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The Impact of Bank Financing on Agricultural Output – Evidence from Nigeria

Impact of bank financing on agricultural output project materials to download:-evidence from Nigeria

CHAPTER ONE
INTRODUCTION

1.1   BACKGROUND OF THE STUDY

Finance for agricultural development has an increasing role in contemporary times. According to Nzotta and Okereke (2009), finance affects economic growth, stagnation or even decline in any economic system. However, a growing concern has developed over time regarding the need for effective access to credit facilities for farming purposes. The Nigerian government recognises that finance is an essential tool for promoting agricultural development because the agriculture sector is one of its main sources of sustainability. Access to finance for agriculture is an incentive for increasing the agricultural sector‟s performance; it stimulates productive growth, and supports the survival of small and new enterprises. Adams and Mortimore (1997) note that access to finance increases the average inputs of labour and capital which has positive effects on production output. Irrespective of the benefits that can be derived from financing agriculture, there is an inherent risk of loan defaults amongst farmers, which discourages banks from lending to farmers.

According to Beck and Demirguc-Kunt (2006), specific financing tools can be useful in facilitating greater access to finance. The government of Nigeria, being fully aware of the need of progressive policies has introduced various initiatives and policies to attract finance to enhance agriculture productions dating back to the 1970s.

Such policies have mainly been in the form of specialised agriculture lending, the supply of credit finance by the commercial banks in favour of the agriculture sector and through various programmes. While some of these efforts have failed, the operation of the remaining leaves one to wonder if they are actually achieving their intended objectives as rural poverty is on the increase and yet a large portion of the population is engaged in agricultural activities (Iheancho, Abdullahi & Ibrahim, 2006).

The problem of access to finance for agriculture is not solely as a result of non availability of finance but it is caused by the reluctance of credit providers to give out loans without a certainty of recovering the loan. However, the banks are not to be blamed as they are not charity organisations who disburse money without recourse to repayment; rather they are in business to make profit from their lending operations.

Unfortunately, the situation makes farmers a neglected group in the economy because they are not able to provide the adequate collateral needed to secure bank loans. Because of the challenges facing  farmers, which have adverse  effects  on agricultural production, Nigerian banks thought it fit to act as an intermediary through the provision of finance to increase agricultural produce in Nigeria.

The role of agricultural credit in enhancing agricultural growth and development cannot be overemphasised. According to Olomola (1989), the agricultural credit guarantee system is often considered as an effective policy instrument for improving the production and distribution of agricultural commodities. Rahji (2010) affirms that credit finance is more than just another resource such as labour, land, equipment and raw materials.

Under the ACGS, the government guarantees credit finance given to farmers from the commercial banks while it is supposed to achieve agricultural growth through increased production. According to Levitsky (1997), credit guarantee schemes assist banks to lend to small and medium enterprises while it cushions the banks from the risks involved. There are several existing banks agricultural finance schemes in Nigeria. Most of the schemes encourages an increase in bank credit in the form of loans, advances, overdrafts and any other credit facility to the entire agricultural subsectors.

If indeed the fund provided has been effectively utilised, it should reflect on the output of agricultural production. Therefore, it is important to determine the extent to the impact of bank financing on agricultural produce in Nigeria.

STATEMENTOF PROBLEM

At the wake of emerging development financing, the decline in agricultural production has placed more responsibility on government, farmers and financiers and other stakeholders to intensify their efforts on agricultural financing. The need for ensuring an effective financing approach in the agriculture sector cannot be overemphasised in order to attain increased productivity, growth as well as sustainability. Effective, financing of agricultural activities in an emerging world could have positive effects on GDP growth, which ultimately translates to the entire economy’s wellbeing. Agriculture is an effective engine of growth for most agriculture based countries like Nigeria.

The problems that impede the agriculture production are quite enormous. The agricultural sector of the Nigerian economy is still under exploited with huge potential and investment opportunities. The ACGS is aimed at solving one of the most important challenges facing the sector, i.e. access to finance for farmers.

