EFFECT OF COMMERCIAL BANKS’ CREDIT ON AGRICULTURAL GROWTH IN NIGERIA

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ABSTRACT

 

The main objective of this study is to examine the effect of commercial banks’ credit on agricultural growth in Nigeria using time series data from 1981-2014. Secondary source of data collection was used. The data collected were subjected to ADF-Augmented Dickey Fuller test. Descriptive statistics was used to determine the values of various measures included in the work. The ex-post facto research design was used and the data were analyzed using multiple regression analysis method. The analysis revealed that commercial banks' loans and advances have positive and significant impact on agricultural growth in Nigeria. Agricultural credit guarantee scheme fund has also a positive and significant impact on agricultural growth in Nigeria. Lending rate was found to have a negative and insignificant impact on agricultural growth in Nigeria. Based on the findings, the study recommended that government and other monetary authorities should use rewards and other measures of incentive that will motivate commercial banks in granting more loans and advances to agricultural sector. Government should also strengthen agricultural credit guarantee scheme by increasing the percentage of her guarantee against loan default to about 90%, so as to increase the confidence of commercial banks in granting more credit to agricultural sector in Nigeria.






TABLE OF CONTENTS

Title page                                                                                                 i

Declaration                                                                                               ii

Certification                                                                                             iii

Dedication                                                                                                iv

Acknowledgement                                                                                    v

List of Tables                                                                                           x

Abstract                                                                                                           xi

                                                                                            

CHAPTER 1: INTRODUCTION

1.1       Background to the Study                                                                                1

 1.2      Statement of the Problem                                                                               3

1.3       Objectives of the Study                                                                                  5

1.4       Research Questions                                                                                        6

1.5       Research Hypotheses                                                                                      6

1.6       Significance of the Study                                                                               6

1.7       Scope of the Study                                                                                          7

1.8       Limitations of the Study                                                                                 7

CHAPTER 2:  LITERATURE REVIEW

2.1       Conceptual Framework                                                                                  8

2.1.1    The history of modern banking in Nigeria                                                     11

2.1.2    Sources of agricultural financing in Nigeria                                                  12

2.1.3    The role of commercial banks in agricultural growth in Nigeria                        13

2.1.4    Policies and programmes established to enhance agricultural growth in              

             Nigeria                                                                                                           17

2.1.4.1 By the commercial banks                                                                               17

2.1.4.2 By the central bank of Nigeria                                                                       20

2.1.4.3 By the government                                                                                         21

2.1.5    Agricultural growth and economic development                                           31

2.1.6    Problems of agricultural financing in Nigeria                                                34

2.2       Theoretical Framework                                                                                  37

2.2.1    Theory of financial intermediation                                                                37

2.2.2    Theory of economic growth                                                                          39

2.3        Empirical Review                                                                                          41

2.4       Gap in Literature Review                                                                              55

 

CHAPTER3: RESEARCH METHODOLOGY

3.1      Research Design                                                                                              57

 3.2     Nature and Sources of Data                                                                                             57

3.3       Population of the Study                                                                                   58

3.4       Method of Data Analysis                                                                                58

3.4.1   Descriptive statistics                                                                                       58

3.4.2    Correlation matrix                                                                                          58

3.4.3    Stationarity testing                                                                                          59

3.4.4    Unit root test                                                                                                   60

3.4.4     Multiple regression analysis                                                                           61

3.4.5     Co efficient of determination                                                                        61

3.4.6     F-statistics                                                                                                      61

3.4.7   T-statistics                                                                                                      61

3.4.8    Durbin Watson statistics                                                                                 62

3.4.9    Breush Godfrey statistics                                                                               63

3.5       Model Specification                                                                                       63

3.5.1    Description of model  variables                                                                     63

3.5.1.1  Dependent   variable                                                                                      64

3.5.1.2  Independent   variables                                                                                  64

3.5.1.3  Stochastic  variable                                                                                       64

 

CHAPTER 4: DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS

4.1       Data Presentation                                                                                            65

4.2       Data Analysis                                                                                                  67

4.2.1    Descriptive statistics                                                                                       67

4.2.2    Correlation matrix                                                                                          68

4.2.3     Test for stationarity                                                                                       69

4.2.4    Regression analysis                                                                                        70

4.2.5    Test for auto correlation                                                                                 72

4.2.6    Test of hypotheses                                                                                          73

4.2.6.1 Hypothesis one                                                                                               73

4.2.6.2 Hypothesis two                                                                                               73

4.2.6.3 Hypothesis three                                                                                             73

4.2.6.4 Hypothesis four                                                                                              74

4.3       Discussion of Results                                                                                     75

 

