Full Project – Agricultural credit and Nigeria’s economic performance

Full Project – Agricultural credit and Nigeria’s economic performance

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1.1        Background of the Study

Agricultural Production in Nigeria is progressively on the decline in terms of its contribution to the Gross Domestic Product (GDP) as well as satisfying the country’s food requirement, despite the fact that about 70 per cent of the population engage in agriculture, thus Nigeria agricultural sector is unable to fulfill its most basic and traditional role of being the source of food for the nation, therefore the food import has continued to rise (Odigbo, 2000). There is a growing recognition by the Nigerian farmers of the effect of improved inputs and new technologies on agricultural yield. The use of these inputs and the adoption of high yielding techniques have given rise to an increased need for agricultural credit since majority of Nigerian farmers are small-scale farmers and are often limited by unfavorable economic, social, cultural and institutional conditions (Olubiyo and Hill, 2000). Insufficiency of capital has been a major constraint to agricultural development (Agu, 1998) in order to improve agricultural production modern farm inputs such as fertilizers, improved seed, feeds and plant protection chemicals and agricultural machineries are needed over the hoe and machete technology. Most of these technologies have to be purchased, yet very few farmers have the financial resources to finance such purchases (Adeniji and Joshua, 2008).

Agriculture contributes immensely to the Nigerian economy in various ways, namely, in the provision of food for the increasing population; supply of adequate raw materials (and labour input) to a growing industrial sector; a major source of employment; generation of foreign exchange earnings; and, provision of a market for the products of the industrial sector (Okumadewa, 1997; World Bank, 1998; Winters et al., 1998; FAO, 2006). The agrarian sector has a strong rural base; hence, concern for agriculture and rural development become synonymous, with a common root (Eze et. al., 2010).

Eze et. al. (2010) posit that support for agriculture is widely driven by the public sector, which has established institutional support in form of agricultural research, extension, commodity marketing, input supply, and land use legislation, to fast-track development of agriculture. These are aside the Private sector participation is not limited to local or foreign direct and portfolio investment financing, but also to sponsorship of research and breakthrough on agricultural issues in universities, capacity building for farmers and, most importantly, the provision of financing to farm businesses. International governmental and non-governmental agencies including the World Bank, Food and Agricultural Organization of the United Nations, etc., also contribute through on-farm and off-farm support in form of finance, input supply, strengthening of technical capacity of other support institutions, etc (see, Eze et. al., 2010).

At independence in 1960, Nigeria’s agriculture was characterized by high production achieved by mobilizing small scale farmers, provision of infrastructure (roads, railways) geared towards developing crops required for export, and foundation laid for research and export. After independence, government interventions in agriculture were realized within the framework of development plans and annual budgets. Food was abundant and demand met without resort to import (Okoro and Ujah, 2009).

Using a broad classification, the Central Bank of Nigeria (CBN) and National Bureau of Statistics (NBS) document the import and export agricultural products in the following categories – live animals and animal products; vegetable products; animal and vegetable fats and oil; foodstuff, beverages, spirit and vinegar, tobacco; and raw hides and skins leather, fur skins, and saddler. The agricultural exports of significance include cocoa beans and products, rubber, fish/shrimp, cotton, processed skin, etc (Okoro and Ujah, 2009). These agricultural products account for about 39.7% of the total non‐oil exports in 2007 (CBN, 2007). According to Soludo (2006), agriculture has been growing at about 7% per annum in the last three years and has been driving the non‐oil growth, and will continue to hold the key to growth, employment and poverty reduction.

In terms of value of import vis‐à‐vis export, Nigeria is a huge net‐importer of agricultural products. The import‐export gap has been widening since 1999 and this puts the agricultural policy of the nation to question. This situation, however, provides a unique opportunity for closing up or eliminating this ‘agricultural deficit’ through functional policies and budgets (Okoro and Ujah, 2009).

Approximately 70% of the Nigeria’s population engages in agricultural production at subsistence level, while agricultural holdings are generally small and scattered (FGN, 2008). Smallholder farmers constitute 81% of all farm holdings and their production system is inefficient. Small‐scale (0.1‐5.9 ha), medium scale (6.0‐9.9 ha) and large scale (>10 ha) are the three broad categories of farm holdings in Nigeria, with the small‐scale farm holdings predominating the country’s agriculture and accounting for about 81% of the total farm area and 95% agricultural output (see, Shaib et al., 1997; FMAWR, 2009). The estimated average operational holding is 2 ha per farm family.

