THE IMPACT OF FINANCE ON AGRICULTURAL OUTPUT IN NIGERIA 1981-2018
The study examined the impact of Finance on agricultural output in Nigeria. The study makes used of the Error Correction Model (ECM).
A preliminary test for descriptive statistics (JarqueBera statistic (JB)) was used to test the normality of the variables, and test for unit root and co integration using the Augmented Dickey – Fuller (ADF) and Johansen co integration was used to test for long run relationship of the variables.
The JarqueBera statistic (JB) indicate that most of the variables are normally distributed, by the probability value of the JarqueBera (JB) statistics which for all are statistically different from zero at 0.05 level of significance; the results of the unit root test indicated that all the variables employed in the study were free from unit root tangle at first difference and the co integration test indicated that there exists a long run equilibrium relationships among the variables specified in the model; the results of the Error Correction Model (ECM) indicated that there exist a direct and significant relationship between agricultural credit guarantee scheme fund and agricultural gross domestic product; also, commercial bank credit was established to have indirect effect on agricultural gross domestic product while government expenditure agriculture has positive effect on agricultural gross domestic product; Finally, gross capital formation was found to have positive effect on agricultural gross domestic product.
The study concludes that, in setting fiscal targets for government priority should be placed on agricultural sector in order to increase agricultural sector productivity and the sector contribution to gross domestic product.
To this end, the study suggested amongst others that;the proportion of government capital expenditure to agricultural sector should be increase; there should be high degree of transparency and accountability of government spending in various sectors of the economy; Policies aimed at encouraging commercial banks to lend to agricultural sector should be formulated and implemented by government and regulatory authorities; effective agricultural schemes and programs should be established; And massive investment on infrastructural facilities in the rural areas should be embarked on by the government.
1.1 BACKGROUND TO THE STUDY
1.2 BACKGROUND OF THE STUDY
1.3 STATEMENT OF THE PROBLEM
1.4 RESEARCH QUESTIONS
1.5 OBJECTIVE OF THE STUDY
1.7 SIGNIFICANCE OF THE STUDY
1.10 DEFINITIONS OF TERMS
2.1 Conceptual Review
2.1.1 Concept of Agricultural Financing
2.1.2 Concept of Economic Growth
2.2 Theoretical Review
2.2.1 Harrod-Domar Model
2.2.2 Solow Model of Growth
2.2.3 Endogenous Growth Model
2.3 Empirical Review
3.2 Theoretical Framework
3.3 Model Specification
3.4 Sources of Data
3.5 Estimation Technique
DATA ANALYSIS AND INTERPRETATION OF RESULTS
4.1 DESCRIPTIVE STATISTICS
4.2 CORRELATION MATRIX
4.3 TEST OF STATIONARITY FOR THE VARIABLES
4.4 THE TEST FOR CO-INTEGRATION RESULT FOR THE MODEL
4.5 Interpretation of Model Results
4.5.1 Test of Goodness of Fit
4.5.2 The Durbin Watson Statistic
4.5.3 Test of Overall Significance
4.6.5 Post Test Techniques
4.7 DISCUSSION AND IMPLICATION OF THE FINDINGS
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
1.1 BACKGROUND TO THE STUDY
The agricultural sector used to be the mainstay of the Nigerian economy in the 1960s and early 1970s. During this period, the sector had the highest contribution to gross domestic product(GDP) and export earnings. The discovery of crude oil in the mid1970s led to the neglect of the agricultural sector. Since 1980s, its contribution to GDP and foreign exchange dropped drastically. The sharp decline in the performance of the agricultural sector resulted to the introduction and implementation of various agricultural financing schemes in Nigeria. According to Olorunsola and Bassey (2017), the notable agricultural financing schemes in Nigeria include:
Nigerian Agricultural Cooperative and Rural Development Bank (NACRDB): This is the foremost development finance institution in Nigeria. The bank is a limited liability company owned by the Federal Government of Nigeria in which 60% of the shares are secured by the Federal Ministry of Finance while the Central Bank of Nigeria owns the remaining 40%. The primary function of NACRDB is to finance agriculture as well as small and medium enterprises since majority of agricultural enterprises in Nigeria are small. The NACRDB accepts deposits, offers loans and advances, to provide microfinance services and positions itself as the gateway for investors in agricultural sector in Nigeria (Ozurumba&Uzomaka, 2011).