CHAPTER 5: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION

5.1       Summary of Findings                                                                                     78

5.2       Conclusion                                                                                                      78

5.3       Recommendation                                                                                            79

5.4       Contribution to Knowledge                                                                            79

5.4.1    Method                                                                                                            80

5.4.2    Scope                                                                                                              80

References                                                                                                     81

APPENDICES                                                                                                89

 

 

 

 

LIST OF TABLES

Tables                                                                                                                         Page

4.1       Macroeconomic and Financial Indicators                                                      66

4.2       Descriptive Statistics of the Variables                                                           67

4.3       Correlation Matrix                                                                                          68

4.4       Summary of Unit Root Test for the Variables                                               69

4.5       Summary of the Regression Result on the Impact of Commercial Banks’

credit on agricultural growth in Nigeria.                                                        70

4.6       Breusch-Godfrey’s  LM statistics                                                                  72

 

 

 

 

 

 

 

CHAPTER 1

INTRODUCTION


1.1     BACKGROUND TO THE STUDY

Research has shown that Nigeria is endowed with abundant natural resources. Ajakaiye (1993) conceived that arable land constitutes about 75 percent of her total land resources. Matthew (2008) report that the country has fresh water sources covering 68 million hectares, 960 km of coastline, and an ecological diversity of crop and livestock, forestry and fishery products. Ijaiya and Abdulaheem (2000) reported that agriculture in Nigeria is the most dominant sector and indeed, a major source of livelihood for its citizens. Corroborating the above statement, Binswanger and Townsend (2001) asserts that agriculture is one of the sectors that encourage economic growth and development. This is justified by the fact that, it is this sector which provides food, domestic savings, employment opportunities, rural development and the improvement of the Gross Domestic Product (GDP). In the same vein, Reynolds (1975) states that agricultural development can promote the economic development by increasing the supply of food available for domestic consumption and releasing the labour needed for industrial employment.  Abubi (2000) also posits that, it accounts for about 70 percent of the sectors that generate employment for the working population. Anyanwu (2002), further unveiled that the role of agriculture in transforming the socio-economic framework of an economy cannot be overemphasized. It is because agriculture has been the main source of gainful employment from which the Nigerian nation feeds its teeming population, provides industries with local raw materials and serves as a reliable source of government revenue.

The production and exportation of agricultural products play a dominant role in attracting foreign exchange. The major agricultural export commodities in Nigeria include cocoa, coffee, cotton, groundnut, groundnut oil, palm kernel, palm oil, soya beans, ginger,  rubber, benign, (CBN, 2003). Obadan (2000) conceive that the production of palm oil accounted for about 96.4 per cent of the total export earnings while non-oil export products accounted for about 97.3 per cent of export before the discovery of crude oil in Nigeria. He observed that from the 1970s, the Nigerian economy became mono-cultural, having been transformed from one dependent on fairly diversified portfolio of agricultural products to an economy heavily dependent on crude oil for economic growth and sustenance. Ojo (2003) in the same vein, unveiled that the advent of crude oil production and related activities especially in the early 1970s changed radically the structure of Nigerian economy. According to him, the huge foreign exchange earnings from crude oil export encouraged importation of finished goods to the detriment of our domestic goods while the agricultural sector was rendered less competitive over time through over-valued currency, inappropriate pricing policies and scarcity of farm labour, caused mainly by the migration of youths to urban areas in search of white collar employment.

Since the availability of adequate credit is vital for the improvement of agricultural growth in the economy, the Federal Government of Nigeria prioritized the agricultural sector and thus directed that commercial banks devout a certain percentage of their loanable funds to the sector. To encourage the commercial banks to meet this target, the Central Bank of Nigeria introduced the Agricultural Credit Guarantee Scheme Fund (ACGSF) in 1977 to guarantee credit disbursement by commercial banks to the sector. The loan amount was raised and guaranteed rate was raised to 75 percent against default payment of loans. The incentive and others, the agricultural sector contribution to the total Gross Domestic Product (GDP) is still very low. Thus, to enhance an increase in agricultural growth, farmers have to adopt a capital intensive strategy and this called for an additional demand for banks loans and advances. It is against this backdrop that this study is embarked upon, to examine previous works related to this study and determine how commercial banks’ credits could enhance the growth of the agriculture in Nigeria.


