Deposit Money Bank Loans And Agricultural Sector Performance In Nigeria

Project and Seminar Material for Accountancy / Accounting

Deposit Money Bank Loans And Agricultural Sector Performance In Nigeria


The study examined the deposit money bank loans and agricultural sector performance in Nigeria.

This study employed regression analysis method to show if there is significant relationship between deposit money bank loans and agricultural sector in Nigeria for the period of 2006-2015. Real bank rate could not be given by the CBN and financial institutions, 45% of the total 100% of the original distribution bank credit gotten from its Statistical Bulletin of the Central Bank of Nigeria was used.

Hypothesis generated for the study was tested at 0.05 level of significance using ordinary least square (OLS) regression analysis, To ensure the content and face validity of the instrument, Serial Correlation LM Test and White Test of Heteroskedasticity were carried out to ensure that the data for this study was fit for the model for the validity of the instrument.

Result from the study indicated that bank credit is key variables of deposit money bank loan that significantly have relationship with agricultural productivity.

Also, agricultural sector with better bank credit naturally tend to perform better than other sectors.

Findings were discussed and relevant recommendations were made for further studies.

Chapter One


1.1 Background to the Study

Nigeria is the largest country in West Africa and shares its boundaries with Cameroon on the East, Niger and Chad on the North, Benin on the west and the Gulf of Guinea on the south. Its topography consists of the northern savannah, the middle belt tropical rainforests and the southern mangrove swamps. Anyanwu (1979) observed that the significance of the agricultural sector to human existence generally cannot be over emphasized in an emerging economy such as Nigeria. This is in consonance with the fact that Nigeria as a country is highly endowed with abundant natural resources including land and labor with a large percentage of the populace living in rural areas that depend on agriculture to a large extent to make a living. Okwuosa (1970) argues that 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 its teeming population. This underscores the contribution of agriculture to the overall development of the economy especially in emerging economies which is apparent in the provision of gainful employment, provision of increased food supplies, provision of capital, capital formation, increasing foreign exchange and increase in the welfare of the citizens through wealth creation among others. Tomori (1979) posited that, the Nigerian agricultural sector has been seemingly, if not totally, neglected with the discovery of oil. This is evident in the sharp decline in the contribution of agricultural sector to the gross domestic product (GDP) from 64% in 1960 to 35% in 1988 and presently, the agricultural sector in Nigeria contributes less than 30% to GDP, with crop production accounting for an estimated 85% of this total, livestock 10% with forestry and fisheries contributing the remaining 5%.

Compared with other African and Asian countries, especially Indonesia, which is comparable to Nigeria in many respects, economic development has been disappointing because 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. In the wake of the declining trend in agricultural sector’s contribution to the GDP as a result negligence in terms of finances leading to insignificant contribution to the overall GDP vis-a-vis poor output, there is every need for concerted efforts to enhance productivity in the agricultural sector (Manyong, 2003; Okwuosa 1970). This accentuates the importance of credits as a means for improving farm capital investment in Nigeria with which there may be little or no progress in the sector to adequately fulfill its expected roles in our current economic realities.

In view of the above, Iganiga and Unemhilim (2011) posit that the role of deposit money banks’ in financial intermediation which facilitates the linkage between mobilization and use of resources should be effectively and efficiently utilized as this will lead to an enhanced agricultural output. Thus, there should be resolute efforts to harness the enormous resource from surplus sector for increased agricultural output. Iganiga et al (2011) further hypothesized that the three main factors that contribute to agricultural growth are increased use of agricultural inputs, technological change and technical efficiency which agricultural credit or funding appears to be an essential input along with modern technology for higher productivity. This is perhaps because finance, also called capital in economics, coordinates all the other factors of production.

According to Nzotta (2004), banks play very important roles in the economic development of any country. Banks, which are also known as financial intermediaries provide loans and credits to 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.

Following the adoption of universal banking in 2001, the Banks and Other Financial Institutions Act (BOFIA) 1991 was amended and banking business is now defined as “The business of receiving deposit on current, savings or other accounts, paying or collecting cheques drawn or paid in by customers, provision of finance, consultancy and advisory services relating to corporate and investment matters; making or managing investments on behalf of any person and the provision of insurance, marketing services and capital market business or other services as Governor of the Central Bank of Nigeria by gazette designate as banking business”.

