1
COMMERCIAL BANK CREDIT AND AGRICULTURAL
OUTPUT IN NIGERIA: (1982-2007)
BY
UGWU CHINYERE. MARTHA
EC/2006/267
DEPARTMENT OF ECONOMICS
FACULTY OF MANAGEMENT AND SOCIAL SCIENCE
CARITAS UNIVERSITY, AMORJI-NIKE, EMENE, ENUGU.
AUGUST, 2010.
2
TITLE PAGE
COMMERCIAL BANK CREDIT AND AGRICULTURAL OUTPUT IN NIGERIA:
(1982-2007 )
A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE AWARD OF BACHELOR OF SCIENCE (B.SC)
DEGREE IN ECONOMIC
BY
UGWU CHINYERE. MARTHA
EC/2006/267
3
APPROVAL PAGE
This project has been supervised and approved as having satisfied
the conditions for the award of Bachelor of Science Degree in the
department of Economics at Caritas University, Amorji Nike, Emene,
Enugu.
By
……………………………
Mr. Ugwu .J. O
(Project Supervisor)
………………………………
Date
……………………………
Barr. Onwudinjo P.C
(Head of Department)
………………………………
Date
……………………………
Dr. C.C. Umeh
Dean of Faculty
………………………………
Date
……………………………
External Examiner
………………………………
Date
4
DEDICATION
This work is dedicated to almighty God whose grace was sufficient
throughout my stay in this university and also to my beloved mother Mrs.
Ugwu Pauline.
5
ACKNOWLEDGMENT
Without doubt the break through made in the writing of this work is
by the special grace and infinite mercies of God Almighty.
My gratitude goes to my beloved mother, Mrs. Ugwu Pauline for her
financial supports, patience, encouragement and guidance throughout my
stay in the university.
My gratitude also goes to my uncles and aunties who has been
supportive throughout my stay in the university.
I am also indebted to my brothers and sisters, Mr. Benedict Ugwu,
Mr. Anthony Ugwu, Tochukwu Ugwu, Onyinye, Nwanneka, Ebere, Ifeoma,
Arinze, chekwube and Okwy; i thank them for their financial and moral
support.
In a special way i am very grateful to Mr. Ugwu Johnson my
supervisor over his unflinching support and who with love moderated this
work.
6
My gratitude goes to the head of department Barr. Onwudinjo. P.C.
and the entire teaching staff of Economics Department, Caritas University
whose teaching remain a source of inspiration to me.
I also express my appreciation to my friends and colleagues, Bekky,
Ajuma, Glory, Tity, Chidexcapable, SexyJon, Irene, Ben, James,
Goodicious-Goody, My small tutor Femi: I thank them all for their
corporation , understanding, supply and forbearance throughout the timeabsorbing process required to complete my years in the university.
May God almighty reward every one abundantly.
UGWU CHINYERE M.
ABSTRACT
7
This research work examined the impact of commercial Bank credit on
Agricultural output in Nigeria using Macroeconomic variables (commercial
bank credit and agricultural output). The broad objective of the study is to
investigate the extent to which commercial bank credit had supported
agricultural output Nigeria. The specific objectives are: (i) to determine the
impact of commercial banks credit on agricultural output in Nigeria, and (i)
to determine the impact of agricultural output on economic growth in
Nigeria. The methodology adopted for the study was ordinary least square
(OLs) involving the student’s T-test, to test the significance of the
individual parameter estimate, the F-test, to test the significance of the
entire regression plane, the R2 and Adjusted R2, to test the joint influence of
the explanatory variables on the dependent variable. Finally, DurbinWatson’s statistics (DW) was used to check the presence or absence of
serial correlation on the data. After the regression, the result shows that:
firstly, agricultural output as well as commercial bank credit to agriculture
and real interest rate contributed a lot to economic growth in Nigeria.
Secondly there is a general agreement that Nigeria agricultural sector is
grossly underfunded. Finally, the share of actual expenditure that went to
the agricultural sector compared unfavorable with the shares that went to
other sectors. Based on the findings above, the researcher made the
flowing suggestions:
There is the need for improvement of public expenditure tracking system in
agricultural sector.
There is also the need for clarification of the roles of the three tiers of
government in agricultural services delivery.
