THE IMPACT OF AGRICULTURAL CREDIT ON AGRICULTURAL PRODUCTIVITY IN NIGERIA

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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).

 

 

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