Agricultural financing and economic growth in nigeria

Thesis Overview

<p> </p><h2>INTRODUCTION</h2><h2>1.1 &nbsp; &nbsp; Background to the Study</h2><p>Finance for agricultural development has an increasing role in<br>contemporary times. Finance affects economic growth, stagnation or even<br>decline in any economic system. However, a growing concern has developed<br>over time regarding the need for effective access to credit facilities<br>for farming purposes. The Nigerian government recognizes that finance is<br>an essential tool for promoting agricultural development because the<br>agriculture sector is one of its main sources of sustainability. Access<br>to finance for agriculture is an incentive for increasing the<br>agricultural sector’s performance; it stimulates productive growth, and<br>supports the survival of small and new enterprises. Access to finance<br>increases the average inputs of labour and capital which has positive<br>effects on production output. Irrespective of the benefits that can be<br>derived from financing agriculture, there is an inherent risk of loan<br>defaults amongst farmers, which discourages banks from lending to<br>farmers.</p><p>According to Beck and Demirguc-Kunt (2006), specific financing tools<br>can be useful in facilitating greater access to finance. The government<br>of Nigeria, being fully aware of the need for progressive policies, has<br>introduced various initiatives and policies dating back to the 1970s to<br>attract finance to enhance agriculture productions. Such policies have<br>mainly been in the form of specialized agriculture lending, the supply<br>of credit finance by the commercial banks in favour of the agriculture<br>sector and through various programmes. While some of these efforts have<br>failed, the operation of the remaining leaves one to wonder if they are<br>actually achieving their intended objectives as rural poverty is on the<br>increase and yet a large portion of the population is engaged in<br>agricultural activities.</p><p>The problem of access to finance for agriculture is not solely as a<br>result of non availability of finance but it is caused by the reluctance<br>of credit providers to give out loans without a certainty of recovering<br>the loan. However, the banks are not to be blamed as they are not<br>charity organizations who disburse money without recourse to repayment;<br>rather they are in business to make profit from their lending<br>operations. Unfortunately, the situation makes farmers a neglected group<br>in the economy because they are not able to provide the adequate<br>collateral needed to secure bank loans. Because of the challenges facing<br>farmers, which have adverse effects on agricultural production, the<br>government thought it fit to act as an intermediary through the<br>Agricultural Credit Guarantee Scheme (ACGS) whereby the government<br>stands as a guarantor for agricultural loans in order to mitigate the<br>risk involved in agricultural financing.</p><p>Agriculture contributes immensely to the Nigerian economy in many<br>ways, namely; in the provision of food for the increasing population;<br>supply of adequate raw materials to a growing industrial sector, a major<br>source of employment generation, foreign exchange earnings; and<br>provision of a market for the products of the industrial sector (Food<br>Agricultural Organization, 2006). The agrarian sector has a strong rural<br>base; hence, generation concern for agriculture and rural development.<br>Support for agriculture is widely driven by both government and the<br>public sector, which has established an institutional support in the<br>form of agricultural research, extension, commodity marketing, input<br>supply, and land use legislation to fast-track development of<br>agriculture and rural economic empowerment. Central Bank of Nigeria<br>(2010) asserts that over the years, the inability of this sector to<br>expand and as well contribute meaningfully to the growth of Nigerian<br>economy was due to inadequate financing to improve on the situation;<br>that is, facilitating agricultural credit). Also, the problem of<br>agricultural development in Nigeria indicates that efforts directed at<br>achieving expanded economic base in the rural farmers were frustrated by<br>the scarcity of, and restrictive access to loanable fund. One of the<br>reasons for the decline in the contribution of agriculture to the<br>economy is lack of formal credit policy and paucity of credit<br>institutions which can assist farmers</p><p>The role of financial capital as a factor of production to facilitate<br>economic growth and development as well as the need to appropriately<br>channel credit to rural areas for economic development of the poor rural<br>farmers cannot be over emphasized. Credit is viewed as more than just<br>another resource such as labour, land, equipment and raw materials<br>(Rhaji, 2008). According to Shepherd (2002), credit determines access to<br>all the resources on which farmers depend. Since banking cannot be<br>separated from economic development, the banks (especially Deposit Money<br>Banks) in the banking industry have been instrumental to various<br>development schemes of Nigeria over the years. However, their<br>performance in the facilitation of agricultural finance has not been<br>adequately felt in the Nigerian economy; especially in the rural areas<br>(farmers).</p><p>Also, in line with Nigeria’s quest for development; the erratic<br>nature of events within the banking industry vis-à-vis agricultural<br>financing is a cause for concern. This uncertain nature of access to<br>credit by farmers in the agricultural sector could result to total loss<br>of confidence in banks by citizens in the sector, as well as growth<br>impediment in the overall economy of Nigeria. Questions are been asked<br>concerning the role of agricultural financing, its contribution to the<br>attainment of agricultural growth and development. It is therefore<br>pertinent to empirically analyze agricultural financing and its economic<br>implication (impact) on Nigeria with the aim of identifying measures to<br>tackle the existing challenges and rebuild the lost glory of the<br>agricultural sector.</p><br> <br><p></p>