According to The Encyclopedia of Banking Business in Nigeria (2008), the generic name “Deposit Money Bank” was adopted for all banks (Commercial and Merchant) operating in Nigeria since the commencement of universal banking in 2001. Banks owe some basic responsibilities to their communities. The traditional functions, which they render in form of financial intermediation, must be efficiently delivered to maintain the confidence of their customers.

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 funds needed.

For a long time, the relationship between the banking industry and the agricultural sector in Nigeria has been controversial. If one takes a vote of every judgment on the matter by various governments since independence and classify them into two groups; those praising the efforts of the banking industry and those castigating them as regards granting credit to agriculture, one will likely notice that the ratio would be around one to four. This could further be reflected in the legislation of governments and the directives of quasi government institutions like the CBN. Nwanyanwu (2012) posited that the setting up of a wholly government owned bank; the Nigerian Agriculture, Cooperative and Rural Development Bank (NACRDB) with the aim of lending solely to agricultural endeavours on short, medium and long-term basis is predicated on the philosophy that the mainstream banking industry does not adequately and effectively cater for the urgent need of credit required to rapidly transform the agricultural sector of the Nigerian economy.

This study dwells on the pertinent areas:

  1. Existing policies and institutional network for agricultural credit in Nigeria under ACGSF policy
  2. Assessment of the impact of credit on agricultural performance.
  3. Identification of some major constraints that dwarf the growth of this sector to achieve its desired goal and expectation in the economy of the country.

1.2 Statement of the Problem

The function of the 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, Obilor (2009). But banks, precisely the commercial (deposit money) banks, have refused to lend to agriculture which they believe that is a risky endeavor because of such factors like time lag in agricultural production and seasonality in the case of crop production.

In Obilor (2009)’s view, despite various instruments used by the Central Bank of Nigeria such as moral suasion and even the formulation of various agencies and programs by successive 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 facilitate and effectively fast track the needed growth in the sector.

The aim of this research work is to evaluate how far banks have gone over the years (1981-2014) in giving financial support to the agricultural sector in form of loans; and recommendations as to how best both sectors can work together to achieve a growth in this real sector which has the capacity to boost the nation’s GDP exponentially.

1.3 Objectives of the Study

The following are the objectives of this study:

  1. To evaluate the impact of banks credit on agricultural productivity.
  2. To study the impact of banks interest rates on agricultural productivity
1.3.1 Research Questions

The following research questions were developed:

  1. To what extent does banks credit influence agricultural productivity?
  2. At what level does banks’ interest rate influence agricultural productivity?
1.3.2 Research Hypothesis.

Within these contexts the following null research hypothesis are tested:

  • Ho: There is no significant relationship between bank credit and agricultural productivity.
  • Ho: There is no significant relationship between bank interest rate and agricultural productivity.

1.4 Significance of the Study

This research work is significant in the following ways:

This work will expose to the general public the need to show up the capital base available to the agricultural sector to enable the effective utilization of Nigeria’s enormous manpower and great landmass. Once this is done, the government and policy makers can pay attention to other sectors of the economy.

It is significant to the government because it will make them aware of the contributions of the banks to agricultural productivity and also determine what more can be done in terms of policy formulations to enhance more access to finance and protection of the agricultural finance arm.

It is important to students of finance and other related disciplines as it will infuse them with pragmatic knowledge on the role agriculture can play in an economy if it is adequately funded by the banks.
It will serve as a basis for further study.

1.5 Scope and Limitation of the Study

The study studies the overall impact and contribution that the banks have had on enhanced agricultural productivity in Nigeria. It will cover the period from 2006-2015. The data used for this research work will be gotten from the Central Bank of Nigeria, Statistical Bulletins, World Bank Development Indicators as well as the Annual Abstracts of Statistics published by the National Bureau of Statistics, relevant text books, journals, articles, and printed relevant materials from the internet.

1.6 Definition of Terms

DMBC: Deposit Money Bank’s Credit:

Is a debt provided by a bank to an entity (organization or individual) at an interest rate, and evidenced by a promissory note which specifies, among other things, the principal amount of money borrowed, the interest rate the lender is charging, and date of repayment.

