THE IMPACT OF AGRICULTURAL CREDIT ON AGRICULTURAL PRODUCTIVITY IN NIGERIA

ABSTRACT

In most  agrarian  economies  like  the  type  that  exists  in  Nigeria,  agricultural  production provides the needed fulcrum upon which a sustainable development would blossom. Being the main source of food for most of the population, till date, agricultural production remains the mainstay of the Nigerian economy. It provides the means of livelihood for most of the population, a major source of raw materials for the agro-allied industries and a potent source of the much needed foreign exchange.  However, inadequate credit (among other factors) to the agricultural  sector led to the downward  trend observed  in agricultural  productivity  in Nigeria. To avert such trend, the Federal Government of Nigeria established the Agricultural Credit Guarantee Scheme Fund (ACGSF) in 1977 to assist farmers have access to credit as to improve  agricultural  productivity.  The  setting  up  of  the  ACGSF  was  predicated  on the unwillingness of commercial banks to give loans to smallholder farmers for reasons of high default rate on loan repayment and, therefore high risk, of repayment. In the course of the fund’s operations, a number of problems have been identified as militating against its smooth performance; some of which affected the amount of credit granted to the various agricultural subsectors.  Therefore,  this study sought  to examine  (i) the impact  of  Agricultural  Credit Guarantee Scheme Fund on crop output in Nigeria; (ii) the impact  of Agricultural Credit Guarantee Scheme Fund on livestock output in Nigeria; (iii) the impact of Agricultural Credit Guarantee Scheme Fund on fisheries output in Nigeria; and (iv) the impact of Agricultural Credit Guarantee Scheme Fund total fund granted on Agricultural output and productivity in Nigeria. The ex-post facto research design was adopted to enable the researcher make use of secondary data and determine  cause-effect  relationship  during the period, 1978-2008. The Ordinary  Least  Square  (OLS)  estimation  technique  was  adopted,  using  SPSS  statistical software to test the  hypotheses,  where Total Agricultural  Credit Guarantee  Scheme Fund (TACGSF),  Agricultural  Credit Guarantee  Scheme Fund to crop production (ACGSFCP), Agricultural  Credit  Guarantee  Scheme  Fund  to  livestock  (ACGSFLSP)  and  Agricultural

Credit  Guarantee  Scheme  Fund  to  fisheries  (ACGSFP)  were  used  as  the  independent variables  while Agricultural  Production  (AP),  Gross Domestic  Product  Agricultural  Crop Production   (GDPACP),   Gross   Domestic   Product   Agricultural   Livestock   Production (GDPALS) and Gross Domestic Product Agricultural Fisheries Production (GDPAFP) were used as the dependent variable. The study found that Agricultural Credit guarantee scheme fund for crop production, livestock production and fisheries had significant positive impact on crop, livestock and fisheries productivity in Nigeria for the period of the study and also, the  total  agricultural  credit  guarantee  scheme  fund  had  significant  positive  impact  on agricultural  output  in Nigeria.  The  study therefore  recommends  that  stakeholders  in the scheme viz: the farmers, lending institutions and government must show greater commitment and dedication for the scheme to achieve its laudable objectives.

CHAPTER ONE

INTRODUCTION

1.1      Background of the Study

Agricultural Production in Nigeria is progressively on the decline in terms of its contribution to the Gross Domestic Product (GDP) as well as satisfying the country’s food requirement, despite the fact that about 70 per cent of the population engage in agriculture, thus Nigeria agricultural sector is unable to fulfill its most basic and traditional role of being the source of food for the nation, therefore the food import has continued to rise (Odigbo, 2000). There is a growing  recognition  by the  Nigerian  farmers of the  effect  of  improved  inputs  and  new technologies on agricultural yield. The use of these inputs and the adoption of high yielding techniques  have  given rise to  an increased  need  for agricultural  credit  since majority of Nigerian farmers are  small-scale  farmers and are often limited  by unfavorable  economic, social, cultural and institutional conditions (Olubiyo and Hill, 2000). Insufficiency of capital has been a  major constraint to agricultural development (Agu, 1998) in order to improve agricultural production modern farm inputs such as fertilizers, improved seed, feeds and plant protection  chemicals  and  agricultural  machineries  are  needed  over  the  hoe  and  machete technology. Most of these technologies have to be purchased, yet very few farmers have the financial resources to finance such purchases (Adeniji and Joshua, 2008).

Agriculture contributes immensely to the Nigerian economy in various ways, namely, in the provision of food for the increasing population; supply of adequate raw materials (and labour input) to a growing industrial sector; a major source of employment;  generation of foreign exchange  earnings;  and,  provision  of a market  for  the  products  of the  industrial  sector (Okumadewa,  1997; World  Bank, 1998; Winters et al., 1998; FAO,  2006). The agrarian sector has a strong rural base; hence, concern for agriculture and rural development become synonymous, with a common root (Eze et. al., 2010).

