BANKS CREDIT AND AGRICULTURAL SECTOR OUTPUT IN

NIGERIA: AN EMPIRICAL ANALYSIS

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DEPARTMENT OF FINANCIAL MANAGEMENT TECHNOLOGY

SCHOOL OF MANAGEMENT TECHNOLOGY
 ABSTRACT

This study investigated the impact of bank credit on agricultural sector

output in Nigeria for the period 2000-2015. The study was motivated by
the existing evidence of low output of the agricultural sector, which
inadequate financing may be one of the causal factors. In carrying out
the work, a multiple regression model which use Commercial banks
credit and ACGS of the CBN as explanatory variables using interest rate
as a moderating variable, while Agricultural GDP proxied agricultural
sector output. The result of the analysis shows that CBC and ACGS
credits have significant positive effects while that of BOA is positive but
not significant. On the other hand, the effect of interest rate is positive
but not significant. The study concluded that though bank credit has
made significant positive impact on agricultural output in Nigeria, but
more positive impacts need to be made by the banking sector. To this
extent the study recommended for increase awareness of farmers on
BOA activities.

Keywords: Banks; credit; agricultural output.

 TABLE OF CONTENTS
CERTIFICATION
DEDICATION
ACKNOWLEDGEMENTS
ABSTRACT
CHAPTER ONE: INTRODUCTION
1.1 BACKGROUND OF THE STUDY
1.2 STATEMENT OF THE RESEARCH PROBLEM
1.3 AIM AND OBJECTIVES OF THE STUDY
1.4 RESEARCH HYPOTHESES
1.5 SIGNIFICANCE OF STUDY
1.6 SCOPE AND LIMITATION OF THE STUDY
CHAPTER TWO: LITERATURE REVIEW
2.1 CONCEPTUAL FRAMEWORK
2.1.1 The Concept of Bank Credit
2.1.2 Nigeria’s Agricultural Credit Policy
2.1.3 Agricultural Productivity among Beneficiaries and Non –Beneficiaries of
Credit
2.1.4 Socio-Economic Characteristics of Farmers in Nigeria.
2.1.5 Problems of Bank Credit Acquisition for Agriculture
2.2 THEORETICAL FRAMEWORK
2.3 EMPIRICAL LITERATURE
2.3.1 Financing Agriculture in Nigeria
2.3.2 Sources of Agricultural Financing
2.3.3 Effect of Commercial Bank Credit on Agricultural Output
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 RESEARCH DESIGN
3.2 SOURCES OF DATA
3.3 DATA COLLECTION
3.4 PROCEDURE DATA ESTIMATION
3.5 MODEL SPECIFICATION
CHAPTER FOUR: RESULTS AND DISCUSSIONS
4.1 INTRODUCTION
4.2 PRESENTATION OF DATA
4.3 TESTING OF HYPOTHESES
4.3.1 The influence of banks credit on agricultural sector development in Nigeria.
4.3.2 Test of Model Significance - ANOVA
4.3.3 Test of Significance of the Explanatory Variables - T-tests
4.4 DISCUSSION OF RESULTS
4.4.1 Analysis of Results of the Model
CHAPTER FIVE: CONCLUSION AND RECOMMENDATION
5.1 SUMMARY OF FINDINGS
5.2 CONCLUSION
5.3 RECOMMENDATIONS
REFERENCES
 CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Qureshi, Akhtar and Shan (1996) have argued that Banks’ credit has the
capacity to remove the financial constraints faced by farmers, as it provides
incentives to enable farmers to switch quickly to new technologies which can
enhance the achievement of rapid productivity and growth.

Ijere (1996) viewed banks’ credit as a catalyst that can activate the engine of
growth enabling it to mobilize its inherent potentials and to advance in the
planned or expected direction.

Banks’ credit has a significant contribution to economic development by

enhancing production and productivity and thus higher income and better
quality of life to the people (Well, 1970).

According to CBN (2000), Nigeria is endowed with huge expanse of fertile

land, rivers, streams, lakes, forests and grasslands, as well as a large active
population that can sustain highly productive and profitable agricultural
sector which can ensure self-sufficiency in food and raw materials for the
industrial sector and as well provide gainful employment for the teeming
population and generate foreign exchange for the economy.

In support of Ijere’s view, Umoh (2003) maintained that banks’ credit

constitutes the power or key to unlock latent talents, abilities, visions and
opportunities, which in turn act as the mover of economic development.

