International Research Journal of Finance and Economics

ISSN 1450-2887 Issue 24 (2009)

© EuroJournals Publishing, Inc. 2009
http://www.eurojournals.com/finance.htm

A Multinomial Logit Analysis of Agricultural Credit Rationing

by Commercial Banks in Nigeria

M.A.Y. Rahji
Department of Agricultural Economics, University of Ibadan, Ibadan, Nigeria
E-mail: mayrahji@yahoo.com

S.B. Fakayode
Department of Agriultural. Economics and Farm Management
University of Ilorin, Ilorin,Nigeria

Abstract

The study tried to identify the determinants influencing Commercial banks decision
to ration agricultural credit in South-Western, Nigeria. Data for the analysis were sourced
from the agricultural credit transactions of the banks. Evidence from the multinomial logit
model estimated shows that the borrowers are heterogeneous. Farm size, previous income,
enterprise type, coop membership, household net-worth and agricultural commercialization
level are positive and significantly associated with the classification of the two groups
relative to the reference group. The significant variables affect both the probability of
classification and the utility of the banks in their decision making. The partial elasticities of
farm size are elastic at 1.5380, 1.2796, and 1.0065 for the groups as classified. The quasi
elasticities for the household net-worth and agricultural commercialization variables are all
elastic for all the groups. The quasi–elasticity for the income variable for the first group is
elastic at 1.4278 and for the second group at 1.2551. This variable is inelastic for the
reference group. It is recommended that Banks borrowing decisions must be group specific
and not general. There is also the need to find an innovative way of meeting the need of the
rejected group in terms of Micro finance arrangements. The blanket policy approach will
not lead to the desired results of easy access to agricultural production credit by the
resource poor farm households in Nigeria.

Keywords: Agricultural credits, rationing, commercial banks, South Western, Nigeria.

Introduction
Agricultural credit is expected to play a critical role in agricultural development (Duong and Izumida,
2002). Farm credit has for long been identified as a major input in the development of the agricultural
sector in Nigeria. The decline in the contribution of the sector to the Nigeria economy has been
attributed to the lack of a formal national credit policy and paucity of credit institutions, which can
assist farmers among other things. The provision of this input is important because credit or loan-able
fund (capital) is viewed as more than just another resource such as labour, land, equipment and raw
materials. It determines access to all of the resources on which farmers depend (Shephard, 1979).
Agricultural sector is situated within the framework of the rural economy and the financial markets. A
International Research Journal of Finance and Economics - Issue 24 (2009) 91

key feature of the sector is the dominance of smallholding farm families, rural households, agricultural
households, or farm households. They cultivate less than 5 hectares. Hence, they look significant
individually but collectively they form the foundation on which the nation’s economy rests (Falusi,
1995).
Agricultural household models (Singh et al; 1986; Sadoulet and de Janvry, 1995) suggest that
farm credit is not only necessitated by the limitation of self-finance, but also by uncertainty pertaining
to the level of farm inputs and output and the time lag between inputs and output (Duong and Izumida,
2002). The farm household is typically located in an environment characterized by a number of market
failures. A frequent cause of market failure is limited access to working capital / credit (Duong and
Izumida, 2002). According to Swinnen and Gow (1999), access to agricultural credit has been severely
constrained in developing countries. This is because of the imperfect and costly information problems
encountered in the financial markets. Such problems are known to be particularly important in
agriculture (Stiglitz, 1993).

