Effectiveness Of Agricultural Credit On Agricultural Output In Nigeria

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CHAPTER ONE

INTRODUCTION

           1.1       Background of the study

“It is in the agricultural sector development through financial incentives to the farmers that the battle for long term economic development will be won or lost”- Gunner Myrdal, Noble Laureate in economics (2008). Economic development is one of the major concerns of every nation in the world and agriculture (output) has been viewed to play an indispensable and supportive role in the process of economic development. This is contained in its role of ensuring food sufficiency (food security) as well as fuelling for the expansion of the industrial economy by means of its output as a source of raw material.

Basically, an agriculture-based strategy for economic development requires an accelerated agricultural output-growth through technological, institutional and most importantly financial-incentive-changes designed to raise the productivity of small farmers, without it in most cases industrial growth either would be stultified or if it succeeded would create such severe internal imbalances in the economy such that the problems of widespread poverty and income inequality would become even more pronounced.

Nigeria with an increasing population of over 140 million people is unarguably endowed with abundant human and natural resources as well as favourable weather conditions. As an agricultural nation, most farming activities are carried out in the rural areas thus the rural dwellers represents over 70 percent of active farmers in Nigeria.

These farmers are marginal farmers as their farming activities is undertaken at the subsistence level, yet more than 75 percent of the total food requirement of the nation is produced by these marginal farmers who are consistently faced with serious constraints of lack of adequate capital,(CBN, 2003).

Globally, agricultural credit has been identified as the major input for the development of agricultural sector as its traditional role in covering financial gap for farmers for increased productivity provides the foundation for this position. Moreso, agricultural credit/ loanable funds plays a fundamental role in determining access to the needed inputs that facilitates farming and other extensive agricultural practices which ultimately transforms into increased output while increased agricultural output establishes a forward linkage (multiplier effect) in terms of development to other sectors as well as higher income and better quality of life for the rural poor,(Hazell,2005).

For instance, Brazil through its agricultural financial incentives to its farmers was able to change its hitherto underdeveloped status to that of a Newly Industrialized Country (NIC), (Platteau, 2008).

Considering the significance to mechanize and improve farming activities to enhance food sufficiency for the teeming population as well as transform the economy into perhaps an industrialized one (in line with agriculture-based economic development strategy), the government over the years has prioritized the sector in its expenditure policies, establishing numerous agricultural credit institutions that could facilitate the flow of credit to famers as well as the appeals to the financial institutions to devout a certain percentage of their loanable funds for farmers while ensuring a favourable long tenure and single digit lending rate.

The Nigerian Agricultural and Co-operative Bank (NACB) now known as the Nigeria Agricultural Cooperative Rural Development Bank established in 1973 was part of government’s efforts to inject oil wealth into the agricultural sector through the provision of credit facilities to support agriculture for increased agricultural output. Others include the Nigerian Agricultural Commercial Bank, Bank of Agriculture, Agricultural Intervention Fund, and other Agricultural credit schemes with various names.

According to Akinleye (2005), government has further continued to enhance these credits 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 Abdulrheem (2007) argued that there has been a general failure of the credit supplies.

Therefore unless the magnitude/efficacy of agricultural credit supply and the direction of its impact are precisely determined it would be difficult to adopt a suitable agricultural framework/policy that will launch Nigeria on the path of economic progress. It is therefore in this context among other things that the researcher considered that this study is laden with profile benefits.

            1.2       Statement of the Problem

There has been numerous government’ agricultural credit supplies over the years as well as the polices designed to facilitate the flow of these credit/funds to farmers’ in order to mechanize and improve agricultural activities which ultimately should enhance food sufficiency, increase farmers’ income, provide essential raw materials for the local agro-based industries among other aims. Currently in Nigeria, a large percentage of farmers especially the rural farmers are poor and the level of poverty has been exacerbated by the decline in agricultural output as well as income inequality.

The Gini coefficient for income inequality is 0.49 in the rural areas and 0.54 in the urban areas (MDG’s Report, 2005).

Also the rapid growth in importation of some agricultural commodities which hitherto formed the bulk of our agricultural exports produced mainly by small scale farmers rising despite the credit facilities. In 2003 alone, Nigeria imported over 183,000 mt tons of palm of oil, 95,000 mt tons of cotton, 431,000 tons of maize and until the ban on rice importation, Nigeria has been spending an average of 60 million USD in importation of rice annually (Bernard, 2007). Despite the huge food imports, over 46 percent of the population especially rural dwellers (mostly famers) are chronically undernourished. (World Bank Development). Thus, this has further shown the level of food insecurity in the face of an increasing population in Nigeria.

More so is the low record of agro based industries as well as the closure of the few industries who cannot cope with the unavailability of essential raw materials despite huge efforts by government in providing agro credit facilities to farmers. Given these inherent challenges, a pertinent question comes to the mind which is: Should the government continue to pursue agricultural development for increase productivity through the provision of agricultural credit facilities as a strategy or not? To this end therefore, it has become imperative to ascertain the impact of agricultural credit on agricultural output considering the aim of the numerous credit supplies. If this is not determined it would be difficult to modify the existing strategies to make its application more effective for stimulating agricultural productivity and hence economic development.

            1.3       Research Questions

Accordingly, the research work has essential questions that will serve as the engine of the study; hence the research work will revolve around answering the following questions:

1. What is the effect of agricultural credit on agricultural output in Nigeria?

2. What is the long run relationship between agricultural credit and agricultural output?

            1.4       Objectives of the study

Considering the problem statement of this study, the general of objective of this study is to examine the impact of agricultural credit in boosting agricultural output in Nigeria.

The specific objective therefore is to:

1. To investigate the effectiveness of agricultural credit on agricultural output.

2. To investigate the long run relationship between agricultural credit and agricultural output.

 
1.5       Statement of Hypothesis

The following hypothesis will be tested in the course of this work and the results will be analyzed.

Hypothesis 1

H_o; Agricultural Credit has no effect on agricultural output in Nigeria.

H₁; Agricultural Credit has an effect on agricultural output in Nigeria.

Hypothesis 2

H_o: There is no long run relationship between agricultural credit supply and agricultural output in Nigeria.

H₁: There is a long run relationship between agricultural credit and agricultural output in Nigeria.

1.6       Significance of the Study

Although several studies have been embarked on this study, yet there are inconsistencies abound in these studies. This has therefore rendered this present study imperative as this present study will serve to mediate among the conflicting findings of other studies. Besides a longer time series data about the study has been generated. Moreso, other studies had employed qualitative design for analysis of data and still others have adopted partial approach in their analysis. This have provided further justification for the present study which would adopt quantitative approach that is essentially global in nature as only a detailed data pertaining to this study can yield result which would constitute a suitable framework for formulating a suitable agricultural policy for economic growth and development

1.7  Scope of the Study

The study concentrates on the Nigerian economy as regards its agriculture with emphasis on agricultural credit viz-a-viz its effect on agricultural output.

This study covered a time span of 39 years (1970-2008). The scope is considered adequate and encompassing in order to capture some important economic events in the country especially in the agricultural sector.

Furthermore the study will employ annual time series data covering from 1970-2008.

Data was sourced from secondary sources which include data from the CBN Statistical Bulletin (Jubilee edition), Journals, Unpublished Dissertations and Textbooks.

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