The performance of the agricultural sector in Nigeria, as in most other

developing countries is low. According to Oliseh (1990) the problem of
productivity in agriculture is majorly the unavailability of credit to farmers,
which would have enhanced production.
This is as a result of inaccessibility to credit facilities by small-scale farmers,
who form the bulk of farmers in the country. The Cross River State
government has over the years had as a policy thrust financial intermediation
in agriculture. This has given rise to medium and soft loans, subsidies, grants,
etc. to farmers in the state, to aid farmers boost agricultural production (C.R.S
News Bulletin, 2005). But the result of these financial intermediations is poor
as agricultural production in the state is still marked by low output.

How can farmers avail themselves of agricultural credit to facilitate taking

advantage of developing entrepreneurship in farming? Nwanna (2002) noted
non-provision of financial services as one of the major constraints to small-
scale enterprise development, particularly to increasing investment,
production activities, etc.

Where financial institutions are found, there are always remotely located to
the rural/small-scale farmers. The extension of credit facilities to farmers can
only be done on provision of adequate and acceptable security. Farmers are
constrained using their farmlands as security, because the land does not
belong to a single individual, by the nature of land tenure system practiced,
but by the whole community.

Repayment patterns by previous beneficiaries constitute another problem to

credit acquisition. Problems of credit repayment are rampant among
individual smallholder borrowers. This situation is exacerbated by the fact
that government policies often exempt small credits from collateral (Arene,
1992). Low credit acquisition by farmers can also be attributable to high
interest rate. Berger (1989) noted that high interest rate charged by formal
and informal sources of finance scare farmers. A good lending policy of
government is that which is capable of giving sufficient credit for the need of
farmers and at affordable rates, for increased agricultural production. High
interest rates often make farmers to divert credit to other non-agricultural
uses, which they believe would give quick returns to investment.
Red-tapism in acquiring credit discourages small-scale farmers. Credit
application forms are expected to pass through many tables and stages before
final approval is given.

Farmers are expected to provide guarantors, tax clearance receipts, passports

initial deposit, etc., as well as the inspection of the security and claims by the
credit officer, before the form is finally sent to the headquarters for approval.
The process is rather cumbersome to the rural farmers, who may not be
patient enough to wait for all these stages.

Repayment when due or non-repayment as a whole, causes lenders net

returns to be low, hence affecting institutional growth, which often causes
financial distress of such institutions. The result is that further credit
disbursement to these institutions becomes discouraging.

Many research works have been carried out over the years about credit and
farmers:

Eneh (1996) worked on credit use, access and repayment. Credit needs,
sources and uses was done by Ozougwu (2001), Ochai (2003) studied loan
repayment and technical aid among farmers, etc. in all these works and many
others related to this research problem, the aspect of how credit can be
obtained and used efficiently, so that agreed repayment can be met for
increased agricultural production, is either omitted or poorly stressed. The
research study is prompted by these gaps, which it hopes to fill.

Several factors have been blamed for the poor performance of the agricultural
sector in Nigeria; these include virtual neglect of the sector, poor access to
modern inputs and technology, and lack of optimum credit supply (Enyim,
Ewno and Okoro, 2013).

Aside the problem of poor access to modern technology, the major bane of
agricultural development in Nigeria is low investment finance (Salami and
Arawomo, 2013).

According to Udih (2014) Bank credit is expected to impact positively on the

investible sectors of the economy through improved agricultural production
of goods and services. He opined that sufficient financing of agricultural
projects will not only promote food security, but also enhance the
entrepreneurship performance of our young investors. Concluding that, this is
borne out of the expectation that a good match between adequate bank credit
and agricultural entrepreneurship will ensure massive agricultural
productivity.

However, from available statistics of commercial banks total sectoral credit

distribution in Nigeria, the allocation to the agricultural sector, given the
importance of the sector, is insignificant. For instance, credit allocation to the
sector fluctuated between 6.98% and 10.66% in 1981 to 1985; between
10.66% and 16.15% in 1985 to 1990; between 16.15% and 17.5% in 1990 to
1995. It declined sharply to 8.07% in 2000, 2.46% in 2005, 1.67% in 2010,
and fluctuated between 1.67% and 3.44% in 2010 to 2013 (CBN, 2017).

1.2 STATEMENT OF THE RESEARCH PROBLEM

Nigeria, like most other countries in the African continent is not only,
endowed with vast agricultural farmland, but also conducive geographical
condition that favours agricultural production throughout the year. Despite
this great potential, there is not much to show for it (Salami & Arawomo,
2013).

Over the years, there have been efforts by various governments to diversify
the economy. Policies have been initiated, committees set up but the
seemingly good initiatives have been marred by little commitment from
government. For the agricultural sector, successive governments have made
serious efforts at making good agricultural policies through schemes,
programmes and institutions, they however, have not been able to back them
up with adequate budgetary allocation and financing coupled with corruption
in the execution of the policies.

