4.6 SAMPLE SIZE
One hundred and twenty (120) Enumeration Areas were selected in 12 replicates in each state
from the NISH master sample frame (that is, replicates 4 - 15). Five (5) housing units (Hus)
were scientifically selected in each selected E.A for study. One replicate (10 E.As) was
canvassed per month. This implies that fifty (50) HUs will be covered per month or six
hundred 600 HUs per state or 22,200 households for the country for the 12-month survey
period. The indicators were computed for about 91,806 individuals.
4.7 SOFTWARE TO BE EMPLOYED
In this study, the researcher shall employ software packages such as Microsoft Excel and
Stata version 13.
4.8 LIMITATIONS OF THE SURVEY DATA
The team encountered a problem in finding the households or respondents. Vague
information supplied at pre-survey stage, movements of households to another location,
destruction or demolition of the dwellings of the households, unavailability of adequate
respondents, refusal (fully or partly) of households to participate in the survey (or answer
questions in some sections of the questionnaire) were the problems faced by the interviewers.
If a household moved or the head of the household changed- due to death- the interviewers
interviewed the people present in the household, provided that it was the coded household.
No replacement was made for those households that refused to participate in the survey.
Again, in case the household coded suffered a disaster, or attrited (reduction in number
usually as a result of resignation, retirement or death), no replacement was also made.
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CHAPTER FIVE
PRESENTATION AND ANALYSES OF RESULTS
5.1 DESCRIPTIVE STATISTICS
Table 1: Descriptive Statistics
VARIABLE OBS. MEAN STD DEV. MIN. MAX.

Experience 91806 23.81237 .062839 1 86
Sex 91806
Male 81153 .8839618 .3202724 0 1
Female 10653 .1160382 .3202724 0 1
Ageyrs 91806 46.924 13.2535 13 99
Hhsize 91806 5.15836 2.9613 1 26
Totamt 91806 9005.15 23574.8 0 800,000
Hmharves 91806 162.239 1348.09 1 48,000
Acrcult 91806 2.7154 313.564 1 5
Hhincome 91806 130195 147542 37,256.2 235,840
Salevalequip 91806 69421.2 61874.3 9,368.33 125,499
Valland 91806 10862.4 10692.3 720 786, 600
Hghleve 91806
Noedu 38,617 .420637 .493664 0 1
Priedu 3,248 .035379 .1847367 0 1
Secedu 36,078 .3929809 .4884153 0 1
Hgheduc 13,863 .1510032 .358054 0 1
Pov 91806
Core Poor 17180 .1871337 .390021 0 1
Moderately
Poor 32774 .3569919 .479115 0 1
Non Poor 41852 .4558743 .4980518 0 1
Sector 91806
Urban 24709 .2691436 .4435172 0 1
Rural 67097 .7308564 .4435172 0 1
Marstat 91806
Single 3,921 .0427096 .0427096 0 1
Married 87,885 .9572904 .9572904 0 1
Source: Researcher’s Estimation using Stata 13.
Table 1 shows some basic statistics from the agricultural section of the National Bureau of
Statistics (2012). From the table above, the experience level of the small scale farmers ranges
from 1 to 86 years, with average years of experience of about 24 years. For sex of the
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farmers, about 81,153 out of 91, 806 small scale farmers sampled are male (representing
about 88.4% of the sampled farmers), while 10, 653 (11.6%) are female. The age of the small
scale farmers sampled, in years, ranges from 13 to 99 years. The average age is about 47
years. The household size ranges from 1 to 26 persons per home with average household size
of about 5 persons per household. Total amount of credit received ranges from zero to 800,
000 naira. The average amount of credit accessed was about N9,005.15 kobo only. The total
of the last twelve months harvest ranges from 1 to 48, 000 kilograms with an average of
about 162.24 kilograms per year. For acreage cultivated, it ranged from 0 to 5 acres, with an
average of 2.7 acres. The total annual small scale farmers’ household income ranges from
N37,256.20 kobo to N235,840 with an average total annual household income of about
130,195 naira. The sales values of their equipment ranges from 9,368.33 naira to 125,499
naira with an average of about 69, 421.20 naira, while the value of their land ranges from 720
naira to 786, 600 naira only, with estimated average of about 10, 862.40 naira. For the highest
level of education attained, out of 91,806 small scale farmers sampled, 38,617 of the small
scale farmers had no education—that is 42.06% of the farmers, 3,248 had primary school
education—representing about 3.54% of the farmers, 36,078 had secondary education—
which is about 39.3% of the sample, while 13, 863 (that is, about 15.1%) had tertiary or
higher education. However, about 17,180 (18.7%) of the small scale farmers are core poor,
32,774 (35.7%) are moderately poor, while 41,852 (45.6%) of the small scale farmers
sampled are non poor. For sectors, 24,709 (26.9%) small scale farmers sampled live in the
urban areas while about 67,097 (73.1%) of them live in the rural sector. About 87,885,
representing 95.73% of the sample of the small scale farmers were married, while 3,921
(4.27%) of them were single.
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5.2 THE PRESENCE OF SAMPLE SELECTION BIAS
Table 2: The Presence Of Sample Selection Bias

Heckam
Inverse Mill’s Ratio (Mymill) 630.23797***
(0.000)
legend: * p<0.05; ** p<0.01; *** p<0.001
Source: Researcher’s Estimation using Stata 13. Where Heckman is the Results of The estimated
Inverse Mill’s Ratio of the Heckman Two-Step Model. The value in parenthesis is the probability
value. *** p<0.001, is significant at less than 1% level.
The probability value of the Wald Chi-square is 0.000. This shows that the model is properly
fitted. In order to verify if there was sample selection bias in the selection of small scale
farmers who had accessed to credit from the entire population of small scale farmers
assessed, we ran a Heckman Two-Step regression. The value of the inverse Mill’s ratio
(mymill), calculated with the estimates saved from the probit regression of the selection
equation and added to the output equation and estimated with OLS, is statistically significant
at less 1% level, indicating that there was sample selection bias which was corrected for by
the Heckman’s inverse Mill’s ratio. The size of the upward bias would have been 630.23797
had it not been corrected for. This is shown in column 2 of table 2 above.
5.3 PRESENTATION AND THE INTERPRETATION OF PRELIMINARY RESULTS FOR

THE INSTRUMENTAL VARIABLE TECHNIQUE APPLICATION
5.3.1 Test Of Endogeneity (Orthogonality Conditions) For Access To Credit (Loanuse)
Tests of endogeneity of: loanuse

Ho: Regressor is exogenous
Wu-Hausman F test: 11.27747 F(1,6381) P-value = 0.00079
Durbin-Wu-Hausman chi-sq test: 11.27875 Chi-sq(1) P-value = 0.00078
The p-values of both the Wu-Hausman F test and Durbin-Wu-Hausman chi-sqaure test are
less than 0.05. This implies that we can, at less than 5% level of significance, reject the null
hypothesis that the regressor ‘‘loanuse’’ is exogenous and conclude that it is true that access
to credit (loanuse) is endogenous. That is, the covariance between loanuse and the error term
is not zero. Some variable(s) in the error term influence(s) loanuse. If we continue with OLS,
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the parameter of access to credit (loanuse) will not measure the true effect of credit access on
the output of small scale farmers without also carrying the effects of other variables like
managerial ability that can as well affect access to credit and output of small scale farmers.
This brings in the need for the instrumental variable (IV) test. The IV estimates of Two-Stage
Least Squares (2SLS) and Generalized Method of Moments (GMM) are shown in columns 2
and 3 of appendix S.
In order to know the right instrumental variable model to use, we went on to test for
heteroscedasticity in the model.
5.3.2 Result of The Test For Heteroscedasticity
IV heteroskedasticity test(s) using levels of IVs only

Ho: Disturbance is homoskedastic
Pagan-Hall general test statistic : 39.094 Chi-sq(11) P-value = 0.0001
Pagan-Hall test w/assumed normality : 693.376 Chi-sq(11) P-value = 0.0000
White/Koenker nR2 test statistic : 50.454 Chi-sq(11) P-value = 0.0000
Breusch-Pagan/Godfrey/Cook-Weisberg : 1316.547 Chi-sq(11) P-value = 0.0000
The probability values of all the statistics are less than 0.05, meaning that at more than 95%
level of confidence, we can reject the null hypothesis that the error term is homosckedastic
and conclude that the error term is heteroskedastic. That is, it has no constant variance. With
the heteroskedastic nature of the disturbance term, generalized method of moments (GMM) is
the only consistent instrumental variable estimator we can employ in the presence of
heteroskedasticity.
5.3.3 Interpretation of The Results For The Tests of Overidentifying Restrictions
H0 : The instruments are uncorrelated with the error term

