The study examined the impact of agricultural financing on output growth in Nigeria between 1981 and 2016. It was established that agricultural finance is the examination and analysis of financial aspects of farm business. An important variant of agricultural finance is agricultural credit which is the amount of investible funds made available for agricultural production from resources outside the farm sector. The study reviewed three theories of output growth namely Harrod-Domar growth model, Solow growth model and endogenous growth model.
The models were estimated via the ordinary least square technique. The findings revealed that; Agricultural credit guarantee scheme fund was the most influential agricultural financing variable; Agricultural credit guarantee scheme fund contributed positively and significantly to real GDP, agricultural output and agricultural value-added in Nigeria within the sampled period; Government spending on agriculture had significant positive impact on agricultural value-added in Nigeria, insignificant positive impact on agricultural output and a weak negative impact on real GDP; Commercial banks loans and advances had insignificant positive impact on real GDP and agricultural value-added in Nigeria, and a weak negative influence on agricultural output.
The study concluded that Nigeria’s agricultural sector has not been adequately financed over the years. The dearth of funds has constrained the agricultural sector to achieve rapid growth of agricultural productivity and national output. The study recommended that; Agricultural financing programmes should exert more commitment in implementing the policy of granting loan by purpose so that those segments of the nation’s agricultural produce that are targeted for improved productivity will be achieved; Government are advised to pay more attention to the agricultural sector by compelling financial institutions to supplement government efforts towards financing agriculture through the disbursement of loans at low interest rate at appropriate time in order to avoid diversion of such loans;Farmers should recognize the practice and advantages of accumulated savings, which is often allowed to group when existing facilities are not fully adjusted. Machinery should be set up to ensure that the loans given to farmers are utilized for right purpose. Farmers caught using the loan for other purposes should be sanctioned; There is need for government to put in place policies that would enhance agricultural commercialization through cooperative system; Government should fight against corruption in the disbursement process of ACGSF and ACGS loans, commercial banks and other agencies in the agricultural sector.
1.1 Background to the Study
Agriculture is imperative in the process of growth and development of an economy. The benefits of agriculture to mankind cannot be undermined. Firstly, agriculture provides food for the ever-increasing populace of Nigeria. Secondly, through rearing of animals, agriculture provides agro-allied products that are highly nutritious for the populace. Thirdly, agriculture is being depended upon by other sectors of the economy for source of raw materials. Fourthly, agriculture has been regarded as the largest employer of labour force in Nigeria (Odu, 2007). Fifthly, agriculture interlinks the subsistent sector with the modern sector to enhance economic growth. These benefits demonstrate that agricultural development is fundamental for industrialization (Ozurumba & Uzomaka, 2011). Okoh (2015) noted that almost 70% of the entire working population in Nigeria is employed in the agricultural sector. Agriculture used to be the linch-pin of the Nigerian economy in the 1950s, 60s and early 70s, whose contribution to the gross domestic product (GDP) was above 50% in these periods. Furthermore, during this era, agriculture generated huge foreign exchange earnings for the economy from exportation of primary products such as rubber, cotton, cocoa, palm oil and groundnut amongst others. The economic fortune of agriculture was shattered as a result of the emergence of crude oil as the country’s major export products. Available statistics from the Central Bank of Nigeria indicated that the contributions of agriculture to GDP fell from 57% in the 1960s to 30% in the 1970s.
The importance of agricultural financing cannot be undermined. Agricultural financing has the capacity to eliminate the financial challenges facing farmers, paves way for adoption of new technologies to spur productivity, promotes economic development through increased income and improved living standards and helps to unveil talents, capacities, prospects and opportunities, which are catalytic elements of sustainable development. The Central Bank of Nigeria (2010) recognized agricultural credit as a veritable source of finance for agricultural development. Agricultural financing can be grouped into two categories namely micro-sources and macro-sources. Micro-source of financing involves accessing credit from commercial banks and other financial institutions. On the other hand, macro-source of financing involves mobilizing capital from government through its rural banking programmes for agricultural development. Access to financing enables massive acquisition of factor inputs for increased productivity. According to Nzotta and Okereke (2009), there is a positive correlation between finance and economic growth, while paucity of finance results in economic retardation. The essence of agricultural financing is the enhancement of agricultural activities and serves as provision of assistance to peasant farmers and other players in the sector. Accessibility to capital is as germane as other factor inputs such as labour and land needed for production. Agbada (2015) noted that the funding challenges faced by the agriculture sector does not emanate from paucity of finance, but rather stems from the unwillingness of financial institutions to grant loans and credit facilities to farmers without necessary collateral requirements. Often times, peasant farmers are incapable to provide collateral requirements needed to access credit facilities, and eventually left with the option of sourcing funds through personal savings, profit and aids from family and friends, thereby drastically hampering agricultural activities.