Nigerian Agricultural Insurance Corporation (NAIC): This scheme was introduced in 1977 at the time the need for financing agricultural development in Nigeria required a specialized agricultural insurance company to provide insurance company to provide insurance cover for farmers. The idea was informed by government’s concern over the vacuum created due to the unwillingness of conventional insurance company to cover agricultural activities, which they considered as risky. The NAIC was established specifically to provide insurance cover for framers against natural disasters and other risks associated with agricultural production.
Refinancing and Rediscounting Facility: This scheme was developed by the Central Bank. The motive of the scheme is to support agricultural exports. This facility is available to assist commercial banks to provide short-term finance in local currency at preferential interest rates in support of exports of produced goods. According to the Central Bank of Nigeria, the objectives of the facility are to encourage medium and long-term bank lending to the productive sectors of the economy in order to diversify the nation’s production base, to reverse the trend where short-term credits to general commerce and trade dominates domestic lending and to encourage a high ratio of aggregate credits to the real sector for growth and development.
N200 billion Commercial Agriculture Credit Scheme (CACS): This scheme kicked off in 2009. It focused on financing large projects in the value chain of the agricultural sector.
Agricultural Credit Guarantee Scheme Fund (ACGSF): This scheme was established to encourage the flow of credit to the agricultural sector by making guarantees available to commercial banks. The banks supplemented the scheme with an operation of interest drawback program in the payment of interest rebate of 40% to farmers that make timely repayment.
Agricultural Credit Support Scheme (ACSS): The motive of this scheme is to provide credits at a fixed rate of interest in which recipient have the privilege of a certain percentage of the interest being refunded to when the loan is repaid on scheduled.
Since 2006, the commercial banks have the main supplier of credit to the agricultural sector (Olorunsola& Bassey, 2017). Commercial bank credit to the agricultural sector rose from N48.6 billion to N1, 870.6 billion in 2006. This increment indicates a growth of more than 3000%. In the same period, loans guaranteed under the Agricultural Credit Guarantee Scheme (ACGSF) rose from N9.37 billion in 2005 to N10.86 billion in 2015, representing a growth of 16% within the period (Central Bank of Nigeria, 2016).
Agriculture in Nigeria is one of the main sources of income to more than 40 percent of its populates. The sector is the most dominant in the Nigerian economy today and the main source of livelihood for the majority of her population. It forms the basic source of employment in the country creating employment opportunity for large number of people in the country, provision of food to the increasing population, provision of raw materials for the industrial sector, increasing foreign exchange, agricultural sector has been seemingly if not totally neglected with the discovery of oil. This is evident in the sharp decline in the contribution of agricultural sector to the gross domestic product (GDP) from 64% in 1960 to 35% in 1988 and presently, the agricultural sector in Nigeria contributes less than 30% to GDP, with crop production accounting for an estimated 85% of this total, livestock 10% with forestry and fisheries contributing the remaining 5% the inability of this sector to expand and as well contribute meaningfully to the growth of Nigeria economy is due to inadequate financing and this has brought up few challenges such as; Reduction in the food production in the country Reduction in employment level Pollution of the soil from petroleum production.
The role of financial capital as a factor of production to facilitate economic growth and development as well as the need to channel this funds to rural areas for economic development of the poor rural farmers cannot be over emphasized. Agricultural funding in Nigeria which is controlled by the ACGSF provides funding to farmers to aid them in the acquisition of basic farming tools and seeds needed for planting, this funding has reduced due to the fact that amount that is now budgeted to the agricultural sector has dramatically declined over the years cause of problems such as; Infertility of the soil, Corrupt government official, Reduction in oil price in the world market.