Tests of overidentifying restrictions:
Sargan N*R-sq test 2.444 Chi-sq(1) P-value = 0.1180
Basmann test 2.441 Chi-sq(1) P-value = 0.1182
The probability values of both the Sargan and Basmann tests are more than 0.05, meaning
that we fail to reject the null hypothesis that the instruments are uncorrelated with the error
62 | P a g e
term at 5% level of significance. We then conclude that the instruments (value of land and
sales value of equipment) are valid instruments.
5.3.4 Interpretation of the Results of The Test For Identification of The Model and
The Relevance or Redundancy of the Instrument
Weak-Instrument-Robust Inference:
Tests of joint significance of endogenous regressors B1 in main equation
Ho: B1=0 and overidentifying restrictions are valid
Anderson-Rubin Wald test F(2,6379)=8.72 P-val=0.0002
Anderson-Rubin Wald test Chi-sq(2)=17.47 P-val=0.0002
Stock-Wright LM S statistic Chi-sq(2)=17.43 P-val=0.0002
The probability values of all the tests are less than 0.05, indicating that at 5% level, we reject
the null hypotheses that the instruments are jointly irrelevant and that the overindentification
restrictions are valid. We conclude, therefore, that the instruments are jointly relevant and
that the model is not over-identified.
5.3.5 Interpretation of Results For Model Underidentification Tests
Ho: matrix of reduced form coefficients has rank=K1-1 (underidentified)

Ha: matrix has rank=K1 (identified)
Anderson canon. corr. N*CCEV LM statistic Chi-sq(2)=9.12 P-val=0.0105
Cragg-Donald N*CDEV Wald statistic Chi-sq(2)=9.13 P-val=0.0104
The under-identification test is an LM test of whether the equation is identified, that is, that
the excluded instruments are relevant, meaning that they are correlated with the endogenous
regressor. The test is essentially the test of the rank of a matrix: under the null hypothesis
that the equation is under-identified. A rejection of the null hypothesis indicates that the
matrix is full column rank; that is, the model is identified. The probability values (p-values)
of both the Anderson canonical correlation LM statistics and Craigg-Donald Wald statistic
are both less than 0.05, we reject the null hypothesis that the model is underidentified and
conclude that the model is properly identified and the instruments are valid.
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5.4 INTERPRETATION OF RESULTS FOR THE FIRST STAGE INSTRUMENTAL
VARIABLE AND HECKMAN SELECTION ESTIMATIONS (FOR OBJECTIVE ONE)
Table 3: Results For The First Stage Instrumental Variable And Heckman Selection
Equation Estimates
.
Loanuse First Stage IV Heckman
valland 2.04e-07* 5.89e-06*

(0.040) (0.033)
hhsize .0018767* .0637554*
(0.010) (0.021)
acrcult 3.53e-06 .0000852
(0.354) (0.447)
hghlevel .0001453* .00405*
(0.029) (0.039)
ageyrs -3.86e-06 .0155855
(0.996) (0.561)
experience 2.02e-06 -.0000616
(0.767) (0.809)
sexes .0030013 .0891979
(0.454) (0.686)
pov .0046867 .1912622
(0.058) (0.081)
marstatus 0.0052056 -.0170033
(0.523) (0.648)
hhincome 9.79e-10 -9.78e-07
(0.962) (0.215)
cons -.0222005 4.031406***
(0.213) (0.000)
legend: * p<0.05; ** p<0.01; *** p<0.001
Source: Researcher’s Estimation using Stata 13. Where First Stage IV in column one is the
results of the IV first stage analyses and heckman, in column two, is the result of the Heckman
selection equation (first step) of the Heckman Two-Step estimation technique. p is the probability
value. * p<0.05, is significant at 5% level; ** p<0.01, is significant at 1% level; *** p<0.001,
is significant at less than 1% level. The values in parentheses are probability values.
The probability values of the F-statistic for IV and Wald chi-square for the Heckman Two-Step
estimations are both 0.0000, which is less than 0.05, indicating that the model is very good and that
the coefficients of the model are statistically different from zero at less than 5% level. We will assume
that the effects of all the factors are fixed. From the result of the analyses on table 3 above, both the
instrumental variable approach and the Heckman selection equation estimated using Probit model
show that only the value of land, household size and highest level of education are, at 5% level, the
significant determinants of credit access by small scale farmers in Nigeria. While the GMM first stage
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analyses show that increase in the value of land by one naira will increase small scale farmers’ credit
access, on average, by about 2.04e-07 compared to 5.89e-06 increase revealed by the Heckman
selection model. For household size, an increase in household by a person, will increase their credit
access, on average, by about 0.2% (0.0018767x100) compared to 6.4% (0.0637554x100) revealed by
the Heckman selection equation. A higher education level attainment—say from no education to
primary, primary to secondary, secondary to tertiary level by smallholder farmers -- will, at 5% level,
significantly increase their access to credit, on average, by about 0.01% (0.0001453x100) compared to
0.4% (0.00405x100) shown by the Heckman’s selection equation, in column two. This means that as
the value of land increases, they become more acceptable collateral to access credit. The two models
also show that improving small scale farmers’ level of education from no education to primary
education, primary to secondary level education or from secondary to tertiary level of education will,
at 5% level, significantly increase their access to credit, at each higher level. That is, the more
educated they become, the easier it will become for them to access credit. Increase in their household
size will increase their need for credit to finance their farm activities so as to take care of the
increasing needs of their households.
5.5. INTERPRETATION OF THE RESULTS FOR ORDINARY LEAST SQUARES (OLS)

ESTIMATION FOR OBJECTIVE TWO (THE REFERENCE MODEL)
Table 4: Results of Ordinary Least Squares Estimates
Hmharves OLS
Hhsize 73.567603***
(0.000)
Acrcult .09217477***
(0.001)
Hghlevel -.01369941
(0.976)
Ageyrs -52.729854***
(0.000)
Experience .45571218***
(0.000)
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Pov -51.282503**
(0.002)
Sex 45.453688
(0.103)
marstatus -146.07054**
(0.010)
Hhincome -.00024308*
(0.039)
Loanuse -111.72364
(0.199)
Mymill
Cons 1413.0064***
(0.000)
legend: * p<0.05; ** p<0.01; *** p<0.001
Source: Researcher’s Estimation using Stata 13. Where OLS in column one is the result of the
ordinary least squares estimation. p is the probability value. * p<0.05, is significant at 5% level;
** p<0.01, is significant at 1% level; *** p<0.001, is significant at less than 1% level. The
values in parentheses are probability values
The probability value of the F-statistic is 0.000, indicating that the model is well fitted. The
R2 is 0.0950, which is low. It shows that about 10% of the variations in the total annual output
of smallholder farmers are due to the changes in the variables included in the model. The
Ordinary Least Squares (OLS) estimates in column one of table 4, show a downward bias
except in its measure of the effect of household income on the output of small scale farmers,
which shows an upward bias. This biasness is due to the bias in sample selection, the
presence of heteroskedasticity in the model and endogeneity of access to credit (loanuse).
With the coefficient of all other variables fixed, the estimates of the coefficients of its
regressors show that increase in household size by one person, acreage cultivated by an acre
and years of experience by an additional year will, at 1% level, significantly increase the
output of small scale farmers, on average, by about 73.57 kilograms, 0.092 kilogram and 0.46
kilogram respectively, while increase in their age by an additional year will significantly
66 | P a g e
reduce their level of output by about 52.73 kilograms at 1% level. Whether a small scale
farmer is not educated, has primary, secondary or tertiary education does not significantly
reduce his/her output. That is, level of education has no significant effect on output of small
scale farmers at 5% level of significance. For sex of farmers, there is no significant difference
in the output of male and female small scale farmers sampled at 5% level of significance. For
poverty status, there is significant difference in the output of small scale farmers who are
poor relative to that of those who are not poor. The outputs of poor small scale farmers is, at
1% level, significantly less than those of their non-poor counterparts by about 51.28
kilograms on average. For marital status, the output of married small scale farmers is, at 1%
level, significantly less than those of the single smallholder farmers by an average of 146.1
kilograms. For household income, an increase in the level of income of smallholder farmers
by a naira, will, at 5% level, significantly reduce their output by about 2.4308× 10− 5
kilograms, holding the effects of other regressors constant. On the other hand, credit access,
although it reduced output by about 111.72 kilograms on average, does not significantly
decrease the output of small scale farmers at 5% level of significance.
5.6 INTERPRETATION OF THE RESULTS OF THE GENERALIZED METHOD OF

MOMENTS (GMM) ESTIMATION FOR OBJECTIVE THREE AND ITS COMPARISON
TO OLS ESTIMATES
Table 5: Results of OLS and GMM Estimates
Hmharves OLS GMM

Hhsize 73.567603*** 95.160022***
(0.000) (0.000)
Acrcult .09217477*** .13860034*
(0.001) (0.046)
Hghlevel -.01369941 2.0992112
(0.976) (0.137)
Ageyrs -52.729854*** -48.358451***
(0.000) (0.000)
Experience .45571218*** .44199693***
(0.000) (0.000)
Pov -51.282503** 8.9162718
(0.002) (0.803)
Sex 45.453688 77.704545*
(0.103) (0.043)
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marstatus -146.07054** -80.103863
(0.010) (0.290)
Hhincome -.00024308* -.00051425**
(0.039) (0.007)
Loanuse -111.72364 -13363.191
(0.199) (0.061)
Cons 1413.0064*** 1059.4947***
(0.000) (0.000)
legend: * p<0.05; ** p<0.01; *** p<0.001