Inadequate funding of the agriculture sector has been recognized as a leading setback for the agricultural sector in Nigeria (Udoka & Duke, 2016). In attempt to lessen the cumbersomeness of access to credit by farmers, several programmes and policy measures were instituted. Commonest amongst them were Green Revolution, Nigerian Agricultural Cooperative and Rural Development Bank (NARCDB), Nigerian Agricultural Insurance Corporation (NAIC), Agricultural Credit Guarantee Fund Scheme (ACGSF) and National Agricultural and Co-operative Bank (NACB). Majority of these programmes failed to achieve their stated objectives. Ihenacho (2016) asserted that most of agricultural programmes targeted to revamp the agricultural sector were literally inexistent evidenced by the increasing rate of rural poverty and dwindled agricultural productivity. The Agricultural Credit Guarantee Scheme (ACGS) was introduced to resolve the funding challenges faced by peasant farmers in Nigeria. In this scheme, government acts as the middle man between farmers and providers of credit. Government also acts as a guarantor for credit facilities to enable easy access to such facilities and reduce the inherent risk associated in making such facilities available.
Agricultural financing is heavily limited in developing economies as a result of the imperfection and costliness of information in the financial markets (Swinnen, 2005). Farm households in developing countries are heavily constrained to accessing credit from financial markets. Ranjula (2011) posited that about 5% of Nigerian farmers and 15% in Asia and South-America had benefited from formal credit and on the average, only 5% benefitted from 80% of credit in developing countries. Available Statistics from the Central Bank of Nigeria revealed that commercial bank credit equaled N7 million was allotted to the agricultural sector in 1970, rose to N37.4 million in 1974, N462.2 million in 1980 and N1,310.2 million in 1985. Aggregate credit to agricultural sector rose to N4, 221.4 million, depicting 16% of the total credit in the economy, and N25, 278.7 million in 1995, which was 17% of the overall credit available in the economy. Starting from the year 2000, the proportion of credit to agriculture sector increased in absolute terms but decreased on relative grounds. For example, total credit to agriculture rose from N41, 028.9 million, representing 2.46% of total credit in 2005, to N128, 406.0 million in 2010, representing 1.67% of total commercial bank credit to the economy. As at 2013 and 2014, the share of agriculture credit in total commercial bank credit fell were 3.9% and 3.7% respectively.
Although, agriculture credit has been increasing in absolute terms over the years, but its share in total credit to the economy is negligible. This analysis symbolizes disregard and relegation of the sector. However, agricultural financing is pivotal to agricultural development and economic growth, and has been among the policy thrusts of successive government. The Federal Government of Nigeria has instructed financial institutions to make loans and credits available for the sector. Despite the enormous investment in the agricultural sector via provision of loans to farmers, agricultural sector is still performing below expectation, evident by its low share in national output and massive importation of food products.
1.2 Statement of Problem
Nigeria is blessed with vast arable land for cultivation, mineral, natural and human resources and a favorable climate that supports agricultural production, but it is disheartening that agricultural sector in Nigeria is far from development. Poor funding or inadequate financing has been identified as one of the principal challenges facing farmers and agro-allied entrepreneurs in Nigeria (Agbada, 2015; Agunuwa, Inaya & Proso, 2015). The rigidity and cumbersomeness of agricultural financing in Nigeria is largely connected to the unwillingness of financial institutions to grant loans to farmers as they are perceived as financially incapable to repay the loans. Credit providers in Nigeria prefer to disburse their funds to other viable sectors of the economy such as commerce and industry where there is higher profitability. Often times, it has also been reported that farmers find it extremely difficult to meet the collateral requirements for obtaining loans from financial institutions and this has made financial institutions to conceive agriculture as a risky sector (Ojeigbe & Duruechi, 2015).
