Innovative approaches to financing the poor urban farmer: Lessons from Ghana and Nigeria

By Irene S. Egyir[1], Kemisola O. Adenegan, Adetola Adeoti [2] and Olufunke Cofie

The urban farmer usually accesses funds from informal sources such as family, friends, traders, money lenders and esusu operators. What these lenders offer has been insufficient; the farmers need to purchase several inputs to increase production and farm income. Innovative financing approaches are needed. Studies were carried out in Accra (Ghana) and Ibadan (Nigeria) to assess opportunities and bottlenecks within the formal financing institutions in the cities, and the demand for credit by farmers. The methodology used for the studies followed a five-step approach: a review of literature, stakeholder mapping, focus group discussions, key informant interviews and a validation workshop. In all 179 people were interviewed in Ghana and 150 in Nigeria.

The results of the studies showed that there are universal banking institutions, semi-formal savings and loans and credit unions, rural and community banks and financial NGOs in each of the cities. These institutions offer several financial products including savings, credit, insurance and money transfers. Their lending facilities operate on a save-before-credit model. However, the institutions studied indicated that they were free to develop tailor-made products to suit special groups of clients such as poor urban farmers.

The key bottleneck in developing a special product is the fear of default by the farmers. In Nigeria, two financial NGOs reported that in 2009, outstanding loans in default was worth N 200 million (US$ 1.3 million), while in Ghana, the mean default rate of 37 micro finance schemes was 29 percent. Other bottlenecks included: inadequate capital base, low capacity of finance institutions to implement social responsibility packages (e.g. free training programmes and subsidised credit), unfavourable policies by the Central Banks and poor market infrastructures.

Farmers “challenges” with repayment was also reported: unpredictable weather, leading to crop failure, high household dependency ratio and expenditure points, high interest rate, short repayment periods required by the institutions (usually 3 months) and low return on investments due to low sales or poor business management skills were noted. Farmers expressed their financial needs in terms of loan amounts and preferred interest rates. The range of loan amounts was between US$ 140.00 and US$ 700.00. The tolerable interest rate per annum was 40 percent (about 3.33% per month - see Figure 1). Farmers, particularly in Nigeria demanded for disbursements of credit in kind, example seeds and agro chemicals.

Source: Ghana and Nigeria FStT finance studies (2009)

To facilitate easier access by poor urban farmers to formal financial support, an integrated financing approach is recommended. Based on our research findings we recommend four point: (1) Financial institutions should form a partnership with urban farmer cooperatives and develop a special product with low interest rate per annum (i.e. 3%), (2) Farmers should diversify their income generating activities and learn the principles of loan use and repayment (3) Local government should improve the conditions of market infrastructure such as road conditions in the cities and (4) Stakeholders involved in group formation and dynamics should increase their support for training urban agricultural producers.

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[1] Lecturer, Department of Agricultural Economics and Agribusiness, University of Ghana, Legon.

[2] Senior Lecturer, Department of Agricultural Economics, University of Ibadan, Nigeria.