Eze et. al. (2010) posit that support for agriculture  is widely driven by the public  sector, which  has  established  institutional  support  in  form  of  agricultural  research,  extension, commodity marketing, input supply, and land use legislation, to fast-track development of agriculture. These are aside the Private sector participation is not limited to local or foreign direct   and   portfolio   investment   financing,   but  also   to   sponsorship   of  research   and breakthrough on agricultural issues in universities,  capacity building for farmers and, most importantly, the provision of financing to farm businesses. International governmental and

non-governmental  agencies including the World Bank, Food and Agricultural Organization of the United Nations, etc., also contribute through on-farm and off-farm support in form of finance, input supply, strengthening of technical capacity of other  support institutions, etc (see, Eze et. al., 2010).

At  independence  in  1960,  Nigeria’s  agriculture  was  characterized  by  high  production achieved  by mobilizing  small  scale  farmers,  provision  of  infrastructure  (roads,  railways) geared towards developing crops required for export, and foundation laid for research and export. After independence, government interventions in agriculture were realized within the framework of development plans and annual budgets. Food was abundant and demand met without resort to import (Okoro and Ujah, 2009).

Using a broad classification,  the Central Bank of Nigeria (CBN) and National Bureau  of Statistics  (NBS)  document  the  import  and  export  agricultural  products  in  the  following categories – live animals and animal products; vegetable products; animal and vegetable fats and oil; foodstuff, beverages, spirit and vinegar, tobacco; and raw hides and skins leather, furskins,  and  saddler.  The  agricultural  exports  of  significance  include  cocoa  beans  and products,  rubber,  fish/shrimp,  cotton, processed  skin,  etc  (Okoro  and Ujah, 2009). These agricultural products account for about 39.7% of the  total non‐oil exports in 2007 (CBN,

2007). According to Soludo (2006), agriculture has been growing at about 7% per annum in the last three years and has been driving the non‐oil growth, and will continue to hold the key to growth, employment and poverty reduction.

In terms of value of import vis‐à‐vis export, Nigeria is a huge net‐importer of agricultural products. The import‐export gap has been widening since 1999 and this puts the agricultural policy of the nation to question. This situation, however, provides a unique opportunity for closing up or eliminating this ‘agricultural deficit’ through functional policies and budgets (Okoro and Ujah, 2009).

Agriculture also is a significant sector in the Nigerian economy. Although Nigeria depends heavily on the oil industry for her revenues, Nigeria is predominantly an agrarian society with the  sector  contributing  about  42%1  of  real  GDP  in  2008  (CBN,  2008).  In  2007,  the contribution of agriculture to economy totaled some $132.2 billion (Economist, Sept. 2008). Eboh,  Ujah  and  Nzeh  (2009)  show  that  the  contemporary  economic  significance  of  the

agricultural  sector is even more remarkable  as in the past half a decade,  the  impressive growth  rate of the  nation’s  economy  has been  driven by the  non‐oil  sector, particularly agricultural sector.  There are, however, doubts about the sustainability of the current growth rate.  The  recent  upsurge  in  agricultural  growth  rate  could  have  been  driven  mainly  by production  of  staple  crops,  while   productivity   has  remained   low  and  internationally uncompetitive,  and yields of most  crops have actually declined over the past two decades (Mogues et al., 2008; Eboh et al., 2006).

Approximately  70%  of  the  Nigeria’s  population  engages  in  agricultural  production  at subsistence level, while agricultural holdings are generally small and scattered (FGN, 2008). Smallholder  farmers  constitute  81% of all farm  holdings  and  their  production  system  is inefficient. Small‐scale (0.1‐5.9 ha), medium scale (6.0‐9.9 ha) and large scale (>10 ha) are the three broad categories of farm holdings in Nigeria, with the  small‐scale  farm holdings predominating the country’s agriculture and accounting for about 81% of the total farm area and 95% agricultural output (see, Shaib et al., 1997; FMAWR, 2009). The estimated average operational holding is 2 ha per farm family.

Further  analysis  of the working  population  data indicates  that  growth rate of  agriculture working population seems to be the driver of the growth rate in total working population. For instance the growth rate of agriculture working population dropped from 3.73% in 2003 to

1.94% in 2007, while that of the total working population dropped from 4.46% in 2003  to

3.25% in 2007 (see, Ujah and Okoro, 2009). The high correlation between growth rates of total working population and agriculture working population seems to suggest that agriculture holds the potential for tackling unemployment in the country at least in the short‐run. Despite the  significance  of  agriculture  in  the  nation’s  economy,  the  sector  is  clearly  the  least productive when compared to other sectors (Ujah and Okoro, 2009).