Nwankwo (2013) noted that although the agricultural credit guarantee scheme was instituted to make commercial banks provide loans to farmers, with the government acting as a guarantor in order to reduce possible risks in lending, the scheme has not fully achieved its goals due to the fact that agriculture is a labour and capital-intensive venture that requires enormous capital base. Udoka and Duke (2016) remarked that the other challenges of agricultural financing include channeling loans by farmers meant for agricultural projects to personal activities, outrageous rate of interest charged on loans, incapacity of farmers to meet the collateral requirements of financial institutions, unnecessary politicking and nepotism involved in disbursement of loans and non-readiness of the government to revamp the agricultural sector.
Okoh (2015) further commented that the share of government expenditure on agriculture to total expenditure is less than 6%. The insufficiency of finance to fund agricultural projects subsequently led to the failure of the agricultural sector evident by the increasing importation of food commodities, acute food shortage, high price of food, importation of factor inputs and low share of agriculture in national output. These adverse outcomes consequently contributed to the escalating rate of unemployment and inflation and poor standard of living. This largely showed that the efforts of the government to restructure the agricultural sector have not paid off.
1.3 Objectives of the Study
The broad objective of the study is to examine the impact of agricultural financing (commercial banks loans and advances to agriculture, Agricultural Credit Guarantee Scheme Fund and government expenditure on agriculture) on output growth in Nigeria. The co-objectives are
- To examine the impact of agricultural financing on agricultural output in Nigeria.
- To assess the impact of agricultural financing on agricultural value-added in Nigeria.
1.4 Research Questions
Based on the research questions, the study attempts to provide the following research questions:
- To what extent has agricultural financing enhanced output growth Nigeria?
- To what extent has agricultural financing promoted agricultural output in Nigeria?
- To what extent has agricultural financing aided agricultural value-added in Nigeria?
1.5 Research Hypotheses
In tandem with the research objectives and questions, the following hypotheses are stated in order to be able to make valid conclusions:
- H01: Agricultural financing has no significant impact on output growth in Nigeria.
- H02: Agricultural financing has no significant impact on agricultural output in Nigeria.
- H03: Agricultural financing has no significant impact on agricultural value-added in Nigeria.
1.6 Justification for the Study
Agriculture finance and the total output today is expected to generate and make a significant positive change to the net foreign exchange earnings of the Nigerian economy. This is not so due to shortage of funding for the sector. Farmers have nothing attractive and acceptable to offer as security. The land and building which they are using is probably owned by the community or is obtained from rentage. Majority of these farmers are semi-educated and lack required knowledge of the schemes and efforts towards agricultural development. The farmers lacked courage to demand for credits as well as the desire to approach the bank for financial assistance. Loan diversion is another challenge of agricultural financing. At times, loans given to farmers are not used for agricultural projects; rather they are invested on other purposes. It has been on record that many farmers who were fortunate to secure loans meant for agriculture used them to build houses and buy cars. Some used theirs to marry more wives, acquire chieftaincy tiles and send their kids abroad. Another problem is loan default by farmers, which is popular in Nigeria and other developing countries. The Food and Agriculture Organization (FAO) in 1994 observed that the inability of farmers to repay loan is connected to the imperfection of the credit delivery system and some institutional factors such as poor managerial skill, poor sale of agricultural products, low level of technology, natural disaster and unnecessary rapid inflexible repayment arrangement.
My major aim in doing this project is to broaden our view over the concept finance of the agro sector and to shade light on the total output of the sector and if it has been able to grow over the years.
Has efforts been made to the gaps in agricultural sectors and has researchers develop integrated research assessment approaches?
Has financial aid from the government and other private organization been able to develop the sector that it can compete with foreign countries and has the sector been able to produce more than enough output for the ever growing population?
These are key questions that must be answered and I intend to be able to provide needed information on this.
1.7 Scope of the Study
The time frame of the study ranged from 1981 to 2016. The study basically covered the Pre-Structural Adjustment Programme (SAP); Structural Adjustment Programme (SAP) era and Post-SAP era. The choice of the time period encapsulates the period when SAP was adopted in Nigeria. Among the major objectives of SAP was to enlarge the productive base of the country, diversify the economy and reduce overdependence on oil. The tenets of SAP advocate the need for the Nigerian economy to generate revenue and foreign exchange from non-oil sources in a view of enhancing economic growth devoid of inflationary pressures. Although, many scholars believed that SAP had no economic benefits for the Nigerian economy, nevertheless, it is imperative to determine the extent to which Nigerian agriculture sector (a critical non-oil sector) has been financed between 1981 and 2016.