Source: Researcher’s Estimation using Stata 13. Where OLS is the Estimates of Ordinary Least
Squares Regression--The Reference Equation/Model;GMM is Generalised Method of Moments
Regression Results. p is the probability value. * p<0.05, is significant at 5% level; ** p<0.01, is
significant at 1% level; *** p<0.001, is significant at less than 1% level. The values in
parentheses are the probability values.
The probability values of the F-statistic for both the OLS and GMM models are 0.000,
indicating that the models are well fitted. That is, the coefficients of the variables in the
models are statistically different from zero. All things being equal, on one hand, the GMM
estimates in table 5 indicate that whilst the effect of small scale farmers’ household size,
acreage cultivated, age in years, experience, sex and household income are, at 5% level,
statistically different from zero, the coefficients of highest level of education, poverty status,
marital status and access to credit are not significant from zero on the second hand. An
increase in the size of small scale farmers’ household by one person will, at 5% level,
significantly increase their output, on average, by about 95.16 kilograms compared to 73.57
kilograms increase seen in the OLS estimates in column one. For acreage cultivated, a one
acre increase in the number of acres cultivated by small scale farmers will, at 5% level,
significantly increase small scale farmers’ output, on average, by about 0.138 kilogram
compared to 0.092 kilogram slight increase reported by the OLS estimate. For age in years,
an increase in the age of small scale farmers by one year will, at less than 1% level,
significantly reduce their output on average by about 48.37 kilograms compared to 52.73
kilogram decrease shown by the OLS. Again, additional year of experience by small scale
farmers will, at 1% level, significantly increase output on average by about 0.44 kilogram
68 | P a g e
compared to about 0.46 kilogram increase revealed by the OLS estimates. Whereas the GMM
estimate on small scale farmers’ poverty status reported that poverty status has no significant
effect on the output of small scale farmers at 5% level, the OLS estimate on poverty status
indicated that, on average, the output of poor (both core and moderately poor) small scale
farmers are about 51.23 kilograms less than the output of non-poor small scale farmers.
While the GMM estimate on sexes show that, at 5% level, the output of male small scale
farmers are significantly higher than those of their female counterparts on average by about
77.70 kilograms, the OLS estimates indicated that there is no significant difference between
the output of male and female small scale farmers. For marital status, the GMM estimate
shows that there is no significant difference in the output of single and married small scale
farmers, while the OLS estimate shows that the output of married small scale famers are, at
1% level, significantly less than the output of small scale farmers who are single on average
by about 146.1 kilograms. While the GMM estimate shows that household income will, at
1% level, significantly reduce output by about 5.14x10-4 kilograms, the OLS result shows that
household income will at only 5% level, significantly reduce output on average by about
2.43x10-4 kilograms. The cause of the slight difference may be because their incomes are
usually very low. Both models show no significant effect of credit access on the output of
small scale farmers. They also show that access to credit has negative effect on the output of
small scale farmers. While the GMM estimates show credit access by small scale farmers
reduced their output on average by about 13,363.19 kilograms — after correcting for
endogeneity bias, the OLS estimates showed a decrease of about 111.72 kilograms, indicating
an upward bias in the OLS estimate caused by the endogeneity of credit access (loanuse).
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5.7 INTERPRETATION OF THE RESULTS FOR THE HECKMAN STEP TWO
(HECKMAN) ESTIMATION FOR OBJECTIVE THREE AND ITS COMPARISON
WITH ORDINARY LEAST SQUARE (OLS) ESTIMATES
Table 6: Estimates of Ordinary Least Squares and Step-Two of Heckman Model
hmharves OLS HECKMAN
Hhsize 73.567603*** 103.7447***

(0.000) (0.000)
acrcult .09217477*** .13898308***
(0.001 ) (0.000)
hghlevel -.01369941 2.3076302***
(0.976) (0.001)
Ageyrs -52.729854*** -42.28626***
(0.000) (0.000)
experience .45571218*** .4021854***
(0.000) (0.000)
pov -51.282503** 37.555827
(0.002) (0.131)
sexes 45.453688 137.57186***
(0.103) (0.000)
marstatus -146.07054** -119.3944*
(0.010) (0.035)
hhincome -.00024308* -.00057286***
(0.039) (0.000)
loanuse -111.72364 -98.129838
(0.199) (0.258)
mymill 630.23797***
(0.000)
cons 1413.0064*** -1087.6983*
(0.000) (0.041)
legend: * p<0.05; ** p<0.01; *** p<0.001
Squares Regression--The Reference Equation/Model;Heckman is the Result of The Second Step of
Heckman Two-Step Technique. p is the probability value. * p<0.05, is significant at 5% level; **
p<0.01, is significant at 1% level; *** p<0.001, is significant at less than 1% level. The
values in parentheses are the probability values.
5.7.1 Interpretation of The Results For The Heckman Step Two (heckman)
Estimation for Objective Three
The probability values of both the F-statistics for OLS and GMM models is 0.000, indicating
that the models are well fitted. That is, the coefficients of the variables in the models are
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statistically different from zero. If we hold the effects of other variables constant, the
estimates of Heckman second-step estimation reported in column 3 of table 6 show that
household size, acreage cultivated, highest level of education, age in years, experience, sex
and household income have significant effect on the output of small scale farmers at less 1%
level, while marital status has significant effect on their output at 5% level. Their poverty
status and credit access have no significant effects on their output at both 1% and 5% levels,
after correcting for representativeness. The results show that an increase in household size by
a person, acreage cultivated by an acre and years of experience by a year will, at 1% level,
significantly increase small scale farmers’ output, on average, by about 103.74 kilograms,
0.14 kilogram and 0.40 kilogram, respectively. For highest level of education, educational
advancement from primary to secondary or secondary to tertiary level will, at less than 1%
level, increase the output of small scale farmers on average by about 2.31 kilograms at each
level of education attained. For age and income of the farmers, an increase in age by one year
and one naira increase in household income of small scale farmers will, at less than 1% level,
significantly reduce their output on average by about 42.29 kilograms and 5.73x10 -4
kilograms respectively. Small scale farmers, who are male, at 5% level, significantly produce
more output than their female counterpart on average by about 137.57 kilograms. For marital
status, the output of small scale farmers who are single are, at 5% level, significantly less
than those of their peers who are married on average by about 119.39 kilograms. Whether a
small scale farmer is poor or not does not significantly impact on his/her output, at 5% level
of significance. The Heckman estimate of the parameter of access to credit shows that, after
correcting for sample selection bias, access to credit has no significant effect on the output of
small scale farmers who accessed credit at 5% level of significance.
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5.7.2 Comparison Of The Heckman Step-Two Estimates With Ordinary Least Squares
(OLS) Estimates
From table 6, Holding the effects of other factors fixed, an increase in the size of small scale
farmers’ household by one person will, at 1% level, significantly increase output on average
by about 103.74 kilograms compared to 73.57 kilograms increase reported in the OLS
estimates in column one. For acreage cultivated, an increase in the number of acres cultivated
by small scale farmers by an acre will, at 1% level, significantly increase small scale farmers’
output, on average, by about 0.14 kilogram compared to 0.092 kilogram reported by the OLS
estimate. While the Heckman model shows that an increase in the level of education from
primary to secondary or secondary to tertiary level, will at each higher level of education
significantly increase output of small scale farmers on average by about 2.31 kilograms at 1%
level of significance, the OLS estimate show that at each increase in educational level, the
output of these farmers will, at 5% level, insignificantly fall, by about .01 kilogram. For age
in years, an increase in the age of small scale farmers by one year will, at less than 1% level,
significantly reduce their output, on average, by about 42.29 kilograms compared to 52.73
kilograms decrease shown by the OLS estimate. Again, an additional year of experience by
small scale farmers will, at 1% level, significantly increase output on average by about 0.40
kilogram compared to about 0.46 kilogram increase revealed by the OLS estimates. Whereas
the Heckman model estimate shows that output of poor small scale farmers (though not
significant at 5% level) are higher than those of their peers who are non poor on average by
about 37.55 kilograms, the OLS estimate on poverty status indicated that, on average, the
output of poor (both core and moderately poor) small scale farmers are about 51.23 kilograms
less than the output of non-poor small scale farmers at 5% level. This shows a downward bias
in the OLS estimate on poverty. Again, the Heckman estimate on sexes show that, at 1%
level, the output of female small scale farmers are significantly higher than those of their
72 | P a g e
male counterparts on average by about 137.57 kilograms, while the OLS estimate indicated
that there is no significant difference between the output of male and female small scale
farmers at same 5% level. For marital status, the Heckman estimate shows that the output of
married small scale farmers are, at 5% level, significantly less than those of their peers that
are single by about 119.39 kilograms, while the OLS estimate shows that the output of
married small scale famers are, at 1% level, significantly less than the output of small scale
farmers who are single on average by about 146.1 kilograms. While the Heckman estimate
shows that household income will, at 1% level, significantly reduce output by about 5.72x10 -4
kilogram, the OLS result shows that household income will at only 5% level, significantly
reduce output on average by about 2.43x10 -4 kilogram. Both models show no significant
effect of credit access on the output of small scale farmers. They also show that access to
credit has negative effect on the output of small scale farmers. While the Heckman estimate
shows credit access by small scale farmers reduced their output on average by about 98.13
kilograms — after correcting for selectivity bias, the OLS estimates showed a decrease of
about 111.72 kilograms. This is also a case of downward bias on the side of OLS as a result
of sample selection bias or endogeneity bias that was not taken care of by the model.
5.8 COMPARISON OF HECKMAN STEP-TWO ESTIMATES WITH GMM ESTIMATES
Table 7: Heckman Step-Two Estimates With GMM Estimates
hmharves GMM HECKMAN
hhsize 95.160022*** 103.7447***

