1.1 Background to the Study
Agriculture was and still remains a pervasive and most thriven occupation of mankind from its early form of wild fruits, leaves, roots, snails and insects gathering, fishing and hunting, to its present mechanized and automated form. It has undergone a lot of development. In the same vein, the study of history of economics provides us with ample evidence that agricultural revolution is a fundamental pre-condition for economic development. The agricultural sector has the potentials to be the industrial and economic springboard from which a country development takes-off. It has the potential to shape the landscape, provide environmental benefits such as conservations, guarantee sustainable management of renewable natural resources, preserve biodiversity, increase the nation’s output and contribute to the viability of rural areas development,(Tilman,2002).
The role of agriculture in transforming both the social and economic framework of an economy cannot be over emphasized. Agriculture remain the main stay of the Nigerian economy despites its decline in the 1970s. Greater part of the estimated proportion of the population depends on the agricultural sector for their livelihood especially the rural economy. The major agricultural export commodities in Nigeria include cocoa, coffee, cotton, groundnut, groundnut oil, palm kernel, soya beans, ginger rubber, millet and chili pepper (CBN, 2003). There are other commodities that are being demanded in the world market such as cassava and cassava products, banana, plantain and so on. The Nigerian economy until today is still dependent on primary products both as foreign exchange earner and contributor to gross domestic product (GDP). The continuous production and export of the agricultural products played a dominant role in attracting foreign exchange to boost economic activities from independence to the early 1970s. Obadan (2000), observes that the production of palm oil accounted for 96.4% of total exports earnings while non- oil export products accounted for 97.3% for total export then. He observed further that from the 1970s, the Nigerian economy became mono-cultural, having been transformed from one dependent on fairly diversified portfolio of agricultural products to an economy heavily dependent on crude oil for growth and sustenance. Oyo (1994) observed that the advent of crude petroleum production and related activities especially in the early 1970’s changed radically the structure of Nigeria economy. This has been an intrusion of disruption that juxtapose the place of agricultural sector for oil boom which led to rapid decline in allocations given to agriculture, consequentially affecting the level of output being produced annually. The huge foreign exchange earnings from crude oil export encouraged importation of finished goods to the detriment of domestic manufactured ones, while the agricultural sector was rendered less competitive over time through over-valued currency, inappropriate pricing policies and scarcity of farm labour caused mainly by the migration of youths to urban areas in search of wage employment,(Dethier,2012).
Many factors accounted for low productivity in agriculture in Nigeria. One of these inhibiting factors is that of inadequate credit facilities or finance. The importance of credit to farmers needs not to be over stressed. Among other things, it enables the farmers to adopt new and improved farm practices which will help them achieve both increased output and income. Fund is indeed needed to enable the farmer purchase more land, buy his inputs at the appropriate time and pay for hired labour or farm machinery. Despite this farmers continue to face hardship in the use of credit facilities. Obtaining of credit from financial institutions poses no mean problem to farmers.
One of the credit institutions open to the farmers is the commercial banks. The commercial banks have had a long history of lending to the agricultural sector in the country right from the 1950s and 1960s when they identified themselves with the marketing boards. Today their lending activities to the agricultural sectors have increased significantly both in scope and size. They lend to both the corporate and individual farmers. Perhaps these credits are not easily available for most of the farmers because of collateral and other things that are usually required by the commercial banks and other credit institutions. This makes it possible for most of the farmers in Nigeria to lack the required capital for investment in large scale agriculture, hence the reason for the recent low agricultural productivity.
1.2 Statement of Problem
In the past agricultural activities and foreign trade had driven growth performance of the Nigerian economy. During the pre-independence era, the Nigerian government was able to execute investment projects through earnings from agricultural product exports. In the 1940s and1950s, Nigeria’s agricultural export commodities contributed over 75per cent of the total annual merchandise exports (Ekpo and Egwaikhide 1994; Oyejide 1998; Okoruwa etal., 2003). During this period, agricultural products dominated Nigeria’s non-oil export trade accounting for nearly 70 percent of the value of non-oil exports. Agricultural export commodities such as cocoa, rubber, cotton, palm oil, palm kernel, groundnut and coffee played a prominent role in economic development by providing the needed foreign exchange for capital development projects. Thus, the agricultural export commodities constituted the main export trade basket of the colonial period.
Nevertheless, introduction of petroleum into the nation’s export trade had changed the composition and structure of the export trade. The oil sector, which initially contributed modestly to the economy in the 1960s, became more important in the 1970s and it is now overwhelmingly important to the point of the economy becoming over-dependent on it, providing about 95 per cent of foreign exchange earnings, as well as 65 percent of budgetary revenues (CBN 2010).
