An Appraisal Of The Impact Of Deposit Money Banks On The Agricultural Sector (1980 – 2015)

Project and Seminar Material for Economics

Abstract

Nigeria is endowed with huge expanse of fertile agricultural land, rivers, streams, lakes, forest and grassland, as well as a large active population that can sustain a high productive and profitable agricultural sector; yet the country is an import dependent nation even of the commodities she would have ordinarily produced, given her natural endowment. The study then investigates the impact of Deposit Money Banks on the Agricultural sector with this question in mind: “does it mean that deposit money banks are not advancing adequate credit that will boost the productivity of the agricultural sector?”We developed two models, in line with economic theory.

The first model investigates the impact of Commercial Bank credit and Government expenditure on agriculture on the level of Agricultural productivity in Nigeria. The second model looks at the contribution of agricultural productivity on the Gross Domestic Product with interest rate as a control variable. The study found that deposit money banks’ credit and interest rate does not have impact on agricultural productivity in Nigeria. Other findings of the study are agricultural output has significant impact on economic growth Nigeria; and Government spending on agriculture in Nigeria has impact on agricultural productivity. The study recommends that government should map out long-tenured fund for agricultural purpose in commercial banks and disbursement of such fund adequately monitored.

Chapter One

Introduction

1.1 Background of the Study

In the early stages of economic development of most developing countries including Nigeria, agriculture and the agrarian population generates a greater proportion of the gross domestic product (GDP) and invariably stimulates the development of other sectors of the economy. The place of agriculture, in Nigerian’s economy has remained critical over the years since independence .This is because prior to the political crisis of 1967-1970, the country’s food demand was satisfied from domestic production thereby obviating the need to utilize scarce foreign exchange resources on food importation. Prior to growing fortunes of the petroleum sector in the 1970’s , agricultural played enormous role in the Nigerian economy in terms of its contributions to labour force employment and GDP as shown by Tomori (1979), Agriculture is still the main stay of the Nigerian economy, without 70% of the country’s labour force employed in this sector.

At independence in 1960 the percentage contribution of the sector was about 70% as indicated by the CBN Publication. Also, substantial amount of capital were derived from the agricultural sector through tax revenue as shown by Hewlleiner (1966) between the periods of 1950-1967. The accumulation of marketing surplus from the agricultural sector was also used to finance many other developmental projects, for example University of Nigeria Nsukka was established with the revenue accumulated by the marketing board in the eastern and western Regions of Nigeria. With the political crisis and the rising fortunes of the petroleum sector in the 1970’s ,available statistical publications indicates that the agricultural sector’s contributions to the economy in terms of output growth (GDP), labour employment ,adequate food supplies , investment capital and linkages with the rest of the economy became low (CBN Publication).This development in the sector resulted in rising food prices and inflation, increased food importation and agricultural raw materials for the nations local industries, a relative decline in agricultural export earnings and deteriorating standard of living of the common man.

The socio-economic and political implication of this situation can be better imagined as any nation that cannot feed its people apparently becomes a beggar Nations and politically Volatile. Given the enormous and strategic importance of the agricultural sector to the economy, the urge to foster the sector’s growth and development in terms of producing both quantity and quality agricultural commodities to meet the nutritional requirements of our people as well as industrial need ,has often compelled governments to intervene in the areas of extension ,input supply ,credit and marketing services.

According to CBN (2000), Nigeria is endowed with huge expanse of fertile land, rivers, streams, lakes, forests and grasslands, as well as a large active population that can sustain highly productive and profitable agricultural sector which can ensure self-sufficiency in food and raw materials for the industrial sector and as well provide gainful employment for the teeming population and generate foreign exchange for the economy. Ironically, the reverse is the case. Several factors account for the poor performance of the agricultural sector in Nigeria; these include virtual neglect of the sector, poor access to modern inputs and technology, and lack of optimum credit supply. (Enyim, et al, 2013). Aside the problem of poor access to modern technology, the major bane of agricultural development in Nigeria is low investment finance. (Salami and Arawomo, 2013).