(0.000) (0.000)
acrcult .13860034* .13898308***
(0.046) (0.000)
hghlevel 2.0992112 2.3076302***
(0.137) (0.001)
ageyrs -48.358451*** -42.28626***
(0.000) (0.000)
experience .44199693*** .4021854***
(0.000) (0.000)
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pov 8.9162718 37.555827
(0.803) (0.131)
sexes 77.704545* 137.57186***
(0.043) (0.000)
marstatus -80.103863 -119.3944*
(0.290) (0.035)
hhincome -.00051425** -.00057286***
(0.007) (0.000)
loanuse -13363.191 -98.129838
(0.061) (0.258)
mymill 630.23797***
(0.000)
cons 1059.4947*** -1087.6983*
(0.000) (0.041)
legend: * p<0.05; ** p<0.01; *** p<0.001
Source: Researcher’s Estimation using Stata 13. Where GMM is Generalised Method of Moments
Estimation Results;Heckman is the Result of The Second Step of Heckman Two-Step Technique. p is
the probability value. * p<0.05, is significant at 5% level; ** p<0.01, is significant at 1% level;
*** p<0.001, is significant at less than 1% level. The values in parentheses are the
probability values.
With good fitted models, as seen in the probability values of F-statistic (for GMM) and Wald
Chi-square (for Heckman), we compare the estimates of two models. Sample selection bias
and endogeneity bias refer to two distinct concepts, both entailing distinct solutions. In
general, sample selection bias refers to problems where the dependent variable is observed
only for a restricted, non random sample. Here, we observe a small scale farmer’s output only
if the farmer has access to credit. Conversely, we observe a credit constrained small scale
farmer’s output only if the farmer does not access credit. According to Amemiya (1985),
endogeneity refers to the fact that an independent variable included in the model is potentially
a choice variable, correlated with unobservables that are relegated to the error term. The
dependent variable, in the case of endogeneity however, is observed for all observations in
the data. Here credit access may be endogenous if the decision to take credit or not is
correlated with unobservables that affect small scale farmers (Maddala, 1983). For instance,
if small scale farmers with high managerial ability are more likely to access credit and
therefore produce more outputs, ceteris paribus, then failure to control for this correlation will
74 | P a g e
yield an estimated credit effect on outputs of the farmers that is biased downwards as seen in
the ordinary least squares (OLS) estimates reported earlier.
Again, in instrumental variable approach, the entire sample of small scale farmers is used, the
sample selection problem is not addressed here, but there may be sample selection issue to
the extent that outputs are observed only for small scale farmers who accessed credit (Main &
Reilly,1993). In addition, the betas (coefficients of the independent variables), under
endogeneity estimation techniques, are restricted to be the same for small scale farmers who
accessed credit and those who did not. That is, outputs are restricted to be the same,
regardless of whether a small scale farmer has access to credit or not.
From table 7, we could see that due to the correction of the sample selection bias by the
Heckman Two-Step approach, highest level of education and marital status that were reported
not to have significant effect on the output of small scale farmers by Instrumental Variable
GMM, are seen to have statistical significant influence on the output of small scale farmers.
While acreage cultivated and sex of small scale farmers that were only significant at 5% level
in GMM approach were significant at less than 1% level in Heckman Two-Step technique.
This implies that sample selection problem may have caused the GMM estimates to have
high standard errors which affect their level of statistical significance. It also affected the size
of their coefficients. Therefore, the Heckman model is better than the GMM technique
because the GMM technique only controls for endogeneity and heterosckedasticity but not
sample selectivity bias that is also controlled for by the Heckman Two-Step model.
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5.9 INTERPRETATION OF THE ORDINARY LEAST SQUARES ESTIMATES OF THE
EFFECTS OF POVERTY STATUS ON THE OUTPUT OF SMALL SCALE FARMERS
WHO ACCESSED CREDIT (OBJECTIVE THREE)
Table 8: OLS Estimates of Small Scale Farmers’ Poverty Status Effect on Their Output
hmharves COEFICIENTS
loanmodpoors -144.06517
(0.318)
loancorepoors -413.23556*
(0.043)
cons 1414.8876***
(0.000)
legend: * p<0.05; ** p<0.01; *** p<0.001
Source: Researcher’s Estimation using Stata 13. p is the probability values. * p<0.05, is
significant at 5% level; ** p<0.01, is significant at 1% level; *** p<0.001, is significant at
less than 1% level. The values in parentheses are the probability values.
Base category: Non-poor small scale farmers with access to credit access.
The R-squared is 0.955, meaning that about 96% of the variation in the output of small scale
farmers is due to the variables in the model. The probability value of the F-test is less than
0.05, showing that it is a well-fitted model. From the results on table 8, the ordinary least
squares estimates of the effect of poverty status on the output of small scale farmers who
accessed credit show that while there is no significant difference between the output of
moderately poor small scale farmers who accessed credit and those of their peers who are non
poor but accessed credit as well, there is a statistically significant difference in the output of
core poor and non poor small scale farmers who accessed credit. Although the output of
moderately poor small scale farmers who accessed credit may not, at 5% level, significantly
vary from those of the non poor who accessed credit, the result indicates that it is less than
the output of non poor small scale farmers who accessed credit on average by about 144.06
kilograms. For the core poor small scale farmers who accessed credit, their outputs are, at 5%
level, significantly less than the output of the non poor small scale farmers who accessed
credit on average by about 413.24 kilograms, keeping the effect of other variables fixed. This
results show that as the poverty level of the small scale farmers improved, their output also
76 | P a g e
improved. Meaning that, the more poor the small scale farmers are, the lesser their output
even when they have accessed credit.
5.10 INTERPRETATION OF THE ORDINARY LEAST SQUARES ESTIMATES OF THE

