Different types of study abroad experiences

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MODULE 3

Unit 1 Internal Methods of Acquiring Capital Unit 2 External Methods of Acquiring Capital Unit 3 Internal and External Sources Capital Unit 4 Agricultural Credit Banks

UNIT 1 INTERNAL METHODS OF ACQUIRING

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external sources are items 5 to 9. This unit deals with the internal sources.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

 explain inheritance

 explain gifts

 describe savings

 list and explain family arrangements.

3.0 MAIN CONTENT 3.1 Inheritance

In Nigeria as a result of the land tenure system most land is passed from one generation to another through inheritance. Sons inherit the land cropped by their parents and these are passed down from generation to another. In most communities, as the families enlarge the available land is divided among the many children and therefore land becomes more and more fragmented. Under subsistence farming in the communities, 90 per cent of land ownership is through inheritance.

3.2 Gifts

Land is also owned through gifts between two families, friends and mother to son or one type of relation to another. This is common in subsistence farming situations.

3.3 Savings

Capital accumulated through savings (defined as net worth, less gifts and inheritance) forms the foundation of the farm financial structure.

Except for gifts and inheritance, savings provide the backbone for farm capital. Savings provide not only capital, as such, but risk-bearing ability (reserves) and demonstrate capacity to earn and save the two very essential components of a strong credit rating.

Farming is big business and big business requires a large amount of capital and a sound financial foundation and framework which savings alone can provide. Few people who are unable to save will be successful in commercial farming. The farmer is the one to whom profit derived from farming accrues and, therefore, he must stand the risk of loss.

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Funds also are needed for sickness, education, and other family uses.

Savings must be accumulated by the successful farm family to provide a financial base for all such purposes.

Accumulating any amount of savings takes time for most people. Living standard tends to be upgraded as income increases, which leaves little for saving. However, it is surprising how rapidly wisely invested savings

“grow”. Even a small amount saved regularly produces a surprisingly large sum in a fairly short period. Save N500 per week and in ten years it will grow to N305,000 when invested at 3 per cent, and to N327,000 when invested at 5 per cent.

3.3.1 Attitudes of Farmers towards Savings

Farmers save large amounts during their lifetimes. It is doubtful if any occupational group in the economy saves as large a proportion of its income in the developed world. Much of these savings are “forced” by the nature of the business. The farmer must have capital to be successful and this practically forces the farm family to save. It is often said that farmers live poor but die rich. This is because they keep investing in more modern, more efficient capital till they die. Would farmers save as much if it were not for this “forced savings” aspect of agricultural production? The recommendation is often made that larger loans be made to farmers so they will not have to save so much. On the other hand, it is apparent that well-established farmers continue to save when additional capital is not a necessity in the business. What are farmers' attitudes on savings?

A large proportion of farmers feel that a greater proportion of income should be devoted to investment in farm business than consumption.

However, family cycle has a great influence on the farm activities and plans. Older farmers tend to allocate more of the income to consumption than into farm business. The reverse is the case for younger farmers.

3.4 Family Arrangements

Family arrangements are of considerable importance in acquiring capital to farm, particularly for beginning farmers. Where parents or family members are able, gifts or loans are made to the beginning farm family to assist in providing capital. In other cases assistance in acquiring capital to farm is provided through formalised agreements, such as father-son-partnerships, and rental arrangement.

The importance of family agreements is increasing. Extension of Social Security to farmers in United States of America for example, encourages many to reduce their farming activities so as to gain full Social Security

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benefits. Family arrangements to accomplish this objective are becoming more frequent. Moreover, with larger and fewer farms the beginner is becoming increasingly dependent upon family assistance in acquiring a farm to operate.

Father-and-son agreements are the most common forms of family arrangements. They provide a means whereby a son or son-in-law with limited capital can work into the farm business. From the father's viewpoint such an arrangement often is desirable since he is able to

“ease up” a bit. With the decrease in the amount of manual labour an older farmer can perform comes an almost certain decline in farm upkeep and income. An agreement with a son, therefore, may be welcomed by the father not only to help out with the work but to help maintain a vigorous and profitable business.

