Simulación y Proyección del modelo

Interest is the amount or price paid for the use of money, as is commonly expressed as a percentage. Thus an annual interest rate of 5% means that the borrower must pay an amount of 0.05 of the money borrowed (i.e. of the principal) if he has the use of the money for a year. In a fundamental sense interest charged tries to equate the future value of money with the present. For example a 10% interest rate tells us that N1.10k received or paid a year from now is equal to N1.00 received or collected today. The lender charges interest because of the alternative opportunities he has for the use of the fund. The lender must be rewarded because he loses control over his fund for the length of the loan agreement and because he faces the risk of loss of part or all of the money loaned if the borrower failed to repay as agreed. Similarly, the lender

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will also take into account the possible loss in the purchasing power of the money he borrowed out which may result from inflation.

Elements of Interest

1. Pure Interest- Pure interest is the cost forbearance or delaying the use of money. It has been described as the rate charged for a loan where there is no risk of loss through inflation, default and where any administrative cost is negligible. Starting with this “pure” rate of interest as a base, the interest rate actually charged on a given loan is then adjusted upwards to allow for the risk involved, the length of the loan, administrative costs and the imperfection in the credit market.

2. Risk of Losing Money- If risks is high, interest rate is high and if risk is less interest rate will be low.

3. Management and Associated Costs in Making and Serving a Loan- Management and serving cost per naira loaned typically runs much higher than on large loans. As a result, the interest rate on small loans is higher than on larger loan. On the other hand, initial cost of making the loans are about as high as for short term than for long term loans. Moreover, short term loans with frequent payments involved much more service expense (i.e. accounting expense) and sometimes more management than long term loans with only one or two payments about a year. This is the fundamental and primary reason why interest rates on short term loans usually higher than interest on long term loans.

Demand and supply for agribusiness credit also influences the interest rates to be charged. From the classical economic view a rational farmer borrows only if the productivity of the additional capital justifies the payment of interest on borrowed funds at the existing interest rate. The demand is given as:

Cd = f(r,P,R)………8.1 Where,

Cd = the demand for credit r = rate of interest

P= the general price level

R= rate of returns on borrowed funds

On the supply or lender side, the traditional theory implies that lenders prefer consumption now to consumption in the future. They would therefore, surrender their right to current consumption (lend) only if they expect a positive return from lending.

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Calculation of Interest Rates

There are different ways of in which interest may be computed depending on the terms of the loan and the policy of the lender. The method used determines to a large extent the actual rate to be paid. A borrower especially a farmer need to understand the various methods of charging interest on a loan in order to avoid being a perpetual debtor; some of these methods include the following:

(i) Simple Interest (S.I) - it is simply the product of the principal (P), the tine (T) in years and the annual rate of interest (R).

Therefore, S.I = P x I x R Example 20:

Calculate the simple interest on a loan of N100, 000 for one year at 7.5%.

S.I= P x I x R S.I= 100,000 x 1 x

100,000 x 0.075 = N7, 500, 00

Using the simple interest method only one payment is made at the maturation of the loan. Thus, S.I is made or suitable for only short period of time usually one year or less. When simple interest is computed for a part of a year, the time becomes a fraction of a year for example 6 months = 6/12.

(ii) Compound Interest (C.I):- Compound interest is involved in savings or the use of credit whenever interest is paid more than once during the period involved. It could also be defined as an amount called principal together with interest due on such principal after a given period all reinvested at the same rate.

It is calculated by this formula:

S= P (1+r)^t Where, S= Compound interest

P= the original principal or the present value

t = number of interest (or conversion) periods involved (the interval between the successive conversion is called the conversion period. The total amount due at the end of conversion period is called the compound amount.

r = interest rate per conversion period

This is used for just one year, assuming that the compounding is to be done twice a year then.

S= P (1+ )t x 2 ………8.2 For four times a year

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S= P (1+ )t x 4 ………8.3 For several times in a year

S= P (1+ ) nt ………8.4 Example 21 –

Find the value of N1000.00 at 5% when the compounding is based on a daily basis.

P= 1000, r= 5%, n = 365 S = 1000(1 +

)³⁶⁵ = 1000 ^{( )}

= 1000 x 1.0513 = N1050

iii) Discounting or Discount Interest Rate –discounting is the process of determining the present value of future investment (S).

S = P (1+r)^t P =

( ) ……….8.5

= S (1+r) ^–t (all parameters as previously defined)

On the other hand, annual rate of interest charged on a given loan could be determined, if:

a) the total charge made on a loan, including the amount for inspection fees and service charges;

b) the amount of money actually available to the borrower after deducting any interest and other fees collected in advance;

c) the length of loan expressed as a fraction of a year are known.

The interest can then be determined by the formula:

r=

………..8.6 Where r =interest rate

C = all charges

P= amount actually received T= time (in fraction of 1 year) Example 22:-

If a lender charges N20.00 for every N200.00 loan for 4 months with interest deducted in advance (discounted loan), determine the interest rate charged.

P= N200.00-20.00, the time is for 4 months (

) r = =

=

= 0.34

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= 0.34 x 100 = 34%

Exercises for Chapter Eight

1. Define the following concept agricultural finance, credit and interest.

2. Find the present value of N100, 000 to be paid in 6 years from now when the discount rate is 10% where the discounting is done (i) annually (ii) biannually.

3. Find the total amount due on a loan of N10, 000 at 18% simple interest at the end of four months.

4. Differentiate compound interest from discounting rate.

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CHAPTER NINE

AGRICULTURAL CREDIT AND CREDIT POLICY 9.1 Sources of Agricultural Credit

Two (2) major sources of credit to farmers can be:- (1) Traditional or Non-Institutional (Informal) Sources (2) Institutional, Formal Sources

Informal sources of microfinance are provided by traditional institutions that work together for the mutual benefits of their members. These institutions provide saving and credit services to their client. The informal/traditional microfinance institutions operate under different names in Nigeria, for instance

„esusu‟ among the Yorubas, „etoto‟ for the Igbos and „adashi‟ for the Hausas.

The key features of these schemes are savings and credit components, informality of operations and higher interest rates are prevalent. The informal associations that operate traditional microfinance in various names and forms are found in all the rural communities in Nigeria, they also operate in the urban centres. Members of this group include individuals, friends, relatives, shopkeepers, moneylenders, landlords, cooperatives and leasing associations.

Formal microfinance suppliers are licensed, supervised and regulated by Central Bank of Nigeria to operate as financial institutions. Their key features include, taking deposits from members of the public and lending the funds to users directly or indirectly singly or in groups. They have complete management structure, specialized manpower and are generally motivated by profit drive. They may be fully owned by public or private institutions or individuals. Members of this group include Nigeria Agricultural Cooperative and Rural Development Bank (NACRDB) (now Bank of Agriculture (BOA)), Microfinance Banks (MFB), commercial banks such as First Bank Plc, Union Bank among others.The source of funds for multipurpose cooperatives is the individual membership monthly contribution, while for the organized microfinance is aid and grants which mainly come from abroad. Major donor organizations are – United Nations Development Programmes (UNDP); Ford Foundation; African Development Foundation (ADF); Community Development Foundation among others. Experiences of other African developing countries like Bangladesh, Malawi, Kenya, Tanzania and Togo in micro financing show similar trends with Nigeria. The successes recorded from these countries are as a result of the adoption of the Grameen Model (moved from micro credit to microfinance, started more individual- based lending).

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