EFFECTS OF MARITAL STATUS ON THE OUTPUT OF SMALL SCALE FARMERS
WHO ACCESSED CREDIT (OBJECTIVE FOUR)
Table 9: OLS Estimates of The Effect of Small Scale Farmers’ Marital Status on
Output of Those Who Accessed Credit
Hmharves Coeficients
loanuse#marstatus -242.00537*
11 (0.020)
1367.1529***
cons (0.000)
legend: * p<0.05; ** p<0.01; *** p<0.001
Source: Researcher’s Estimation using Stata 13. p is the probability values. * p<0.05, is
significant at 5% level; ** p<0.01, is significant at 1% level; *** p<0.001, is significant at
less than 1% level. The values in parentheses are the probability values.
Base category: Single small scale farmers who accessed credit
The probability value of the F-test is 0.0000 which is less than 5%, revealing that the model
is well fitted. About 13% variation in the output was due to the variables in the model. From
table five above, we could see that the marital status of the small scale farmers who accessed
credit significantly influenced their output. The result on table 9 shows that, keeping the
effect of other variables constant, the output of married small scale farmers who accessed
credit are, at 5% level, significantly less than the output of single small scale farmers who
accessed credit on average by about 242 kilograms.
5.11 DISCUSSION OF RESULTS AND EVALUATION OF RESEARCH HYPOTHESES
The results which were presented and analysed in this chapter of my research work show that
there is a sample selection bias in the selection of small scale farmers into those who have
credit access and those who do not. This justifies my use of Heckman Two-Step technique.
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Again, the estimates show that the value of land, household size and level of education were
the significant determinants of small scale farmers’ access to credit. This is consistent with
the works of Anang, Sipilainen, Backman & Kola (2005) highlighted under the empirical
literature. This addresses objective one of my study.
On the other hand, the results of all the models show that there is a negative, though
insignificant, relationship between access to credit and output of small scale farmers. This
implies that an increase in credit access by small scale farmers will reduce their output,
though not significantly. This outcome is in line with the works of Omojimite (2012) and
Akpan and Babalola (2009). The results address objective two. The results emphasized in this
study are those of GMM and Heckman Two-Step techniques because GMM takes care of
endogeneity and heterskedasticy as does Heckman Two-Step which additionally takes care of
sample selection bias. Moreover, between the two models (GMM and Heckman), the
Heckman model is preferred due to the presence of sample selection bias.
However, there is a significant difference in the output of core poor small scale farmers who
accessed credit and those of the non poor smallholder farmers who also had credit access.
And the amount of this difference is about 413.24 kilograms less than the output of the non
poor small scale farmers. This resolves our objective three. We also saw that, with both
having access to credit, the output of married small scale farmers were significantly less than
those of the single small scale farmers. This is unexpected but it addresses objective four of
this study. This difference is about 242 kilograms.
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CHAPTER SIX
SUMMARY, CONCLUSION AND RECOMMENDATIONS
6.1 SUMMARY
In summary, this study found a significant positive relationship between the value of land and
small scale farmers’ access to credit. This implies that the higher the value of an asset (such
as land) that can be used as collateral to access credit, the higher the ability of the small scale
farmers to access credit. Household size was also positively significant at determining access
to credit. This means that the more the size of small scale farmers’ household, the greater
their need for credit to carter for their increasing number. Again, this study also found that
increase in education levels will increase credit access of the smallholder farmers in Nigeria.
This is because they will be more enlightened and disposed to apply for credit.
However, Ordinary Least Squares are not consistent estimators in the presence of edogeneity
and heteroskedasticity. That is, they produce spurious estimates. The biases in the estimates
are mostly downward in nature. This also means that their parameter estimates do not
measure their true effects on the outcome of interest. Models that correct for selectivity bias
and endogeneity (Endogenous Switching Regression and Heckman Two-Step estimation
techniques) are appropriate in estimating the effect of access to credit on the output of small
scale farmers in Nigeria. The Heckman Two-Step estimation technique is a consistent
estimator in the presence of endogeneity, heteroskedasticity and selectivity bias. Its estimates
found that Household size, number of acres cultivated, experience and sex show positive and
significant effects on output of small scale farmers. As a result, increasing them will increase
the output of small scale farmers in Nigeria. Notwithstanding, age in years and household
income have negative significant effects on the output of small scale farmers in Nigeria. The
negative effect of age in years on small scale farmers’ output is because the average age in
years of the sampled farmers is about 47 years. They are already old farmers, and as the years
79 | P a g e
go by, they grow older and their output at this older age will definitely drop significantly. We
also found that the average total annual household income of sampled small scale farmers is
about 130,195 naira. With this level of income, the average small scale farmer spends,
approximately, about 357 (130,195/365) naira per day. This is less than the $2 per day recent
poverty line at the current 425 naira per day dollar exchange rate. This also means that, on
average, the sampled small scale farmers are poor. Therefore, most of the funds accessed by
these small scale farmers are channelled towards taking care of their basic needs and they
may sometimes prefer to go into petty trading or motorcycle operation as this will guarantee
them immediate income rather than wait for the harvest period of the agricultural products.
We also found a significant difference between the output of single small scale farmers and
married small scale farmers. The result showed that the small scale farmers who are single
produced more output than their married counterparts. The study also found that the average
total amount of credit accessed was about 9,005.15 naira. This is not in any way going to
alleviate their problem not to talk of eradicating poverty. This amount cannot even cultivate
two plots of land for them but can start off a petty trade, like selling of ‘‘recharge cards’’.
This also may have contributed to the negative, though not significant, effect of credit access
on the output of small scale farmers in Nigeria.
Furthermore, the research found the output of core poor small scale farmers who accessed
credit to be significantly less than that of non poor small scale farmers who also accessed
credit. Also, the output of moderately poor small scale farmers who have credit access are,
though not significant at 5% level, less than the output of non poor small scale farmers who
accessed credit. These differences in output reduced as the small scale farmers’ poverty
statuses improved. This means that as there poverty conditions improve, the effect of their
credit access on output is very likely to improve as well, if they don’t abandon farming for
trading or other ventures.
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Finally, the research also corrected for endogeneity by using sales value of land and
equipment which could be used as collateral to access credit from the credit institutions. The
instruments were found to be good instruments and identification (exclusion restriction) for
Instrumental Variable and Heckman Two-Stage estimators, respectively.
6.2 POLICY IMPLICATIONS AND RECOMMENDATIONS
As Nigeria attempts to diversify its economy to cushion the negative effect of oil price shock
on it, improving the production capacity of small scale farmers through productivity increase
is an important policy goal, especially now that agriculture is seen as an important sector in
reviving the economy. For government efforts at improving the condition of these farmers to
be felt—when it comes to granting them credit, it should target the real farmers and not party
loyalist who may not be farmers. Government policies at advancing credit to small scale
farmers should consider the amount required by these farmers before they are made. A
sizeable amount of credit is required by these farmers, if the effect of credit is to be
felt/significant. The government and bank credit polici(es) should also consider the timing of
agricultural activities to ensure that these credits are given to the farmers at the right time to
ensure that the required impact on their output is achieved. The recently clamoured ‘‘stomach
infrastructure’’ should be implemented as a policy through social welfare service by granting
the unemployed people (of which the children of these small scale farmers are the most) a
reasonable stipend per month to take care of their basic needs. For private sector credit such
as credits from banks and other financial institutions, who require acceptable collateral to
guarantee their loans, governments should stand in for the small scale farmers by
guaranteeing their loans and ensuring that they pay back by ensuring that counsellors and
traditional heads of their wards sign-off on the loans.
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Furthermore, the Agricultural Credit Guarantee Scheme should be made more active to
ensure that the collateral problem of these farmers is taken care of and their credit access
improved. The rural banks established under the Rural Banking Scheme should be revived.
This will make the banks very close to the small scale farmers (most of whom are rural-
based) to have easy access to agricultural credit when provided. The federal government
should ensure that its programs on agriculture inculcate the features of the National Poverty
Eradication Program (NAPEP). Features such as social welfare service scheme, which
ensures quality education for the poor, primary healthcare, provision of agricultural inputs
(like improved and disease resistant seedling, fertilizers and pesticides), credit delivery to
rural areas; rural infrastructures like portable water, rural electrification and transportation to
ensure that farm products are processed and transported to enable small scale farmers get a
fair price for their products.
6.3 SUGGESTIONS FOR FURTHER RESEARCH
As suggested earlier, this study would serve as a reference point for further research work on
this topic. This is because other than the gap filled by this research; there are still exigency
gaps, which could not be filled due to the scope and context of this study. To this end, the
suggestions made for further research work relating to access to credit and effect of credit on
the output of small scale farmers in Nigeria are as follows:
1. The Effect Of Credit Use On The Output Of Small Scale Farmers In Sub-Saharan
Africa.
2. Zonal Analyses Of Access To Credit And Output Of Small Scale Farmers In Nigeria.
3. Health Status And The Performance Of Small Scale Farmers In Nigeria.
82 | P a g e
6.4 CONCLUSION
In conclusion, these analyses made use of the agricultural section of Nigerian Living
Standards Survey Data version 2009 and the Generalized Living Standard Survey of 2012. In
spite attempts made in the past by some studies to explore the link between access to agricultural
credit and agricultural productivity in Nigeria, many of these studies did not apply the widely
accepted impact assessment methodologies and are therefore subject to serious problems arising
from sample selection bias. In order to fill this gap in the literature and complement other studies,
this study assesses the demographic and socio-economic features of small scale farmers which
significantly determine their access to credit and the impact of credit access on the output of
small scale farmers in Nigeria using the Heckman Two-Step Instrumental Variable estimation
techniques. We focused essentially on output of small scale farmers, because agricultural output
is a measure of the performance of the agricultural sector and thus provides a guide to the
efficiency of the sector (Thirtle et al., 2005). The analyses made use of household size, acres of
land cultivated, highest levels of education of small scale farmers, their age and experience in
years, poverty status, sex, marital status, total annual household income and their access to
credit. Sector was dropped due to colllnearity problem. When marital status was dropped,
sector did not show any significant effect on both access to credit and output of small scale
farmers. however, the study found that only the size of household, acreage cultivated, highest
level of education attained, sex, marital status and household income were significant at
determining the level of output of small scale farmers in Nigeria, while their access to credit
were significantly determined by only the value of their land, household size and their highest
level of education.
In this result, the relationship between credit access and the output of small scale farmers
looks odd, but then it makes a good sense when one looks at it more closely for various
reasons. First, while access to credit is supposed to increase output of smallholder farmers, it
is also true that credit access by these small scale farmers is for both production and
83 | P a g e
consumption. Since the average small scale farmer is poor, the fund they accessed will, first
of all, be used to take care of his/her basic needs such health care, food and even to pay
his/her children’s school fees. The amount received as credit is also not enough as to make
significant impact. The timing of the loans are also wrong due to delay in approving the
credits that most times enter the non planting period leaving the small scale farmers with no
option than to trade with the credits obtained. Again, some of the beneficiaries of the credits,
especially the credits from the government, are false farmers (party loyalist who claim to be
farmers) who get these credits and use them for other things instead of agricultural activities.
Another is the result of the effect of marital status on the output of small scale farmers who
accessed credit. This maybe justifiable as married farmers are supposed to have more
responsibilities like paying children school fees, taking care of their health needs and feeding.
Because of these pressures, they may prefer to use the credits for petty trading when they get
them—as agricultural activities are seasonal and may require more time before the output is
harvested.
Therefore, government should care for the basic needs of these smallholder farmers through
the provision and sustaining of more free health care facilities, free education for the less
privileged and ‘‘stomach infrastructure’’ to enable them apply these credits on agricultural
activities when they access them.
84 | P a g e
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APPENDICES
APPENDIX A: RESULTS FOR THE ORDINARY LEAST SQUARE ESTIMATION

TECHNIQUES (THE REFERENCE MODEL)
. reg hmharves hhsize acrcult hghlevel ageyrs experience pov sexes marstatus hhincome loanuse
Source SS df MS Number of obs = 6393