DMBL: Deposit Money Bank Loan:

These are loans given by resident depository corporations and quasi-corporations which have any liabilities in the form of deposits payable on demand, transferable by cheque otherwise usable for making payments

DMBLR: Deposit Money Bank’s Lending Rate:

Is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (i.e. the amount borrowed).

AQ: Agricultural Output:

Final agricultural output measures the value of agricultural products which, free of intra-branch consumption is produced during the accounting period and before processing, is available for export and or/ consumption. Is measured as the ratio of agricultural outputs to agricultural inputs.

Chapter Five

Conclusion and Recommendations

5.1 Summary

Inadequate Capital is considered as one of the major factors affecting Agricultural productivity in Nigeria. To that purpose, the work examines how Commercial Banks’ Credit enhances Agricultural performance of Nigeria for the period 2006-2015. The work employed three independent variables (deposit money banks’ loan and advances to agricultural sector, value of loan guaranteed under agricultural credit guarantee scheme fund and average market lending rate) against one dependent variable (agricultural value added per worker used as proxy for agricultural productivity). Also, analysis was done using the ordinary least square method after confirming the stationarity of the data.

However, the researcher found that the relationship between bank loan and advances to agricultural sector, value of loan guaranteed under agricultural credit guarantee scheme funds and average market lending rate respectively and agricultural productivity measured by agricultural value added per worker is significant at 95% confidence level. Equally, there is a high coefficient of determination (R2) of (0.9646) implying that the variables in the equation are useful for explaining the level of change in agricultural productivity that has occurred between 1981 – 2015. There is also a highly significant adjusted coefficient of determination (adj-R2) of (0.9611), implying that the variables in
the model explain 96.11% of the changes in the dependent variable while 3.89% is explained by other factors not expressed in the model.

Likewise, the variables were found to be stationary at first difference and therefore, are integrated of order one, I(1). There is also evidence of positive serial correlation in the regression model. Finally, it was established that the variables are not cointegrated meaning that long run relationship does not exist between the dependent variable and the independent variables used in the work.

5.2 Conclusion

The specific findings of the work are:

  1. There is significant relationship between deposit money banks’ loan and advances to agricultural sector and agricultural productivity of Nigeria.
  2. There is significant relationship between value of loan guaranteed under Agricultural Credit Guarantee Scheme Fund and Agricultural Productivity of Nigeria.
  3. There is significant relationship between average market lending rate and Agricultural Productivity of Nigeria.

Based on the findings, the work concludes that commercial banks’ credit to agricultural sector has positive and significant impact on agricultural productivity in Nigeria.

5.3 Recommendations

Based on the findings, the following are the recommendations:

  1. Efforts should also be made by government to increase agricultural productivity through the provision of necessary inputs to famers, good marketing facilities, adequate extension services, good transport services and farm infrastructures.
  2. Government should strengthen agricultural guarantee scheme and more institutions in order to monitor and grant more credits to agricultural sector in Nigeria.
  3. Government and other monetary authorities should use selective credit control measures in order to persuade banks to grant more loan and advances to agricultural sub sector. Hence, it is pertinent for the government and monetary authorities to design favourable policies and create an enabling environment that will encourage banks to make more funds available to the agricultural sector as this will impact positively by increasing the level of agricultural productivity in the country thus contributing more to economic growth.
  4. Providing a national data bank of farmers reduces the cost of administering loans on the part of banks. The high cost of loan administration is transferred easily to farmers in form of high interest rate. This is because banks are established on the premise of profit maximization. Thus, interest rate charged on loan must be adequately high enough to cover the cost of loan administration. If the national data bank is provided and the cost of administering loans is reduced, it will transcend to reduction in interest rate. Interest rate on agricultural loans should be determined by market forces and not by some government directives to peg it below prevailing rates in the market; this should be done to avoid loan diversion (people obtaining agricultural loans with low interest rates and diverting such loans for other purposes). These concessionary interest rates can cause moral hazard problems to farmers. Furthermore, concessionary interest rates in the face of high cost of loan administration and deposit mobilization tend to discourage banks from granting loans to the sector.
  5. The government should encourage the export of agricultural produce to the rest of the world by granting excise duty waiver and also encourage the import of modern farm equipment by granting of import duty waiver to agricultural machines. This will encourage mechanization of our agricultural sector currently dominated by the use of crude implements.

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