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;
- To what extent does the banking sector affect agricultural productivity in Nigeria
- What has been the contribution of the banking sector on agricultural productivity
- What is the effect of banks loans on agriculture
- 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;
- To access the role of the banking sector on agricultural productivity in Nigeria
- To examine the extent to which government fund allocation has been boosting agricultural productivity.
- To examine the impact of financial deepening on agricultural productivity.
- To examine the impact of interest rate on agricultural productivity.
1.4 HYPOTHESES OF THE STUDY
The hypotheses of the study include the following
- There is no significant impact of banking sector on agricultural productivity
- There is no significant impact of government fund allocation on agricultural productivity
- There are no significant relationship between financial deepening and agricultural productivity
- 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.