There is the need for applied research targeted at priority issues
8
TABLE OF CONTENTS
TITLE PAGE……………………………………………………………..i
APPROVAL PAGE………………………………………………………ii
DEDICATION…………………………………………………………….iii
ACKNOWLEDGEMENT…………………………………………………iv
ABSTRACT………………………………………………………………..vi
TABLE OF CONTENT……………………………………………………viii
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND TO THE STUDY……………………………………….1
1.2
STATEMENT OF PROBLEM…………………..………………………..6
1.3
OBJECTIVE OF THE STUDY…………………………….…………..…9
1.4
HYPOTHESIS OF THE STUDY…………………………………………9
1.5
SIGNIFICANCE OF THE STUDY…………………….………………..10
1.6
SCOPE AND LIMITATION OF HE STUDY…………………………..10
9
CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1
THEORITICAL L ITERATURE……………………………….……….12
2.1.1 THE PRE-REQUISITE THESIS VERSUS
THE CONCURRENCE THESIS……………………………………….14
2.2
FINANCING AGRICULTURE IN NIGERIA …………………………18
2.1.1 SOURCES OF AGRICULTURAL FINANCING …………………….20
2.3
COMMERCIAL BANK CREDIT AND AGRICULTURAL
OUTPUT………………………………………………………………... 23
2.4
EMPIRICAL LITERATURE……………………………………………..28
CHAPTER THREE
RESEARCH METHODOLOGY
3.1
MODEL SPECIFICATION …………………………………….……….34
3.2
ESTIMATION PROCEDURE………………..…………………………36
3.3
EVALUATION TECHNIQUES………..………………………………..37
3.4
DATA REQUIRED AND SOURCES…………………………………..41
10
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.1
UNIT ROOT TEST………………………………………………………43
4.2
CO INTEGRATION TEST………………………………………………44
4.3
PRESENTATION AND INTERPRESTATION OF RESULT………..46
4.3:1 INTERPRESTATION OF REGRSSION RESULT…………..………..47
4.4
EVALUATION OF EMPIRICAL RESULT……………………………..48
4.4:1 ECONOMIC CRITERIA (A PRIORI EXPECTATION)……………....48
4.4:2 STATISTICAL CRITERIA……………………………………………..50
4.4:3 COEFFICIENT OF DETERMINATION (R2)………………………….51
4.4.4 THE T-STAISTICS……………………………………………………..51
4.4.5 THE F-TEST…………………………………………………………….52
4.5. ECONOMIC CRITERIA (SECOND ORDER TEST)…………………53
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
11
5.1
SUMMARY……………………………………………..……………..… 59
5.2
CONCLUSION …………………………………………………………..62
5.3
RECOMMENDATION………………………………………..………….63
BIBLIOGRAPHY……………………………………………….…………67
APPENDIX
12
CHAPTER ONE
1.1
BACKGROUND TO THE STUDY
As confirmed by Ugochukwu (1999:02), agriculture is the first and
most thriven occupation of mankind. From its early form of wild fruits, leaf,
root, snail and insect gathering, fishing and hunting, to its present
mechanized and almost automated form, it has undergone a lot of
development
Okah (2007:04) conceived agriculture as the cultivation of land,
raising animals for the purpose of production of food for man, feed for
animals, and raw materials for our industries. It also consist of croup
production, forestry, livestock and fishing. It is also essential for expansion
of employment opportunity, reduction of poverty and improvement of
income distribution, speeding up industrialization and easing the pressure
of balance of payments disequilibrium.
The role of agriculture in transforming both the social and economic
frame work of an economy cannot be over emphasized. Anyanwu
(1997:213) posits that “agriculture has been the main source of gainful
employment from which Nigeria nation can feed its feeding population,
providing the nations industries with local raw materials and as a reliable
13
source
of
government
revenue.
Corroborating
the
above
is
Reynolds(1975.35) who asserts 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.
The major agricultural export commodities in Nigeria include cocoa,
coffee, cotton, groundnut, groundnut oil, palm kernel, soya beans, ginger
rubber, benign –seed and chili pepper (CBN,2003).there are other
commodities that are being demanded in the world market such as cassava
and cassava products, banana, plantain and so on. The Nigerian economy
until today is still dependent on primary products both as foreign exchange
earner and contribute to gross domestic product.(GAP). Olurosunsola
(1996:131) attributes this to the fact that the main interest of the colonial
masters was and still is the exportation of products needed for their home
industries.
