Assessment Of The Impact Of Bank Credit On Agricultural Development (A Case Study Of First Bank Of Nigeria Plc)

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Abstract

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The study is an investigation into the impact of Bank Credit on Agricultural Development with emphasis on First Bank of Nigeria Plc.

Specifically, I examined the effect of Central Bank of Nigeria credit guidelines and other financial bodies on Agricultural Development, also examined the relationship of bank lending policies in Nigeria, and to what extent there credit facilities are effectively been utilized by the farmers.

Two major statistical tools were adopted, while a time-series analysis was conducted to observe the movement of the loans and advances against the years loans were utilized by small and large scale farmers.

Some of the major findings of these tests confirm that bank credit has a significant impact in Agricultural Development for the small and large scale farmers.

Further investigation shows that the highest agricultural loan was granted in 2009 with over One Hundred and Seventy Five Million Naira the loan granted in 2010 and 2011 decreased drastically by 20 percent which was basically due to the global financial meltdown.

Based on these results, some of the major recommendations are that Federal Government should increase the banks share and credit base in order for the bank to cope with increasing loans demand.

Finally, for credit to be more effective, other sector of the economy should asked to corporate with the bank in providing the relevant service to support the scheme the bank in its bid to relive farmers other predicaments.

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Table Of Contents

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Preliminary Page(s)

• Title Page
• Declaration
• Approval
• Dedication
• Acknowledgement
• Abstract
• Table of Content

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Chapter One:

Introduction

• 1.1 Background of the Study
• 1.2 Statement of the Problems
• 1.3 Objectives of the Study
• 1.4 Research Questions
• 1.5 Research Hypotheses
• 1.6 Significance of the Study
• 1.7 Scope of the Study
• 1.8 Limitation of the Study
• 1.9 Definition of Terms

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Chapter Two:

Literature Review

• 2.0 Introduction
• 2.1 Conceptual Framework
• 2.2 The Nigeria Agricultural History
• 2.2.1 Agricultural Sector in the Pre Independent Era
• 2.2.2 Agricultural Sector in the Post Independent Era
• 2.3 Credit And Its Role Agriculture
• 2.4 Sources of Agricultural Credit
• 2.5 Agricultural Finance
• 2.6 The Role of Financial Institution in Agricultural Financing
• 2.6.1 Central Bank of Nigeria Role 2.6.2 Commercial Bank’s Role 2.6.3 Development Bank’s Role 2.6.4 Merchant Bank’s Role
• 2.7 Terms of Agricultural Credit Repayment
• 2.8 Rural Banking and Agricultural Extension
• 2.8.1 Problems of Rural Banking
• 2.9 First Bank Agricultural Scheme
• 2.9.1 The First bank Farm Settlement Scheme
• 2.9.2 Guaranteed Fund Credit (GFC)
• 2.9.3 Multi-Channels Agricultural Finance Scheme (Multi-Cafs)
• 2.9.4 First bank Agricultural Credit To Schools (Facts)
• 2.9.5 National Agro Dealer Scheme (NADS)
• 2.9.6 GSM 102
• 2.9.7 Commercial Agriculture Credit Scheme
• 2.10 First Bank Nigeria Plc Finance Operation and Evaluation
• 2.11 Problems of Agricultural Credit Repayment in Nigeria
• 2.11.1 Farmer Related Problem
• 2.11.2 Bank Related Problems
• 2.11.3 Government Related Problems 2.12 Problems of Agriculture

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Chapter Three:

Research Methodology

• 3.0 Introduction
• 3.1 Sources of Data
• 3.2 Population of the Study
• 3.3 Sample Size and Sampling Techniques
• 3.4 Restatement of Research Hypotheses
• 3.5 Method of Analysis
• 3.6 Assumption to Questionnaire
• 3.7 Validity of the Research Instrument
• 3.8 Reliability of the Research Instrument

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Chapter Four:

Data Presentation and Analysis

• 4.1 Introduction
• 4.2 Personal Characteristics of the Respondent
• 4.3 Response of Respondents to the Problem Areas.
• 4.4 Testing and Interpretation of the Hypotheses
• 4.4.1 Analysis of Hypothesis One
• 4.4.2 Analysis of Hypothesis Two
• 4.5 Presentation of Secondary Data
• 4.6 Discussion of Result

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Chapter Five:

