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Access to credit has been identified as one of the key factors required to accelerate agricultural growth and improve welfare of rural dwellers in developing countries.The credit market serving agriculture in Nigeria is encumbered by operational and administrative inadequacies and the discriminatory tendencies of financial institutions. The government has implemented policies to redress the situation, but small-scale farmers have not benefitted from these incentives to any reasonable degree. This makes it imperative to examine the factors circumscribing loan demand and the various rationing mechanisms. This study examines the factors militating actual credit access and the various rationing mechanisms and the effect of credit rationing on farm household‘s productivity and investment. It seeks to (1) examine the nature of risks facing smallscale farmer-borrowers in Nasarawa State, (2) analyze the factors that affect access to credit of agricultural credit by farmers and highlight the key determinants of this access, (3) ascertain the extent to which farmers are credit rationed and the factors influencing the rationing and how the rationing affects both productivity and investment of the small scale farmers. The study employs primary data obtained from 592 small-scale farmers through a survey conducted in 2018 across the three senatorial regions of the state. Methodologically, the study extends the analysis of credit rationing beyond quantity rationing and presents explicit econometric models for analyzing the determinants of three types of credit rationing: quantity rationing, risk rationing, and price rationing. The logit and probit regression models are employed to ascertain the determinants of credit access and credit rationing respectively. The effect of credit rationing on farm household productivity and investments were also examined by identifying credit-rationed ix households based on direct elicitation of their credit-rationed status from survey questions about restrictions on credit and an endogenous regression model was used to analyse the effect of credit constraints on farm household performance .

The results show that credit market access was significantly influenced, among other variables, by gender, monthly income, assets value, savings, repayment capacity and social capital, indicating that security and guarantee is the main criterion lenders use in granting credit. In other words, clients‘ credit risk profile plays a determining role in household credit accessibility. We used logit model for the access to credit equation and the probit regression model to estimate the determinants of households‘ credit rationed conditions. The results show that there is a higher probability that farmers will be rejected than that they will be given a loan amount lower than what was requested. It also shows that gender, age, land and asset ownership, strength of previous relationship and social capital are significant in determining whether a household is credit rationed. The effect of credit rationings on farm household productivity and investment were estimated and we found that gender, geographical location, and marital status have no statistically significant effect on the probability that farmers will be quantity rationed. The effect of credit rationing on household productivity and investment which was estimated show that credit rationed households have lower productivity and even investment compared to the unrationed households. The results presented in this study therefore support the claims that credits have an important role to play in rural farm production and additional rural finance can enhance productivity and farm household investment, thus contributing to agricultural sector development. To address the credit rationing challenges and improve demand for loans by smallscale farmers, it is recommended that government and banks should mobilize resources and x establish loan-monitoring committees at the grassroots level to serve as insurance against the risk of loan default .

TABLE OF CONTENTS Table of Contents Pages Title Page i Declaration ii Dedication iii Certification iv Acknowledgement v Abstract viii Table of Contents x List of Tables xv List of Figures xvi List of Appendices xvii CHAPTER ONE: INTRODUCTION 1.1. Background of the Study 1 1.2. Statement of the problem 7 1.3. Research Questions 15 1.4. Research objectives 15 1.5. Hypotheses 16 1.6. Justification of the Study 17 1.7. Limitation of the Study 21 xi 1.8. Organization of the Study 21 CHAPTER TWO: LITERATURE REVIEW 2.1 Introduction 23 2.2 Concept and Definition of Credit, Credit Access and Credit Rationing 23 2.2.1 Credit 23 2.2.2 Credit Access, credit rationing and small-scalefarmers 27 2.3 Conditions under which small scale farmers access credit and credit is rationed 29 2.3.1 Risk 30 2.3.2 Credit Rationing 35 2.3.3 Transaction Costs 40 2.3.4 Delinquency and Defaults 42 2.3.5 Interest Rate 43 2.3.6 Collaterals 46 2.4 Constraints and Opportunities for Increased Lending to Small Scale Farmers in Nigeria 50 2.4.1 Constraints on Increased Lending to Small Scale Farmers in Nigeria 50 2.4.2 Policy failures and institutional weaknesses 51 2.4.3 Stringent Terms and Conditions of Financial Products 52 2.4.4 Agricultural Sector Specific Risks 53 2.4.5 Opportunities and Incentives for Credit Participation by Small Scale Farmers 53 2.4.6 Recent Performance of the Agricultural Credit Guarantee Scheme Fund 54 xii 2.4.7 Self-Help Group Linkage Banking 54 2.4.8 The Trust Fund Model 55 2.4.9 Interest Drawback 56 2.4.10 Agricultural Credit Support Scheme 57 2.4.11 Development of Microfinance Banks 58 2.4.12 Commercial Agriculture Credit Scheme 59 2.4.13 Nigerian Incentives-based Risk Sharing System for Agricultural Lending 61 2.5 Theoretical Review 62 2.5.1 Introduction 62 2.5.2 Credit Rationing: Theoretical Contributions 62 2.5.3 New Institutional Economics: Theoretical Contributions 125 2.5.4 Empirical Literature: A Review 128 2.6 Gap in the literature 140 2.7 Theoretical and conceptual framework 146 CHAPTER THREE: METHODOLOGY OF RESEARCH 3.1 Introduction 158 3.2 Study Area: Socio-Economic and Demographic Profile of Nasarawa State 158 3.3 Sampling Procedure 162 3.4 Collection of Data 165 3.5Analytical Techniques 166 3.5.1 Descriptive Statistics 167 3.5.2 Econometric Approach 167 3.6 Measuring credit access and credit rationing 170 xiii 3.7 Model Specification 173 3.7.1 Model of Credit Access for Small scale Farmers in Nasarawa State 173 3.7.2 Model of Credit Rationing among Small scale Farmers in Nasarawa State 182 3.7.3 Behavioural Foundation and Model on effect of credit rationing for Small Farmers‘ productivity 193 3.7.4 Model of the Effects of Credit Rationing on small farmers‘ Investment in Nasarawa State 206 CHAPTER