The agreement also has advantages for the younger man, offering him an opportunity to start farming with less capital than is possible with any other method. By working with his father, he can profit from mature advice and can develop gradually his knowledge of agriculture and business and his management ability. Where the father is nearing retirement and other heirs are not involved, an agreement facilitates transfer of the farm to the son, enabling him to start farming “on his own” with a more adequate unit than might otherwise be possible.

3.4.1 Essentials of Successful Family Partnership

There are ten essentials for successful father and son farm partnerships.

These are summarised as follows:

1. Desire of the son and his wife to farm. The best accomplishments in life are made by individuals who like their work. Farming is not easy, and to be a successful farmer, he and his wife must enjoy their profession as an offset to the hard work and long hours involved.

2. Satisfactory living conditions for two families. Separate living accommodation should be provided if at all possible, to allow individual freedom and to eliminate a source of possible friction.

3. Ability to get along with each other. The elder couple should have a determination to recognise that the younger couple will do things differently and have different ways. The young folks should respect their elders and their judgment.

4. Belief that a farm partnership is desirable. Do all parties concerned believe the partnership will enable the two families to make better progress and be happier than if they operated independently?

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5. Adequate size of farm business. Is the farm large enough to provide employment and an adequate living for the two families?

If not, can it be enlarged sufficiently through more intensive operation, or by renting or buying additional land?

6. Good farm management. If good farm management is not followed, the agreement probably will not succeed.

7. Knowledge of farm business by son. The son should have knowledge of the business of farming and of the individual farm business in which he is to become a partner.

8. Good business judgment in the use of money. Many young people have “too big ideas” and make investments that plague them for years. Excessive risks should be avoided. The young should seek the counsel of their elders in financial affairs.

9. Partnership in the entire farm business. To avoid trouble, participants in the business must be interested in the conduct of the entire farm enterprise.

10. Good partnership agreement. A sound agreement which fits the farm and the partners is essential. A written agreement helps prevent misunderstanding.

3.4.2 Legal Aspects of Partnerships

In forming partnerships, the partners should know and understand what is involved and give proper attention to legal aspects. Each person entering into a partnership assumes considerable responsibility for actions of the partner. A partner may sell property of the partnership, make contracts for the business, and create partnership debts without consent of other partners. Moreover, each partner has unlimited liability for suits against the partnership.

Usually these things are relatively unimportant in father-and-son partnerships, but provision should be made for handling eventualities-perhaps as one way of insuring that difficulties will not arise. Since laws governing partnerships vary from state to state, a qualified attorney should be employed to help prepare the partnership agreement, incorporating proper safeguards. Adequate insurance should be carried to cover insurable liability claims against the partnership.

Death of either partner automatically terminates a legal partnership. This possibility should be recognised and the method of dissolving the partnership in such event should be included in the agreement.

SELF-ASSESSMENT EXERCISE Discuss legal aspects of partnerships.

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4.0 CONCLUSION

In this unit you have learnt that the farmer can acquire capital through inheritance, gifts, and savings and family arrangements.

5.0 SUMMARY

In this unit you have learnt that:

 As a result of the land tenure system most land is passed from one generation to another through inheritance.

 It is common in subsistence farming situations that land is given as gifts between two families, friends and mother to son or one type of relation to another; savings provide the backbone for farm capital and also serve as a risk-bearing ability (reserves).

However, older farmers tend to allocate more of the income to consumption than into farm business. The reverse is the case for younger farmers.

 The importance of family agreements is on the increasing e.g.

father-son- partnerships. There are ten essentials of successful family partnerships.

 There are also some legal aspects of the family partnerships.

6.0 TUTOR-MARKED ASSIGNMENT

1. Why are savings important in the farm business?

2. Outline and discuss the essentials of successful family partnership arrangements.

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7.0 REFERENCES/FURTHER READING

Olukosi, J. O. & Alamu, J. F. (2013). Introduction to Agricultural Finance: Principles and Applications. Nigeria: Great Glory Publishers.

Reddy, S. S. & Ram, P. R. (2004). Agricultural Finance and Management, New Delhi: Oxford & IBH Publishing Co. PVT.

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UNIT 2 EXTERNAL METHODS OF ACQUIRING