Summary, Conclusion and Recommendation

• 5.0 Introduction
• 5.1 Summary of Findings
• 5.2 Conclusion
• 5.3 Recommendations
• 5.3.1 Recommendation for the Government
• 5.3.2 Policy Recommendation for the Bank
• 5.3.3 Policy Recommendation for Farmers
• Bibliography
• Appendix I

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Chapter One

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Introduction

1.1 Background of the Study

Like many other African countries, Nigeria is primarily agrarian with its abundant land and water resources. Despite the rapid growth of the oil industry over the years, agriculture still accounts for 40% of GDP and provides employment (both formal and informal) for about 60% of Nigerian’s 150 million people. Nigeria’s agriculture remains largely subsistence-based with about 80% of agricultural output coming from rural farmers living on less than a dollar per day, earned from farming less than one hectare (2.47 acres). Nigeria has diverse agro-ecological conditions that can support a variety of farming models to create its own green revolution.

However, successive administrations neglected agriculture over the years and failed to diversify the economy away from overdependence on the capital-intensive oil sector. Nigeria was once a large net exporter of agricultural products and the sector was the major foreign exchange earner before the advent of oil in 1970s. Nigeria is currently a huge net importer of agricultural products, with such imports exceeding $3 billion in 2010. The country has the potential to return to its previous position if adequate attention is given to agricultural growth policies, finance and provision of rural infrastructure.

The fact of the matter is most of the smallholder farmers lack access to capital to acquire the needed inputs to increase their productivity and incomes and reduce their poverty. Farmers require credit to purchase seeds, fertilizers, herbicides, and buy or rent mechanized equipment and related services.

Nigerian agricultural policy recognizes the vital role of agriculture finance in attaining the much desired green revolution. A major focus of the policy is to establish a system of sustainable agricultural financing schemes, programs and institutions that could provide micro and macro credit facilities for the small, medium and large-scale producers, processors and marketers. However, public expenditure on agriculture which serves as the bedrock of financing for the sector has consistently fallen short of recommendations. It is therefore not surprising that these policies have failed to achieve the set goals of food self-sufficiency, self reliance, poverty reduction and rural development. Importantly, Nigeria agriculture is abysmally under-financed. At a public forum in early 2011, the Governor of the Central Bank of Nigeria (CBN) was quoted to have said “currently agriculture accounts for 40 percent of the GDP, yet it receives only one percent of total commercial bank loans.” This is significantly below the level of other developing countries, e.g. Kenya and Brazil which reportedly registers 6 percent and 18 percent, respectively.

Nigeria’s agricultural development is constrained by the lack of access to credit for the predominantly smallholder farmers. Efforts by successive governments to address the problem have been largely unsuccessful. Commercial banks in the country perceive agricultural finance to be high-risk. The Central Bank of Nigeria is making efforts to de-risk the sector and encourage banks to lend to farmers.

This research work tends to asses the impact of bank credit on agricultural development with special reference to First bank Nigeria Plc. The role of the Central bank of Nigeria (CBN) and some other commercial banks will also be examined.

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1.2 Statement of the Problems

It is important to note that in the early 70s when the oil price increased, the agricultural sector suffered a serious neglect as the focus and concern of the nation’s economic activities and government revenue shifted to the industry. Consequently, price fell in the world market.

The Nigerian food import bill assumed an unprecedented level of about N1.5billion while the traditional agricultural exports were progressively declining. The need then arose for re-engineering the agricultural sector and a fundamental restructuring of the economy towards self-sustaining growth and development. After the post independent, the CBN established some agricultural agency like Credit Guarantee Loan Scheme (1972) to address the problem of agriculture by granting loan and advances to agricultural sector, but this scheme was not properly implemented.

1971, an agricultural reform was established called “Operation Feed the Nation”. Poor assessment and implementation of the programme could not allow the government to achieve its objectives.1989, the government came up with a reform called Structural Adjustment Programme, the programme was also with a wrong motive.

The Bank reform 2005 by CBN resulted in the growth of the banks with new branches springing up everywhere across the major cities, and was celebrated by self-deluded bourgeois ideologues. The banks were given a clean bill of health, and they were said to be poised to finance the critical sector of the economy. Rather than invest in the real sector of the economy like agriculture, manufacturing, iron and steel, etc that will bring about improved productivity in the economy, the banks went into the oil whose price has now crashed at the international market. In addition, they also invested colossal sums of money in the casino market, where they speculated wrongly in anticipation for quick returns, but the stock market has now crashed, and the banks have lost over 900 billion naira invested in shares.