4.1 Introduction 209 4.2 Characteristics and credit profile of SmallFarmers‘ credit accessibility in Nasarawa State 209 4.2.1Credit characteristics of Small-Scale Farmers in Nasarawa state 221 4.2.2 Knowledge of Credit Programs 224 4.2.3 Reasons for Loan Rejection 225 4.2.4 Reasons for not applying for Credit 225 4.2.5Small scale farmers credit sources in Nasarawa state 227 4.2.6 Econometricresults on factors influencing small scale farmers access to credit in Nasarawa State 230 4.3The characteristics of credit rationing among small farmers in Nasarawa State 243 4.3.1Empirical results for the factors that determine Credit Rationingamong small-scale farmersin Nasarawa State 251 4.4 Effect of Credit Rationing on Agricultural Productivity of small scale farmers in Nasarawa state 257 xiv 4.5 Effect of Credit Rationing on farm investment by small farmers in Nasarawa state 262 4.6 Discussion on the findings 267 CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION 5.1 Summary 273 5.2 Conclusion 282 5.3 Recommendations of the Study 284 5.4 Recommendations for Future Research 289 Bibliography/References 292 List of appendices: Questionnaires 324 xv LIST OF TABLES 3.1 Sample size of small farmers that need credits by Senatorial Regions and Village Areasin Nasarawa state 165 4.1 Demographic and Socioeconomic Profile of the Respondents (Borrowers and non-borrowers) 212 4.2 Credit characteristics of Small Farmers in Nasarawa State 222 4.3 Small scale farmers credit accessibility in Nasarawa state 224 4.4 Reasons for Loan Rejection 225 4.5 Reasons for not applying for Loan 226 4.6Borrowing status of farmers by Gender, source of loan and region 228 4.7Results of Heckman selection correction model of credit access 231 4.8 Logit Estimate of factors for small farm Household‘s accessibility to credit 233 4.9 Frequency of Rationing Experience of the small farmers 244 4.10 Frequency of the type of credit Rationing by farms Households 244 4.11Credit rationing situations by sample senatorial regions 250 4.12Probit Regression Estimates for Credit Rationed Farmers 252 4.13 Marginal Effects of the Variables in the Estimated Probit Model 254 4.14 Determinants of Agricultural Productivity for each Credit Regime 258 4.15 Means shares of Various Investment activities of Credit Rationed Farmers (in descending order) 264 4.16 Description of Variables used in the Investment Model (Rationed Sample) 265 4.17 Estimated Investment equation/model 266 xvi LIST OF FIGURES 2.1 The Perfect Capital Market and optimal Intertemporal choice 74 2.2 Equilibrium Credit Rationing 95 2.3 A Framework for Credit access, Credit Rationing and Performance of small scaleFarmers 155 xvii LIST OF APPENDICES 1 Questionnaires 222 1 CHAPTER ONE INTRODUCTION 1.1 Background to the Study Access to credit has been identified as one of the key factors required to accelerate growth and improve welfare of rural dwellers in developing countries. Rural development programmes in these countries have shifted their emphases to rural credit as the Governments recognized that small farmers are potentially productive agricultural producers, that cheap and accessible credit is essential for rural development. In the developed countries, governmental intervention on credit markets is a major instrument to support national farming sectors. State-administered loan programmesin the developed countries for agriculturaldevelopment include the ‗cooperative Farm Credit System‘ (created in 1916) and the ‗Farm Services Agency‘ (formerly the ‗Farmers Home Administration‘, created in the 1940s) in the United States of America, (Barry and Robison 2001, p. 557). The support measures in these programmes usually encompass interest subsidies, public grants or public loan guarantees or a mixture of these elements .