Problem Statement
As a result of the informational imperfections between the lenders and the borrowers, rationing of
credit demand becomes necessary for financial institution (Stiglitz, 1994). Credit rationing policy is,
however, regressive to the small–holder farm households as it has serious implication for growth and
equity objectives of development policy. This is because when credit is rationed some borrowers
cannot obtain the amount of credit they desire at the prevailing interest rate, nor can they secure more
credit by offering to pay a higher interest rate. In such circumstances, liquidity can become a binding
constraint on farmers’ operations. Yet the rationing behaviour by the banks may be due to their rational
and efficient response to information and contracting problems inherent in agricultural credit markets.
By 2008, about 34 years after Nigerian Agricultural Cooperative and Rural Development Bank
(NACRDB) formerly Nigerian Agricultural and Cooperative Bank(NACB) established in 1973 and 31
years after the Agricultural Credit Guarantee Fund Scheme(ACGFS) put in place in 1977, one would
have thought that the problem of agricultural credit inadequacies would have been solved. The problem
is still very much around and be-devilled with many bottlenecks. Viewed against this background, it is
felt that there is the need to examine the operation of commercial banks in terms of agricultural credit
approval and rejection. The aim is to identify key determinants in their decision making process.
Agricultural credit access has particular salience in the context of agricultural and rural
development in Nigeria. Some 70% approximately of the population lives in the rural areas with their
main source of livelihood being agriculture. Credit constraints to farm households thus impose high
cost on the society. This is in terms of rural unemployment, rural poverty, and distortion of production
and liquidation of assets. Governments in both developed and developing countries attempt to
overcome these problems by subsidizing credit, setting up credit guarantee fund schemes (e.g. ACGFS
in Nigeria) and specialized agricultural credit bank (e. g NACB, now NACRDB, 2002) and stimulating
institutional innovations in the financial system (e.g. People’s Bank, Community Bank, Rural Banking
Schemes, etc). There were policies which subsidized loans advances to agriculture. This was available
at 16-18 percent interest rate to individuals and 15-16 percent to cooperatives or corporate farms when
the ruling market interest rates for the other sectors of the economy range between 30 and 40 percent.
This indicated that the shadow price of capital was far in excess of its social opportunity cost and
implies a weak financial intermediation(Sial and Carter,1996). Carter and Boucher(1994) noted that in
an economic environment that is characterized by a weak financial market, the provision of interest
rate subsidies on formal credit does not seem to be a rational economic policy. This is because it may
reduce access to agricultural credit. In Nigeria, it is feared that the attempt at credit price discrimination
led to policy distortion and the divergence of its benefits from the intended to the unintended
beneficiaries.
92 International Research Journal of Finance and Economics - Issue 24 (2009)

Even then, many banks perceive agricultural credit as risky and seek to channel credit to less
risky sectors. This behaviour calls for empirical quantification in the Nigerian context. It is, therefore,
pertinent to ask how formal lenders respond to the borrowing demands of farm households in Nigeria.
More so, farm households are quite heterogeneous in terms of resource endowments, production and
consumption opportunities. Hence, lenders are supposedly able to obtain and use information about the
potential credit-worthiness of the borrowers. Credit rationing models have been developed and applied
(Zeller, 1994; Barham et al; 1996; Duong and Izumida, 2002). According to Zeller (1994), as pioneers
in this field, Feder et al. (1990) enumerated the occurrence of loan rationing through household survey.
Juppeli (1990) asserted that most of the literature on the issue lack information on loan rationing. It is
the contention of this study that households survey data can not sufficiently capture the decision
making process of the formal credit market in terms of credit rationing.
There is thus the research need to examine the impact of and the financial market performance
in terms of the spate of government’s intervention measures and how these have affected the credit
access or constraints facing farm households in Southwestern Nigeria. The outcomes of the demand for
credit depend on, the lending practices of the credit agencies. Commercial banks concerned with losses
from untimely repayment or default, seek to minimize these by choosing carefully the distribution of
credit across farmers (Anderson, 1990). As a result the lenders are faced with loss-minimizing credit
distribution problem. A fall-out of this is the “access rule” they use in the valuation of farmers
characteristics and in sorting them. It thus becomes reasonable to assess the pattern of credit receipts
across heterogeneous farmers as a result of the bank’s policy of constrained optimizing behaviour. An
investigation into the relationship between the farmers’ circumstances and characteristics and their
receipts or otherwise of credit may shed light on the factors that influence the lenders’ behaviour.
There is a dearth of such studies in a developing agriculture like Nigeria. The present work thus
attempts to bridge this apparent gap in the literature. The aim is to identify key determinants in the
credit rationing decision-making process of formal credit institutions in South -Western, Nigeria.