First Bank Plc currently has a loan scheme called Farmers First, which started in 2008. Under this scheme purportedly meant for all categories of farmers, the individuals or group of farmers who want to access the loan (N1million minimum) are expected to meet the following requirements before they are eligible: own an existing farm for some time; open and run current account for a period of six months; deposit 25 per cent of the total sums intended to borrow; six months moratoria; agriculture insurance; and other sundry charges. These hurdles notwithstanding, many poor farmers who have scaled it are still denied the loans on flimsy excuses, grounds for the rich farmers.

Nigeria’s agricultural development is constrained by the lack of access to credit for the predominantly smallholder farmers. Commercial banks in the country perceive agricultural finance to be high-risk making it difficult to grant predominant farmers loan.

The researcher tends to examine the impact of commercial banks to these problems and proffer suggestions and recommendation that could limit these challenges.

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1.3 Objectives Of the Study

The broad objectives of this research work is to examine the impact of bank credit on agricultural development. Other specific objectives include;

1. To examine the effect of CBN Credit guidelines and other financial bodies on Agricultural development.
2. To examine the relationship of bank lending policies in Nigeria as the relate to Agricultural development.
3. To examine how effective or defective are these credit policies on the preferred Sector of an economy.
4. To examine factors that are responsible for only few individuals and small-scale agriculture industries benefiting from such polices.
5. To proffer recommendations on Assessment of the Impact of Bank Credit on Agricultural Development.

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1.4 Research Questions

For the purpose achieving the objectives of this research study, the following research questions were asked.

1. Does any relationship exist between the CBN credit guidelines on agriculture and agricultural development in Nigeria?
2. Is there any significant difference between the loan repayment of small and large-scale farmers?
3. Is there any Relationship between the type of borrower and loan repayment?
4. Is there any significant relationship between gender and loan repayment patters of farmers?
5. Is there any significant relationship between the types of security pledges and repayment patterns?
6. Is there any significant relationship between the educations of farmers’ and loan repayment?
7. What are the banks lending policies in Nigeria as they relate to agricultural development?
8. What factors are responsible for only few individuals and small scale agriculture industries benefiting from such policies?

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1.5 Research Hypotheses

Hypothesis is a tentative answer to a research question. It is a conjectural statement about the relationships that exist between two or more variables which needs to be tested empirically before they can be accepted or rejected. In a research work, hypotheses are never proved or disproved, they are either supported (i.e. accepted) or rejected. To provide answer to the research questions arising from this study, the following hypotheses are postulated.

Hypothesis 1

• Ho: There is no significant relationship between the CBN credit guidelines on agriculture and agricultural development in Nigeria.
• Hi: There is significant relationship between the CBN credit guidelines on agriculture and agricultural development in Nigeria.

Hypothesis 2:

• Ho: There is no significant relationship between the type of borrower and there repayment patterns.
• Hi: There is significant relationship between the type of borrower and their repayment patterns.

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1.6 Significance of the Study

This research study focus on the assessment of bank credit on agriculture and how effectively this credits utilization enhances the agricultural development.

In essence, the study will be useful to the managers of economy if there is a significant improvement in the area of agriculture with the justification of effective utilization of funds which lead to sustainable in the area of economy development.

The work will contribute to already existing works in the field of economy and agricultural performance in Nigeria.

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1.7 Scope of the Study

The research would focus on the activities of First Bank Nigeria Plc., towards the financing and development of agriculture in Nigeria. Emphasis would be on operational schemes of the bank, condition and pre-requisites for borrowing, financing procedures, sources and application of funds, evaluation financing. The study would cover a definite period to enable us have a clear vision of the role of First Bank Nigeria Plc. in relation to agricultural credit in Nigeria. The study uses data on agriculture loan and advancement extracted from First bank annual journal, 2012 that covers 2000-2011

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1.8 Limitation of the Study

In the course of conducting this research work it is expected that the following will constitute impediments to the effective conduct of the study

1. Time constraint within which the study must be completed.
2. Financial constraint
3. Inaccessible and inadequate data

Nevertheless, I believe the above limitations will in no way affect the reliability and validity of the research study.