In developing countries, credit programmes sponsored by governments or international donor organisations to boost agricultural production assumed major importance after World War II, (Adams 1995).Sustained agricultural growth is crucial for reducing hunger and poverty .

Agricultural growth has powerful leverage effects on the rest of the economy especially in the early stages of development and economic transformation, when agriculture accounts for large shares of national income, employment, and foreign trade. In addition, smallholder farmers occupy the majority of the countries land and produce most of its crop and livestock products .

Yet most of the population engaged in smallholder agriculture continues to be poor (Salami et 2 al., 2010). According to Udry (2015),the root cause of this poverty is low agricultural productivity. Agricultural productivity is still lagging behind in many African countries, and most of the continent‘s lands remain uncultivated.Africa‘s value added per worker also still lags behind compared to other regions, and therefore there is need to raise agricultural productivity to achieve distributed economic gains .

After decades of policy inattention, disproportionate taxation, and a lack of investment, the importance of the agricultural sector is starting to be recognized by most African countries. The Maputo Declaration (AU, 2003) pledged the investment of 10 percent of countries‘ national budgets into agriculture and a proposed6 percent annual growth rate of the agricultural sector .

The Malabo Declaration (AU, 2014) builds on the previous declaration to include a doubling of productivity gains (Dryden, 2015). If agriculture is to catalyze Africa‘s development, however, smallholder farmers will need to be the drivers of sustainable agricultural growth. To achieve this goal, the Bill and Melinda Gates Foundations, among other donors, have aimed to address factors that can result in doubling productivity and sustainability for African smallholders through partnerships that leverage an annual investment in agriculture of US$400 million. These factors including policies aimed at increasing yields per hectare through the use of modern seeds and sufficient fertilizer are important, other policy interventions need to be implemented, such as expanding credit in rural areas (Zedillo, 2015) .

However, many credit programmeshave been introduced in these countries and they are characterised by strict interest controls or ceilings on loan interest rates, additional subsidisation, and extensive loan targeting. The latter is pursued by making credit access conditional on the use 3 of certain input or technology packages, supervision, or the affiliation with specific borrower groups. More recently, under the heading of ‗rural microfinance‘, there is a shift towards public support of financial institutions serving various types of rural clientele, including women or small-scale enterprises and farmers in general .

In Nigeria, government has provided cheap funds to the market in an attempt to improve access to credit by small scale farmers. As the provision of credit to small farmers has been widely perceived as an effective strategy for increase production and the development of the agricultural sector, several credit policies have been put in place in Nigeria to improve the performance of small farmers. These include the establishment of schemes, programmes and institutions to address and deliver government‘s intentions in the sector. The institutions and schemes for financing agriculture have the first objective of encouraging banks to lend to the sector despite the relatively higher inherent risk and uncertainty associated with agricultural business. The second objective is promoting farmers‘ access to credit by provision of concessionary lending terms. It is believed that by providing small producers with cheap credits, they could be induced to use modern technologies, increase the number of hectares cultivated, agricultural production and rural employment would increase while rural income distribution would improve which in turn, would accelerate agricultural growths and development.With all these efforts to increase agricultural investment in Nigeria, the Nasarawa state agricultural sector remains grossly undercapitalized. Farmers and other stakeholders in the value chain need credit in order to address the issues of poor capitalization, the low level of use of modern inputs, and low productivity .

4 Despite the advances in technology and policy incentives provided by the government, the financial sector in Nasarawa state has not been able to deliver the services required to transform the agricultural sector. Inadequate information in the market system remains a critical problem in the agricultural finance value chain. The agricultural credit market is beset by numerous imperfections, including covariate risk, scarcity of collateral, information deficiencies, and mass illiteracy of clients. The widespread information asymmetry often leads to problems of adverse selection and moral hazard, which underpin the reluctance of banks to lend to small-scale farmers (Olomola 1996, 1999a) .

Nonetheless, the dire need for financial credits by the various subsectors of agriculture (crop, livestock, fisheries, and forestry) cannot be ignored. The credits required vary by type and location of enterprise as well as scale of operation. In general, the need for finance will be in the form of accumulation of funds (savings), working and investment capital, money transfer, and risk mitigation (insurance). According to Making Finance Work for Africa (MFW4A) (2011), secure savings-deposit facilities are needed to meet contingency expenditures and smooth cash flows .

Due to a number of factors, including high incidence of poverty, low savings, and harsh economic conditions, it has been difficult for farmers to rely on equity capital to meet their needs. They have therefore continued to seek debt capital which is creditfrom various sources, both informal and formal. Although sustainable access to financial credits to grow the economy and reduce poverty such access is highly restricted. Access to credits is most limited in Nasarawa state .