The continuous production and exports of the agricultural product
played a dominant role in attracting foreign exchange to boost economic
activities from independence to the early 1970s. Obadan (2000:68),
observes that the production and palm oil accounted for 96.4% of total
exports earnings while non- oil export product accounted for 97.3% for total
14
export then. He observed further 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 growth and sustenance. Oyo (1994:23)
observed that the advent of crude petroleum production and related
activities especially in the early 1970’s changed radically the structure of
Nigeria economy. The huge foreign exchange earnings from crude oil
export encouraged importation of finished foods to the detriment of
domestic manufactured ones, 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 youth to urban areas in search of wage employment.
Nigeria agriculture is divided into two types, the subsistence
agriculture and commercial agriculture-: the subsistence agriculture is the
type of farming which involves only the farmer and his family i.e the farmer
produces for himself and his family with little or none to sell in the market it
is practiced in small scale system. It involves only a little amount of money
to practice unlike commercial farming that involves huge amount of money
to practice. It does not involve the machine to carry out, since the land is
very small and fragmented (Amechi 2004).
15
The second type is commercial agriculture, and this is where a farmer
produces his crops and sells them in the market. It is carried out in large
scale with enough land and machines. These machines are used in
cultivating crops. It involves a lot of capital and time, and also increase the
farmers income. Commercial farming helps farmers
16
to engage in the cultivation of different varieties of crops, since the money,
land and equipment could easily be used.
In agriculture, fund is needed to enable the farmer purchase more
land, buy his inputs at the appropriate time and to pay for hired labour or
farm machinery. Unfortunately, credits are not easily available for most of
the farmers because of collateral and other things that are usually required
by the commercial banks and other credit institutions. This makes it
possible for most of the farmers in Nigeria to lack the required capital for
investment in large scale agriculture, hence the reason for the recent low
agricultural productivity.
With the recent move by the leading economies of the world to
diversify their economy Nigeria in a bid to join the rest of the developed
economies is conscious of the danger signals observed both within and
outside the country that underscores the need to move away from total
reliance on petroleum related revenues. These signals according to soludo
(2009:28) include the on-going global economic crisis that is threatening
the growth and development agenda of the present administration, the
crisis in the Niger delta which has interrupted petroleum operations in the
past few year’s, and the frightening revelation that the united states of
America, the highest buyer of Nigeria crude oil, Brazil and several other
17
countries are seriously engaged in research for an alternative source of
energy.
Hence,
the
need
to
diversify
Nigerian
economy,
especially
Agricultural sector that has for long, been neglected.
1.2
STATEMENT OF THE PROBLEM
Several research have shown that Nigeria Is endowed with Huge
expance of fertile Agriculture land rivers, streams, lakes, forest and
grassland, as well as a large active population that can sustain a high
productive and profitable agricultural sector. Adubi(2000:103) admits that
this enormous resource baser 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.
In spite of these endowments, the sector has continued to record a
declining productivity. The capacity of the sector to fulfil it tradition roles in
Nigerian economy has been constrained by various social-economic and
structural problem such as;
a.
Unavailability of credits to local farmers
18
b.
The civil war of the late 1960S
c.
The severe drought of the early 1970s and 1980s
d.
The discovery of oil (the oil boom of the 1970 created relative disincentives
for agriculture in relation to other sectors of the economy).
e.
High interest rates on loans to farmers
f.
Rural- urban migration
g.
Ineffective institutions charged with policy implementations.
Not until recently, have government seriously thought and attempted
to mobilize potential savings for the rural farmers. Commercial banks
themselves have given little attention to the approval of loans to farmers for
fear of defaults. Where credits are received from other sources apart from
government and commercial lending, the interest rates have been too high.
These reported high interest rates are stark realities to the peasant
farmers. However, Ogunfowora etal (1972:35) attributed most of the short
comings on institutional credits in Nigeria to factors such as, ineffective
supervision
or
monitoring
insufficient
funds,
political
interference,
cumbersome and time consuming loan processing, large loan defaults and
absence of financial projections.
The question deducible from the above is, how have the credit
institutions, especially commercial banks, been able to impact positively on
19
the level of agricultural productivity in Nigeria a midst aformentioned
problems?
b.
