IMPACT OF AGRICULTURAL CREDIT GUARANTEE SCHEME FUND ON AGRICULTURAL PRODUCTION IN NIGERIA 1978-2011.

Abstract

Supporting smallholder farmers to play a greater role in food production and natural resource stewardship has been identified as one of the quickest ways to lift Nigerians out of poverty. Funding has been seen as a major problem militating against achieving this goal. It is argued that  adequate   credit  facility  could  play  an  important   role  in   enhancing  agricultural productivity through the acquisition of latest technology,  employment  of skill manpower, promotion of agricultural research and commercial  farming. In an attempt to mitigate the funding problem of the agricultural sector, the Federal Government of Nigeria has instituted several  agricultural  financing  schemes.    One of such schemes  is the Agricultural  Credit Guarantee Scheme Fund (ACGSF) which was established by the federal government in 1977 with the aim of enhancing commercial banks’ loans to the agricultural sector in Nigeria with focus on agro-allied and agricultural production in order to mitigate the risk associated with lending to the  sector. The scheme is expected to stimulate agricultural production for both domestic consumption and export purposes but not much has been researched in this regard. This  study  strives  to  fill  this  important  knowledge  gap  by  examining  the  impact  of Agricultural Credit Guarantee Scheme Fund (ACGSF) on total agricultural productivity  in Nigeria, as well as on the four major subsectors (crop, livestock, forestry and fishery) of the agricultural sector in Nigeria. The ex-post facto research design was adopted for the study and annualized data for a 34-year period, 1978-2011, were obtained from the Central Bank of Nigeria Statistical Bulletin. The multiple regression technique was used to estimate the five hypotheses  formulated  for the study. Aggregate  agricultural  production,  crop, livestock,  forestry  and fishery productions were adopted as the dependent variables, while the  independent variable was Agricultural Credit  Guarantee  Scheme  Fund  including  some  other  relevant  variables.  The  study also controlled for government expenditure in agriculture, foreign exchange rate and inflation rate. Results indicate that the Agricultural Credit Guarantee Scheme Fund (ACGSF) has a non- significant positive effect on aggregate agricultural output but significant positive impact on both crop and fishery subsector outputs. Nevertheless, the effects of the scheme on livestock output was non-significant and negative, while that of the forestry output was non-significant and  positive. Thus, it is evident that the ACGSF plays a fundamental role in stimulating agricultural production in Nigeria. As a strategy to realize the optimal potential of farmers in enhancing  agricultural  performance,  it  is  recommended   that  the   Nigerian  government continues the use of the credit  finance  from the ACGSF as an  inducement  to encourage farmers to put in their best efforts in agricultural production.  The study has contributed to knowledge by using modified versions of earlier works to produce relevant results.

CHAPTER ONE

INTRODUCTION

1.1      Background of the Study

Agriculture  represents  one  of the most important  sectors  of the Nigerian  economy.  It  is particularly important with regards to its employment generation and contribution to  gross domestic  product  (GDP)  and export  revenue  earnings.  Regardless  of its rich  agricultural resource  endowment,  however,  the  agricultural  sector  in Nigeria  has  recorded  very  low growth rate. Less than 50% of the country’s cultivable agricultural land is under cultivation. In addition  to  this,  smallholder  and  traditional  farmers  who  use undeveloped  production techniques, with resultant low yields, cultivate most of this land (Manyong, et. al., 2005). The smallholder  farmers  are  limited  by  various  constraints  among  which  access  to  credit according to Olomola (1990) is a major militating factor, against agricultural production and development in Nigeria. Problems associated with obtaining credit have been corroborated by different authors (Nto and  Mbanasor, 2008; Olaitan, 2005; Okorie, 1998; Henri-Ukoha, et. al., 2011).

Credit delivery to the agricultural sector has been recognized as a major input in the growth of the sector in Nigeria. The decline in the contribution of the sector to the Nigerian economy has  been  blamed  on  the  lack  of  a  formal  national  credit  policy  and  paucity  of  credit institutions,  which  can  be  beneficial  to  farmers  and  small  and  new  business  operators engaged in agriculture and agro-allied businesses (Rahji, et. al., 2010).