5 The agricultural sector has been poorly served by the financial system partly on account of the unfavorable policy environment, which includes weak regulatory regimes, poor physical and financial infrastructure, and policies that repress the formation of effective linkages between the financial and real sectors of the economy. The credit market serving agriculture is encumbered by the operational and administrative inadequacies and exploitative tendencies of financial institutions. These include (i) the stringent loan terms and conditions set by financial institutions, (ii) the negative attitude of financial institutions, (iii) high interest rates, (iv) inadequate capacity to offer services, and (v) inappropriate financial products and services .

The government has implemented policies to redress the situation, including a capital injection in 2009 to boost the financing of commercial agriculture and the introduction of the Nigeria Incentive-based Risk Sharing System for Agricultural Lending (NIRSAL) in 2010. The smallscale farmers who constitute the backbone of Nigeria‘s agriculture and its substantial contribution to the country‘s gross domestic product (GDP) have not benefitted from these incentives to any reasonable degree. This is an indication that the intervention strategies aimed at enhancing the performance of agricultural finance often address the supply-side constraints without paying due attention to the demand side. Thus, over the years farmers‘ access to formal credit has remained restricted and their capacity for inclusion in the credit market continues to be undermined. This discriminatory approach must be redressed. Doing so requires a full 6 understanding of the nature of the credit rationing that borrowers are facing and the type of remedial measures that will engender a win-win solution that is also in the interest of investors in the agricultural sector. The major form of state intervention on rural credit markets in Nigeria is the extension of preferential loans to agricultural producers .

The Preferential loans under the government programme are extended through the existing network of banks. There are two types of lending organizations specialised on agriculture, namely the Bank of Agriculture (BOA), and the system of commercial banks. The BOAwas the primary channel for financing state-managed agriculture before 1986 when the structural adjustment program was introduced .

The existence of financial constraints and credit rationing in the small farmers activities and finance literature has long been recognized. Small scale farmers have encountered many difficulties in accessing credit from lending institutions in support of their working and fixed capital investments (Meyer 1989; Cruickshank, 2000). The credit market serving agriculture is encumbered by operational and administrative inadequacies and the discriminatory tendencies of financial institutions. When a farmer lacks access to credit or cannot borrow as much as he wants, he is said to be credit rationed or credit constrained. Credit rationing is commonly used to describe a situation where banks limit the supply of loans, even though it has enough funds to loan out, (Jaffee and Modigliani 1969) .

The performance of small farmers requires adoption of new technology which is largely depended on availability of capital and agricultural credit is considered as one of the major 7 sources of this capital. Availability and accessibility to this credit can stimulate the transfer of technology into agriculture, alleviate the constraints inherent in farming and lead to increased crop yield .

Despite the positive effect of agricultural credit on output, investment and sectoral growth in agriculture, credit institutions find it difficult to lend to small-holder farmers. The tentative analysis suggests that positive impacts of governmental credit market intervention on the structural problems of the small-scale farmer in Nigeria and Nasarawa State in particular are in no way evident. It seems even unclear whether access to credit and credit rationing are in fact the bottleneck which is constraining farming operations to a significant extent. Two questions therefore emerge from the preceding discussion which provides the major motivation for this study. First, is there a problem of credit access and credit rationing existing in Nasarawa State farm sector, and second, if yes, can the government intervention programme contribute to solve this problem? 1.2 Statement of the Problem Although an increasing number of Banks, governmental and non-governmental organizations (NGOs) are involved in raising the efficiency of financial intermediaries targeting rural farmers, their effectiveness in improving the small-scale farmers‘ access to credit and credit rationing is below expectations (Olomola,and Gyimah-Brempong 2014). Quantitative analyses of the factors influencing credit access and credit rationing in the rural sector have focused more attention on consumption loans than on production loans, or, in many instances, they have made no effort to identify the factors influencing the credit access and rationing for production loans (Kirchler, 8 Hoelzl, and Kamleitner 2008; Nguyen 2007; Del-Rio and Young 2005; Magri 2002). In effect, a wide variety of variables are often included in the analysis, including household income, savings, cultivated land area, skill of household head, level of education, and official status (Cheng 2006), as well as age of household head, household size, number of working members per household, and number of children under six years (Pastrapa 2011) .

Access and rationing of formal credit are important for the development of the firm. Several factors are responsible for this but some are not publicly available. Factors such as the probability that a loan requested by a good applicant be granted, probability that a loan requested by a bad applicant be rejected, and the probability of collecting from loan defaulters are without publicly available data. Other factors prevailing in the credit market that make the provision of credit difficult and/or impossible to obtain include borrower‘s creditworthiness, terms of credits, asymmetric information for both lenders and borrowers and transaction costs among others .

Since lenders behave with the profit motive in mind, they will lend to borrowers who are creditworthy. More often than not, these borrowers can offer collateral or collateral substitutes that are deemed acceptable by the lenders to become creditworthy. However, the choice of this collateral is not easy. Borrowers incur transaction costs in their search for credit. If such costs become too prohibitive for them, they are more likely not to borrow at all .