Qureshi, Akhtar and Shan (1996), in their contribution argued that Banks credit has the capacity to remove the financial constraints faced by farmers, as it provides incentives to enable farmers to switch quickly to new technologies which can enhance the achievement of rapid productivity and growth. Umoh (2003) maintained that banks’ credit constitutes the power or key to unlock latent talents, abilities, visions and opportunities, which in turn act as the mover of economic development.

Banks’ credit has a significant contribution to economic development by enhancing production and productivity and thus higher income and better quality of life to the people. However, from available statistics of deposit money banks total sectoral credit distribution in Nigeria, the allocation to the agricultural sector, given the importance of the sector, is insignificant. For instance, credit allocation to the sector fluctuated between 6.98% and 10.66% in 1981 to 1985; between 10.66% and 16.15% in 1985 to 1990; between 16.15% and 17.5% in 1990 to 1995. It declined sharply to 8.07% in 2000, 2.46% in 2005, 1.67% in 2010, and fluctuated between 1.67% and 3.44% in 2010 to 2013,and also fluctuated between 3.4% and 3.7 % in 2014 and 2015 (Source: CBN Annual report- 2015).

1.2 Statement of Problem

Several researches have shown that Nigeria is endowed with huge expanse of fertile agriculture land rivers, streams, lakes, forest and grassland, as well as a large active population that can sustain a high productive and profitable agricultural sector. Adubi (2000) admits that this enormous resource if well managed could support a vibrant agricultural sector capable of ensuring self- sufficiency in food and raw materials for the industrial sector as well as, providing gainful employment for the teeming population and generating foreign exchange through exports. In spite of these endowments, the sector has continued to record a declining productivity.

The capacity of the sector to fulfill it tradition roles in Nigerian economy has been constrained by various social-economic and structural problem such as; Unavailability of credits to local farmers, the civil war of the late 1960S , the severe drought of the early 1970s and 1980s, the discovery of oil (the oil boom of the 1970 created relative disincentives for agriculture in relation to other sectors of the economy), High interest rates on loans to farmers ,Rural- urban migration, Ineffective institutions charged with policy implementations. Not until recently, have government seriously thought and attempted to mobilize potential savings for the rural farmers. Deposit money banks themselves have given little attention to the approval of loans to farmers for fear of defaults. Where credits are received from other sources apart from government and commercial lending, the interest rates have been too high. These reported high interest rates are stark realities to the peasant farmers.

However, Ogunfowora et al (1972) attributed most of the short comings on institutional credits in Nigeria to factors such as, ineffective supervision or monitoring insufficient funds, political interference, cumbersome and time consuming loan processing, large loan defaults and absence of financial projections, this short comings lad to some policies formations like (OPN) Operation feed the Nation in 1976, which was to increase food productivity, encouraging food nutrition and self-sufficiency of food supply, and in the 1980s the establishment of national agriculture land development authorities (NALDA), and in 1987 the establishment of the directorate of foods ,roads and rural infrastructure by the Babangida administration. The question deducible from the above is: How have the credit institutions especially deposit money banks been able to impact the level of agricultural productivity in Nigeria? Is the high interest rate on loans given to farmers really preventing them from borrowing from credits institutions? Is market failure the problem of low productively in Nigeria Agricultural sector?

1.3 Objectives of Study

The objectives of this study are to:

Evaluate the impact of deposit money banks credit on agricultural productivity in Nigeria;
To assess the effect of government spending on Agricultural productivity;
To assess the effect of agricultural productivity on the Growth on the Nigerian Economy; and
To analyze the problem and make appropriate recommendations for improving the effectiveness of agricultural credit policy in the light of the recent trends and future role of Agriculture in the Nigerian Economy

1.4 Significance of the Study

The significance of this research work is quadripartite –to the government, the business unit, the society and to me, the researcher.

To the government, most especially planners, a good understanding of the role of deposit money banks credit policies to agricultural development is a requisite for effecting current and future planning with respect to agricultural policies and programs that are geared towards boosting the economy.
To the business unit, particularly agricultural firms, the study is expected to help them identify and comprehend agricultural credit policies of the deposit money banks and thus make viable investment decisions.
To the society, the study is expected to improve their welfare by recommending appropriate macroeconomics policies that are primarily aimed at increasing the level of food production.
Finally to the researcher, the study would afford me an opportunity to explore a comparative analysis of the impact of deposit money banks credit policies on the Agricultural sector and on the basis to recommend appropriate policies.