The Agricultural Credit Guarantee Scheme Fund (ACGSF) was formed under the  military government  in 1977 with an initial capital base of N100 million distributed  between the federal government (60% equity) and the Central Bank of Nigeria –CBN (40%). The ACGSF is exclusively managed by a board set up under the supervision of the CBN (management agent). The fund is set up with the sole purpose of providing guarantee in respect of loans granted by any bank for agricultural purposes (Central Bank of Nigeria, 1990). Nwosu et al

(2010) noted that the ACGSF was formed solely with the objective of encouraging financial institutions  to  lend  funds  to  those  engaged  in  agricultural  production  as  well  as  agro- processing activities with the aim of enhancing export capacity of the nation as well as for local consumption. This is solely exclusive for large scale farming (Somayina, 1981).

The question that comes to mind is whether the declining share of agricultural loan  from commercial banks can be traceable to the challenges that encumbered ACGSF. For example, Nwosu et al (2010)  identified  three major problems associated  with the  ACGSF scheme, which  include  increasing  incidence  of  loan  defaulters,  bank  related  problems  and  the inclusion of the term “personal guarantee”. Nwosu et al reiterates that the term is subjective in interpretation  especially  as the  decree  forming  ACGSF  was  not  able  to  explain  this. Therefore, banks utilize personal judgment and  circumstantial  framework to interpret this. This will hinder the achievement of the objective of the scheme (see, Nwosu, 2010).

One of the sole objectives for the establishment  of the ACGSF is to enhance the  export capacity of agricultural produce (Somayina,  1981). The ACGSF is aimed at  guaranteeing agricultural  outfit  that  specializes  in  the  following;  agricultural  outfit  engaged  in  the establishment and management of plantation for cash crop produce like rubber production, oil palm  extracting,  cocoa  plantation  etc;  agricultural  outfit  engaged  in  the  cultivation  and production of food crops like fruit of all kinds, tubers of yam, cereals and all other food crops and agricultural activities involved in the large scale production of animal husbandries.  The vast employment opportunity and the quest towards diversification of the revenue source by the federal government and development agencies have shifted attention towards the informal and the agricultural sector. For example, to sustain the agricultural production in Nigeria, the World Bank developed  a  project called Agricultural Development  Projects (ADPs) which was designed to enhance the production of agricultural outputs in Nigeria.

There are four sub‐sectors of agriculture in Nigeria. These are arable crops (including food

crops),  livestock,  fishery  and  forestry  (including  tree  crops).  Most  of  the   researches conducted in this area have dealt on the overall impact of the Agricultural Credit Guarantee Scheme fund on non-oil export output (Somayina, 1981; Efobi, 2011 etc) and contribution to Nigeria’S GDP (Nwosu, et al., 2010; Shaib, et al., 1997).

1.2      Statement of the Problem

Agricultural credit is expected to play a critical role in agricultural development (Duong and Izumida,  2002).  Agricultural  credit  has for long  been identified  as a major  input  in the development of the agricultural sector in Nigeria. The decline in the contribution of the sector to the Nigeria economy has been attributed to the lack of a formal national credit policy and paucity of credit institutions, which can assist farmers among other things. The provision of this input is important because credit or loan-able fund (capital) is viewed as more than just another resource such as labour, land, equipment and raw materials. It determines access to all  of  the  resources  on  which  farmers  depend  (Shephard,  1979).  However,  agricultural productions have not improved and this lead to the establishment of the Agricultural Credit Guarantee Scheme. The problems which inadequate credit through the scheme may have as pertained agricultural productivity are;

1.   Low agricultural cash crop productivity in Nigeria

2.   Low agricultural livestock productivity in Nigeria

3.   Low agricultural fisheries productivity in Nigeria and

4.   Poor Agricultural productivity in Nigeria

In  the  course  of  the  fund’s  operations,  a  number  of  problems  have  been  identified  as militating against its smooth performance, which have limited the funds contribution the cash crop,  livestock  and  fisheries  agricultural  subsectors  which  have  lead  to  low  agricultural productivity  in Nigeria.  According  to  Akinleye  et al (2005),  some of the  problems  are: increasing incidence of loan defaults, high rate of loan repayment by ACGS beneficiaries, others  are: natural  disasters,  poor  farm  management,  low  product  prices,  loan diversion, deliberate refusal to pay and the inability of farmers to  assess loan requirements properly leading to farmers receipt of inadequate or excessive loans; Participatory banks in the ACGS do not cooperate fully in lending to farmers.  Because of the high cost of processing loans relative to the actual loans and the high default, rate of the farmers, many banks prefer to pay penalty to risk lending their funds to agriculture.