In Nigeria, agricultural lending funds come from a number of sources which impose different levels of restrictions on the bank‘s lending operations, especially on its credit evaluation or screening activities. Traditionally, the Government and international financial institutions provide Banks with funds to finance predetermined group(s) of borrowers and/or agricultural 9 activities, thereby preventing arbitrary selection of borrower. The direct effect is the changing parameters used in decision making such as the banker‘s screening technology that can allow for a good borrower being accepted rather than for a bad borrower .

Cheap and abundant credit is often regarded as essential for rural development. In Nigeria, the government has strengthened regulation and provides cheap funds to the market in an attempt to improve access and rationing of credit by small scale farmers. However, the performance of rural financial markets remains problematic. Credit programs tend to be self-destructing and policymakers are largely blaming institutional design for the poor financial results from rural credit programs .

The rural financial markets literature (e.g., relationship lending, information asymmetries between lenders and borrowers and transaction cost of information search and monitoring) has identified cheap-credit policies and high operational costs per unit of money loaned as some of the most important factors causing the disappointing results observed in formal agricultural or rural credit programs. Claudio Gonzalez-Vega (1984) and Aguilera, and Graham, (1990) argued that cheap-credit policies tend to create excess demand, thereby forcing formal agricultural lenders to ration credit through non-price mechanisms. Since operational lending costs and associated risks in serving large producers are lower than those associated with small producers, the formal agricultural lender is motivated to favor the largest producers in order to reduce per unit lending costs. The main argument here is that interest rate deregulation would serve to alleviate discriminatory credit rationing and would improve the financial viability of rural credit institutions. Despite the recognized importance of these arguments and the number of studies 10 engaged in understanding the disappointing results of rural credit programs, few attempts have been made to consider how the imperfect nature of information in credit markets and a role for a non-neutral financial intermediary would help to explain these results. Formal credit market in Nigeria is highly regulated and the amount of research on this issue is limited. Most of the credit market regulations implemented in Nigeria have been established with little if any understanding of how much regulation would affect their main economic aspects, for example, credit access, and credit rationing, loan default and small farmers‘ performance .

Available empirical evidence suggests that most agricultural credit programs implemented in the country have failed to reach their intended expectation with credit being often diverted to the largest producers and influential producers, thus worsening rural income distribution, (Gonzalez- Vega 1984b and Aku, 2011). The Nigerian Bank of Agriculture Limited that has participated in these programs has fallen into increasing financial difficulties due to a large percentage of nonperforming assets. In some cases, credit expansion has coincided with a decline in agricultural output and an increase in agricultural imports and in rural unemployment .

Carter (1988), Aguilera, and Gonzalez-Vega. (1993)and later (Jeffers 2013) argued that interest rate deregulation would be insufficient to guarantee better results in credit markets if there are asymmetric information problems. Their conclusions however are based on the model of Stiglitz and Weiss, (1981) which does not account for a non-neutral financial intermediary using riskreducing technologies. Furthermore, the markets considered by them are perfectly competitive without regulations. It is important to recognize that information in credit market is incomplete .

The formal agricultural lender cannot know with certainty the riskiness, ability, honesty, or effort 11 of borrowers, nor can he control all the actions taken by borrowers with borrowed money. Due to adverse selections (information asymmetry) and moral hazard (hidden action) problems, the lender cannot know with certainty the borrower‘s ability or willingness to repay loans and how it affects the performance of the farmer. The formal lender always faces the possibility of loan default and farmers face the problem of poor performance in production/investment. In view of the credit market information asymmetry, the risk of loan default from poor harvest faced by the agricultural borrower may increase with more stringent terms of the loan contract for two reasons. First, tightened terms of the loan contract may induce applicants with relatively safer projects (Stiglitz and Weiss, 1981, 1983, Wette, 1983), more responsible behavior (honest) (Jaffee and Russell, 1976), and/or higher ability as producers to drop out of the applicants‘ pool or these terms may force a larger share of borrowers to default on their loan obligations. This is the adverse selection problem. Second, tighter terms of the loan contract may induce some borrowers to invest in riskier activities (Stiglitz and Weiss, 1981, 1983), and/or to devote less effort to their productive activities, thereby increasing the overall risk faced by the agricultural lender. This is the incentive or moral hazard problem .

The incomplete nature of information and the existence of asymmetric information problems in credit markets prompt some problems in measuring agricultural loans in monetary units. Interest rate changes modify the probability of loan default, that is, the quality of the loan. Similarly, an increase in loan size may change the risk to the lender and this cannot be compensated by an increase in the interest rate charged. Thus, for the lender, it is of crucial importance to whom it grants a loan and what actions the borrower takes with it. So, loans cannot be treated as 12 homogeneous goods measured in monetary units. Neither the interest rate nor costs per loan can be considered to be the price nor the cost of money lent .