In Nigeria, credit has been recognized as an essential tool for promoting Small and Medium Enterprises (SMEs). About 70 percent of the population is engaged in the informal sector or in agricultural production. The federal and state governments in Nigeria have recognized that for sustainable  growth and development,  the financial  empowerment  of the rural areas is vital, being the repository of the predominantly poor in the society and particularly the small and  medium   enterprises   (SMEs).   If  this   growth  strategy  is  adopted   and  the  latent entrepreneurial capabilities of this large segment of the people is sufficiently stimulated and sustained  then  positive  multipliers  will  be  felt  throughout  the  economy  (Olaitan,  2006; Olowu, 2011).

The Federal Government  of Nigeria has severally instituted  various agricultural  financing policies  through  schemes,  programmes  and  institutions,  aimed  at  improving  agricultural

production capabilities, positively channel the potential of SMEs to alleviate the standard of living and place the sector in the forefront of Government’s development strategy. Eze (2010) opined that the objective of these policies in Nigeria is to establish  an effective system of sustainable agricultural financing schemes, programmes and  institutions that could provide micro and macro credit facilities for the micro, small,  medium and large scale producers, processors and marketers.

The CBN on its part has shown robust interest in the development of the nation’s agricultural sector which is dominated by smallholder farmers who share the funding problems that the sector is confronted with.

Limited access to credit facilities has been incriminated as hindering growth and productivity of the agricultural sector (Ammani, et. al., 2010). Credit allows farmers and others involved in agro-allied businesses to utilize to their benefit inputs and factors of production by granting them  additional  access  to  resources  through  the  removal  of  financial  constraints.  The provision of credit will reduce the costs of capital intensive technology and assets relative to family labour. Thus, instead  of growing low yielding  local crops, for example, access to credit may allow an increased use of improved seeds and fertilizers leading to higher crop output per unit of labour and land  (Ammani, et. al., 2010). Iqbal et. al. (2003) are of the opinion that boosting credit distribution could lead to efficient resource allocation, increased food production and  farmers’ income because as the demand for credit increases, farmers output and well being are also enhanced.

Several intervention programmes have been put in place to alleviate the complaints of SMEs in the past, yet the problem still persists. There were also a myriad of foreign funds that came in  from  the  World  Bank,  International   Monetary  Fund  (IMF),   International  Finance Corporation (IFC), etc. In a bid to accomplish these schemes, programmes, and institutions, the government  over the years has made budgetary allocations to agriculture which when compared with the total budget; fell short of meeting policy intentions. Some of these efforts have failed to actualize their intended objectives as rural poverty seems to be on the increase and a large portion of the population is engaged in agricultural activities.  Olowu (2011) notes that the problem of access to finance for agriculture is not solely as a result of non availability of finance but could as well be caused by the reluctance of credit providers to give out loans without a certainty of recovering them. Banks are not to be blamed solely for this as they are profit oriented organizations and on the other hand, farmers should not be made to bear the

whole brunt of this due to their inability to secure bank loans without adequate collateral. In order to alleviate this predicament, the federal government instituted the Agricultural Credit Guarantee  Scheme  Fund  (ACGSF).  The government  acts as an intermediary  through the scheme and also as a guarantor for agricultural loans in order to alleviate the risk involved in agricultural financing.

