CHAPTER ONE
INTRODUCTION
1.1 Background of Study
The term capital structure is used to represent the proportionate relationship between debt and equity. Equity includes paid-up share capital, share premium and reserve and surplus (retained earnings) (Pandey, 2010), while debt can be classified into bank debt, straight bond debt, convertible bond debt, program debt (such as commercial paper), mortgage debt, and all other debts (Rauh & Sufi, 2008). A firm can issue a large amount of debt or a large amount of equity; hence it is important for a firm to deploy the appropriate mix of debt and equity that can maximize its overall market value. Utilization of different levels of equity and debt by managers is one strategy used by firms to improve their financial performance (Gleason, Mathur & Mathur, 2000).
Capital structure is important for agricultural firms, lenders, and policy analysts because all of them need information about financial structure of agricultural enterprises in order to make justified decisions about farm viability (Nurmet, 2011). It is the most significant aspect of company’s operations. Capital structure theories predict that leverage level influences a firm’s performance (Orua, 2009). Maina and Ishmail (2014) reported that there was evidence of a negative and significant relationship between capital structure and all measures of performance. This implies that the more debt the firms used as a source of finance they experienced low performance. Capital structure decision is a vital decision with great implications for the firm’s sustainability. The ability of the organization to meet its stakeholders need is closely related to the capital structure (Leon, 2013).
Agricultural credit is the present and temporary transfer of purchasing power from a person who owns it to a person who wants it, allowing the later opportunity to command another person’s capital for agricultural purposes, but with confidence in his willingness and ability to repay at a specified future date with or without interest (Nwaru, 2011). According to Akudugu (2012), credit is a strategic empowerment tool that has the potential to change the life of a person, family or community from a situation of abject poverty to a more dignified life. It can transform self-image, unlock potential and boost the productivity and well-being of the poor and vulnerable. Credit could bring about higher productivity and profit in agricultural production (Ashaolu, Mamioh, Philip & Tijani,2011) and may be financial or consist of goods and services.
Access to agricultural credit has been positively linked to agricultural productivity in several studies in Nigeria (Rahaman & Marcus 2004; Abu, Odoemenem,& Ocholi, 2010; Ugbajah, 2011), higher credit levels are associated with higher input use (Satyasai, 2012). Access to credit by small and medium agro enterprises is vital because the contributions which small and medium scale enterprises (SMEs) make to the economic growth process have been well documented (Mambula, 2002). Small and medium scale enterprises (SMEs) generate more direct job per naira of investment than do larger enterprises. They serve as a training ground for developing technical and entrepreneurial skills and; by virtue of their greater use of indigenous technological capabilities, they promote local inter-sectoral linkages and contribute to the dynamism and competitiveness of the economy. Prior to the 1970s, the small and medium scale enterprises (SMEs) belonged to the past but this view has since changed because the contributions of SMEs to industrial and economic growth of countries have been recognised internationally (Nnanna, 2001). SMEs access to credit therefore will play an important role in enhancing economic recovery. The extent to which firms can access external financing has been shown to have an influence on the investment activity of the firm and the ability of the firm to trade internationally (McCann, 2001). Unfortunately, SMEs, the engine of economic growth and development in many developing economies are still a shadow of themselves (McCann, 2001).
Ihyembe (2000), Eze (2007), Ike and Chidebelu (2003), attributed several reasons for the poor performance of agro-based SMEs. Among these is that they are operating under an environment of poor credit policy support which does not provide opportunity for maximization of profit in a competitive market. Ihyembe (2000) also reported that the absence of capital could frustrate the taking off of any business and since personal savings or contributions from family members and peer groups were not always enough, providing bank credit to SMEs would enable the SMEs provide necessary capacity building, infrastructure and raw materials to large scale industries. Due to diverse financial as well as non-financial and behavioural factors, small and medium scale enterprises rely more heavily on short term funding and this makes them more prone to volatile economic situations. Under such circumstances, banks have to request for more reliable collateral security to guard against loan default.
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