F( 10, 6382) = 67.02
Model 305073293 10 30507329.3 Prob > F = 0.0000
Residual 2.9049e+09 6382 455171.259 R-squared = 0.0950
Adj R-squared = 0.0936
Total 3.2100e+09 6392 502186.525 Root MSE = 674.66
hmharves Coef. Std. Err. t P>|t| [95% Conf. Interval]
hhsize 73.5676 4.845925 15.18 0.000 64.06796 83.06724

acrcult .0921748 .0265139 3.48 0.001 .0401987 .1441509
hghlevel -.0136994 .4615691 -0.03 0.976 -.9185297 .8911309
ageyrs -52.72985 4.697472 -11.23 0.000 -61.93848 -43.52123
experience .4557122 .0465124 9.80 0.000 .3645323 .546892
pov -51.2825 16.76347 -3.06 0.002 -84.14454 -18.42047
sexes 45.45369 27.83556 1.63 0.103 -9.113364 100.0207
marstatus -146.0705 56.52422 -2.58 0.010 -256.877 -35.26408
hhincome -.0002431 .0001176 -2.07 0.039 -.0004735 -.0000126
loanuse -111.7236 86.94176 -1.29 0.199 -282.1587 58.7114
_cons 1413.006 122.6118 11.52 0.000 1172.646 1653.367
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APPENDIX B: RESULTS FOR THE EFFECT OF THE INSTRUMENTS ON
ACCESS TO CREDIT(LOANUSE)
. reg loanuse salevalequip valland

F( 2, 91803) = 740.66
Model 58.5434971 2 29.2717485 Prob > F = 0.0000
Residual 3628.16962 91803 .039521253 R-squared = 0.0159
Total 3686.71311 91805 .040158086 Root MSE = .1988
loanuse Coef. Std. Err. t P>|t| [95% Conf. Interval]
salevalequip 4.05e-07 1.06e-08 38.18 0.000 3.84e-07 4.26e-07

valland -3.88e-07 6.14e-08 -6.32 0.000 -5.09e-07 -2.68e-07
_cons .0180077 .0011751 15.32 0.000 .0157044 .0203109
95 | P a g e
APPENDIX C: RESULTS FOR THE FIRST STAGE OF THE 2SLS
. ivreg2 hmharves hhsize acrcult hghlevel ageyrs experience pov sexes marstatus hhincome (loanuse= salev
> alequip valland ), first
First-stage regressions
First-stage regression of loanuse:
OLS estimation
Estimates efficient for homoskedasticity only

Statistics consistent for homoskedasticity only
Number of obs = 6393

F( 11, 6381) = 2.72
Prob > F = 0.0017
Total (centered) SS = 60.41795714 Centered R2 = 0.0047
Total (uncentered) SS = 61 Uncentered R2 = 0.0142
Residual SS = 60.13640374 Root MSE = .09708
loanuse Coef. Std. Err. t P>|t| [95% Conf. Interval]
hhsize .0018767 .0007295 2.57 0.010 .0004467 .0033067

acrcult 3.53e-06 3.82e-06 0.93 0.354 -3.94e-06 .000011
hghlevel .0001453 .0000664 2.19 0.029 .0000151 .0002755
ageyrs -3.86e-06 .0006905 -0.01 0.996 -.0013574 .0013497
experience 2.02e-06 6.82e-06 0.30 0.767 -.0000114 .0000154
pov .0046867 .0024677 1.90 0.058 -.0001508 .0095243
sexes .0030013 .0040125 0.75 0.454 -.0048645 .0108671
marstatus .0052056 .0081425 0.64 0.523 -.0107564 .0211676
hhincome 9.79e-10 2.03e-08 0.05 0.962 -3.88e-08 4.08e-08
salevalequip -5.07e-08 3.59e-08 -1.41 0.158 -1.21e-07 1.97e-08
valland 2.04e-07 9.95e-08 2.05 0.040 9.37e-09 3.99e-07
_cons -.0222005 .0178226 -1.25 0.213 -.0571388 .0127378
Included instruments: hhsize acrcult hghlevel ageyrs experience pov sexes

marstatus hhincome salevalequip valland
Partial R-squared of excluded instruments: 0.0013

Test of excluded instruments:
F( 2, 6381) = 4.27
Prob > F = 0.0141
96 | P a g e
APPENDIX D: RESULTS FOR MODEL IDENTIFICATION TESTS
Summary results for first-stage regressions
Variable | Shea Partial R2 | Partial R2 | F( 2, 6381) P-value

loanuse | 0.0013 | 0.0013 | 4.27 0.0141
Underidentification tests
Weak identification test

Ho: equation is weakly identified
Cragg-Donald Wald F-statistic 4.27
See main output for Cragg-Donald weak id test critical values
Weak-instrument-robust inference
Number of observations N = 6393

Number of regressors K = 11
Number of instruments L = 12
Number of excluded instruments L1 = 2
97 | P a g e
APPENDIX E: RESULTS FOR THE SECOND STATGE OF THE 2SLS TECHNIQUE
IV (2SLS) estimation
Estimates efficient for homoskedasticity only

Statistics consistent for homoskedasticity only

F( 10, 6382) = 29.33
Prob > F = 0.0000
Total (centered) SS = 3209976267 Centered R2 = -1.0986
Total (uncentered) SS = 3345554216 Uncentered R2 = -1.0135
Residual SS = 6736394575 Root MSE = 1027
hmharves Coef. Std. Err. z P>|z| [95% Conf. Interval]
loanuse -8088.455 3619.368 -2.23 0.025 -15182.29 -994.6238

hhsize 85.09965 9.039129 9.41 0.000 67.38329 102.816
acrcult .1208077 .0423788 2.85 0.004 .0377467 .2038687
hghlevel 1.198897 .8919185 1.34 0.179 -.5492311 2.947025
ageyrs -50.59072 7.212754 -7.01 0.000 -64.72746 -36.45399
experience .4514466 .0707953 6.38 0.000 .3126903 .5902028
pov -21.36099 28.88981 -0.74 0.460 -77.98397 35.26199
sexes 64.74833 43.24623 1.50 0.134 -20.01272 149.5094
marstatus -104.3592 88.05717 -1.19 0.236 -276.9481 68.22965
hhincome -.0003213 .0001824 -1.76 0.078 -.0006787 .0000361
_cons 1223.681 205.3593 5.96 0.000 821.1843 1626.178
Underidentification test (Anderson canon. corr. LM statistic): 8.540

Chi-sq(2) P-val = 0.0140
Weak identification test (Cragg-Donald Wald F statistic): 4.268

Stock-Yogo weak ID test critical values: 10% maximal IV size 19.93
15% maximal IV size 11.59
Source: Stock-Yogo (2005). Reproduced by permission.
Sargan statistic (overidentification test of all instruments): 2.522

Chi-sq(1) P-val = 0.1123
Instrumented: loanuse
marstatus hhincome
Excluded instruments: salevalequip valland
98 | P a g e
APPENDIX F: RESULTS OF THE ENDOGENEITY TEST OF ACCESS TO
CREDIT (LOANUSE) AND HETEROSKEDASTICITY IN THE
MODEL
.
. ivendog
Tests of endogeneity of: loanuse

H0: Regressor is exogenous
Wu-Hausman F test: 11.27747 F(1,6381) P-value = 0.00079
Durbin-Wu-Hausman chi-sq test: 11.27875 Chi-sq(1) P-value = 0.00078
.
. ivhettest, all
IV heteroskedasticity test(s) using levels of IVs only
Ho: Disturbance is homoskedastic
Pagan-Hall general test statistic : 39.094 Chi-sq(11) P-value = 0.0001
Pagan-Hall test w/assumed normality : 693.376 Chi-sq(11) P-value = 0.0000
White/Koenker nR2 test statistic : 50.454 Chi-sq(11) P-value = 0.0000
Breusch-Pagan/Godfrey/Cook-Weisberg : 1316.547 Chi-sq(11) P-value = 0.0000
.
> alequip valland ), gmm robust
-gmm- is no longer a supported option; use -gmm2s- with the appropriate option
gmm = gmm2s robust
gmm robust = gmm2s robust
gmm bw() = gmm2s bw()
gmm robust bw() = gmm2s robust bw()
gmm cluster() = gmm2s cluster()
99 | P a g e
APPENDIX G: RESULTS FOR THE GMM ESTIMATION TECHNIQUE FOR THE
EFFECT OF CREDIT ACCESS ON OUTPUT OF SMALL SCALE FARMERS
2-Step GMM estimation
Estimates efficient for arbitrary heteroskedasticity

Statistics robust to heteroskedasticity

F( 10, 6382) = 13.18
Prob > F = 0.0000
Residual SS = 1.34798e+10 Root MSE = 1452
Robust
loanuse -13363.19 7131.27 -1.87 0.061 -27340.22 613.8405

hhsize 95.16002 14.20091 6.70 0.000 67.32675 122.9933
acrcult .1386003 .0693755 2.00 0.046 .0026269 .2745738
hghlevel 2.099211 1.413101 1.49 0.137 -.6704152 4.868838
ageyrs -48.35845 8.381048 -5.77 0.000 -64.785 -31.9319
experience .4419969 .0823771 5.37 0.000 .2805407 .6034532
pov 8.916272 35.68197 0.25 0.803 -61.01911 78.85166
sexes 77.70455 38.47511 2.02 0.043 2.294708 153.1144
marstatus -80.10386 75.71412 -1.06 0.290 -228.5008 68.29309
hhincome -.0005142 .0001913 -2.69 0.007 -.0008892 -.0001393
_cons 1059.495 245.4395 4.32 0.000 578.4421 1540.547
Underidentification test (Kleibergen-Paap rk LM statistic): 1.463