Diverse  studies  have shown that credit plays  an important  role in enhancing  agricultural productivity of the farmer (Okorji and Mejeha, 1993; Nweze, 1991; Mafimisebi, et. al., 2008; Nwosu, et. al., 2010) and shortage of primary production credit has been identified as one of the major causes for declining Agricultural production.  The  ACGSF is one of the existing agricultural   finance  schemes   in  Nigeria  which   has  been  operating   as  a  specialized development  finance  scheme  since  1978  to  date.  The  main  purpose  of  the  Nigerian Agricultural Credit Guarantee Scheme Fund is to encourage banks to lend to those engaged in agricultural production and agro-processing activities. Consequently, the primary aim of the scheme is the motivation of total agricultural production for both domestic consumption and export; and the encouragement of financial institutions to contribute towards increasing the nation’s agricultural productive capacity through a capital lending programme. The scheme is expected  among  other  functions  to  provide  guarantee  on  loans  granted   by  financial institutions  to  farmers  for  agricultural  production  and  agro-allied  processing.  The  cover pledges to pay to the banks, 75% of the amount in default net of any amount realized by the lending bank from the sale of the security pledged by the borrower (Nwosu, et. al., 2010).

This  study therefore,  focuses  on the  importance  of determining  the  extent  to  which  the ACGSF  has  impacted  credit  delivery  to  the  small  and  medium  enterprises  in  Nigeria’s agricultural sector which employs the largest number of workers and generates a significant share of GDP in the country. It is also intended that the study will throw more light on the effects  of  the  ACGSF  on  agricultural  production  output  and  seek  ways  by  which  the operation of the scheme in enhancing access to finance will create an opportunity to increase the level of entrepreneurial capabilities of the agricultural sector in Nigeria.

1.2      Statement of the Problem

One  of  the  major  challenges  facing  many  developing  economies  in  Africa  is  devising appropriate  development  strategies  that will address the financial  service  requirements  of small  and  medium  entrepreneurs  who  constitute  about  70  percent  of  the  populace.  The Nigerian  government  views  this  segment  of  the  population  as  very  important  for  the

realization of its development efforts and over the years has come up with various policies aimed at achieving this objective (Olaitan, 2006). Some of these include; a commercial bill financing  scheme,  regional  commodity  boards,  an  export  and  financing  and  rediscount facility, the Nigerian Agricultural Cooperative  and Rural  Development  Bank, Community Banks, Peoples Bank, The Agricultural Credit Guarantee Scheme Fund (ACGSF) amongst others.

Nigeria’s agriculture is faced with a major problem of inadequate funding by the government budget and the private sector, and about 65% of Nigeria’s economically active population lack access  to formal financial  services  (CBN, 2007). This has led  to various efforts by government  at all levels to address the issue.  There  is need  to  put in place an effective financing approach in the agricultural sector which can help achieve increased productivity, growth and sustainability. Adequate credit delivery to the agricultural sector of a developing economy like Nigeria could have positive  effects on  the Gross Domestic Product  (GDP) growth, and as well improve the economy.

The ACGSF is aimed at solving one of the most important challenges facing the sector, i.e. increasing the level of bank credit to the SMEs in the agricultural sector. It is vital to mention that since the inception of the scheme, the objectives on which it was founded seemed hardly to be realized. Previous studies conducted indicate that the Nigerian farmers who are mostly SMEs have not fared better in the area of access to agricultural credit. This could be as a result  of decline  in agricultural  production  as well  as  other  sectors  of the  economy.  In addition  to  this,  the  agricultural  system  in Nigeria  is  still  largely  of  the  traditional  and primitive type which could result from lack of funds to procure modern farm technological inputs.

Olowu (2011) notes that, several financial institutions exist in Nigeria which 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 has been eliminated by the credit guarantees of ACGSF. However, studies by Olomola (1989), Ojo (1998), Manyong, et. al., Olaitan (2006) and Olowu (2011) concurred that inadequate finance still remains  a major  problem  of agriculture  in  Nigeria  both by private  and  government financial institutions. The above pertinent situation calls for the need for an enquiry into the functions of the ACGSF in providing finance to SMEs in Nigeria’s agricultural sector with a

view to increasing productivity, the nation’s Gross Domestic Product, GDP and ultimately delivering its intended objectives.

An evaluation of the impact of ACGSF in financing agricultural production is very essential in emphasizing the need for continuous credit finance policies in agricultural sector. Against this background, one begins to wonder, has the credit finance provided by the ACGSF been effective in enhancing agricultural productivity of the Nigerian farmers and/ or what level of impact has the ACGSF made on the nation’s Gross Domestic Production (GDP)? All these form the problem of this study.