1.5 Research Hypotheses

In carrying out this research work the following assumptions are made to further facilitate the analysis of the study.

H01: Deposit money banks’ credit does not have impact on agricultural productivity in Nigeria.
H02: Interest rate of deposit money banks’ credit has no influence on agricultural productivity in Nigeria.
H03: Agricultural output has no significant impact on economic growth.
H04: Government spending in Nigeria has no impact on agricultural productivity.

1.6 Scope and Limitation of the Study

This investigation of the impact of commercial bank credit on the agricultural output in Nigeria is form the period 1980-2015. The major problem encountered by me is inconsistency of data. The data as reported by CBN is not consistent with that of federal office of statistics. Despite this problem, I still believe that the result of my study will go a long way in guiding future policy making in this era.

Chapter Five

Summary, Policy Recommendations and Conclusion

5.1 Summary

The worry that Nigeria is endowed with huge expanse of fertile agricultural land, rivers, streams, lakes, forest and grassland, as well as a large active population that can sustain a high productive and profitable agricultural sector; yet the country is an import dependent nation even of the commodities she would have ordinarily produced, given her natural endowment motivated this study. A guiding question of this study is: “does it mean that deposit money banks are not advancing adequate credit that will boost the productivity of the agricultural sector?”

To have good insight into this study, we developed two models, in line with economic theory and found that deposit money banks’ credit and interest rate does not have impact on agricultural productivity in Nigeria. Other findings of the study are agricultural output has significant impact on economic growth Nigeria; and Government spending on agriculture in Nigeria has impact on agricultural productivity.

5.2 Policy Implications / Recommendations

The deposit money banks’ credit to agricultural productivity is not statistically significant, though positive. The implication of this is that commercial banks in Nigeria are not willing to lend to farmers. Perhaps, they are not willing to wait for longer time when agricultural yields would be sold and the loans repaid. Another issue that may contribute to the insignificant nature of the deposit money banks’ credit on the agricultural productivity is poor channeling of fund. Farmers may borrow and will not channel the borrowed fund to the purpose it was borrowed to increase agricultural productivity. Cost of borrowing from the commercial banks also could contribute to the insignificant impact of deposit money banks’ credit to agricultural productivity. In other to improve agricultural productivity through credit, efforts should be shifted away from commercial banks in providing loans to farmers since they are interested in immediate return to their investment. Government should intensify efforts in educating the farmers on the existence of Bank of Agriculture (BOA). Also BOA should be spread evenly across the nation. It is also recommended that government should map out long-tenured fund for agricultural purpose in commercial banks and disbursement of such fund adequately monitored.

Government expenditure on agricultural sector is significant. Policy should be sustained in other to reap more benefits of government spending on this sector. More capital spending should be encouraged in other to produce more for export.

Agricultural output is positive and statistically significant. This is expected having observed that government expenditure on agriculture is yielding good result. However, the contribution of agricultural sector to the GDP is very small (about 0.7%). The implication of this poor contribution of agricultural sector to the GDP could be attributable to poor marketing outlet of agricultural product and/or inadequate methods of harvesting and preserving the agricultural produce. Hence earnings are lost and resulted to poor contribution to overall GDP. It is therefore recommended that leakages to earnings from agricultural sector be tightened. Industries that could preserve and package these agricultural produce should be given fertile ground to operate. Government should equally assist in providing implements that could harvest these produce without wastages.

5.3 Conclusion

The result from this study reveals that deposit money banks’ in Nigeria does not significant on the agricultural sector, for the period under study (1980 to 2015). On this note we suggest that efforts should be shifted away from commercial banks in providing loans to farmers since they are interested in immediate return to their investment. It is also recommended that government should map out long-tenured fund for agricultural purpose in commercial banks and disbursement of such fund adequately monitored.

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