EFFECT OF AGROALLIED FUNDING ON AGRICULTURAL PRODUCTIVITY

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EFFECT OF AGROALLIED FUNDING ON AGRICULTURAL PRODUCTIVITY

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Finance is essential for any economy seeking to achieve growth and consequently economic progress. Such finance is one of essential resources which if invested in strategic sectors of the economy have the potential to result in the transformation of the economy (Mellor & Dorosh, 2010). One source of finance of significant importance in any business is credit.

Credit may be obtained from various sources, including banks, nonbank financial institutions, stock markets, and so on. However, banks remain a major source of credit for investment by both individuals and firms. This credit borrowed while it may be invested in various sectors of the economy, in the case of a developing country as Nigeria, the Agriculture sector may be argued as a strategic sector of importance for the growth and development of the Nigeria economy and hence a sector of choice for investment of credit. In Nigeria today, agriculture accounts for one third of the Gross Domestic Product GDP and employs about two third of the labour force (Oyeyinka, 2002). In fact, the agriculture sector is argued as the most dominant sector and indeed a major source of livelihood for the citizens of a country (Udoka, Mbat & Duke, 2016).

The importance of agriculture stems from the sector providing food for the teeming population of the economy thereby ensuring food security, and being the only source of raw materials that is used as input in the production process in other sectors of the economy (Ijaiya & Abdulaheem, 2005). Further the agriculture sector through the rearing of animals provides agro-allied products for industrial growth and development, provision of employment opportunities, especially to the rural populace; provision of market for the industrial sector; and provision of the needed linkage between the traditional sector and the modern sector (Ijaiya & Abdulaheem, 2005). Consequently, agriculture may serve as a catalyst for the growth of the entire economy, and hence the growth and development of the agriculture sector cannot be over-emphasized.

The lack of credit supply to the agriculture sector is particularly of concern as agricultural credit is an integral part of the process of modernization of agriculture and commercialization of the rural economy. The introduction of easy and cheap credit is the quickest way for boosting agricultural production. Therefore, it has become the prime policy of all the successive governments, to meet the credit requirements of the farming community. However, as highlighted by Jumare (1996) successive governments have come up with numerous programmes to address the inability of agricultural output to keep pace with the country’s demand for agricultural products but despite this farmers have had limited success in accessing the much needed credit for investment in the activities of their farms (Bolarinwa & Oyeyinka, 2005; Olagunju & Adeyemo, 2008).

The sources from which funds may be obtained for financing the activities of the agriculture sector may be categorized into Micro and Macro sources of finance. The micro sources relate to the use of Deposit Money bank financing as capital for agricultural activities, while agricultural funding through capital mobilization and allocation by government through such agencies as rural banking development programmes, Nigerian Agricultural Cooperative and Rural development Bank (NACRDB) and the Central Bank of Nigeria (CBN), constitute the macro sources of Agriculture sector finance.

Therefore, with a variety of sources of credit available in Nigeria, and with the recent shift in focus of the Nigeria government towards rekindling interest in the development of the Nigeria Agriculture sector, the present study is an examination of Deposit Money Bank credit to the Agriculture sector and Agriculture sector output in Nigeria.

Several studies in this area including Enyim, Ewno and Okoro (2013), Bolarinwa and Oyeyinka (2005), Olagunju and Adeyemo (2008), and Udoka, Mbat and Duke (2016) have identified poor credit supply as one of the factors accounting for the poor performance of the agricultural sector in Nigeria. The Deposit money banks have no keen interest in agricultural finance (Obilor, 2013). 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 agriculture requires huge capital outlay because it is both labour and capital intensive venture (Nwankwo, 2013). This made the country to rely on massive importation of basic food items and raw materials for industrial inputs (Itodo, Apeh and Adeshina, 2012). The resultant effect is the high cost of living coupled with high level of unemployment on the common man. Evidently, this suggests that the government’s effort to fortify the Nigeria agricultural sector has not yielded the desired result (Udensi, Orebiyi, Ohajianya and Eze, 2012). Thus, the need for further investigation in this area cannot be overemphasized.

1.2 Statement of the problem

In particular, with credit being scarce, and with significant competition amongst alternative uses of this credit, it is pertinent to examine the impact of Deposit money bank credit on Nigeria’s agriculture sector output. This is important as the Nigeria government’s renewed interest in agriculture in recent time critically depends on the extent to which sufficient credit may be directed to the sector in addition to its efficient use by the sector. This credit should not only be directed in the short run but also the long run and hence the need for also establishing whether deposit money bank credit to the Nigeria agriculture sector and agriculture sector output has a long run relationship. The questions then are: Is there a long run relationship between Deposit Money Bank credit to the agriculture sector and agriculture sector output in Nigeria?; What is the impact of Deposit Money Bank credit to the Nigeria agriculture sector on agriculture sector output in Nigeria?

Therefore this study examines the relationship between agriculture sector credit and agriculture sector output in Nigeria: investigating whether a long run relationship exists between credit to the agriculture sector and agriculture sector output in Nigeria and thereafter determines the impact of the credit on the sector’s output. The study covers the period of 1978 to 2016, based on data availability.

1.3 Objectives of the study

1. To understand the effect of agroallied fundings on agricultural productivity

2. To understand the relationship between agroallied funding and agricultural productivity

1.4 Research Questions

1. What is the effect of agroallied fundings on agricultural productivity

2. What is the relationship between agroallied funding and agricultural productivity

1.5 Research Hypothesis

H0: There is no relationship between agroallied funding and agricultural productivity

H1: There is a relationship between agroallied funding and agricultural productivity

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