1.3      Objectives of the Study

For  the  purpose  of  this  study,  emphasis  was  laid  on  only  one  aspect  of  the  Nigerian government’s lending programme, which is the Agricultural Credit Guarantee Scheme Fund, (ACGSF). The objective is to evaluate the impact of ACGSF credit finance on agricultural production in Nigeria. The specific objectives of the study are therefore;

i.     To determine  the impact of credit from Agricultural Credit Guarantee  Scheme  on agricultural production in Nigeria.

ii.      To evaluate the extent to which ACGSF has impacted the output of the crop subsector of the agricultural sector in Nigeria.

iii.      To evaluate the extent to which ACGSF  has impacted  the output of the  livestock subsector of the agricultural sector in Nigeria.

iv.      To evaluate  the extent  to  which  ACGSF  has impacted  the output  of the  forestry subsector of the agricultural sector in Nigeria.

v.      To  evaluate  the  extent  to  which  ACGSF  has  impacted  the  output  of  the  fishery subsector of the agricultural sector in Nigeria.

vi.      To  articulate  the  policy  implications  of  findings   and  to  recommend   possible intervention that could help in improving the scheme’s effectiveness.

1.4      Research Questions

In pursuance  of the objectives  of the study,  the  researcher  was  guided  by the  following questions:

i.     To  what  extent  has  Agricultural  Credit  Guarantee  Scheme  Fund  impacted  on agricultural production in the Nigeria?

ii.      How far has ACGSF  impacted  the output of the Crop sub-sector  of the  Nigerian agricultural sector?

iii.      How far has ACGSF impacted the output of the Livestock sub-sector of the Nigerian agricultural sector?

iv.      How far has ACGSF impacted the output of the Forestry sub-sector of the Nigerian agricultural sector?

v.      How far has ACGSF impacted the output of the Fishery sub-sector of the  Nigerian agricultural sector?

1.5      Research Hypotheses

To achieve the above objectives, the following hypotheses are postulated and will be tested for their validity.

i.     Credit  provided  under  the Agricultural  Credit  Guarantee  Scheme  Fund,  (ACGSF)

does not have a significant positive impact on agricultural production in Nigeria.

ii.      Agricultural Credit Guarantee Scheme Fund, (ACGSF) loans do not have a significant positive effect on the output of the crop subsector of the agricultural sector in Nigeria.

iii.      Agricultural Credit Guarantee Scheme Fund, (ACGSF) loans do not have a significant positive  effect  on  output  of  the  livestock  subsector  of  the  agricultural  sector  in Nigeria.

iv.      Agricultural Credit Guarantee Scheme Fund, (ACGSF) loans do not have a significant positive effect on the output of the forestry subsector  of the  agricultural  sector in Nigeria.

v.      Agricultural Credit Guarantee Scheme Fund, (ACGSF) loans do not have a significant positive  effect  on the output of the fishery subsector  of the  agricultural  sector  in Nigeria.

1.6      Scope of the Study

The  cardinal  objectives  of  agricultural  credit  policy  in  Nigeria  is  to  make   adequate investment funds available to the agricultural sector at the right time, place and of such rates

as to make the returns more attractive than before (Federal Ministry of Agriculture,  Water

Resources and Rural Development, 1989:41).

In view of the wide and complex nature of agricultural financing and performance in Nigeria, the study concentrated more on the institutional arrangements in the provision of agricultural loans. This study is intended to review the operations of the Agricultural Credit Guarantee Scheme Fund with emphasis on its role on agricultural production for the period 1978-2011. The base year 1978 was chosen because it marks the inception of the scheme. For the purpose of this study, other financing schemes that have been introduced by the Nigerian government was not analysed.

1.7      Significance of the Study

The significance of this study can be viewed from two major standpoints.

