CHAPTER ONE
INTRODUCTION
1.1 INTRODUCTION
Nigeria, which spans an area of 924,000 square kilometers, is
bordered by the Gulf of Guinea, Cameroon, Benin, Niger, and Chad. The topography
ranges from mangrove swampland along the coast to tropical rain forest and
savannah to the north. Nigeria is generously endowed with abundant natural
resources. With its reserves of human and natural resources, Nigeria has the
potential to build a prosperous economy and provide for the basic needs of the
population. This enormous resource base if well managed could support a vibrant
agricultural sector capable of ensuring the supply of raw materials for the
industrial sector as well as providing gainful employment for the teeming
population.
Nigeria’s rich human and material resource endowments give it the
potential to become Africa’s largest economy and a major player in the global
economy. Compared with other African and Asian countries, especially Indonesia,
which is comparable to Nigeria in many respects, economic development in
Nigeria has however been disappointing, Nigeria has become one of the poorest
countries in the world. Having earned about $300 billion from oil exports
between the mid-1970s and 2000, its per capita income was disappointingly 20
percent lower than that of 1975. Inability to tap much of the abundant human
and material resources can therefore put the attainment of the Millennium
Development Goals by 2015 in jeopardy as a country is endowed
with vast land mass, fertile soil and a good topography which is suitable for
agriculture. In fact, the Nigerian economy at independence in 1960 was still
largely agriculture based country contributing about 64% to the Gross Domestic
Product (GDP), producing food for her consumption and cash crops like
groundnut, cocoa, rubber, and palm oil for export (Iyoha, 2003). But with the
advent of oil boom and its attendant free money from rents and royalties paid
to the government by the multinational oil companies that dominated the sector
in 1970s led to the shifting of attentions from agriculture to the petroleum
sector concerning the decay and gradual collapse of the agricultural sector
productivity to the inability of the agricultural sector to maintain an
independent output trend. This is so because it has been noticed that as the
output of the petroleum sector is increasing, there is a decline in the level
of productivity of the agricultural sector.
There
is need to reverse this trend and for agricultural sector to grow in terms of
output and productivity. The need for the banking sector to contribute to an
increase in agricultural output becomes paramount. The banking sector which is
also known as financial intermediaries provides loans and credits to the
deficit units. This sector is needed to provide the necessary funds for the
agricultural sector to acquire land, mechanized farming implements, raw
materials and so on which invariably will lead to an increase in agricultural
productivity. Financing the agricultural sector is necessary because
agricultural sector has a multiplier effect on a nation’s socio-economic and
industrial fabric, as a strong and efficient agricultural sector would enable a
country to feed its ever growing population, generate employment, earn foreign
exchange and provide raw materials for industries (Ogen, 2009). It also has the
potential to be the industrial and economic spring board, from which a
country’s development could takeoff, shape the landscape and provide environmental
benefits. But the agricultural sector cannot do this without the needed funds.
There
is a need to intensify the allocation of loans, subsidies and transfer payments
to the agricultural sector. However, the government of Nigeria overtime has
strived to improve the level of credits available to agricultural sector
overtime (Obilor, 2003). With the current growth rate of agriculture in Nigeria
on an increase, this figure still has to be boosted because Nigeria can achieve
a balanced growth between the oil sector and the agricultural sector. With
proper financing of the agricultural sector in Nigeria, the ‘’a la Dutch Disease Syndrome’’ that has
plague Nigeria since the 1970s where the relative contribution of agriculture
to Gross Domestic Product (GDP) fell steadily from about 41.3% in 1970 to about
28.7% in 1979 (Iyoha, 2003) would be reduced if
not totally wiped out.
Consequently,
this study will be taking a look at the role of banking sector on agricultural
productivity in Nigeria and not focusing solely on the banking sector’s loan
and credit to the agricultural sector but also on other factors such as
interest rate which determines the ability of farmers to access loans and when
such interest rate is high, the ability of farmers to have access to loans
becomes difficult. Also, financial deepening will also be considered as a
variable that determines the extension of loans to farmers and finally
government expenditure on agriculture which has a significant effect on the
amount of loans demanded among others has a great impact on agricultural
productivity in Nigeria. Given the above introduction, this study will centre
on the relative contribution of the banking sector to agricultural productivity
and possible way forward.
1.2 STATEMENT
OF THE PROBLEM
The
aim of any banking sector is financial intermediation which involves the
processes through which funds and financial resources are channeled from the
surplus sector to the deficit sector. But the Nigerian banking sector like that
of many less developed countries are high regulated leading to financial
disintermediation which retarded the growth of the Nigerian economy. The effect
is that the banking sector finds it rather too difficult to advance much loans
to the real sectors. Banks keep declaring billions upon billions of profit at
the end of each financial year and yet the real sector continues to grow weak.
Many farmers produce below potential capacity because of the inability to
acquire loans from banking sectors due to the fact that the cost of borrowing
is too outrageous.
Banks
in Nigeria are highly liquid but refuse to lend to the agricultural sector
because they believe that it is too risky to lend to agricultural sector which
has led to decline in agricultural productivity in the country. Other problems
such as seasonality, time lag in agricultural production and the domestic
profit which cannot be predicted makes banks unwilling to take the risk of
advancing loans to farmers.
