Financial inclusion of rural smallholder farmers in Nigeria : measurement issues, impact on livelihood and implications for policy interventions

Abstract

Financial inclusion is fundamental to sustainable agriculture and inclusive rural economic development. Prevailing dominant measurements of financial inclusion (FI) tend to measure the concept as access to bank services or formal account ownership. This study proposes that FI is multidimensional and access indicators alone, though required, may not provide adequate conditions for consumers such as rural smallholder farmers to sustainably meet their agricultural financial needs or cope with livelihoods. The policy commitment of the Government of Nigeria to achieve a financial inclusion rate of 80% by 2020 necessitates knowing the level of financial inclusion of rural smallholder farmers. The study developed a multidimensional financial inclusion index specifically to determine the level of financial inclusion of rural smallholder farmers in Nigeria, and to ascertain how FI varies according to gender and geographical location. The study also determined the contribution of financial inclusion indicators to the financial inclusion of rural smallholder farmers. In order to determine the robustness of findings in informing policy interventions, the study further assessed the sensitivity of contributions of financial inclusion indicators to changes in financial inclusion adequacy. In light of the fact that, although rural smallholder farmers primarily depend on agriculture, they may also engage in other income-generating activities, the study assessed the impact of financial inclusion on their livelihood strategies when financially included, relative to when they are excluded. This study utilised the 2016 Nigeria smallholder secondary data set prepared by the Consultative Group to Assist the Poor. A stratified two-stage sampling procedure was utilised to select a total of 2,300 rural smallholder respondents. Data analysis involved adapting the Alkire-Foster method to compute a multidimensional financial inclusion index based on the domains of financial inclusion: financial participation; financial capability; and financial well-being. The three domains cover nine financial inclusion indicators, namely access, usage, no barriers, financial literacy, consumer protection, financial planning, control over finance, financial resilience, and financial situation. Furthermore, to investigate its findings, the study employed descriptive statistics, decomposition techniques and sensitivity analysis. Ultimately, a propensity score matching model was used to determine the impact of financial inclusion on the livelihoods of rural smallholder farmers. The results indicated that 78% of rural smallholder farmers in Nigeria were still yet to be financially included. Moreover, findings suggest that formal access to finance is significantly different from the sustainable financial inclusion required for rural smallholder farmers. Gender variations in multidimensional financial inclusion showed that male rural smallholder farmers were, to a large extent, more financially included than females were. Geographical variations demonstrated that rural smallholder farmers in the southern zones had higher levels of financial inclusion than those in the northern zones, and that females had a higher geographical disparity in the level of financial inclusion. In addition, results indicated that Nigeria’s South South geopolitical zone had the highest level of FI of rural smallholder farmers, compared with the national assessment of the country’s South West zone. Equally important, results showed that there are differences in the levels of financial inclusion related to specific individual and household characteristics of rural smallholder farmer subgroups. These include factors such as age, education, marital status, household size, income and poverty status. The contribution of FI indicators to levels of financial inclusion showed the highest gender gaps specifically in financial resilience, control over finance and formal access. Based on geographical location considerations, the study found that adequacies of financial inclusion indicators, namely access, usage, consumer protection and financial planning, were lowest in the North West zone. Conversely, contributions of financial resilience, financial situation, financial literacy, no barrier, and control over finance indicators were found to be lowest in the North East zone. Aggregate contribution by financial inclusion domains indicated the lowest censored headcount ratio of rural smallholder farmers in financial capability relative to financial well-being. Findings from the propensity score matching and sensitivity analysis highlighted the point that financial inclusion significantly reduces the sole dependence of rural smallholder farmers on farm income activities relative to exclusion. However, the engagement of rural smallholder farmers in both farm and non-farm income-generating sources significantly increased with financial inclusion. The findings suggest that, if Nigeria’s policy goal is to sustainably increase financial inclusion of rural smallholder farmers, then it is important for efforts to be made to intensify interventions beyond formal account ownership. More so, if closing the gender gap is part of the goal, then the findings suggest that policy interventions to advance the financial inclusion of rural women smallholder farmers are important, with more focus on indicators such as formal access, control over finance and financial resilience. Furthermore, the results imply that policy interventions are more likely to succeed if targeted to rural smallholder farmers, based on variations in financial inclusion status across geographical location, rather than on aggregated national assessments. Finally, if financial inclusion policy aims at promoting sustainable rural livelihoods and economic development, then it is crucial that efforts to increase the financial inclusion of rural smallholder farmers be intensified, as this strengthens the integration of farm and non-farm economic sectors.