Objectives of the Study

The general objective of this study is to examine credit-rationing behaviour of Commercial banks in
Southwestern Nigeria. The specific objectives include to:
• Identify the factors influencing credit rationing decisions of the banks,
• estimate the elasticities of probability of classification of borrowers into different groups,
• examine the effect of changes in the significant variables on the elasticities, and
• test the appropriateness of the model applied in this study.

Methodology
Area of Study
Southwestern Nigeria is made up of six states Lagos, Ondo, Ogun, Osun. Ekiti, and Oyo states. Oyo
state was purposively selected for the study. It is located between latitudes 6º north and 9ºnorth of the
equator and longitudes 3ºeast and 6ºeast of the meridian. Ibadan, the capital city, is the largest city in
West Africa. It has a population of about 2million inhabitants (Census, 1991).
In the state, agriculture is mostly rain-fed. The vegetation of the area is forest savannah. Mixed
cropping is the common farming system in the area. Majority of the people are farmers. There are
many Merchant and Commercial banks in the state. These banks have rural branches all over the state.
There is a branch of the Central Bank of Nigeria (CBN) in the state in Ibadan the capital.

Sources of Data
The data for the study were sourced from the agricultural credit transactions of the rural branches of
four principal Commercial banks in Ibadan. The banks received a total of 881 applications, for
agricultural credit for the year under consideration. Out of these, 144 were fully approved, 176 were
International Research Journal of Finance and Economics - Issue 24 (2009) 93

partially approved while the remaining 561 applications were completely rejected. Data collection was
constrained by banks protocol. Officials were unwilling to release the necessary information. The fear
of appearing to be frustrating government’s is responsible for this. The banks did not want to be seen
as blocking the flow of credit into agriculture. This was paramount in their consideration to release
data. The data used in this study were, however, released on good will and that the banks remained
anonymous.

Method of Data Analysis

The decision, by the households, to borrow or apply for credit is conceptualized as a sequential
process. In the first step, the household decides on whether to apply or not. It follows that after this
initial decision, some applied for credit. In the second stage, the banks decide on whether to give the
borrower all the credit asked for, or partially approve the demand by reducing the amount requested for
or to totally reject the application. From these outcomes, based on the discretion of the banks, the
applicants can be categorized into three groups. One, credit constrained / rationed are those whose
applications were rationed. Two are those rejected. Three is the credit-non-constrained and are those
whose applications were fully approved. The polychotomous nature of this categorization calls for the
use of multinomial logit model, which is adopted for this study.

Theoretical Framework
Model Specification: Multinomial Logit Model
The multinomial model was used to express the probability of a farm household head being in a
particular category. The model is predicted on the utility derivable by the commercial banks. The credit
institutions are assumed to be seeking to maximize their utility in the allocation of the total credit
portfolio to the potential borrowers. A utility function is therefore assumed to exist for the banks.
Arising from this, is an implicit preference function in respect of the total credit available. The banks
are assumed to be rational allocators and the utilities accruing to them are additive. The banks’ decision
to credit-ration is characterized as a polychotomous choice between three mutually exclusive
alternatives.
Let Uij denote the utility that the banks derive by choosing one of the three outcomes and
Uij = γj Xij + eij
Where γj varies and Xij remains constant across alternatives; and eij is a random error term
reflecting intrinsically random choice behaviour, measurement or specification error and unobserved
attributes of the alternative outcomes.
Let also Pij (j = 0, 1, 2) denote the probability associated with the three choices, with j = 0 if the
borrower is fully rejected, j = 1 if the borrower is partially satisfied, and j = 2 if the borrower is fully
accommodated by the bank.
The multinomial logit model (Babcock et al., 1995), is given by
exp (γj Xi)
Pij =
3
1+Σ exp (γj Xi), for j =1, 2, 3. (1)
j=1
Pij is the probability of being in each of the groups 1and 2..
1 (2)
Pio =
3
1+Σ exp ((γj Xi), for j = 0
j=1
Pio is the probability of being in the reference group or group 0.
In practice, when estimating the model the coefficients of the reference group are normalized to
zero (Maddala, 1990; Greene, 1993; Kimhi, 1994). This is because the probabilities for all the choices
94 International Research Journal of Finance and Economics - Issue 24 (2009)