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1.15 Definition of Terms

Credit or Loan:

Used interchangeably. It refers to the cash or goods or services granted by the financial institution (e.g. bank) to a beneficiary (borrower) to use in the present with a pledge to pay back at a future date.

Loan Repayment:

This is the fulfillment of a loan obligation

Collateral Security:

Is an asset pledge against the performance of a loan.

Loan Disbursement Lag:

Gives an indication to the timeliness of a loan delivery. This is measured by the number of days between application and disbursement.

Loan Delinquency:

Loan default or non-performing loan means the same. It is a failure to fulfill loan obligation. A loan becomes defaulted if the interests is ninety days over due and not enhance or extended.

Socio Economic Station:

Is determined by the farmers’ asset structure which defines his/her standard of living. The assets include: Type of House, Radio, Wrist Watch, Motor Cycle, Bicycle, Car, Television, Farm Produce Processor.

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Chapter Five

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Summary, Conclusion and Recommendation

5.0 Introduction

This chapter marks the latter stage of this study. It summarizes the finding of the analysis and conclusion is drawn based on the results of the analysis.

However, to bring this research work to a logical conclusion, certain deductions are made and recommendations were drawn consequently.

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5.1 Summary of Findings

As revealed in this study, the importance of banks in the development of economy cannot be over-emphasized. Commercial banks are catalysts in the development of the economy. They are established to fill the gap created in the financial system and to perform such function which other financial institution may not be interested in.

First Bank Nigeria Plc is a commercial bank established in 1894. FBN Plc has designed various schemes that would help peasant farmers. Among the schemes operated were the agricultural micro-finance, established in 1990, another of such scheme is the self-help group and the middle scheme credit development scheme. These schemes were designed to aid farmers by providing them with loans at minimal interest rate, providing educative avenues like workshops extension services and management of business and a host of others.

Furthermore, through FBN Plc operations, there now exist established small-scale farming business in poultry, horticulture, piggery, rabbit farming and a host of others, with this development, small scale farmers have now benefited from such project.

The result of the analysis shows that there is significant relationship between the CBN credit guidelines on agriculture and agricultural development in Nigeria. Thus, the agricultural policies of CBN has really enhanced agricultural development in Nigeria.

The result also shows that there is significant relationship between the type of borrower and their repayment patterns; educations of farmers and loan repayment; and types of security pledges and loan repayment patterns.

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5.2 Conclusion

From the foregoing, much as credit is important, the problem of Nigerian agriculture is not necessarily that of lack of credit, indeed, credit above is wholly inapplicable as a means of meeting the agricultural development process and ineffective to persuade farmers to accept new technologies.

Agricultural credit loans plays beneficial role only when it forms parts of a later phase of multi-component national development programmes. Besides, the social psychology of the Nigerian farmer has to be changed; he has to be convinced that there is as much success in farming in Nigeria as there is in other professions such engineering, Architecture, surveying etc.

From the analysis of study, it could be concluded that, the agricultural policies of CBN has really enhanced agricultural development in Nigeria.

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5.3 Recommendations

FBN Plc, like much successful institution in Nigeria is subjected to many opportunities and criticism. It is criticized by the government for not meeting up to her (governments) expectations that it (FBN Plc), ought to have the right to inject a massive momentum into the nations agricultural process and the bank is also accused by agro-businessmen of extreme rigidity of conditions requirement and bureaucratic tendencies.

The recommendation shall be of three forms, phase one will consider recommendation to the government, the second will be to the bank and lastly the farmers would be given their own recommendations.

5.3.1 Recommendation for the Government

Since it is the desire of the government to have agricultural based economy via total transformation of the agricultural sector, the government should in addition to existing schemes implement the following:

1. The federal government should increase the bank’s share and credit base in order for the bank to cope with increasing loans demand.
2. The federal government should come up with a policy directed towards subsidizing the price of farm inputs in addition, indigenous and private bodies and companies should be encouraged to produce these inputs through local sources of raw materials and these should be bought at a cheap rate by farmers.
3. Enlightenment programmes should be embarked upon to enable farmers get to know what obtains at FBN Plc.
4. The CBN should ensure that monetary policies directed towards agriculture are fully embarked and implemented.
5. The CBN should periodically examine the financial books of the bank and ensure that FBN re-coups the loans made to its clients as and when due.
6. Finally, for credit to be more effective, other sector of the economy should asked to cooperate with the bank in providing the relevant service to support the scheme the bank in its bid to relive farmers other predicaments.