Various efforts at promoting investment and export diversification in agricultural sector have not yielded appreciable dividend. The relative share of the agricultural sector in foreign exchange earnings had declined from an average of about 11 percent in the 1970-75sub-periods to average of about 2 percent in the 1991-95 sub-periods (CBN 2003). The efforts to reverse the trend seem to be yielding very limited results, as oil continues to dominate the country’s exports while agricultural exports share of Nigeria’s total exports remained under 5 percent for most years since the introduction of Structural Adjustment Programme (Oni 2007).
Governments have over the decades, initiated numerous policies and programmes aimed at restoring the agricultural sector to its pride of place in the economy. Earlier attempts at improving agricultural production in Nigeria such as the Operation Feed the Nation, the Green Revolution Programme and other laudable interventions in the agricultural sector emphasized increased production without commensurate efforts at post harvest management and industrial utilization. Each programme followed ineffective implementation that creates more problems without achieving anticipated goals. Although, most of the programmes yielded seasonal increases in agricultural output, inefficient and ineffective post-harvest management and generally low level of industrial utilizations have always resulted in substantial agricultural wastages, food losses, reduction in available food, restriction in its spread over the year, and also reduction in employment and rural income.
According to Akinleye (2005), government has further continued to enhance these credit funds. For instance the Agricultural Credit Guarantee Scheme Fund (ACGSF) among other institutions established to increase the flow of credit to farmers has since been enhanced while banks guarantee rate against default payment on loans has been increased to 75 percent from 55 percent. In recent times, the efficacy of the numerous agricultural credit supplies aimed at increasing agricultural output to ensure food security, employment opportunity, increased income for rural farmers as well as raw materials for industrialization has generated different scholarly reactions, hence while Nwosu, Ekpebu and Udeh (2007) posited that agricultural credit responded positively particularly in the early 80’s, Ijaiya and Abdulraheem (2007) argued that there has been a general failure of the credit supplies.
However, since the availability of adequate credit is central to improvement in agricultural production in the economy, the Federal Government of Nigeria prioritized the agricultural sector, and direct the commercial banks through the Central Bank of Nigeria (CBN) to devout a certain percentage of their loanable fund to the sector. Despite this incentive and others, the agricultural sector contribution to the total Gross Domestic Product (GDP) is still very low. The private investment in agriculture in terms of banks’ credits is the least among all economic sectors. Banks are generally reluctant to finance agriculture. For instance, from 2006-2008, the average total annual flow of bank credits to agriculture was only 2.27% of their total credit (Eboh, 2011). However, to enhance an increase in agricultural contribution, farmers have to adopt a capital –intensive strategies and these calls for an additional demand for credit from commercial banks.
The question deducible from the above is:
1.3 Objectives of the Study
The general objective of the study is to investigate the extent to which commercial banks’ credit had supported agricultural output in Nigeria.
However, the specific objectives of the study are as follows:
1.4 Research Questions
1.5 Hypothesis of the Study
Following from the above stated objectives, the following hypothesis are tested in this study.
H0
: Commercial banks credit has no significant impact on agricultural output.H0:
Lending interest rate has no significant impact on agricultural output in Nigeria.H0:
Government spending has no significant impact on agricultural output in Nigeria
1.6 Significance of the Study
Agriculture is expected to make a significant contribution to net foreign exchange earnings to Nigerian economic growth, increase agricultural output both for domestic consumption and exportation which will ultimately lead to favorable balance of payment for the nation. As a result, this study sets to reveal the impacts, important problems and prospects of the agricultural financing by commercial banks and its effect on economic growth in Nigeria. It becomes important to carry out a research on this area of study so as to suggest ways of improving and increasing the contributions of agricultural output to the national output, combating the perceived problems of the peasant farmers, such as, loan procurement, improving the lending ratio of commercial banks and effective credit lending to the benefit of the local farmers.
This study is relevant to government in the sense that it will enable the government in its formulation of policies and programmes directed towards fostering of agricultural outputs, which would bring about more meaningful participation of commercial banks in agricultural financing. It is also beneficial to the farmers because it will enable them to know the share and contribution of agricultural output to the national income (GDP). It is also relevant to the banking industry because it will enable them to know the effectiveness of loans towards agricultural productivity and the investment rate of individuals and corporate bodies into agriculture. Finally, it will serve as a good background for those intending to carry out further research work on related topics.
1.7 Scope and Limitations of the Study
The scope of this work will focus on investigating into the impact of commercial banks’ credit on the agricultural output in Nigeria for the period 1980-2016. The major problem encounteredby the researcher is inconsistency of data. The data as reported by CBN is not consistent with that of federal office of statistics.