1.2 BACKGROUND OF THE STUDY
Agricultural credit to farmers in Nigeria has been a major constrain to the growth of the sector as a whole. It has reduced the capability of the farm land owners, farmers to be able to carry out their own role in the growth of the economy due to lack of credit availability to them, which has in turn reduced the production level, reduction of employment and increase in the unemployed market.
As part of its developmental role, the Central Bank of Nigeria (CBN) in collaboration with the Federal Ministry of Agriculture and Water Resources (FMA&WR) established the Commercial Agriculture Credit Scheme (CACS) in 2009 to provide finance for the country’s agricultural value chain (production, processing, storage and marketing). Increased production arising from the intervention would moderate inflationary pressures and assist the Bank to achieve its goal of price stability in the country. The primary objectives of the Scheme are to:
I. Fast-track the development of the agricultural sector of the Nigerian economy by providing credit facilities to large-scale commercial farmers at a single digit interest rate
II. Enhance national food security by increasing food supply and effecting lower agricultural produce and products prices, thereby promoting low food inflation
The federal government also establishedAgricultural Credit Guarantee Scheme Fund (ACGSF)ACGSF was established by Decree No. 20 of 1977, and started operations in April, 1978. Its original share capital and paid-up capital were N100 million and N85.6 million, respectively. The Federal Government holds 60% and the Central Bank of Nigeria, 40% of the shares. The capital base of the Scheme was increased to N3 billion in March, 2001. The Fund guarantees credit facilities extended to farmers by banks up to 75% of the amount in default net of any security realized. The Fund is managed by the Central Bank of Nigeria which run the day to day activities of this scheme.
Agricultural finance and been declining for the past decades which as affected the total output of the country dramatically, leading to importation of agricultural productions which is in turn a leakage for the country.
According to (tradeeconomics.com) GDP from agriculture in Nigeriadecreased to 4859436.87 Naira Million in the fourth quarter of 2017 from5189365.99 Naira Million in the third quarter of 2017. GDP from agriculture in Nigeria average 3771185.70 Naira Million from 2010 until 2017, reaching an all-time high of 5189365.99 Naira Million in the third quarter of 2017 and a record low of 2594759.86 Naira Million in the first quarter of 2010
1.3 STATEMENT OF THE PROBLEM
Agricultural financing has faced serious challenges in Nigeria. This is due to the fact that agricultural lending is considered risky, unprofitable and less viable compared to other sectors (Agunuwa, Inaya&Proso, 2015). Thus, government, commercial banks, development banks and investors have little interest in agricultural financing. The Nigerian agricultural sector which predominantly consists of peasant farmers depend more on informal sources of fund. These includes personal savings, financial assistance from friends and family members, co-operatives, community development associations, thrift associations (Akinleye, Akanni&Oladoja, 2013). The informal sources of finance cannot meet the credit needs of farmers adequately. In an attempt to enhance the credit needs of farmers adequately, government established the Nigerian Agricultural Cooperative Bank (NACB), which was later renamed the Nigerian Agricultural Cooperative and Rural Development Bank (NACDRB) in 1973 (Nwankwo, 2013). The challenge of poor financing was not adequately resolved following the establishment of NARCB. This emanated from the fact that the budgetary allocation of NACRDB was not enough to meet the credit needs of the agricultural sector (Akinleye, Akanni&Oladoja, 2013).In an attempt to address this issue, the government established the Agricultural Credit Guarantee Scheme (ACGS) in 1977 to encourage commercial banks to increase credit supply to the agricultural sector by providing guarantees against inherent risk in agricultural lending (Agunuwa, Inaya&Proso, 2015).