This kind of study will assist in broadening understanding of the following or the scope of knowledge of the following beneficiaries:

i.     To farmers, small and new business operators engaged in agriculture and agro-allied businesses, it will help enlighten them on the operations of ACGSF in Nigeria. They will be exposed to the various opportunities provided by the  scheme through credit delivery and the guarantee of the loans.

ii.      Also  to farmers,  it will  help  in highlighting  the problems  they are faced  with  in Nigeria’s  agricultural  sector  in  accessing  credit  from  the  ACGSF  and  assist  in proffering solutions to them.

iii.      To the policy makers and regulators in the industry, it will assist them to restructure and overhaul the operations of the scheme. With proper knowledge of the operations of the scheme, difficulties associated with it can be appropriately addressed.

iv.      To economic watchers and the interested  public,  it will provide  some insight  and create awareness on the operations of ACGSF.

In the academic arena, this study will prove to be significant in the following ways:

i.     It will contribute to the enrichment of the literature on Agricultural Credit Guarantee

Scheme Fund.

ii.      It will throw more light on operations of Agricultural Credit Guarantee Scheme Fund and create new avenues for the review of existing guidelines governing the operations of the scheme.

iii.      It will recommend  ways (of interest to academics) based on empirical evidence  of boosting agricultural production in Nigeria.

iv.      The study will serve as a body of reserved knowledge to be referred to by researchers.

1.8      List of Acronyms

Abbreviations,  terms  and  notations  used  in this  study include  but are  not limited  to  the following:

ACGSF: Agricultural Credit Guarantee Scheme Fund

ADB: African Development Bank

BOI: Bank of Industry, which provides medium to long-term loans to enterprises

CBN: Central Bank of Nigeria, the apex bank in Nigeria, which supervises other banks

CGS: Credit Guarantee Scheme

CMD: Centre for Management Development

DAIMINA: Developing Agricultural Input Markets in Nigeria

DFIs: Development Finance Institutions are companies involved in project and development finance such as the Bank of Industry (BOI)

FAO: Food and Agriculture Organisation

GDP: Gross Domestic Product

IDP: Interest Drawback Programme IFC: International Finance Corporation IPD: Initiative for Policy Dialogue

LCCI: Lagos Chamber of Commerce and Industry

LDCs: Least Developed Countries

MAN:  Manufacturers  Association  of Nigeria  is  the official association  of  manufacturing companies in Nigeria

MDG: Millennium Development Goal

MSME: Micro, Small and Medium Enterprises

NBS:   National Bureau of Statistics

NACCIMA:   Nigerian   Association   of  Chambers   of  Commerce,   Industry,   Mines   and

Agriculture is an association of various Chambers of Commerce in Nigeria

NACC: Nigerian American Chamber of Commerce

NACRDB: Nigerian Agricultural Cooperative and Rural Development Bank

NAEE: Nigerian Association of Agricultural Economists Economic

NAPEP: National Poverty Eradication Programme

NASME:  Nigerian  Association  of Small and  Medium  Enterprises,  which  is an  umbrella association of all SMEs

NASSI: Nigerian Association of Small Scale Industries is the umbrella association of all the

Small Scale Enterprises in Nigeria

NCEMA: National Centre for Economic Management & Administration

NCI: National Council on Industry

NDE: National Directorate of Employment

NEEDS: National Economic Empowerment and Development Strategy

NEPAD: New Partnership for African Development

NGO: Non-governmental Organisation

NIRSAL: Nigerian Incentive-Based Risk Sharing System for Agricultural Lending

NBS: National Bureau of statistics NPC: National Planning Commission NPC: National Population Commission

OECD Organisation for Economic Co-operation and Development

SAP: Structural Adjustment Programme

SEEDS: State Economic Empowerment and Development Strategy

SHGL: Self Help Group Linkage

SMEs: Small and Medium Enterprises

SMEDAN: Small and Medium Enterprises Development Agency of Nigeria

SMEEIS: Small and Medium Enterprises Equity Investment Scheme

SRS: Simple Random Sampling

TFM: Trust Fund Model

TWN Third World Network

UNDP: United Nations Development Programme

USAID: United States Agency for International Development. WDR: World Development Report

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