must sum up to unity (Greene, 1993). Hence, for 3 choices only (3-1) distinct sets of parameters can be
identified and estimated.
The natural logarithms of the odd ratio of equations (1) and (2) give the estimating equation
(Greene, 1993) as
[Pij] (3)
In = γj Xi
[Pio]
This denotes the relative probability of each of group 1 and 2 to the probability of the reference
group. The estimated coefficients for each choice therefore reflect the effects of Xi`s on the likelihood
of the banks choosing that alternative relative to the reference group. LIMDEP 7.0 software (Greene,
1995) was used in estimating the model. However, following Hill (1983), the coefficients of the
reference group may be recovered by using the formula
γ3 = - (γ1 + γ2).
For each explanatory variable, the negative of the sum of its parameters for groups 1 and 2 is
the parameter for the reference group.

Coefficients, their Signs and Interpretations

According to Basant(1997), the coefficients of the estimated model can be interpreted as follows. A
positive significant coefficient on a variable for a particular equation indicates that the variable is
associated with a higher probability of being in that group choice relative to the reference group. The
implication is that the probability of the bank deciding on that outcome or the borrower being so
classified is greater than the probability of placing him in the reference group.
A negative significant coefficient on a variable for a particular equation means that the
probability of the bank deciding on that outcome or placing the borrower in that group is smaller than
the probability of him being in the reference group.
Coefficients not significantly different from zero whether positive or negative indicate that, the
particular regressor (Xi) does not affect the utility or the probability of the state to which it applies
relative to the reference state.

Marginal Effects
According to Greene (1993), by differentiating equations (3) and (4), the partial derivatives or marginal
effects of the model on the probabilities are
dPj (4)
= Pj Bj- ΣPkBk
dPj k
When the marginal effects or partial derivatives are obtained the derivation techniques
implicitly indicate that neither the sign nor the magnitude of the marginal effects need bear any
relationship to the sign of the coefficients used in obtaining them (Greene, 1993).

Quasi – Elasticities
The marginal effects or partial derivatives (dPj/dXi) are obtained by differentiating equations (1) and
(2) with respect to the particular explanatory variable. The derivation techniques implicitly indicate
that neither the sign nor the magnitude of the marginal effects need bear any relationship to the sign of
the coefficients used in obtaining them (Greene, 1993). The LIMDEP software provides the partial
derivatives. These are converted to quasi elasticities by using
ηJi = Xi (dPj/dXi), where Xi is the mean value of Xi.
The quasi-elasticity represents the percentage point change in Pj upon a one percent increase in
Xi. These elasticities are superior to the coefficients and the partial derivatives by their ease of
interpretation. However, like the derivatives they too may change sign as well as value when evaluated
at different points (Basant, 1997).
International Research Journal of Finance and Economics - Issue 24 (2009) 95

Dependent Variable
The dependent variable for the model is a categorical variable which represents the choices available to
the banks as earlier on defined with j = 0, j = 1 and, j = 2.