Also banks fault the farmers for submitting  incomplete  application  forms. In some  cases where loans are approved, it arrives too late for it to fulfill the purpose for  which it was intended. This delay seems more of administrative  than any other.  Another  problem  that militates against the smooth operation of the scheme is on “Personal guarantee” as a security

that may be offered to a bank for the purpose of a loan. “Personal guarantee” as a condition was not explained in the decree. This therefore makes it almost nothing as its interpretation rests on the bank officials. Also, the other securities recognized by the decree that could be offered  to the bank for the purpose of any loan under the  scheme  pose problems  in the smooth operation of the scheme. The securities are legal title to land, and a life assurance policy. It is a common knowledge that most people especially in the rural areas do not have clear titles to their land which could serve as collateral for loan under the scheme (Okorie,

1998). Finally, the ACGSF has the problem of publicity. Oguoma (2002) noted that there is a low turnout of farmers in most states of the federation in patronizing the scheme because of lack of awareness.

1.3      Objectives of the Study

The general objective of this study is to examine the impact of Agricultural Credit Guarantee Scheme Fund on the agricultural  production in Nigeria.  The specific  objectives therefore include:

1.   To examine the impact of Agricultural Credit Guarantee Scheme Fund on crop output in Nigeria.

2.   To examine the impact of Agricultural Credit Guarantee Scheme Fund on livestock output in Nigeria

3.   To examine the impact of Agricultural Credit Guarantee Scheme Fund on fisheries output in Nigeria and

4.   To examine  the impact  of Agricultural  Credit  Guarantee  Scheme  Fund  total  fund granted on agricultural output and productivity in Nigeria.

1.4      Research Questions

Having considered the problems inherent in the grant of credit to the agricultural sector and specifically the impact of Agricultural Credit Guarantee Scheme Fund towards agricultural production, the following research questions were asked. These are;

1.   To  what  extent  does  Agricultural  Credit  Guarantee  Scheme  Fund  credit  to  the agricultural cash crop sub sector have a significant impact on crop output in Nigeria?

2.   To  what  extent  does  Agricultural  Credit  Guarantee  Scheme  Fund  credit  to  the agricultural livestock crop sub sector have a significant impact on livestock output in Nigeria?

3.   How far does Agricultural Credit Guarantee Scheme Fund credit to the  agricultural fisheries sub sector have a significant impact on fisheries output in Nigeria?

4.   To  what  extent  does  Agricultural  Credit  Guarantee  Scheme  Fund  credit  to  the agricultural sub sector have a significant impact on agricultural output in Nigeria?

1.5      Research Hypotheses

As a result of the of the research questions raised above, the hypotheses for this study are:

1.   Agricultural Credit guarantee scheme fund does not have a significant positive impact on cash crop output in Nigeria.

2.   Agricultural Credit guarantee scheme fund does not have a significant positive impact on livestock output in Nigeria.

3.   Agricultural Credit guarantee scheme fund does not have a significant positive impact on fishery output in Nigeria and

4.   Agricultural  Credit  guarantee  schemes  fund  does  not  have  a  significant  positive impact on agricultural output in Nigeria.

1.6      Scope of the Study

The research covers the period 1978 to 2008.   The Agricultural Credit Guarantee  Scheme Fund  (ACGSF)  was  established  by Act  20  of 1977  but  started  operation  in  1978.  The principal  objective  of the Scheme  was to facilitate  the provision  of credit  to farmers by providing guarantees to participating banks known as deposit money banks (DMBs) for loans granted to farmers in accordance with the scheme enabling act. Therefore, this research will examine the impact of the scheme since it was established to 2008.

1.7      Significance of the Study

This study is bent on contributing to the literatures available in finance. It will go further in establishing reasons why subsequent research in this area will contribute to the growth and development  of emerging  markets  like  Nigeria.  The following  users  will  find  this  study useful and pertinent;

i)    Government

The government is keen on exploring ways by enacting policies that are in consonance with the establishment and promotion of improved Agricultural productivity and  output.  Hence, the government stands the better position of making sure that the growth of the economy is taken into consideration to better the standard of living of its citizenry.

ii)    Academic Purpose

An advancement of knowledge is achieved when series of research are being carried out in the academic environment. Thereby the scope and horizon of the readers or researchers are widened in order to achieve academic excellence through series of research, development of the intellectual faculty and planning. This also led to the gathering and update in the volume of literature for various field of study that are applicable majorly to finance students.

1.8      Definition of Terms

The following terms as they relate to this study is defined; these are:

Agricultural development:    is a process that involves adoption by farmers of new and better practices (Garba, 1987; Orebiyi, 1999).

Agricultural Credit:             Credit that facilitates the acquisition and application of state of the art technology and enables such enterprise to

be in the driving seat in technology application (World

Bank, 2000).Agricultural Productivity:    Increased in agricultural sector contribution to the Gross domestic Product of the nation (Idachaba, 1995)

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