5.3.2 Policy Recommendation for the Bank

There exist an infallible fact that FBN is trying to meet the needs and aspirations of the farmers in their bid to transform the Nigerian economy with an agricultural base. However, a lot still needs to be done. These include:

1. The bank should plough part of its annual profit into establishment of storage facilities in state/local government areas and charged a token fee for the service in order to remove the problem of storage that has reduced the income of farmers drastically over the years.
2. FBN should carryout massive enlightenment campaign geared towards peasant farmers, in order to create awareness in them as regards the banks activities. Through, the bank has been involved in enormous publication, and form this research work we discovered that it has mostly educated the elites rather than the peasant farmers.
3. The bank should always give professional advice and assistance to its client during loans documentation in order to reduce the burden of loan document preparation and verification on the part of its clients.
4. The bureaucratic procedures entailed in its administrative system should reduced to the barest minimum, although, the professional ethics or norms should not be jeopardized.
5. Loans approved should be timely disbursed to enable clients make use of money as and when due. This is very crucial as agricultural operations in this part of the world are time sensitive especially in arable enterprise. This is however attributed to the level of technology, thus FBN should place more emphasis on timely disbursement of approval to enable farmers make the necessary purchase when mostly needed.
6. The bank should ensure continual supervision of loan after it has been disbursed, it has been revealed from earlier work that instead of funds being ploughed into what they were obtained for, they are rather diverted into other un-economical projects like taking of chieftaincy title, marrying wives, and other ceremonies thus, face the problem of repayment when the time comes. This supervision in addition to checking this attitude will also enable the bank to give necessary advice to the farmers on how to improve their operation.
7. The bank should intensify her activities towards the recovery of loans. Loan beneficiaries should be asked to pay back loan obtained when due and failure to pay back by beneficiaries should be match with some sanctions such as refusal of further loans, prevention from enjoying facilities of other bank. However, despite the positive relationship between the loans disbursed and repaid much can still be done since most of the bank loans recouped will be lent out to future beneficiaries.
8. The bank should endeavour to grant credits (loans and advances) in good time to farmers/borrowers and employ qualified agricultural credit officers who would effectively appraised viable projects and monitor farmers performance.
9. FBN should examine it’s role not only in terms of absolute amount of total funding extended to clients and the number of projects approved for financial reasons but also the status and targets of particulars in terms of development functions and FBN’s achievement is each state.

Although, the problem of presenting qualitative targets may exist but improved managerial skills in forecasting will minimized the difficulty.

5.3.3 Policy Recommendation for Farmers

Farmers and beneficiaries of FBN scheme should desist from non-repayment of their loan. They should not see the loans from the bank as their “own share of the national cake” which needs not to be repaid rather they should endeavour to repay such loans as and when due having in mind that there exist other peasant farmers who would need such loans as they have received from the bank.

Peasant farmers that have received the assistance of the bank either by way of loan or technical assistants should be growth oriented. They should think of how best to increase their production and gain more of the market supply with loan received. In other words, their product possibility frontier should be greater than their consumption function.

Farmers in the village should organize themselves into groups in the form of cooperatives to enable them secure loans from the bank easily, have access to exhibitions and workshops that might be organized by the bank. In addition, such organized groups think of how to secure more loans from other financial bodies.

Loans received by farmers should be invested into the project for which the loans is meant for and not for the farmers to and marry more wives and embarking in title taking.

Farmers should learn how to be prudent in the management of funds and at the close of the farming years. Profit accruing should be ascertained and re-invested in the project or other self-liquidating related projects rather than being consumed as the farmers normally do.

As a corollary of (5) above, the farmers should learn how to keep accounting record/book keeping o their farm produce in order to easily ascertain cost of inputs and accrued profits.

Farmers should ensure that there is a constraints limit between them and the banks to enable them know from time to time the latest development and guidelines that would enhance greater productivity and access to the bank loans and other credit services.

Farmers amongst other things should be honest in their dealing with their bank by prompt repayment of loans. They should report their problem promptly for a joint solution by all agro-service managers.

In conclusion, if the foregoing recommendations are accepted by the parties involved and equally complied with the later, it can be justifiably hoped that FBN Plc will be better placed to contribute to the crucial task of financing agriculture in Nigeria. They should invariably make the expected and desired agriculture self-sufficiency to be attained in Nigeria.

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