It is important to recognize that the aim of the agricultural lender is not only to find borrowers, but borrowers with low probability of default; either because the borrower has a safe project, is honest, a high-ability producer, or has a valuable collateral. Since information in credit markets is incomplete and perfect identification of different classes of borrowers is not possible without additional information, the lender uses different risk-reducing technologies to separate borrowers into different classes, through information or screening technologies, or to induce borrowers to reveal their own class, through incentive and signaling. The lender formulates goals and policy guidelines for loan recovery strategies to collect from unrecognized loan defaulters as well. All these risk-reducing strategies however are costly activities. Thus, it is important that the lender is aware of the marginal impact of these strategies on both revenues and costs and even the productive capabilities of the borrowers .

In the literature, there exist a controversies and limitations in current wisdom of neoclassical economic theory regarding credit rationing. The theoretical controversies are found in the traditional assumption that markets clear and there is no rationing. Any excess demand or supply is eliminated by the ‗invisible hand‘ of the price mechanism. This stands opposite to real world observations of, for example, persisting credit rationing. Although explanations of these phenomena have been sought and proposed for a long time, only recently did economists seriously call into question the general applicability of the standard textbook model of neoclassical theories to certain types of markets. Drawing on pioneers such as Akerlof (1970), a 13 branch called the ‗economics of information‘ developed models in which persistent excess demand could be established due to an asymmetric distribution of information between market participants and Stiglitz and Weiss (1981) on credit rationing .

The major contribution of this branch of literature is the demonstration that contractual arrangements, and in this sense ‗institutions‘, can be analyzed through the use of the basic behavioural hypothesis of neoclassical economics of self-interest as expressed by homo economicus. The result is a genuine extension of the neoclassical standard model. Although this can be regarded as an important theoretical progress, the implications are less comforting. As soon as information asymmetries are introduced, most of traditional welfare analysis breaks down. As shown by Greenwald and Stiglitz (1986), in economies with imperfect information, market equilibria are rarely efficient. This implies that much of received economic reasoning such as government intervention on competitive markets is welfare decreasing loses its basic foundation .

The question is whether the neoclassical standard model of clearing markets is a permissible simplification. Are credit markets really distinct from other markets such as markets for chairs, tables, or pencils? The decision has particularly serious consequences due to the fact that, once information asymmetries are allowed, the models do not provide clear-cut policy advice anymore. A case in point is the interrelatedness of credit rationing and underinvestment. From a standard neoclassical perspective, one would assume that, by its very name, credit rationing necessarily implies too little investment. De Meza and Webb (1987; 2000) show that this is in no way the case, since credit rationing may both imply too much or too little funding. Whether one 14 or the other applies in a given real-world situation is therefore an a priori open question .

Compared with the standard welfare arguments usually put forward by trade theorists when it comes to an assessment of border protection or customs regulation, the economics of information provides much less straightforward guidance. There are, therefore, theoretical controversies on two levels: whether information asymmetries are a relevant phenomenon at all and, if yes, what their implications are .

Nasarawa state in Nigeria has high agricultural potentials. The agro climatic condition of the State favors both crops and livestock production. Although about 90 percent of the population in the state is involved in one form of agricultural activity or the other, available statistics show that agricultural profitability and investment are low according to national and international benchmark. For instance, while recommended average yield of grain products per hectare is 0.35 tones, Nasarawa state average yield per hectare is 0.20 tones. This low yield crop performance has kept the farming population in Nasarawa state poor, (Etonihu, Rahman and Usman 2013) .

Even the technology in use and the development of the sector remain at a subsistence level .

Individual farms in the definition of the National Bureau of Statistical inNasarawa State comprises of privately owned farms cultivating not more than three hectares of land (NBS 2011) .

This is currently the dominant farm type in Nasarawa Stateas they are the practice in all the local government areas. A general impression is the overwhelming importance of small-scale farms in the state. Over the entire period,more than 75 percent of all holdings are individual farms cultivating less than 5 ha, and more than 90 percent cultivate less than 10 ha. Overall, to the extent that it 15 manifested in changes of land resources per farm,there is no structuralchange in the Nasarawa State farming sector since the return todemocracy in 1999. Inaddition, the minimal changes visible in the statistics show no uniform shift towards larger farm sizes .

Though many factors seem to be contributing to this low performance, lack of access to credit and credit rationing seems to be the most important problem. Most of the farmers are peasant farmers and they find itdifficult to meet up with conditionalities in accessing credit from banks .

Stringent regulatoryguidelines governing credit institutions have inhibited credit access. Even those that areprivileged to be given loans may be given just fractions of what is requested among others .