Chi-sq(2) P-val = 0.4812
Weak identification test (Kleibergen-Paap rk Wald F statistic): 0.759

NB: Critical values are for Cragg-Donald F statistic and i.i.d. errors.
Hansen J statistic (overidentification test of all instruments): 0.960

Chi-sq(1) P-val = 0.3271
marstatus hhincome
100 | P a g e
APPENDIX H: RESULTS FOR THE TEST FOR THE RELEVANCE OF THE
INSTRUMENTS USING GMM ESTIMATION TECHNIQUE
> alequip valland ), gmm orthog(salevalequip)
gmm = gmm2s robust


F( 10, 6382) = 13.18
Prob > F = 0.0000
Robust
loanuse -13363.19 7131.27 -1.87 0.061 -27340.22 613.8405

hhsize 95.16002 14.20091 6.70 0.000 67.32675 122.9933
acrcult .1386003 .0693755 2.00 0.046 .0026269 .2745738
hghlevel 2.099211 1.413101 1.49 0.137 -.6704152 4.868838
ageyrs -48.35845 8.381048 -5.77 0.000 -64.785 -31.9319
experience .4419969 .0823771 5.37 0.000 .2805407 .6034532
pov 8.916272 35.68197 0.25 0.803 -61.01911 78.85166
sexes 77.70455 38.47511 2.02 0.043 2.294708 153.1144
marstatus -80.10386 75.71412 -1.06 0.290 -228.5008 68.29309
hhincome -.0005142 .0001913 -2.69 0.007 -.0008892 -.0001393
_cons 1059.495 245.4395 4.32 0.000 578.4421 1540.547

Chi-sq(2) P-val = 0.4812


Chi-sq(1) P-val = 0.3271
-orthog- option:
Hansen J statistic (eqn. excluding suspect orthog. conditions): 0.000
Chi-sq(0) P-val = .
C statistic (exogeneity/orthogonality of suspect instruments): 0.960
Chi-sq(1) P-val = 0.3271
Instruments tested: salevalequip
marstatus hhincome
101 | P a g e
APPENDIX I: RESULTS FOR THE ORTHOGONALITY TEST OF THE
INSTRUMENT-- SALES VALUE OF EQUIPMENT
> alequip valland ), gmm orthog(salevalequip)
gmm = gmm2s robust


F( 10, 6382) = 13.18
Prob > F = 0.0000
Robust
loanuse -13363.19 7131.27 -1.87 0.061 -27340.22 613.8405

hhsize 95.16002 14.20091 6.70 0.000 67.32675 122.9933
acrcult .1386003 .0693755 2.00 0.046 .0026269 .2745738
hghlevel 2.099211 1.413101 1.49 0.137 -.6704152 4.868838
ageyrs -48.35845 8.381048 -5.77 0.000 -64.785 -31.9319
experience .4419969 .0823771 5.37 0.000 .2805407 .6034532
pov 8.916272 35.68197 0.25 0.803 -61.01911 78.85166
sexes 77.70455 38.47511 2.02 0.043 2.294708 153.1144
marstatus -80.10386 75.71412 -1.06 0.290 -228.5008 68.29309
hhincome -.0005142 .0001913 -2.69 0.007 -.0008892 -.0001393
_cons 1059.495 245.4395 4.32 0.000 578.4421 1540.547

Chi-sq(2) P-val = 0.4812


Chi-sq(1) P-val = 0.3271
-orthog- option:
Hansen J statistic (eqn. excluding suspect orthog. conditions): 0.000
Chi-sq(0) P-val = .
C statistic (exogeneity/orthogonality of suspect instruments): 0.960
Chi-sq(1) P-val = 0.3271
Instruments tested: salevalequip
marstatus hhincome
102 | P a g e
APPENDIX J: RESULTS FOR THE REDUNDANCY TEST OF THE INSTRUMENT
SALES VALUE OF EQUIPMENT
> alequip valland ), ffirst redundant(salevalequip)
Summary results for first-stage regressions
Variable | Shea Partial R2 | Partial R2 | F( 2, 6381) P-value

loanuse | 0.0013 | 0.0013 | 4.27 0.0141
Weak identification test

Ho: equation is weakly identified
Cragg-Donald Wald F-statistic 4.27
See main output for Cragg-Donald weak id test critical values
Number of observations N = 6393

Number of regressors K = 11
Number of instruments L = 12
Number of excluded instruments L1 = 2
103 | P a g e
APPENDIX K:RESULTS FOR THE OVERIDENTIFICATION TEST OF THE
MODEL
. overid
Tests of overidentifying restrictions:

Sargan N*R-sq test 2.444 Chi-sq(1) P-value = 0.1180
Basmann test 2.441 Chi-sq(1) P-value = 0.1182
APPENDIX L:RESULTS FOR THE UNDERIDENTICATION TEST OF THE

MODEL
APPENDIX M:RESULTS FOR THE WEAK-INSTRUMENT ROBUST INFERENCE

TEST
104 | P a g e
APPENDIX N:RESULTS FOR THE HECKMAN SECOND STAGE MODEL
. reg hmharves hhsize acrcult ageyrs experience hghlevel pov sexes marstatus hhincome loanuse mymill

F( 11, 6381) = 63.26
Model 315653695 11 28695790.5 Prob > F = 0.0000
Total 3.2100e+09 6392 502186.525 Root MSE = 673.49
hhsize 103.7447 7.901976 13.13 0.000 88.25417 119.2352

acrcult .1389831 .0281863 4.93 0.000 .0837286 .1942376
ageyrs -42.28626 5.163827 -8.19 0.000 -52.4091 -32.16342
experience .4021854 .0477356 8.43 0.000 .3086076 .4957632
hghlevel 2.30763 .6658173 3.47 0.001 1.002405 3.612856
pov 37.55583 24.86719 1.51 0.131 -11.19221 86.30387
sexes 137.5719 33.70318 4.08 0.000 71.50232 203.6414
marstatus -119.3944 56.6953 -2.11 0.035 -230.5362 -8.252577
hhincome -.0005729 .0001358 -4.22 0.000 -.000839 -.0003067
loanuse -98.12984 86.83571 -1.13 0.258 -268.357 72.09732
mymill 630.238 130.4916 4.83 0.000 374.4306 886.0453
_cons -1087.698 532.0445 -2.04 0.041 -2130.684 -44.71233
APPENDIX O: RESULTS FOR THE MEANS OF SOME OF THE VARIABLES
Mean estimation Number of obs = 3848
Mean Std. Err. [95% Conf. Interval]
ageyrs 52.47869 .2159536 52.0553 52.90208

hhincome 176236.4 2464.201 171405.1 181067.7
totamt 9005.146 380.0404 8260.046 9750.246
105 | P a g e
APPENDIX P:RESULTS FOR THE ORDINARY LEAST SQURES ESTIMATION OF
THE EFFECT OF POVERTY LEVELS OF SMALL SCALE
FARMERS WHO ACCESSED CREDIT ON THEIR OUTPUT
. reg hmharves hhsize acrcult hghlevel ageyrs experience pov sexes marstatus hhincome loanmodpoors loanc
> orepoors

F( 11, 6381) = 61.27
Model 306631718 11 27875610.7 Prob > F = 0.0000
Total 3.2100e+09 6392 502186.525 Root MSE = 674.54
hhsize 73.83711 4.847577 15.23 0.000 64.33423 83.33999

acrcult .0921468 .0265121 3.48 0.001 .0401742 .1441195
hghlevel -.0134492 .4613814 -0.03 0.977 -.9179117 .8910133
ageyrs -52.6768 4.697242 -11.21 0.000 -61.88497 -43.46863
experience .4549508 .0465092 9.78 0.000 .3637772 .5461245
pov -52.27665 16.75912 -3.12 0.002 -85.13015 -19.42316
sexes 45.69388 27.83283 1.64 0.101 -8.867814 100.2556
marstatus -147.3077 56.51881 -2.61 0.009 -258.1036 -36.51187
hhincome -.0002481 .0001176 -2.11 0.035 -.0004785 -.0000176
loanmodpoors -144.0652 144.1679 -1.00 0.318 -426.6827 138.5524
loancorepoors -413.2356 204.2423 -2.02 0.043 -813.6191 -12.85202
_cons 1414.888 122.5775 11.54 0.000 1174.595 1655.181
106 | P a g e
APPENDIX Q:OLS RESULTS FOR THE EFFECT OF MARITAL STATUS ON THE
OUTPUT OF SMALL SCALE FARMERS WHO ACCESSED CREDIT
. reg hmharves hhsize acrcult hghlevel sectors ageyrs educ experience pov sexes hhincome i.loanuse#i.marst
> atus
note: 1.loanuse#0b.marstatus identifies no observations in the sample