Further analysis of the working population data indicates that growth rate of agriculture working population seems to be the driver of the growth rate in total working population. For instance the growth rate of agriculture working population dropped from 3.73% in 2003 to 1.94% in 2007, while that of the total working population dropped from 4.46% in 2003 to 3.25% in 2007 (see, Ujah and Okoro, 2009). The high correlation between growth rates of total working population and agriculture working population seems to suggest that agriculture holds the potential for tackling unemployment in the country at least in the short‐run. Despite the significance of agriculture in the nation’s economy, the sector is clearly the least productive when compared to other sectors (Ujah and Okoro, 2009).

The Agricultural Credit Guarantee Scheme Fund (ACGSF) was formed under the military government in 1977 with an initial capital base of N100 million distributed between the federal government (60% equity) and the Central Bank of Nigeria –CBN (40%). The ACGSF is exclusively managed by a board set up under the supervision of the CBN (management agent). The fund is set up with the sole purpose of providing guarantee in respect of loans granted by any bank for agricultural purposes (Central Bank of Nigeria, 1990). Nwosu et al (2010) noted that the ACGSF was formed solely with the objective of encouraging financial institutions to lend funds to those engaged in agricultural production as well as agro-processing activities with the aim of enhancing export capacity of the nation as well as for local consumption. This is solely exclusive for large scale farming (Somayina, 1981).

The question that comes to mind is whether the declining share of agricultural loan from commercial banks can be traceable to the challenges that encumbered ACGSF. For example, Nwosu et al (2010) identified three major problems associated with the ACGSF scheme, which include increasing incidence of loan defaulters, bank related problems and the inclusion of the term “personal guarantee”. Nwosu et al reiterates that the term is subjective in interpretation especially as the decree forming ACGSF was not able to explain this. Therefore, banks utilize personal judgment and circumstantial framework to interpret this. This will hinder the achievement of the objective of the scheme (see, Nwosu, 2010).

One of the sole objectives for the establishment of the ACGSF is to enhance the export capacity of agricultural produce (Somayina, 1981). The ACGSF is aimed at guaranteeing agricultural outfit that specializes in the following; agricultural outfit engaged in the establishment and management of plantation for cash crop produce like rubber production, oil palm extracting, cocoa plantation etc; agricultural outfit engaged in the cultivation and production of food crops like fruit of all kinds, tubers of yam, cereals and all other food crops and agricultural activities involved in the large scale production of animal husbandries. The vast employment opportunity and the quest towards diversification of the revenue source by the federal government and development agencies have shifted attention towards the informal and the agricultural sector. For example, to sustain the agricultural production in Nigeria, the World Bank developed a project called Agricultural Development Projects (ADPs) which was designed to enhance the production of agricultural outputs in Nigeria.

1.2        Statement of the Problem

Agricultural credit is expected to play a critical role in agricultural development (Duong and Izumida, 2002). Agricultural credit has for long been identified as a major input in the development of the agricultural sector in Nigeria. The decline in the contribution of the sector to the Nigeria economy has been attributed to the lack of a formal national credit policy and paucity of credit institutions, which can assist farmers among other things. The provision of this input is important because credit or loan-able fund (capital) is viewed as more than just another resource such as labour, land, equipment and raw materials. It determines access to all of the resources on which farmers depend (Shephard, 1979). However, agricultural productions have not improved and this lead to the establishment of the Agricultural Credit Guarantee Scheme.

In the course of the fund’s operations, a number of problems have been identified as militating against its smooth performance, which have limited the funds contribution the cash crop, livestock and fisheries agricultural subsectors which have lead to low agricultural productivity in Nigeria. According to Akinleye et al (2005), some of the problems are: increasing incidence of loan defaults, high rate of loan repayment by ACGS beneficiaries, others are: natural disasters, poor farm management, low product prices, loan diversion, deliberate refusal to pay and the inability of farmers to assess loan requirements properly leading to farmers receipt of inadequate or excessive loans; Participatory banks in the ACGS do not cooperate fully in lending to farmers. Because of the high cost of processing loans relative to the actual loans and the high default, rate of the farmers, many banks prefer to pay penalty to risk lending their funds to agriculture.