1.3 Research Questions Taking the notion of credit access and credit rationing as a potential problem in rural credit markets in Nasarawa State, the central research questions of this study can be grouped as follows: (i) What are the socio-economic and loan characteristics of small-scale famers in Nasarawa state? (ii) What factors influence small scale farmer‘s access to credit in the Nasarawa State rural credit market? (iii) What factors influence banks credit rationing to small scale farmers in the Nasarawa State rural credit market? (iv) How does credit rationing affect productivityof small-scale farmers in Nasarawa State? 16 (v) How does credit rationing affect investment of small-scale farmers and does it provide an explanation for the structural problems ofthe Nasarawa State farms? 1.4 Objectives of the Study The main aim of this study is to examine the effect of credit rationing on the performance of small-scale farmers in Nasarawa state and the specific objectives are: (i) To investigate the profile of the borrowers and examine the loan characteristics of small-scale farmers in Nasarawa state; (ii) Identify and evaluate the factors determining small scale farmer‘s access to credit in Nasarawa State; (iii) Identify and evaluate the factors influencing credit rationing of small-scale farmers in Nasarawa State; (iv) Analyse the effectof credit rationing on the productivityand loan repayment of smallscalefarmers in Nasarawa State .

(v) Analyse the effectof credit rationing on investment of small farmers use of credit and to determine whether it is responsible for the structural problems of the Nasarawa state farming sector .

1.5 Hypotheses The hypotheses put forward for this study are: (i) Access to credit is not influenced by the small-scale farmer socio-economic characteristics in Nasarawa state; 17 (ii) Small scale farmer credit rationing is not affected by socio-economic characteristics and government intervention in the rural credit market in Nasarawa state; (iii) Credit rationing does not influence the small-scale farmer performance measured as productivity and investment in Nasarawa state agricultural sector .

1.6 Justification of the Study Increasing global attention is being given to the study of small farmers access to credit and its effect on various aspects of human life especially farmers performance and alleviating their poverty. Although access to credit has been shown to be of crucial importance in increasing performance and the reduction of poverty of the small farmer, policy for commercial banks in Nigeria and Nasarawa State in particular appears to be underdeveloped and lacking in coherence, (EFInA, 2012). In a report by EFInA on Access to financial Services in Nigeria Surveys (FinScope, 2012) it was revealed that out of the total adult population of 87.9 million, 71.1% reside in rural areas where farming is their occupation and are excluded from formal financial credits and do not have bank accounts. Thus, 34.90 million people are marginalized or formally excluded from credit. Placing these statistics in context, the unbanked populace in Nigeria are the marginalized poor rural small farmers that form part of the Nigerian‘s population that are poor .

Therefore, the results from this thesis will assist in exposing the reasons for these poor performances .

18 It is obvious that a well-functioning financial sector is a necessary and sufficient condition for rural development and building a prosperous economy. Studies that deal with rural finance and its link with the agricultural sector will have a much greater role. Therefore, this study will provide information that will enable financial institutions to understand how credit affects agricultural production and thereby formulate appropriate lending policies that will improve their lending technology .

The Asian Development Bank (2000) has identified the lack of access to a broader set of financial options as an indication of a potential constraint to entrepreneurship and the ability to undertake socially and privately profitable investment ventures. The reasons for any early failure on the part of financial institutions must be well understood if they are going to play any meaningful role in the delivery of micro financial services. Therefore, the outcomes of this thesis will be useful in determining the modalities for restructuring the rural financial systems in order to convert them into viable rural financial markets that will be well functioning, healthy and expanding with financial innovation that could cause a fall in the costs of financial services .

In practice, small farmers apply for credit and lenders determine how much credit is allocated to them based on their perception of the farmer‘s creditworthiness. This often results in farmer‘s being negatively credit rationed and it reflects the lender‘s perception of the farmer risk profile .

Therefore, understanding the factors that influence small farmers to be credit rationed will highlight specific interventions that may raise the creditworthiness of farmers, both to the advantage of lenders and small farmers .

19 The failure of farmers to gain access to credit is frequently used as an explanation of many important economic phenomena. Accordingly, many studies have been conducted to investigate the determinants of small farmer access to credit and its effects on a different range of issues in Nigeria. Despite the large number of studies on credit accessibility, (Rahji and Fakayode, 2009; Sanusi and Adedeji, 2010; OloladeandOlagunju, 2013; and Eneji, Umejiakwu, Sylvannus, and Gwacham-Anisiobi, 2013) using the probit method, finds that the probability of household applying for credit increases with household total income and decreases with a high level of dependency ration and dissaving circumstances, there has been relatively little empirical work devoted to understanding why farmers are not able to access credit in the credit markets in Nigeria, particularly in Nasarawa State. There is need for empirical research on access to credit and effects of credit rationing on farmer performance in order to generate sustainable information that would serve as a tool or guide for policy makers in their quest to improve agricultural sector credit and performance as well as to achieve the objective of government towards better rural livelihoods. Results from this qualitative study, would be of use in forming a link between concepts and reality. It will also facilitate the proposition of relevant policy interventions and reforms that would lead to improved performance and development of the agricultural sector in Nasarawa State and other States in the country .