1.2     STATEMENT OF THE PROBLEM

 Prior to this research, different authors such as: Udoka (2015), Obilor (2002), and the likes have written on topics related to this study in Nigerian banking sector and came out with various conclusions. Some of these researches have shown that Nigeria, like most other countries in the African continent is not only blessed with ample agricultural farmland, but also conducive geographical/climatical conditions that favour agriculture. Abubi (2000) admits that this enormous resource base, if well managed, could support a vibrant agricultural sector capable of ensuring self sufficiency in food and raw materials for the industrial sector as well as providing gainful employment for the teeming population and generating foreign exchange through exports.

Salami and Arawomo (2013) noted that, despite these endowments, the sector has continued to record a persistent decline in growth. The capacity of the sector to fulfill its traditional role in the Nigerian economy has been constrained by various social-economic and structural problems.

Enyim, Ewno and Okoro, (2014) have identified poor credit supply as one of the factors accounting for the poor performance of the agricultural sector in Nigeria. Obilor (2013) further stated that commercial banks are obviously not interested in agricultural finance because of it’s long-term nature. To encourage the commercial banks, the government established the Agricultural Credit Guarantee Scheme Fund (ACGSF) to provide guarantee against inherent risk in agricultural lending. Nwankwo (2013) emphasized that this measure has not achieved the initial objectives because agriculture being both labour and capital intensive venture, requires huge capital outlay. Enyim, Ewno and Okoro, (2014) also stated that high lending rate of commercial banks loans to farmers is another cause of the decline in Nigerian agriculture.

Itodo, Apeh and Adeshima, (2012) noted that, consequent upon the ineffectiveness of Nigerian agricultural sector, the country with it’s highly diversified agro-ecological condition is depending on massive importation of basic food items and raw materials for industrial inputs. This panacea has led to a severe decrease in the nation’s standard of living and high level of unemployment on the populace. Udensi, Orebiyi, Ohajianya and Eze, (2012) obviously stated that, the government’s effort to equip the agricultural sector has not yielded the expected result.

An investigation is therefore needed in examining the relationship existing between commercial banks’ credit (loans and advances, agricultural credit guarantee scheme fund and lending rate of commercial banks) and agricultural growth in Nigeria in order to suggest a strategy that will ensure increased agricultural growth that will be enough to carter for both export demand, domestic savings and consumption.

 

1.3      OBJECTIVES OF THE STUDY

The main objective of this work is to analyze the effect of commercial banks’ credit on agricultural growth in Nigeria.

The specific objectives of the study includes to:

1.  Investigate the effect of commercial banks’ loans and advances on agricultural growth in Nigeria.

2. Determine the effect of Agricultural Credit Guarantee Scheme Fund (ACGSF) on agricultural growth in Nigeria.

3. Examine the effect of lending rate of commercial banks’ loans and advances on agricultural growth in Nigeria.

 

1.4      RESEARCH QUESTIONS

1.    To what extent have commercial banks’ loans and advances to agriculture affected on the growth of agriculture in Nigeria?

 2.   In what ways has Agricultural Credit Guarantee Scheme Fund affected on the growth of agriculture in Nigeria?

3.    How has lending rate of commercial banks’ loans and advances to agriculture boosted the growth of agriculture in Nigeria?


1.5      RESEARCH HYPOTHESES

Ho1 Commercial banks’ loans and advances have no positive and significant effect on agricultural growth in Nigeria.

Ho2 Agricultural Credit Guarantee Scheme Fund has no positive and significant effect on agricultural growth in Nigeria.

Ho3 Lending rate of commercial banks credit has no positive and significant effect on agricultural growth in Nigeria.


1.6      SIGNIFICANCE OF THE STUDY

Considering the abundance of natural resources in Nigeria, agriculture ought to be a major catalyst for economic growth through adequate provision of food, employment, industrialization and increased GDP through foreign exchange earnings. Thus this study seeks to unveil the problems and prospects of agricultural financing in Nigeria. It is very important to carry out a research of this kind to suggest ways of combating the perceived problems of farmers, such as loan procurement and effective credit lending. The outcome of this study will be beneficial also to students, lecturers, researchers, policy makers, investors, government and all rational persons.


1.7      SCOPE OF THE STUDY

The focus this research analysis is on the effect of commercial banks credit on agricultural growth in Nigeria using the commercial banks registered in Nigeria and listed on the floor of Nigerian Stock Exchange ranging from the year 1981 to 2016. The choice of 1981 is consequent upon the fact that it is a period of oil discovery in large quantity and return of democratic rule in Nigeria. While 2016 was chosen to ensure data currency, over previous researches on related topics.


1.8   LIMITATIONS OF THE STUDY

In the course of this study, several difficulties, such as time constraint and access to the necessary information were encountered. However, I persevered in ensuring the success of this work by overcoming such difficulties.

 

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