Despite the establishment of Agricultural Credit Guarantee Scheme (ACGS) many years ago, the agricultural sector is still poorly funded, effect of this include;
i. Hunger and poverty: when there’s lack of funding the agricultural sector this reduce the productivity of the sector and therefore leading to hunger in the nation and poverty due to lack of food and no income for farmers since they can’t access to funding to buy agricultural input.
ii. Unemployment; unemployment cant spring up from lack of agricultural funding, because farmers no longer have the resource to continue with agricultural production, leading to increasing the ratiounemployment in the nation, leading to more pressure on the government of provide for more unemployed
It is paradoxical to state that inspite of the country’s rich diversification in mineral and natural resources, Nigeria still depend heavily on massive importation of basic food items and industrial raw materials.
The rate of growth of the economy with agriculture in Nigeria has been very low because only few Nigerians are interested in farming.
Diversifying the economy fully to agriculture from oil in Nigeria is not working as the government has tried that so many times to the extent of giving free lands and loans to the interested Nigerians but it was to no avail because every Nigerians are interested in oil sectors and not agricultural sector.
The contribution of agricultural to output is substantial but is atverylow level, this is because the impact of the agricultural is not always felt compare to oil in Nigeria economy.
The sectors output has also been a major problem in the economy, and it has been reducing over the years due to large importation of production which leads to neglecting the improvement of the sector.
1.4 RESEARCH QUESTIONS
i. Does agricultural financing have effect on the growth rate of productivity in Nigeria.
ii. How has credit to agricultural sector affected the growth of agricultural output.
iii. How has credit to agricultural sector affected the economic growth in Nigeria.
1.5 OBJECTIVE OF THE STUDY
The objective of this study is to ascertain the rate at which the agricultural sector is being financed and the volume of output from the sector and also to determine is this credits are helping the farmers in aiding them increasing the total output of the country, and also know how financing has help to improve the total output produced. Other objectives include;
i. To determine the effect of agricultural financing on growth rate of productivity.
ii. To know how credit to agricultural sector affect the growth of agricultural output.
iii. To know how credit to agricultural sector affect economic growth in Nigeria.
1.7 SIGNIFICANCE OF 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, this are key questions that must be answered and I intend to be able to provide needed information on this.
1.10 DEFINITIONS OF TERMS
Gross domestic product (GDP) is the estimation of all formally perceived last merchandise and administrations created inside a nation in a year, or other given time of time. GDP for every capital is regularly viewed as a pointer of a nation’s expectation for everyday life.
Agricultural Credit Guarantee Scheme Fund (ACGSF)was established by Decree No. 20 of 1977, and started operations in April, 1978. Its original share capital and paid-up capital were N100 million and N85.6 million, respectively. The Federal Government holds 60% and the Central Bank of Nigeria, 40% of the shares. The capital base of the Scheme was increased to N3 billion in March, 2001. The Fund guarantees credit facilities extended to farmers by banks up to 75% of the amount in default net of any security realized. The Fund is managed by the Central Bank of Nigeria, which handles the day-to-day operations of the Scheme
Commercial Agricultural Credit Scheme (CACS) this facility was established by the CBN and federal ministry of agriculture to fast track the development of the agricultural sector in Nigeria by giving loans to businesses.
CBN: Central Bank of Nigeria (CBN) established by the CBN Act of 1958 and commenced operations on July 1, 1959. The major regulatory objectives of the bank as stated in the CBN Act are to: maintain the external reserves of the country, promote monetary stability and a sound financial environment, and to act as a banker of last resort and financial adviser to the federal government
⦁ Andrew O Agbada. (2015): Agricultural financing and optimizing output for sustainable economic development in Nigeria
⦁ Obansa S.A.J, (2013): Agricultural financing and economic growth in Nigeria
⦁ Nwankwo Odi Ph.D. (2013): Agricultural financing in Nigeria an empirical study of Nigerian agricultural cooperative..