Is the high interest rate on loans given to farmers really preventing them
from borrowing from credits institutions? Or are the commercial banks
afraid of fraud, the risk of not paying them back the loans?
c.
Do framers really use the money for agriculture or do they (farmer) use it
for their personal needs, i.e getting married, build houses etc?
d.
is market failure the problem of low productively in Nigeria Agricultural
sector?
1.3 OBJECTIVE OF THE STUDY
The broad objectives of the study is to investigate the extent to which
commercial bank credit had supported agricultural output in Nigeria.
However, the specific objectives of the study are as follows.
1.
To determine the impact of commercial banks credit on agricultural output
in Nigeria.
2.
To determine the impact of agricultural output on economic growth in
Nigeria
1.4
HYPOTHESIS OF THE STUDY
20
Following from the above stated objectives, the following hypothesis
are tested in this study;
1
Commercial banks credit has no significant impact on agricultural output
2
Agricultural output has no significant impact on economic growth.
1.5
SIGNIFICANCE OF THE STUDY
Agriculture is expected to make a significant contribution to net
foreign exchange earnings to Nigerian economic growth. As a result, this
study sets to reveal the important problems and prospect of the agricultural
financing and economic growth in Nigeria. It becomes important to carry
out a research on this area of study so as to suggest ways of combating
the perceived problems of the peasant scales farmers, such as, loan
procurement, and effective credit lending to the benefit of the local farmers.
Also, it sets out to help proffer solutions to the problems being faced by the
sector.
This study will serve as a good background for those intending to
carry out further research work on related topics.
1.6
SCOPE AND LIMITATIONS OF THE STUDY
This is an investigation into the impact of commercial bank credit on
the agricultural output in Nigeria for the period 1982-2007.
21
The major problem encountered by the researcher is inconsistency of
data. The data as reported by CBN is not consistent with that of federal
office of statistics.
22
CHAPTER TWO
REVIEW OF RELATED LITERATURE
Agriculture in Nigeria is the most dominant sector and major source
of livelihood for the majority of the population. It accounts for about 70% of
employment, and in spite of this Binswanger, et al (1999):23) say it has not
been able to achieve the major objectives of agricultural development
which the World Bank (1997) indentified to include; (I) increase in food
production and farm income, (ii) make household food, water and energy
secure and (iii) restore and maintain the natural resources. They stated
further that the failure of agriculture to meet these objectives is due to
limited use of purchased inputs and mechanization. This limitation is tied to
undercapitalization or lack of credit (Aku, P.S, (1995).
Hence, since the
availability of adequate credit is central to improvement in agricultural
productivity in an economy, this chapter is devoted to both theoretical and
empirical review of renowned opinions on the impacts of credits on
Agricultural outputs especially in Nigeria.
2:1
THEROTICAL LITERATURE
One of the most dominant theory by which we can conceptualize the
development process is termed
a two-sector or dualistic model. Its
analytical framework is always based on distinguishing the traditional
23
sector (Agricultural) from the modern sector (Manufacturing). The early
model of Lewis (1954:87) began with the assumption of the existence of an
Unlimited (or totally elastic) supply of labour originating from the traditional
sector. It was assumed that the traditional sector was not rational in the
sense of profit maximizing and that the emigration of reduction of its output
because of zero marginal product of its labour.
The modern sector, says Lewis, which consists of manufacturing and
some agricultural production, uses modern technology. The sector is
capital intensive and is rational in the sense of seeking to maximize profit
by hiring labour up to the point where the marginal product of the last unit
of labour transferred to the modern sector is equal to the wage. Savings
were assumed to be made only out of profit. As these profits
were reinvested, the demand for labour would increase. This would
continue until labour in the traditional sector is no longer unlimited. At the
point when labour becomes scarce traditional sector, it began to be
commercialized and subsequently, labor would be hired up to the point
where the marginal product is equal to the wage.
An alternative on Lewis’s unlimited labor supply theory was made by
Rains and Fei (1961:43), where the marginal product of labor was drawn
out of the sector, terms of trade would turn against the modern sector and
24
the wage rate must be raised, as the traditional sector produces, foods
were assumed to be consumed by the modern sector. Consequently,
profits in the modern sector tended to go down, and investment would also
slow down. It is also likely, therefore, that growth will stop prior to the
commercialization of the traditional sector.
