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DEPOSIT
MONEY BANK LOANS AND AGRICULTURAL SECTOR PERFORMANCE IN NIGERIA.
ABSTRACT
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
INTRODUCTION
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:
To evaluate the impact of banks credit on
agricultural productivity.
To study the impact of banks interest rates
on agricultural productivity
1.3.1 RESEARCH QUESTIONS
The
following research questions were developed:
To what extent does banks credit influence
agricultural productivity?
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.
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