Independent Variables
In this study, it is hypothesized that the probability of the Banks deciding on a particular outcome
depends on the age of the borrower in years (X1). This is used as a proxy for maturity and the potential
for careful handling of the loans and the repayment capability of the borrower. Farm size is measured
in hectares(X1). It can be used to estimate the expected income of the borrower. It is also used as a
proxy for the scale of operation of the borrowers being classified into the different groups. Large farm
sizes are expected to lead to increase credit access. The previous years income(X3) is used as a proxy
for the ability of the borrower for self-finance. This variable connotes the need for enterprise viability
or profitability as a key decision variable in credit provision by the bank. Gender/sex, if female=1
otherwise=0 (X4). This is included because males are known to have greater access to formal credit
than females. In the informal arena, women in rural areas are known to have a greater access to credit
facilities than males(Hussain, 1988). Education of borrower is measured in years (X5). Higher levels of
education imply better technical knowledge, know-how and farming skills, more information on credit
markets and facilities and familiarity with bureaucratic procedures. It is expected that educated
borrowers are more likely to use the loans judiciously than the uneducated ones. Enterprise type(X6), if
multi crop and subsistence = 1, otherwise = 0. Cooperative membership (X7), if yes = 1, otherwise = 0,
is expected to be positively related to the possibility of classification into the groups by the banks.
Dependency ratio (X8), is the number of dependents to those working in the household. Household net-
worth in naira (X9), is estimated as the sum of the gross farm income, off farm income, remittances,
and the value of household domestic assets. This is used here as a proxy for the households wealth
status in line with Bussab, 1988 and Briscoe et al; 1990. and the level of agricultural commercialization
(X10), is conceptualized as the ratio of the average value of output(s) market sales to the average value
of total output(s) (von Braun and Kennedy, 1994). It embodies the concept of marketable surplus and
market orientation of the households to agricultural production and their links to the market economy.
It is used to determine and subsequently to classify the households as being market
oriented/commercialized or not.
The selection of these variables is guided by previous studies, economic theory and the peculiar
characteristics of the technology types under consideration.

Goodness of Fit Test for the Model

The likelihood ratio index (ρ2) is used where
1 - L(Bu)
ρ2 =
L(Br)
This statistic is related to the likelihood ratio statistic. It is analogous to the least squares
multiple regression coefficient (R2). It is bounded between zero and one. According to Greene (1993),
the index increases from zero as the fit of the model improves.

Test of Hypothesis
The hypothesis that all the slope coefficients are zero is tested using the likelihood ratio statistic (χ2)
which is also referred to as lambda (λ) is represented as
^ ^
χ2 = - 2[L(Br) - L(Bu)]
This statistics is distributed asymptotically as a chi-square (χ2) with the degrees of freedom
being the sum of all the estimated parameters of the model. Hence, χ2α, d f is the control and tabulated
96 International Research Journal of Finance and Economics - Issue 24 (2009)

value. If the likelihood ratio statistic is greater than the tabulated χ2 value, the alternative hypothesis is
accepted otherwise, the null hypothesis is accepted

Test of Appropriateness of the Model

According to Tiefenthaler (1994), there is the need to confirm whether the polychotomous model is
necessary and appropriate to capture all the relevant alternatives in the choice decisions. Following Hill
(1983), the test statistic used is also the likelihood ratio statistic or lambda. This is of course also
asymptotically distributed like the tabular chi-square (χ2). But the degree of freedom in this case is the
number of the estimated parameters in each equation.
The decision rule states that if λ is greater than tabular χ2, the alternative hypothesis that the
parameter vectors for the equations in the model are for different groups is accepted. If otherwise, the
null hypothesis that the groups are homogeneous or the same is accepted.

Results and Discussions

The results of the study are presented in this section. Table 1 contains the results of the estimated
multinomial logit model. The log-likelihood value for the model is -797.4577.