F( 12, 6378) = 67.42
Model 361361008 12 30113417.4 Prob > F = 0.0000
Total 3.2099e+09 6390 502337.509 Root MSE = 668.3
hhsize 60.2715 5.030946 11.98 0.000 50.40915 70.13385

acrcult .0944462 .0262656 3.60 0.000 .0429568 .1459357
hghlevel -.0224562 .4581344 -0.05 0.961 -.9205536 .8756412
sectors 43.29129 20.62838 2.10 0.036 2.852738 83.72984
ageyrs -49.93901 4.682004 -10.67 0.000 -59.11731 -40.76071
educ 206.0045 19.17222 10.74 0.000 168.4205 243.5885
experience .4026738 .0464276 8.67 0.000 .3116601 .4936876
pov -64.34203 16.8443 -3.82 0.000 -97.36251 -31.32155
sexes 14.71602 28.14568 0.52 0.601 -40.45896 69.89101
hhincome .0000642 .0001204 0.53 0.594 -.0001718 .0003001
loanuse#marstatus
01 -146.7041 56.58298 -2.59 0.010 -257.6257 -35.78242
10 0 (empty)
11 -242.0054 103.87 -2.33 0.020 -445.6254 -38.38536
_cons 1367.153 123.6817 11.05 0.000 1124.695 1609.611
107 | P a g e
APPENDIX R: ESTRACTED RESULTS FOR THE HECKMAN ESTIMATES FOR
DETERMINANTS OF ACCESS TO CREDIT AND EFFECT OF
CREDIT ACCESS ON OUTPUT
loanuse
valland 5.89e-06 2.76e-06 2.13 0.033 4.74e-07 .0000113
hhsize .0637554 .0276483 2.31 0.021 .0095658 .1179451
acrcult .0000852 .000112 0.76 0.447 -.0001343 .0003047
hghlevel .00405 .0019609 2.07 0.039 .0002068 .0078932
ageyrs .0155855 .0268266 0.58 0.561 -.0369936 .0681646
experience -.0000616 .0002557 -0.24 0.809 -.0005629 .0004396
sexes .0891979 .2208661 0.40 0.686 -.3436917 .5220875
pov .1912622 .1097487 1.74 0.081 -.0238413 .4063657
sector .1742626 .136913 1.27 0.203 -.094082 .4426072
marstat -.0170033 .0371955 -0.46 0.648 -.0899051 .0558985
hhincome -9.78e-07 7.89e-07 -1.24 0.215 -2.53e-06 5.69e-07
_cons -4.031406 .8044627 -5.01 0.000 -5.608124 -2.454688
. reg hmharves hhsize acrcult ageyrs experience hghlevel pov sexes marstatus hhincome loanuse mymill

F( 11, 6381) = 63.26
Model 315653695 11 28695790.5 Prob > F = 0.0000
Total 3.2100e+09 6392 502186.525 Root MSE = 673.49
hhsize 103.7447 7.901976 13.13 0.000 88.25417 119.2352

acrcult .1389831 .0281863 4.93 0.000 .0837286 .1942376
ageyrs -42.28626 5.163827 -8.19 0.000 -52.4091 -32.16342
experience .4021854 .0477356 8.43 0.000 .3086076 .4957632
hghlevel 2.30763 .6658173 3.47 0.001 1.002405 3.612856
pov 37.55583 24.86719 1.51 0.131 -11.19221 86.30387
sexes 137.5719 33.70318 4.08 0.000 71.50232 203.6414
marstatus -119.3944 56.6953 -2.11 0.035 -230.5362 -8.252577
hhincome -.0005729 .0001358 -4.22 0.000 -.000839 -.0003067
loanuse -98.12984 86.83571 -1.13 0.258 -268.357 72.09732
mymill 630.238 130.4916 4.83 0.000 374.4306 886.0453
_cons -1087.698 532.0445 -2.04 0.041 -2130.684 -44.71233
108 | P a g e
APPENDIX S: TABLE CONTAINING THE ESTIMATES OF THE
METHODOLOGIES APPLIED
Hmharves OLS 2SLS GMM HECKMAN

Hhsize 73.567603*** 85.099654*** 95.160022*** 103.7447***
(0.000) (0.000) (0.000) (0.000)
Acrcult .09217477*** .12080768** .13860034* .13898308***
(0.001) (0.004) (0.046) (0.000)
Hghlevel -.01369941 1.1988971 2.0992112 2.3076302***
(0.976) (0.179) (0.137) (0.001)
Ageyrs -52.729854*** -50.590725*** -48.358451*** -42.28626***
(0.000) (0.000) (0.000) (0.000)
Experience .45571218*** .45144658*** .44199693*** .4021854***
(0.000) (0.000) (0.000) (0.000)
Pov -51.282503** -21.360991 8.9162718 37.555827
(0.002) (0.460) (0.803) (0.131)
Sex 45.453688 64.748332 77.704545* 137.57186***
(0.103) (0.134) (0.043) (0.000)
marstatus -146.07054** -104.35923 -80.103863 -119.3944*
(0.010) (0.236) (0.290) (0.035)
Hhincome -.00024308* -.00032133 -.00051425** -.00057286***
(0.039) (0.078) (0.007) (0.000)
Loanuse -111.72364 - 8088.4548* -13363.191 -98.129838
(0.199) (0.025) (0.061) (0.258)
Mymill 630.23797***
(0.000)
Cons 1413.0064*** 1223.681*** 1059.4947*** -1087.6983*
(0.000) (0.000) (0.000) (0.041)
legend: * p<0.05; ** p<0.01; *** p<0.001
Squares Regression--The Reference Equation/Model; 2SLS is Two Stage Least Square Instrumental
Variable Regression Results; GMM is Generalised Method of Moments Regression Results;
HECKMAN is the Results of The Output Equation or The Second Step/Stage of The Heckman Two-
Step Model. p is the probability value. * p<0.05, is significant at 5% level; ** p<0.01, is
significant at 1% level; *** p<0.001, is significant at less than 1% level. The values in
parentheses are the probability values.
109 | P a g e

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ACCESS TO CREDIT AND PERFORMANCE OF SMALL SCALE

ABOCHI, SHADRACH IKECHUKWU

AN M.SC. PROJECT SUBMITTED TO THE DEPARTMENT OF

This is to certify that Abochi, Shadrach Ikechukwu, a postgraduate student of the

Department of Economics, University of Nigeria, Nsukka, with registration number

ABOCHI, SHADRACH IKECHUKWU

REV. FR. PROFESSOR H.E. ICHOKU

PROF. (MRS). I.S. MADUEME

Okoronnaya Abochi as well as my mother, Mrs. Christiana Ugwoakunnaya Abochi.

greatly benefited from my discussions with Dr Emmanuel Nwosu, Dr Nathaniel Urama, Dr

inspiring atmosphere. Finally, I am deeply grateful to my family and friends.

ABOCHI, SHADRACH IKECHUKWU

Table 1: Descriptive Statistics 60

Table 2: The Presence of Sample Selection Bias 62

Table 4: Results of Ordinary Least Squares Estimates 66- 67

Table 5: Results of OLS and GMM Estimates 68

Table 6: Estimates of Ordinary Least Squares and Step-Two of Heckman Model 71

Table 7: Heckman Step-Two Estimates with GMM Estimates 74-75

Output of Those Who Accessed Credit 78

Fig.2: Distribution of Commercial Banks’ Loans and Advances to Some Sectors In 3

Fig.4: Micro Finance Banks Loans and Advances to Agricultural Sector 4

2SLS Two-stage Least Squares

ACGSF Agricultural Credit Guarantee Scheme

ADPs Agricultural Development Projects

AGRA Alliance for a Green Revolution in Africa

BLUE Best Linear Unbiased Estimator

GDP Gross Domestic Product

LATE Local Average Treatment Effect

LIMLE Limited Information Maximum Likelihood Estimator

MSAP Multi-Stage Agricultural Development Project

MSME Micro Small and Medium Enterprises

NCRI National Cereal Research Institute

NGOs Non-Governmental Organizations

OLS Ordinary Least Sqaures

RESAKSS Regional Strategic Analysis and Knowledge Support System

RRF Refinancing and Rediscounting Facility

RTEP Root and Tuber Expansion Programme

salevalequip Sales Values of Equipment

Certification …………………………………………………………………. iii

List of Tables..……………………………………………………………….. vii

List of Figures………………………………………………………………… viii

List of Abbreviations…………………………………………………………. ix– xi

Table of Contents ……………………………………………………………. xii – xvii

CHAPTER ONE: INTRODUCTION

1.1 Background to the Study…………………………………….………......... 1–6

1.2 Statement of the Problem………………………………………………....... 6 – 8

1.3 Research Questions……………………………………………………........ 8

1.4 Objectives of the Study ……………………………………………………. 8-9

1.5 Research Hypotheses …………………………………………………......... 9

1.6 Scope of the Study………………………………………………………..... 9

1.7 Significance of the Study……………………………….….......................... 10

CHAPTER TWO: SOCIO-ECONOMIC ENVIRONMENT AND POLICY CONTEXT

2.2 Some Relevant Agricultural Credit Policies and Programs in Nigeria........... 11

2.2.1 The National Accelerated Food Production Project (NAFPP).....…….......... 11-12

2.2.2 The Nigeria Agricultural and Cooperative Bank (NACB)..…….................. 12

2.2.4 The Agricultural Development Projects (ADPs)……………….……... 14

2.2.5 Operation Feed The Nation (OFN)...........................…......................... 15

2.2.6 The Agricultural Credit Guarantee Scheme (ACGS)..………….……. 15-16

2.2.7 The Land Degcree Of 1978…………………………………................ 16