2:1:1 THE PRE-REQUISITE THESIS VERSUS THE CONCURRENCE THESIS
In this regard, there are two schools of thought: the pre-requisite
thesis and the concurrence thesis. The former thesis argues that an
agricultural revolution and the subsequent rise in agricultural productivity
are pre-requisite for the initial spur of development, whereas the latter
thesis denies he condition for pre-requisite and asserts instead that rapid
growth in agricultural productivity could occur simultaneously with
industrialization.
Marx, one of the early growth- stage theorists, presented his (stages)
classification on changes in production technology and associated changes
in the system of property rights and ideology? Rostow also presented his
classification of stages in the transition from a primitive to a modern
economy and offered basically an equivalent reason of regarding the
agricultural
25
development as the pre condition to lake-off” (Hayami and Ruthan, 1971).
As mentioned earlier, one reason for supporting the pre- requisite
thesis is in fact that it is the outputs of the primary sector, rather than of
others that could be increased without costing much of the critically scarce
resources of financial capital and foreign exchange. Thus, it is only when
agriculture is already growing rapidly that it could and should be squeezed
on behalf of the more dynamic sectors of the economy. If, on the other
hand, the agricultural sector is operating at the “immature” stage i.e the
quasi-subsistence level, squeezing agriculture would create economic
stagnation and not growth.
In contrast, the concurrence thesis argues that the agricultural
development and the industrial development could proceed simultaneously.
In addition to the effect of agriculture on industrialization put forward by the
pre-requisite thesis, the industrial development, for its part, tends to offer a
widening
market for rural surpluses. It may also contribute to fuller exploitation of the
agricultural Sector by facilitating improvements in transport, credit and
production techniques.
26
Further, the credit and productivity in the primary sector, may create
a growing market for manufacturing products especially as incomes rise
beyond the level which afford the minimum essentials.
Thus, the pre-requisite argued that efforts to increase food supply
should receive top priority because of the high demand and great need for
additional food or because the highest marginal productivity of capital lies
in agriculture. Coals and Hoover (1986:20) conclude that very substantial
progress in the requisite to successful development of the economy as a
whole, limits the growth of the other; it is more likely to be a case of
agricultural growth limiting non-agricultural and vice versa.
Also, the concurrence group, while recognizing the need for arising
agricultural productivity, concludes that it can be accomplished only by
giving big pushes to economic development programme top priority.
Higgins (1980:37) states his position most plainly by arguing that the only
means to a cumulative improvement in agricultural productivity is a public
policy designed to move to large-scale agricultural and encouraging a rapid
rate of industrialization. Elsewhere, he recognized that such a policy
requires heavy investment in both the industrial and agriculture sectors.
Despite this premise about the agricultural sector, the logic of Higgins
group necessitates emphasis on agricultural productivity since without it,
27
Land consideration? and farm mechanization could hardly increase the
scarcity of labour.
2.2
FINANCING AGRICULTURE IN NIGERIA.
Finance is one input required for agricultural development as it
represents the power to purchase all other inputs and thus, it is not the
single determinant of the level of development in agriculture.
Several studies have been carried out on commercial banks and the
finance of agriculture in the country. According to Elegham (1983:06), the
availability of credits to local farmers pose a serious problem. This is
because of the rate in the increase of defaulting cases among small
farmers. Tims (1974) also revealed that commercial banks in Nigeria were
willing to grant to large-scale farmers because it has noticed that small
farmers default. Mostly in the act of loan repayment, they also have no
provision for collateral security required by banks. It is in light of this that
the government has always maintained that commercial banks should not
neglect agricultural and allied activities since they are the Chief agent of
mobilization of savings.
Not withstanding the unsuitability of commercial banks for financing
agriculture in general and small-scale farmers in particular, studies carried
out by Akinwole (1985), Osuntogu (1973) and Ijere (1975) pointed out the
28
need for raising the volume of loan resources available to the credit
constitutions? so as to permit increase in lending
to the individual
borrowers. However, Ogunfowora et al (1972) attributed most of the
shortcomings and institutional credits in Nigeria to facts such as;
ineffective
supervision
or
monitoring,
insufficient
funds,
political
interference, cumbersome and time consuming loan processing and
gearing absence of financial projections.