Also banks fault the farmers for submitting incomplete application forms. In some cases where loans are approved, it arrives too late for it to fulfill the purpose for which it was intended. This delay seems more of administrative than any other. Another problem that militates against the smooth operation of the scheme is on “Personal guarantee” as a security that may be offered to a bank for the purpose of a loan. “Personal guarantee” as a condition was not explained in the decree. This therefore makes it almost nothing as its interpretation rests on the bank officials. Also, the other securities recognized by the decree that could be offered to the bank for the purpose of any loan under the scheme pose problems in the smooth operation of the scheme. The securities are legal title to land, and a life assurance policy. It is a common knowledge that most people especially in the rural areas do not have clear titles to their land which could serve as collateral for loan under the scheme (Okorie, 1998). Finally, the ACGSF has the problem of publicity. Oguoma (2002) noted that there is a low turnout of farmers in most states of the federation in patronizing the scheme because of lack of awareness.

1.3        Objectives of the Study

The general objective of this study is to examine agricultural credit and Nigeria’s economic performance (1981-2015).. The specific objectives therefore include:

  1. To examine the impact of Agricultural Credit on crop output in Nigeria.
  2. To examine the impact of Agricultural Credit on livestock output in Nigeria
  3. To examine the impact of Agricultural Credit on fisheries output in Nigeria
  4. To examine the impact of Agricultural Credit granted on agricultural output and productivity in Nigeria.

1.4        Research Questions

The following research questions guided the study

  1. To what extent does Agricultural Credit to the agricultural cash crop sub sector have a significant impact on crop output in Nigeria?
  2. To what extent does Agricultural Credit to the agricultural livestock crop sub sector have a significant impact on livestock output in Nigeria?
  3. How far does Agricultural Credit to the agricultural fisheries sub sector have a significant impact on fisheries output in Nigeria?
  4. To what extent does Agricultural Credit to the agricultural sub sector have a significant impact on agricultural output in Nigeria?

1.5        Research Hypotheses

As a result of the of the research questions raised above, the hypotheses for this study are:

  1. Agricultural Credit does not have a significant positive impact on cash crop output in Nigeria.
  2. Agricultural Credit does not have a significant positive impact on livestock output in Nigeria.
  3. Agricultural Credit does not have a significant positive impact on fishery output in Nigeria and
  4. Agricultural Credit does not have a significant positive impact on agricultural output in Nigeria.

1.6        Scope of the Study

This research is an empirical analysis on agricultural credit and Nigeria’s economic performance. The research covers the period 1981 to 2015. The Agricultural Credit Guarantee Scheme

Fund (ACGSF) was established by Act 20 of 1977 but started operation in 1978. The principal objective of the Scheme was to facilitate the provision of credit to farmers by providing guarantees to participating banks known as deposit money banks (DMBs) for loans granted to farmers in accordance with the scheme enabling act. Hence, this study on agricultural credit and Nigeria’s economic performance.

1.7        Significance of the Study

This study is bent on contributing to the literatures available in agricultural credit. It will go further in establishing reasons why subsequent research in this area will contribute to the growth and development of emerging markets like Nigeria.

This study will be of immense help to the government. The government is keen on exploring ways by enacting policies that are in consonance with the establishment and promotion of improved Agricultural productivity and output. Hence, the government stands the better position of making sure that the growth of the economy is taken into consideration to better the standard of living of its citizenry.

An advancement of knowledge is achieved when series of research are being carried out in the academic environment. Thereby the scope and horizon of the readers or researchers are widened in order to achieve academic excellence through series of research, development of the intellectual faculty and planning. This also led to the gathering and update in the volume of literature for various field of study that are applicable majorly to finance students.

1.8        Operational Definition of Terms

Agricultural Credit: Credit that facilitates the acquisition and application of state of the art technology and enables such enterprise to be in the driving seat in technology application (World Bank, 2000).

Agricultural Productivity: Increased in agricultural sector contribution to the Gross domestic Product of the nation (Idachaba, 1995)

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Full Project – Agricultural credit and Nigeria’s economic performance