Agricultural Credit Guarantee Scheme Fund is one of the laudable

programmes put in place by the Federal Government of Nigeria to boost
agricultural production, generate revenue for the farmers, alleviate poverty
and earn foreign exchange for the country. It is also aimed at ensuring food
security, rural transportation and improved nutritional health profile of the
citizens (ACGSF, 2005).

As observed by Okon and Nkang (2009), the ACGSF is founded on the credit
guarantee principle, designed to overcome the reluctance exhibited by
financial institutions towards lending to the disadvantaged borrowers
targeted by the scheme. Formal financial institutions are averse to lending to
these groups of people because of stagnant agricultural markets, high
production risk and perceived low profitability of farming, lack of collateral,
and their poor financial recording systems (FAO, 2006). Credit guarantees are
aimed at stimulating lending to credit-worthy borrowers with feasible
projects, who however lack sufficient assets to offer as collaterals (Reichmuth,
1997). Guarantee schemes, leverage additional funds or “additionality” from
the financial system because lenders make loans that otherwise would not
have been made (Hollinger, 2004).

Several studies in this area including Enyim, Ewno and Okoro (2013), have
identified poor credit supply as one of the factors accounting for the poor
performance of the agricultural sector in Nigeria. According to Obilor (2013),
banks precisely the commercial banks, obviously have no kin interest in
agricultural finance. In order to encourage the banks, the government
established the Agricultural Credit Guarantee Scheme (ACGS) to provide
guarantees against inherent risk in agricultural lending. This measure could
not achieve the intended objectives because agriculture being both labour and
capital intensive venture requires huge capital outlay (Nwankwo, 2013).

Consequently, the country with it highly diversified agro-econological

condition is relying on massive importation of basic food items and raw
materials for industrial imputs (Itodo, Apeh and Adeshima, 2013). The
resultant effect of the high cost of living, coupled with high level of
unemployment on the common man is beyond reasonable imagination.
Obviously, the government’s effort to fortify the Nigeria agricultural sector
has not yielded the desired result (Udensi, Orebiyi, Ohajianya and Eze, 2012).
Thus, the need for further investigation in this area cannot be
overemphasized.

Have the ACGSF impacted on the availability of formal credit for agricultural
production in Nigeria?

1.3 AIM AND OBJECTIVES OF THE STUDY

The aim of this study is to analyse the impact of banks credit on agricultural
sector output in Nigeria. It can be subsumed under the following specific
objectives:

a) To identify the effect of Commercial Banks Credit on agricultural output

in Nigeria;

b) To evaluate the impact of Bank of agriculture credit on agricultural

Development in Nigeria;

c) To examine the impact of Agricultural Credit Guarantee Scheme Fund of

Central Bank of Nigeria on agricultural output in Nigeria;

d) To determine the influence of interest rate for commercial banks’ credit

on agricultural output in Nigeria.

1.4 RESEARCH HYPOTHESES

This study tested the following hypotheses:

Ho1; Commercial banks’ credit for agriculture have not impacted significantly
on agricultural sector development in Nigeria

Ho2; Bank of Agriculture credit for agriculture has no significant impact on

agricultural development in Nigeria;

Ho3; Credit for agriculture through the Agricultural Credit Guarantee of CBN
has not had significant positive impact on agricultural output in Nigeria
Ho4; Interest rate on commercial banks’ credit does not have significant
influence on agricultural output in Nigeria.

1.5 SIGNIFICANCE OF STUDY

The concern of credit facilities as a factor input has been amplified by

different experts and government itself has the potentials of opening new
doors of opportunities in the development of small-scale farming in Nigeria.
There are few studies on the subject of agricultural credit and how their socio-
economic characteristics influence their decision about whether or not to take
credit. The development of the sector is not feasible if an avenue of credit
facilities is not provided. Therefore, this research work is directed at
providing more recent and updated facts into this less studied dimension in
agriculture by eliciting and analyzing the relationship between banks credit
and agriculture in Nigeria. It will provide insight into monetary policy
measures as an instrument of economic stabilization and will therefore be of
valuable use to students, researchers, lecturers, institutions and government.

1.6 SCOPE AND LIMITATION OF THE STUDY

The empirical analysis and estimation will cover the period between 2000 and
2015. However, this work cannot cover all the facts that make up the financial
sector, but will look at the Commercial banks’ funds, Bank of Agriculture, and
Agricultural Credit Guarantee Scheme Funds being used by the agricultural
sector for productivity and stabilization of the economy. The economy is a
large component with lot of diverse and sometimes complex parts; this
research work will look at the agricultural sector output of Nigeria and how it
has been influenced by the financial sector.
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