The importance of project supervision or monitoring of facilities is to
ensure that al conditions attached to the approval of credits facilities are
complied with. Credit Supervision is also aimed at indentifying emergent
problems before they got out of control. Problems detected earlier through
warning signals could be easily solved to avoid total loss of the project.
Agricultural facilities granted are closely monitored. This is occasioned by
the nature of the industry, especially the production aspect that is highly
risky because of its precarious nature.
Agricultural facilities are also known to be specific-purpose oriented
i.e planting, fertilizing, harvesting and transporting etc.). As a result of
follow-up facilities, the indications of possibility of default (usually) referred
to as “danger sign” of default are easily detected, a current finding in the
view on bank credit management.
29
2:2:1 SOURCES OF AGRICULTURAL FINANCING.
According to Amechi (2004:120) sources of agricultural financing are
as follows:
A.
AGRICULTURAL BANKS
In Nigeria, we have the Nigerian Agricultural and financial Bank
(NACB) which was established in 1973 primarily to finance agricultural
projects. Its cardinal aims are:
i.
To stimulate interest in agricultural Production.
ii.
To improve agricultural Production technique
iii. To improve storage and marketing of agricultural produce.
iv. To grant loans on fairly easy terms to finance agricultural projects.
State and local governments may serve as intermediaries by
receiving the loan from the federal government and the NACB for
transmission to the farmers or relevant farmer’s organization.
The federal government, through the Central Bank, is the sole
financier of the NACB. Its headquarters are located in Kaduna.
B. COMMERCIAL BANK
According to Amechi (2004); Commercial banks can also finance
agricultural projects. She further said; “In Nigeria, the federal government
directs Commercial banks to allocate a part of their lending’s to
30
agriculture at reduced interest rates. Such banks usually set up
departments of agriculture and employ agriculturists to manage them.
Such loans can be on:
SHORT-TERM: Where the loans are used to finance Annual and biennial
crops and quick maturing Livestock Projects such as pigs and poultry.
MEDIUM-TERM: Where the loan matures in two or three years. Such
loans are normally invested on biennial and some perennial crop which
mature in about three years such as Cassava, Citrus, Oil palm etc.
LONG-TERM: Where the loan matures in three or more years. They are
used to finance long-spanning perennial crops such as Cocoa, Kola,
rubber, etc.
C. SELF-FINANCING:
According to Aryeetey (1996:18), this is where a farmer decides to
reinvest his savings in another agricultural project or expanding an
already existing one. This however, is a slow process since saving
money depends on a lot of factors, economic and fiscal factors. It leads
to small-scale farming and is only suitable for subsistence farming.
D.
GOVERNMENT SOURCES:
Government (Federal, State and local) can give agriculture loan to
farmers either directly or indirectly through some agencies like Ministries
31
of Agricultural Banks, the Agricultural Development Programme (ADP)
and others.
2:3
COMMERCIAL BANK CREDITAND AGRICULTURAL OUTPUT.
Essang and Olajide (1974:21) define a commercial bank as a
monetary institution owned by either government or private businessmen
for the purpose of profit. In pursuit of the profit, the bank undertakes a
number of functions. One of these functions is the acceptance of
deposits from the public, these deposit are in turn given as credit to trade
industry, agriculture etc. which lead to more production and employment
(see Stephen and Osagie, 1985; Ekezie, 1997; Ijaiya and Abudulraheem,
2000).
To Aryeety (1996: 18) credit is the amount extended out with a future
date of payment. The NDIC prudential guide lines of 1990 however,
provides a wider definition of credit, and this includes aggregate of all
loans, advances, overdrafts, commercial papers, Bankers acceptance,
bills discounted. Leases and guarantee (NDIC, 1990).
Muftau (2003:02), on the other hand, defines agricultural credit as
credit granted to farm and ranch operators to assist in planting and
harvesting crops to support the feeding and care of livestock. Credit to
agricultural sector could take the form of an over draft, short-term,
32
medium-term or long-term depending on the purpose and gestation
period of the project. Such credits granted to framers to purchase inputs
are paid directly to the suppliers who must furnish the bank with evidence
of delivery. This is done to avert diversion of fund, which is common with
Nigeria Farmers ( See Adekanye, 1986: Nzotta, 1999).
