CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Agriculture in Nigeria is a major source of food to the citizenry. It is one of the principal occupations most people engage in for income purpose, feeding and for commercial purposes. Agriculture could be carried out in small, medium and large scale both in rural and urban areas. Irrespective of the size of agriculture engaged in, finance is essential to achieve the primary goal. The importance of agriculture to the development of an economy therefore cannot be over emphasized. As a result of this, governments over the years have continued to show effort by a way of credit extension to farmers to enhance the production on large scale.
Given the requirement of finance in the agricultural sector, there is no doubt that very few farmers have capital of their own to invest in agriculture. Most farmers hardly have any savings to plough back into production, considering the pattern of their income and expenditures (Ammani, 2012). Limited access to credit facilities has been implicated as hindrance to the growth and productivity of the agricultural sector (Ammani, Alamu&Kudi, 2010).
Agricultural credit services are provided by both formal and informal institutions. The informal sector remains the leading provider of agricultural credit. Consequent of their poor resource endowment, most farmers are unable to meet the stipulated criteria for formal credit especially that of pledging collaterals for loans, which is a basic equipment for credit transactions with formal financial institutions. As a result, poor farmers are left with no option other than to source credit from informal sources, which are regarded as exploitative because they mostly charge higher interest rates, much to the disadvantage(chagrin) of the famers.
To increase farmers’ access to credit from formal sources, the then federal military government of Nigeria established the Agricultural Credit Guarantee Scheme Fund as a source of agricultural financing geared towards enhancing the Nigerian economy. The aim of the fund was to increase the level of bank credit to the agricultural sector through the provision of guarantee in respect of loans granted for such purposes. The formal financial institutions are averse to lending credit or loan to famers because of stagnant agricultural markets, high production risk and perceived low profitability of farming, lack of collateral and their poor financial recording systems (FAO, 2006).
Agricultural credit guarantee scheme fund loan leverages additional funds from the financial system because lenders make loans that otherwise would not have been made (Hollinger, 2004). For a nation to arrive at a convenient production to enhance food security and consequently theoverall economy, credit has to take priority position in that with agricultural credit, the farmers are able to secure farm machinery and equipment, cover the unsubsidized portion of farm inputs, and hire additional labour (Oboh, 2006). The inadequacy level of assessment carried out in the agricultural credit scheme fund is a major factor preventing adoption of technological innovations. Farmers in this indisposed situation therefore perpetuate poverty and ultimately a low standard of living.
Most often, financial institutions require huge collateral from customers before loans are granted to them. This is detrimental to farmers' effort that may require such loans to enhance their agricultural production and the economy. The agricultural credit guaranteed scheme as a source of financing enforces the attainment of its objective by mandating commercial banks to set aside (10%) of their profit before tax to farmers as loans and more so have a certain percentage of their branches set up in rural areas. This will enable effective reach to the target beneficiaries. The Central Bank of Nigeria is supposed to ensure and enforce the compliance of the banks to these stipulations.
It therefore implies that the agricultural credit scheme as a source of financing is aimed at reducing this dearth by guaranteeing farmers or other individuals involved in agricultural production when seeking for loans from the banks. In the case of breach in contract, the fund bears the liability of 75% of the amount in default, net of any amount realized by the banks in the sale of the security pledged by the customer. This has made most financial institutions interested and secured in generating loans to agricultural ventures. It is noteworthy to ascertain the impactof the agriculturalguarantee scheme has been in enhancing the disbursement of loans to the agricultural sector by commercial banks geared towards enhancing agricultural output in Nigerian economy. These days, it is obvious that commercial banks recently giving loans to farmers simply because of the collateral requirement which interest rate the farmers cannot afford. 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 agricultural credit guaranteed scheme as a source of financing (Efobi, &Osabuohien, 2011).
This is because some of the innovation which the farmers wish to adopt may be expensive to procure or they may decide to use the lean financial resources in financing other projects, other than agricultural production. Such investment may eventually turn to be a waste because of inadequate assessment of the scheme at the level of the farmers. (Oboh 2006) noted that it has long been recognized that the absence of adequate credit scheme for financing agriculture in Nigeria is one of the major impediments to the country’s agricultural output and development. A pertinent question worth asking is, has agricultural financing impacted on agricultural output in the Nigerian economy? Against this backdrop, this study examines agricultural financing and agricultural output in Nigeria.