In the asymmetric information, Adverse selection, Moral hazard and agency theory literature, micro level efficiency of credit access and credit rationing has been discussed widely under two separate bodies. However, only a limited number of empirical researches, for example, Ali, Deininger, and Duponchel, (2014); Olomola,and Gyimah-Brempong 2014); Kiplimo, 2013; Eneji, Umejiakwu, Sylvannus, and Gwacham-Anisiobi, 2013; Akudugu 2016; Ferede 20 2012;Pastrapa 2011; Sanusi and Adedeji 2010; Doan, Gibson, and Holmes 2010; Kirchler, Hoelzl, and Kamleitner 2008; Nguyen 2007; Del-Rio and Young 2005; Magri 2002 and Atieno 1997) attempted to analyze the microeconomic efficiency of credit rationing. Most empirical studies, for example, (Rahji and Fakayode, 2009; Sanusi and Adedeji, 2010; OloladeandOlagunju, 2013; and Eneji, Umejiakwu, Sylvannus, and Gwacham-Anisiobi, 2013) concentrate on the demand side, i.e. borrowers‘ investment behavior and performance; whereas insufficient information is provided with respect to the supply side, i.e. banks behavior and lending policy. Therefore, the potential role of financial institutions to improve efficiency of credit allocation is largely neglected. It is well known that, in less developed countries; the financial sector has a substantial influence on the overall efficiency of domestic resource mobilization. This study aims to bridge this gap by providing valuable information on bank lending behavior and the efficiency of credit allocation under different regulatory conditions .

While researchers, (Ali, Deininger, and Duponchel, (2014); Olomolaand Gyimah-Brempong 2014), among others have relied on various econometric tools to address equity issues in discriminative lending, their approaches have little influence by the literature on microeconomics of lending decisions, especially to small scale farmers. This latter literature focuses on how lenders cope with the opaque information related to small farm borrowers to fashion loan contracts that overcome asymmetric information, moral hazard, agency problems, and other capital market imperfections and frictions. Therefore, the insights from this work will shed more light on the investigation of discriminatory lending practices as it is expected that new evidence on preferential lending will be uncovered through this thesis .

21 The importance of the study, therefore, is its potential in filling some gaps in literature on access to credit and the effect of lack of credit on small farmers‘ performance in Nasarawa State. It attempts to identify reasons for the limited access to formal financial credits by rural farmers, by looking at demand and supply behavior. This study is also expected to contribute to both the growing knowledge on credit as a tool in production and rural development in the academic world. It is an information input relevant to government, policy makers and banks towards an improved performance status for rural dwellers and bank profitability. As stated by Stone and Brown (1962), it is better to know the working of the economic system before pushing blames here and there on the failure of government policies and programmes .

1.7 Limitation of the Study This study is limited to rural financial markets and it concentrates more on the micro aspects of rural finance. In terms of financial services, only credit components are analyzed while other services such as savings are not considered. The focus in this dissertation is small farmers‘ access to the credit market through the provision of investment and production credit .

One major limitation of the study is that the accuracy of the data depends on the information given by respondents. Most small farmers do not keep records of their operations and finances, hence the dependence of the research on verbal information from respondents. However, all the appropriate scientific approaches to ensure that the confidence levels are high enough are implemented. It is also worth noting that one of the limitations of empirical analysis is that the behavior of only 592 farmers in a random sample is under consideration and generalized to the rest of small farmers in Nasarawa State. Due to the different contexts of the states, the findings of this study cannot be generalized to the rest of Nigeria. Therefore, there is need to complement 22 the result of this study with similar studies in other states in order to broaden the scope of application of the result of this study .

1.8 Organization of the Study This study is divided into five chapters. It began with Chapter one as introduction into the basic characteristics of the Nigerian agricultural sector and the government efforts to improve the agricultural sector performance and how the credit programmes had generated the banking related access and rationing that had to be contended. The study notes however, that the establishment of various schemes and programmes has not help matters. The rest include Statement of the problem, objectives of the research, Justification of the study and the organization of the thesis .

In chapter two: we present the concept of credit and some literatures and theories on the smallscale farmers and Bank behaviors. The review covers the classical, Keynesian and the neoclassical analyses of the information, Market failure and the role of government in rural credit market and bank credit concepts. Specifically, it composes of the conceptual, theoretical and empirical literatures on bank lending and borrowing .

The third chapter engages the methodology of the research along with the models and estimation techniques used in this research. It comprises of the methodology of study, study area, theoretical framework, our modeling approach, nature, sources and size of the data along with the sample and the sampling technique. While chapter four covers the analysis of the results and the study ends with summary, conclusion and recommendations in chapter five .



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