Despite
the use of various instruments such as moral suasion by the Central Bank of
Nigeria and even the formulation of various agencies and programmes by the
governments such as the Agricultural Credit Guarantee Scheme (ACGS), the amount
of loans advanced to the agricultural sector is still a far cry from what is
needed to fast track the needed growth in the sector. Also, the urban locations
of many banks make it difficult for farmers to have access to credit. Though in
recent times the Nigerian banking sector is trying in the aspect of
agricultural financing much more still needs to be done.
The
problems above raise the following questions;
1. To
what extent does the banking sector affect agricultural productivity in Nigeria
2. What
has been the contribution of the banking sector on agricultural productivity
3. What
is the effect of banks loans on agriculture
4. What
percentage of credit is needed from the banking sector to take agriculture to
the needed level
1.3
OBJECTIVES OF THE STUDY
The objectives of this study are as
follows;
1. To
access the role of the banking sector on agricultural productivity in Nigeria
2. To
examine the extent to which government fund allocation has been boosting
agricultural productivity.
3. To
examine the impact of financial deepening on agricultural productivity.
4. To
examine the impact of interest rate on agricultural productivity.
1.4 HYPOTHESES OF THE STUDY
The hypotheses of the study include
the following
1. There
is no significant impact of banking sector on agricultural productivity
2. There
is no significant impact of government fund allocation on agricultural
productivity
3. There
are no significant relationship between financial deepening and agricultural
productivity
4. There
is no significant relationship between interest rate and agricultural
productivity.
1.5 SIGNIFICANCE
OF THE STUDY
Many
literatures have been put forward to justify the need for the banking sector to
contribute to the growth or an increase in agricultural productivity. But these
literatures have in one way or the other neglected other vital factors that
affect agricultural productivity in Nigeria. For instance, Obilor (2013)
focused on only credits to the agricultural sector and agricultural product,
Thomaj (2014) focused on agricultural lending from the banking sector in
Albania, Muhammad and Atte (2006) in their work on the analysis of agricultural
production in Nigerian only focused on different aspect or the sub sectors of
agriculture. In Nigeria, Saleem and Jan (2004) focused only on credits to
different areas under agriculture while Toby and Peterside (2014) focused in
credits from the commercial banks and merchant banks to agriculture. But this
study has its aim to expressly look at the impact of bank credit considering
all types of banks and their credit; impact of key factors such as interest
rate, government allocation to agriculture and financial deepening on
agricultural productivity in Nigeria.
One
of the goals of the Nigerian policy is to diversify the economy and reduce the
over dependence of the economy on oil exports for revenue. This study thus
serves as a tool to access the measures of the Nigerian government can take
through the banking sector to achieve this much needed objective. Given the
present condition of the Nigerian economy, whereby we are witnessing
diminishing oil price, there is a need to accelerate agricultural productivity
if we are to pull through this problem. Nigeria is blessed with a lot of labour
and this manpower is needed to work on the vast landmass but this manpower
without the necessary capital will not achieve much. The study will therefore
bring into limelight the need to collaborate adequate manpower with the
necessary capital base in order to help policy makers, politicians, the
government and students of economics to focus attention on the areas necessary
for economic growth.
To
policy makers, ascertaining the contribution of banking sector can make on
agricultural productivity and therefore investment will enable them to make
policies that will take the economy to the desired level. To the politicians,
this study would provide an insight into the areas that should be focused on
agriculture for development planning and drafting of manifestoes. To students
of economics and other related disciplines, it serves as a pragmatic knowledge
as it enlightens them on the role agriculture can play if adequately funded. It
also serves as a basis for further study.
More
so, ascertaining the key contributing factors like interest rate, government
allocation and financial deepening of the banking sector will enable decision
makers to take actions with the knowledge of the consequences of their actions.
1.6 SCOPE
OF THE STUDY
The
scope of the study is centered on the overall contribution of banking sector to
agricultural productivity in Nigeria. This research work spans a period of 33
years from 1981—2013. The regression analysis will be based on the use of time
series data extracted from the Central Bank of Nigeria Statistical bulletin and
if need be, the National Bureau of Statistics Annual Abstract and world Bank
Development Indicators.
The
Ordinary least Squares (OLS) technique which minimizes the sums of squares
residual is employed to estimate the model. This is because it possesses the
desirable statistical properties of unbiasness, efficiency and consistency. If
the OLS assumptions are met, the estimates obtained will possess the best
linear unbias estimate property (BLUE).
1.7 LIMITATIONS
OF THE STUDY
The study like every other study is
faced with certain limitations. A major limitation of this research is the
inconsistency and discrepancy of data. The data as reported by CBN is not
consistent with that of federal Bureau of statistic and that of the Nigeria
Agricultural cooperative and Rural Development Bank.
Also, there was difficulty in obtaining
empirical data, for adequate data analysis, bureaucracy in assessing data and
inadequate research materials. Furthermore, one of such limitations and
difficulties encountered in course of this research is the inadequate relevant
data owing to the fact that the habit of record keeping is lacking in most
underdeveloped countries like Nigeria.
In
addition,time factor was another limitation due to the combination of lecture
time and project work. All these constraints combined limited the scope of the
work in terms of sample size and number of exogenous variables.