Table 1: Results of the estimated Multinomial Logit Model

Variables Group 1 Group 2 Reference Group

Age (X1) -0.2263 -0.2745 0.5008
(1.3675) (1.4257)
Farm size(X2) 0.5118*** 0.4203** -0.9321
(3.5039) (2.7532)
Previous income(X3) 0.4326*** 0.3541*** -0.7867
(3.1442) (3.0123)
Gender / sex(X4) 0.2043 0.2167 0.4210
(1.5106) (1.4270)
Education(X5) 0.1324 0.0985 -0.2309
(1.1251) (1.1132)
Enterprise type(X6) 0.2761*** 0.2145** -0.4906
(3.8522) (2.6054)
Coop member(X7) 0.1584** 0.1336** -0.2920
(2.1705) (1.9634)
Dependency(X8) -0.2493** -0.2685*** 0.5178
(1.9861) (2.6578)
HH net worth(X9) 0.3652*** 0.3279** -0.6931
(3.7462) (2.1578)
Agric commerce(X10) 0.2813*** 0.2935**
(3.8645) (1.9763)
Constant(K) -1.3458 -1.5172
N 144 176 561
Log likelihood -797.4577
Likelihood ratio 501.6008
ρ2 = 0.3145
Ns = 881
Predictions
Group 1 = 78%
Group 2 = 73%
Reference Group = 85%
Overall % Correct = 76.8%
Source: Field Data Analysis, 2008.

One, the likelihood ratio (χ2) value of 501.6008 is greater than the critical chi-square value
(χ 0.01,30) of 50.8920, and (χ20.05, 30) of 43.7730 at the 1% and 5% levels of significance. This test
2

confirms that all the slope coefficients are significantly different from zero. The alternative hypothesis
International Research Journal of Finance and Economics - Issue 24 (2009) 97

is thus accepted at these levels of significance. Two, the likelihood ratio index ((ρ2) value of 0.3145
also confirmed that all the slope coefficients are not equal to zero. In other words, the explanatory
variables are collectively significant in explaining the classification of the borrowers by the banks. In
the literature, Hill (1983) obtained ρ2 values of between 0.3226 and 0.3484 while Zepeda(1990)
reported ρ2 value of 0.25 as representing a relatively good-fit for a multinomial logit model. Hence, the
ρ2 value of 0.3145 in this study is indicative of good fit for the estimated model..
The results of the estimated equations are discussed in terms of the significance and signs on
the parameters. Evidence from the model as contained in Table 1, shows that the set of significant
explanatory variables varies across the groups in terms of the levels of significance and signs However,
farm size (X2), previous income(X3),enterprise type (X6), coop membership(X7), household net-worth
(X9), and agricultural commercialization level (X10), are positive and significantly associated with the
classification of the two groups relative to the reference group..
The positive sign implies that the probability of the bank classifying the borrowers into the two
groups relative to the reference group increases as these explanatory variables increase. The
implication is that the probability of the bank deciding on these outcomes is greater than the probability
of placing the borrowers in the reference group for a re-classification of the variable from zero to one
since it is a dummy. The negative and significant parameter for the dependency ratio(X10) means that
the probability of being in the two groups is lower relative to the probability of being placed in the
reference group. In this way, the first objective of this study is attained.

Table 2: Marginal Effects and the Quasi – elasticities Estimated

Variables Group 1 Group 2 Reference Group

Farm size(X2) 0.3072 0.1182 - 0.1314
(1.5380) (1.2796) (1.0065)
Previous income(X3) 0.2643 0.1843 - 0.1678
(1.4278) (1.2551) (0.5432)
Enterprise type(X6) 0.1859 0.1236 - 0.1149
(0.5632) (0.2758) (0.3632)
Coop member(X7) 0.0962 0.0711 - 0.1263
(0.7345) (0.3657) (0.3114)
Dependency ratio(X8) -0.1271 -0.1032 -0.1064
(0.4682) (0.2461) (0.2533)
Household net worth(X9) 0.2384 0.1681 - 0.6571
(1.6522) (1.2443) (1.2142)
Agric. Commerce(X10) 0.1506 0.0824 - 0.1143
(1.6113) (1.3281) (1.1065)
Source: Calculated by the Author, 2008.
* Marginal effects are above while partial elasticities are in brackets.