1.2 Statement of the Research Problem
A large number of credit institutions as source of financing so as to enhance the economy have been established, namely Agricultural Credit Guarantee Scheme Fund (ACGSF), Nigerian Agricultural Co-operative and Rural Development Bank (NARDB) and other to cover some portion of losses incurred when borrowers default on loans in order to encourage financial institutions and in particular thee commercial banks to lend agricultural credit to farmers with a view to enhancing agricultural output. Despite all these strategies, few farmers are having access to agricultural credit provided by the scheme; the utilization seems not to be properly channeled to agricultural production by the beneficiaries with the objective of increasing agricultural output in the Nigerian economy (Gistarea.com, 2014).
Agricultural credit facilities available or eligible under the scheme are not properly defined for the farmers to understand, the form of agriculture to be executed by lending institutions are not properly spelt out for the farmers. This obviously affects the agricultural activities and output in Nigeria. Similarly, empirical justification of ACGSF loans impact on agricultural output in Nigeria is very scanty to the best of the researcher’s knowledge. Against the backdrop of these existing problems, the following research questions are raised.
1.2.1 Research Questions
- What is the relationship between Agriculturalguaranteed scheme fund loan and agricultural output in Nigeria?
- Is there a relationship between government capital expenditure and agricultural output in Nigeria?
- How does interest rate impact on the agricultural output in Nigeria?
1.3 Objectives of the study
The objectives of this study are segmented into broad and specific objectives. The broad objective is to examine Agricultural financing and agricultural output inNigeria. However, thespecific objectives are to:
- Determine the relationship between ACGSF loans and agricultural output in Nigeria.
- Examine the relationship between government capital expenditure and agricultural output in Nigeria.
- Ascertain how interest rate impact on the agricultural output in Nigeria.
1.4 Statement of the Research Hypotheses
In order to validate the empirical relationship existing between agricultural financing and agricultural output in the Nigerian economy, the null hypothesis is specified thus:
- Ho: There is no relationship between ACGSF loans and agricultural output in Nigeria.
- Ho: There is no relationship between government capital expenditure and agricultural output in Nigeria.
- Ho: Interest rate does not impact on the agricultural output in Nigeria.
1.5 Scope of the Study
This study examines agricultural financing and agricultural output in Nigeria. The study covers the period 1984 to 2012 using time series data on the aggregate amount of ACGSF loan, government capital expenditure, average rain fall and socio – economic factors on agricultural output in the Nigerian economy.
1.6 Significance of the Study
Although several studies have been embarked on this subject, many inconsistencies still abound in these studies. This has therefore rendered this present study imperative as this present study will serve to mediate among the conflicting findings of other studies. Besides a longer time series data about the study has been generated. Moreover, other studies had employed qualitative design for analysis of data and still others have adopted partial approach in their analysis. This has provided further justification for the present study which would adopt quantitative approach that is essentially global in nature as only detailed data pertaining to this study can yield result which would constitute a suitable framework for formulating a suitable agricultural policy for economic growth and development.
Agricultural financing plays a crucial role at enhancing agricultural output in the overall economy. Famers’ adoption of improved farming inputs require credit to beef up capital.Procurement of agricultural input that will step up production in order to keep pace with the increasing human population, there is the for timely and proper credit delivery system. Many studies may have been conducted before on this subject matter, but the necessity for this is premisedon the time and/or place variations. The time factor may likely reveal new dimensions of performances and problems.
That is why an assessment ofagricultural financing and agricultural output in theNigerian economy is very crucial. Furthermore, the research is likely to open up new areas of study. Future researches will benefit largely from the methodology, analysis and findings obtained from this study.
1.7 Limitations of the Study
A study of this nature is never without some constraints such as unavailability of recent time series data. Data on the variables were not readily available for the period 2013, hence the restriction of the study to the year 2012; this serves as a limitation against this study.