Nigeria is richly endowed with agricultural resources, and has a growing population engaged in agricultural activities. Notwithstanding the operations of the ACGS, Olomola (1989) notes that the agricultural sector has been severely disadvantaged in terms of its allocation of commercial bank loans as compared to other sectors of the economy. Land usage by the sector is still very low, as at 2004, the total utilised land for agriculture was estimated at about 30 percent (IPD, 2004). According to Manyong, Ikpi, Olayemi, Yusuf, Omonona, Okoruwa and Idachaba (2005), the general developmental challenge of the agriculture sector in Nigerian is that farmers and rural entrepreneurs have not been well served by financial institutions.

Olaitan (2006) notes that the country witnesses declining agricultural production at the same time it is faced with an increasing population. Iheancho et al. (2006) suggested that the lack of finance to the agriculture sector has caused a decline in agricultural production and agribusinesses. If these claims are true it raises doubts about the effectiveness of the ACGS which was introduced to specifically provide guaranteed credits to farmers to enhance agricultural production.

Indeed, there are a number of financial institutions in Nigeria that can adequately provide the financial needs of farmers. More so, the risk perception faced by banks to lend to farmers who cannot provide adequate security in form of collateral for such loans is still a threat. It is of concern that studies by Garba (1987), Olomola (1989), Oni, (1993), Ojo (1998),

RESEARCH QUESTIONS

1)      Has the credit finance provided by the banks been effective in enhancing agricultural productivity?

2)      Do farmers in local areas have access to bank financing to increase output?

3)      Is the distribution of the bank financing for agriculture is accurate and effective?

1.2      OBJECTIVEOF THESTUDY 

Following on from the research questions, this study will concentrate on evaluation of impacts of Nigerian banks finance to improve agricultural output.

Specifically the study intends to pursue the following objectives:

  • To examine the experiences and the performance of the agriculture sector in Nigeria.
  • To examine the availability of agricultural bank financing for farmers in local area
  • To know if the distribution of the bank financing for agriculture is accurate and effective

1.3      HYPOTHESIS

Hypothesis one
H1: The performance of bank financing has been significant in enhancing agricultural production in Nigeria.

Ho: The performance of bank financing has not been significant in enhancing agricultural production in Nigeria

Hypothesis two

H1: The channel for distribution of bank finance to farmers  is effective and accurate

Ho: The channel for distribution of bank finance to farmers is not effective and accurate

Hypothesis three

H1: It is easy for farmers to access agricultural finance from banks

Ho: It is not easy for farmers to access agricultural finance from banks.

1.4      RESEARCH METHODOLOGY

The study relies on data from the Central Bank of Nigeria such as: the agriculture production output, credit provided by the ACGS, foreign exchange, interest rates on loans, inflation rate, and the amount of foreign private investment, which was derived for the period 1978 to 2009.

1.5      SCOPE OF THESTUDY

The subject of agricultural financing and performance in Nigeria is wide and complex. However, this study will focus on the role of the ACGS from 1978 to 2009. The analyses will be done at both aggregate level and at the main subsectors. For the purpose of this study, other financing schemes that have been introduced by the government will not be analysed. Also, micro level analysis such as farmers‟ perception about the scheme is not the focus of this study.

1.6  JUSTIFICATION FOR THE STUDY

This research work on the impact of bank financing on agricultural output in Nigeria would be of immense importance to the policy and credit guideline makers in ascertaining the efficiency of banks’ financing on agricultural performance. Also from the recommendations and suggestions, the problems and causes of failures in implementation would be taken care of.  As the  policies involves many financial and other credit institution the research would be of great worth to these institution, for instance, It would  help in assessing the performance and cause of default in credit extension to farmers.

Finally, this work will serve as an addition to the already existing literature and references in the area of policies of central Bank of Nigeria agricultural financing, monetary economics and finance in general.

SEE>>> HOW TO DOWNLOAD THE COMPLETE PROJECT (CHAPTER 1 to 5)

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