CAPITAL FORMATION AND ECONOMIC DEVELOPMENT

Lewis (1954) in his work Economic Development with the unlimited supplies of labour

explain Capital Formation as the way of helping countries to develop and served as the most

import source of economic growth to most rural poor areas. He then defined it as the transfer of

savings from households and government to the business sectors, resulting in increased output

and economic expansion. Sheela (1990) confirmed that, various studies show a positive

correlation between credit availability and women empowerment in rural areas.

Agreeing with the Indias Daily E. Magazine of GK and Current Affairs (2016) which look at

capital formations as the process of adding to the stock of capital per year. The magazine explain

that capital is a stock of all the produced means of production that an economy possess at a point

which include only those means of production which are produced by man such as plant and

machinery, tools and instrument, stock of raw materials, dams, factories, transport-equipment,

etc.

Capital formations is the transfer of savings/ resource of individuals to the corporate sector or to

those who need it, from those who do not need it and is very important to the development of

rural economy/ settlement of sensitive gender issues.

The sources of capital formation involve saving and mobilization of savings, and conversion of

savings into capital goods through investment. They are used for further generation of income

through investment, while investments are instruments of capital formation. The higher the rate

of savings by every gender, the higher the rate of capital formation.

Capital formation asset for economic development according to Khan (2000) include:

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(a). The physical asset: e.g. the natural capital (private and common property rights on land,

pastures, forest, and water, machines, tools and structures, stocks of domestic animals and food),

and financial capitals (Jewelry Insurance, savings and access to credit).

(b). the human assets: labour pools with their age, gender, skills, and health in the household and

communities.

(c). the infrastructural assets are; the public and private provided means of transport and

communication, access to schools and health Centres, storage, portable water, and sanitation.

(d). the institutional assets which include; the legally protected rights and freedoms and

participation in making decisions, at the level of household, community, and supra-community.

Peter (2010) categorized Nigeria capital formation to include both formal and non-formal.

The formal sources are those established by law and they include cooperative societies,

agricultural credit banks, commercial and merchant banks and credit corporations established by

the government. While the non-formal sources are usually private in nature, like the old farm

credit institutions which includes short term loans for consumption, weeding, festivals and other

social obligations. These loans are usually obtained from friends, relatives, neighbours and

money lenders.

Khan (2000) said, some of these lenders, such as product buyers, are close to farmers in the rural

areas and so are able to assess farmers needs. They can both assess the farmer ability to repay

loaned funds and, also, exercise wide discretion in lending more to farmers, who show the ability

to effectively utilize the loans productively. In many cases, product buyers also lend to tree crop

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farmers in anticipation of a bumper harvest. This ensured that produce buyers purchased crops

from the farmers to whom they had earlier supplied cash as working capital.

The rural petty traders play a relatively minor role as lenders to farmers. Their lending activities,

focused only on credit for foodstuffs and other items for daily consumption (CGAP, 2003).

Of all the informal credit institutions in Nigeria, the most interesting has probably been the

traditional esusu credit institutions as earlier discussed at the historical trend. The esusu is

an arrangement in which a fund is created by a group of individuals who make fixed

contributors of money at fixed intervals. The total amount contributed by all members at a time

is handed over to each member on rotational basis until every member has had his or hers

(Famoriyo, 1980). By making large sums of money available to farmers when they need it most,

the esusu thus constitutes a valuable rural credit formation institution.

Igbatayo (2015) buttressed on the practice of pledging crops and/or land, which represents a kind

of indigenous mortgage whereby an owner-occupier of land, gives possessions and use of land to

a pledge-creditor in return for a cash advance. At the end of repayment of debt, full ownership

reverts to the owner-occupier. Of significance, is, the fact that the pledge creditor harvest the

crops, which thus represent the interest on his loan and not part of the principal.

The formal source of credit arose as a result of further development of the rural finance market,

which came in the form of regional credit corporations and development boards. It also includes

the commercial and merchant banks (Otero and Rhyme, 1994). They confirmed that only a

limited amount of commercial banks funds flow directly into rural development. The largest

amount of credit funds for rural development are derived from government revenue, either in the

form of direct appropriations through Agricultural Loan and Credit Scheme, or through overdraft

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guarantee liabilities as is the case with the Registered Cooperative loan funds; which has been

reorganized into the Nigerian Agricultural and Cooperative Bank (NACB), which started

operation in August, 1973. (Now Nigeria Agricultural and Rural Development Bank,(NARDB)).

The Nigerian Agricultural Cooperative Bank (NACB), has delivered the largest volume of credit

to the agricultural sector since its inception; and has continued to encourage agricultural

development in the rural areas, through its loans and advances, some of which are given in cash

and in kind.

The Central Bank of Nigeria is the financial authority of the Federal Government of Nigeria, and

through its activities, it directly or indirectly influences the flow of credit for economic

development (CBN, Annual Reports and Acct; 1985-1986).

The Role and Significance of Capital Formation in Economic Development of Rural Areas

The Role and Significance of Capital Formation in economic development of rural areas are

through: Sustained Rise in Output, generation of Employment, facilitation of Technical Progress,

prompts Human Capital Formation and enhancement of Infrastructural Development.

Vinish (2010) also highlighted the need for capital formation to say; It facilitates exploitation of

natural resources in development process which help one to become self-sufficient in the sense

that the country does not have to rely on foreign investments, since savings of individuals gets

converted into investments.

Factors responsible for lower capital formation to include:

Low Per Capita Income; Low per capita income in less developed countries results in lower

saving which is the primary source of capital formation. Others are; Large Size of Population,

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inflation, Demonstration Effect, Complex Tax-structure, and Limited Extent of Market Demand

in small size market, lower demand, lower investment for capital formation.

Measures to promote capital formation in rural areas include:

Increase in Voluntary savings: Increase in rate of voluntary savings is a prime requirement in

ZAasq1wrural areas. Increase in interest rate can encourage more voluntary savings.

Expansion of Banking Institutions: Banking facilities expansion in rural areas can increase the

savings in rural areas.

Forced Saving through Taxation: Government can increase the capital formation by imposing

direct and indirect tax on economic activities.

Encouraging private Enterprises: Generally, private enterprises are efficiently run when

compared to public enterprises. Encouraging private enterprises can increase the capital

formation.

Reduction in Non-developmental expenditure: The government should reduce non-

developmental expenditure related to administration and defence. Their reduction will result in

more savings to be invested in the Public sector.

Price Stability: Price stability is conducive to both the supply of capital as well as demand for

capital.

Liberal government Policies: Liberal fiscal and credit of the government encourages saving and

investment for capital formation.

Surplus through International Trade: International trade can encourage the flow of capital to the

less developed countries.

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