PROJECT TOPIC :IMPACT OF COMMERCIAL BANKS CREDIT FACILITY TO AGRICULTURAL SECTOR IN NIGERIA
CHAPTERS: Chapter 1 – 5
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Keywords: IMPACT OF COMMERCIAL BANKS CREDIT FACILITY TO AGRICULTURAL SECTOR IN NIGERIA
1.1 Background of the Study
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, Ewno and Okoro, 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).
According to Udih (2014) Bank credit is expected to impact positively on the investible sectors of the economy through improved agricultural production of goods and services. He opined that sufficient financing of agricultural projects will not only promote food security, but also enhance the entrepreneurship performance of our young investors. Concluding that, this is borne out of the expectation that a good match between adequate bank credit and agricultural entrepreneurship will ensure massive agricultural productivity.
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. However, from available statistics of commercial 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 (Source: CBN Statistical Bulletin, 2013).
A dynamic and growing agricultural sector needs adequate finance through banks to accelerate the overall growth. Banks finance agricultural sector by granting loans to farmers for productive purpose which is intended to promote the expansion of financial resources for the credit systems.
Nigeria farmers and agribusiness stakeholders need financing in order to become more competitive but many banks still see the sector as high risk. It is important to note that not all banks focus on agricultural finance. Agricultural banks require a specialist skill which may not be the core competency of some banks and financial institutions. In addition, agriculture is perceived to be a high risk sector especially with Nigeria agriculture dominated by smallholder farmer who quite often are not in a position to offer traditional securities. Lack of useable collateral together with production climate and price risk in agricultural finance failing outside of the traditional balance sheet lending approach. Nigeria has the surplus land and natural resources to allow increased production. Also, when comparing land in Nigeria is cheap when compared to developed countries provided we get efficiencies to right. Nigeria has the opportunity to become a lower cost producer of commodities.
The problem of access to finance for agriculture is not solely as a result of non availability of finance but it is caused by the reluctance of credit providers to give out loans without a certainty of recovering the loan. However, the banks are not to be blamed as they are not charity organizations who disburse money without recourse to repayment; rather they are in business to make profit from their lending operations. Unfortunately, the situation makes farmers a neglected group in the economy because they are not able to provide the adequate collateral needed to secure bank loans. Because of the challenges facing farmers, which have adverse effects on agricultural production, Nigerian banks thought it fit to act as an intermediary through the provision of finance to increase agricultural produce in Nigeria.
The role of agricultural credit in enhancing agricultural growth and development cannot be overemphasized. According to Olomola (2012), the agricultural credit guarantee system is often considered as an effective policy instrument for improving the production and distribution of agricultural commodities. Rahji (2010) affirms that credit finance is more than just another resource such as labour, land, equipment andraw materials. Under the ACGS, the government guarantees credit finance given to farmers from the commercial banks while it is supposed to achieve agricultural growth through increased production. According to Levitsky (1997), credit guarantee schemes assist banks to lend to small and medium enterprises while it cushions the banks from the risks involved. There are several existing banks agricultural finance schemes in Nigeria. Most of the schemes encourage an increase in bank credit in the form of loans, advances, overdrafts and any other credit facility to the entire agricultural subsectors.
Beginning from 2000, the share of credit to agriculture through increasing in absolute terms, has started to decline relatively. By 2000, total credit to agriculture was N41028.9 million in 2005, constituting 2.46 per cent of the total credit and in 2010, total commercial banks credit to agriculture had risen to N128, 406.0 million thereby accounting for only 1.67 per cent of the total commercial banks credit to the economy (CBN, 2011). By 2012, total credit to agricultural sector has risen to N316,364 million, representing 3.9 per cent of commercial bank total credit . Agricultural credit rose again from N343,696.80 million in 2013 to N478,911.78 million in 2014, representing 3.7 per cent of commercial banks total credit. The preceding analysis, it can be observed that though total credit to agriculture has been increasing in absolute terms but when measured in term of percentage share in total credit to the economy, it is found that the credit to agriculture constitutes an insignificant proportion of the total credit.
This represents a sign of neglect of the sector. However, adequate credit availability is critical to the enhancement of production in the agricultural sector in the economy and this has been a top priority for the Federal Government of Nigeria, thus, commercial banks have been directed to devout a major part of their funding to finance this sector. Despite this huge investment in the agricultural sector by the government in the form of provision of the needed finance for farmers, the dwindling fortune of the sector seems to persists, prompting the question as to the role of the financial system in providing credit to agricultural sector in Nigeria. Other numerous problems hindering agricultural financing in Nigeria include: diversion of loans meant for agricultural projects into frivolous activities which may not engender growth. High interest rate charged on loans acquired by farmers, inability of farmers to provide collateral securities for loans; political interference on loan procurement by political big whips and in fact lack of “strong political will” by the government of the day to solve protracted agricultural problem facing modern farming in Nigeria. If indeed the fund provided has been effectively utilised, it should reflect on the output of agricultural production. Therefore, it is important to investigate the Impact of Commercial Banks Credit Facility to Agricultural Sector in Nigeria.