Table 2 contains the values of the estimated marginal effects and the quasi – elasticities
calculated at the overall sample means following Basant (1997) for the significant variables. The
significant variables affect both the probability of classification and the utility of the banks in their
decision making. It is noteworthy that estimates not significantly different from zero indicate that the
regressor or explanatory variable concerned does not affect the probability or utility derivable by the
bank in making its classification decision relative to the reference group into the other two groups.
These results helped in achieving the second objective of this study.
In the literature (Basant,1997), the quasi–elasticities rather than the marginal effects are used
for explanatory purposes because they are easier to interpret. These partial elasticities of farm size are
elastic at 1.5380, 1.2796, and 1.0065 for the groups as classified. The quasi elasticities for the
household net-worth and agricultural commercialization variables are all elastic for all the groups. The
quasi–elasticity for the income variable for the first group is elastic at 1.4278 and for the second group
at 1.2551. This means that a one percent change in the explanatory variable leads to a more than
98 International Research Journal of Finance and Economics - Issue 24 (2009)

proportionate change in the probability of classification into the two other groups relative to the
reference group. This variable is inelastic for the reference group.
The partial elasticities for the remaining variables, enterprise type, coop membership and
dependency ratio, are generally small in magnitude and are also inelastic. The inelasticity of the
variables suggests that the probability of classifying the borrower into a /any particular group is not
greatly affected by marginal changes in the variables as a one percent change in the variable leads to a
less than proportionate change in the probability of classification and so the third objective is met..
In testing for the appropriateness of the model, the likelihood ratio test is used. The test statistic
for the model lambda (λ) is 501.6008. The critical values are (χ20.01,10) of 23.2090, and (χ20.05, 10) of
18.3070 at the 1% and 5% levels respectively. The alternative hypothesis that the parameter vectors for
the equations are not the same.. This means that the borrowers as classified are truly heterogeneous
groups. Hence, they can not be treated as being homogeneous in characteristics, attributes and
circumstances. This finding confirms the appropriate-ness of the use of a polychotomous model in this
study. The estimated model gives an overall percentage correct prediction of 76.8%. In this way, the
fourth objective is met.

Policy Recommendations
The study confirmed the use of credit rationing mechanism by the banks in terms of rejected
applications and also in terms of loan demand partially met. Banks borrowing decisions must be group
specific and not general. There is also the need to find an innovative way of meeting the need of the
rejected group in terms of Micro finance arrangements. This should be based on the applicant’s
endowments, attributes and circumstances. The blanket policy approach will not lead to the desired
results of easy access to agricultural production credit by the resource poor farm households in Nigeria.
Out of the factors hypothesized as the determinants of credit rationing by the banks, farm size,
previous year farm income, enterprise type, dependency ratio and agricultural commercialization are
considered to be of policy relevance. Farm size expansion policy in term of land redistribution to
farmers who are by all standards small-scale producers will improve their chances of obtaining credit.
Similarly farm income improvement policy in terms of adequate remunerations for farmers’ output,
price support for key inputs and provision of storage facilities that will help them to market speculate
and not sell at low prices at harvest will improve their probability of being non-credit
constrained.Measures that will lead to encouraging cooperative membership, agricultural
commercialization or production for the market, and improvement in the reproductive health systems
in terms of family planning and small family sizes as a way of reducing the dependency ratio are called
for. These may greatly influence the banks` decision making and reclassification of the borrowers. The
number of credit rationed households could be greatly reduced thus providing working capital to the
households and possibly resulting in poverty alleviation.
Conclusion: The study examined credit rationing by commercial banks in south western
Nigeria..It is hoped that the results will provide useful guides to other researchers undertaking similar
studies. It is also hoped that they will serve as baseline information to policy makers in the formulation
of policy measures on credit administration, allocation and provision in the agricultural sector in
particular and Nigeria economy in general.
International Research Journal of Finance and Economics - Issue 24 (2009) 99

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