1.2 Statement of the Problem
Nigeria, like most other countries in the African continent is not only endowed with vast agricultural farmland but also conducive geographical condition that favours agricultural production throughout the year. Despite this great potential, there is no much to show for it. (Salami and Arawomo, 2013).
Several studies in this area including Enyim, Ewno and Okoro (2013), have identified poor credit supply as one of the factors accounting for the poor performance of the agricultural sector in Nigeria. According to Obilor, (2013), banks precisely the commercial banks, obviously have no kin interest in agricultural finance. In order to encourage the banks, the government established the Agricultural Credit Guarantee Scheme (ACGS) to provide guarantees against inherent risk in agricultural lending. This measure could not achieve the intended objectives because agricultural being both labour and capital intensive venture requires huge capital outlay Nwankwo, (2013).
Consequently, the country with it highly diversified agro-econological condition is relying on massive importation of basic food items and raw materials for industrial imputs (Itodo, Apeh and Adeshima, 2013). The resultant effect of the high cost of living coupled with high level of unemployment on the common man is beyond reasonable imagination. Obviously, the government’s effort to fortify the Nigeria agricultural sector has not yielded the desired result (Udensi, Orebiyi, Ohajianya and Eze, 2012). Thus, there is need to investigate the Impact of Commercial Banks Credit Facility to Agricultural Sector in Nigeria.
1.3 Purposes of the Study
The general purpose of the study is to investigate the impact of commercial banks’ credit facility to agricultural sector in Nigeria. The specific purposes of the study are:
- To investigate if there is difficulties in accessing credit facilities by farmers from commercial banks
- To investigate if commercial banks’ credit has positive impact on the agricultural productivity in Nigeria.
- To investigate if finance is a major hindrance to agricultural productivity in Nigeria.
1.4 Research Questions
- Are there difficulties in accessing credit facilities by farmers from commercial banks?
- Does commercial banks’ credit have positive impact on the agricultural productivity in Nigeria?
- Is finance a major hindrance to agricultural productivity in Nigeria?
- Research Hypotheses
To facilitate the study, the following hypotheses were formulated:
H0: There is no significant difficulty in accessing credit facilities by farmers from commercial banks
H1: There is significant difficulty in accessing credit facilities by farmers from commercial banks.
H0: Commercial banks’ credit does not have significant impact on the agricultural productivity in Nigeria.
H1: Commercial banks’ credit does have significant impact on the agricultural productivity in Nigeria.
H0: Finance is not a major hindrance to agricultural productivity in Nigeria.
H1: Finance is a major hindrance to agricultural productivity in Nigeria.
1.6 Scope and Limitation of the Study
The subject of agricultural financing and performance in Nigeria is wide and complex.
However, this study will focus on the role of the Agriculture Credit Guarantee Scheme (ACGS). This research work is restricted to Pibe Farms, Lagos Nigeria. For the purpose of this study, other financing schemes that have been introduced by the government will not be analysed. Also, micro level analysis such as farmers’ perception about the scheme is not the focus of this study.
1.7 Limitations of the Study
There are several limitations to the study of this work. Limitations include the unavailability of some vital materials as they are considered highly confidential by government agencies; time constraint; financial constraint and also library facilities have been very inadequate in journals.
1.8 Significance of the Study
This research work on the impact of commercial banks credit facility to agriculture sector in Nigeria would be of immense importance to the policy and credit guideline makers in ascertaining the efficiency of banks’ financing on agricultural performance. Also from the recommendations and suggestions, the problems and causes of failures in implementation would be taken care of. As the policies involves many financial and other credit institution the research would be of great worth to these institution, for instance, It would help in assessing the performance and cause of default in credit extension to farmers.
Finally, this work will serve as an addition to the already existing literature and references in the area of policies of central Bank of Nigeria agricultural financing, monetary economics and finance in general.
1.9 Definition Operational of Terms
Commercial Bank: This is a financial institution that provides various financial service, such as accepting deposits and issuing loans.
Agricultural Finance: Is the provision of multiple types of services dedicated to supporting both on-and off-farm agricultural activities and businesses including input provision, production, and distribution, wholesale, processing and marketing
Agricultural Productivity: This is measured as the ratio of agricultural outputs to agricultural inputs. While individual products are usually measured by weight, their varying densities make measuring overall agricultural output difficult.
Commercial Banks’ Credit: A pre-approved amount of money issued by a bank to a company that can be accessed by the borrowing company at any time to help meet various financial obligations.
Interest Rate: The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.
Agricultural Credit: Agricultural credit is a yearly sectorial distribution of commercial bank’s total loans and advances to the agricultural sector.
Cash Reserve Cash reserves are a supplementary reserve requirement that is kept with Central Bank, which is above the legal minimum reserves. It is express in form of percentages which is aiming at influencing bank lending by freezing i.e. assets that normally constitute the bases on which banks erect their credit creating policies. It takes the forms of special deposits and stabilization securities.
Discount rates are weighted average interest rates on the loans and advances given out by commercial banks. It is express in percentages and it is a technique of monetary control designed to influence the ‘‘cost of credit’’.