Discussing the importance of credit to agricultural sector, Nzotta
(1999) posited that it reactivates, expands or modernizes all types of
agricultural enterprise which are considered economically feasible and
desirable to the achievement of stated economic goals of self-sufficiency
in agricultural production. While Qureshi, et al (1996) reported that such
credit removes financial constraints faced by farmer, as it provides
incentives to adopt new technologies that would otherwise be more
slowly accepted. Thus, the availability of credit enables farmers to switch
quickly to new technologies which enable the achievement of a rapid
productivity and growth.
According to Ijere(1996:20) “ Credit can be considered from its ability
to energize or motivate other factors of production. For example, it can
make the latent, potential or under-used capacities functional. He further
said that credit act as a catalyst that activates the engine of growth
enabling it to mobilize its inherent potentials and to advance in the
33
planned or expected direction. It follows, therefore, that the greater the
influx of capital, the more the propensity of the economy to move in its
given path. As summarized by Fosu (1992) Amin (1996), Umoh (2003)
“Credit thus constitutes the power or key to unlock latent talents, abilities,
vision and opportunities, which in turn act as the mover of economic
development.
Contributing to the argument about Commercial bank Credit and
agricultural output, wells (1970:86) confirms that commercial bank credit
contributions to economic development by enhancing production and
productivity and thus higher income and better quality life for people.
Agricultural credit in Nigeria dates back to the 1930s but organized
credit to farmers did not start until 1972 when the Nigeria Agricultural and
Cooperative Bank (NACB) were established (Ajakaiye. 1984). He further
said that agriculture is the largest sector of Nigerian economy, though its
contribution to the Gross Domestic Product (GDP) has declined from
67% in 1950 to 18% in 1980.
According to the Federal Ministry of agriculture publication(1980),
58% of farming- related borrowings was obtained from family and friends;
24% from professional private money lenders, 15% from merchant and
only 3% from commercial banks and other institutional sources. As
34
Garba (2000) noted, they are grossly, inadequate and unsatisfactory for
the credit needs of the farmers. Thus, there is the need for lager credit
sources.
2.4
EMPIRICAL LITERATURE
The importance of bank credits to agricultural production is well
established in many countries. In the study by Sohail et al
(1991:38) on the relationship between bank credits and agricultural out
puts in Pakistan, they found out that a statistical significant relationship
existed between bank credit in Pakistan and the agricultural outputs.
Moreover, Yaron et al (1997:203) also argued that directed credit
programmes were associated with the adoption of modern technologies
such as green-houses in Morocco and tube wells in North West
Bangladesh and these innovations were associated with increase in
production gains in the agricultural sector (see also Ijaiya and
Abdulraheem 2000).
May (1970:08) reported that countries that emphasized the
agricultural sector ended up with faster industrial growth than those that
focused on industries alone. Hence, agriculture may therefore be the
fastest road to industrialization.
35
Emmanuel (2008:781) carried out a study on the impact of
macroeconomics environment on agricultural sector growth in Nigeria.
The macroeconomic policies included in the model are:- credits to the
agricultural sector, nominal interest rates on the loan, exchange rate,
world prices of agricultural produce, foreign private invest-government
expenditure and inflation rate.
Using multiple regression analytical technique (ordinary least square),
he discovered that nominal interest rate is positively related to the index
of agricultural production. This implies that at higher nominal interest
rate, more credit facilities are made available to the operators of the
Nigerian agricultural sector, but at lower nominal interest rate, credit
facilities are no more widely available. The index of agricultural output is
also positively related to world prices of Nigeria major agricultural
commodities.
This implies that better world prices enhance agricultural output
growth in Nigeria. Similarly, the index of agricultural production was
positively related to government expenditure on agriculture. Moreover, it
was discovered that the index of agricultural production is negatively
related to the level of inflation, implying that as inflation becomes high,
the index of agricultural production declines. He thus recommends that
36
macroeconomic policies that enhance favourable exchange rates, make
agricultural credit widely available at low interest rate, reduce the rate of
inflation, increase foreign private investment in agriculture, would not
fortify government investment in the sector but would be invaluable in
supporting agricultural output growth in Nigeria.
Johnson (1975) studied Japanese industrial development and
concluded that without the prior increase in agricultural productivity, the
financing of Japanese industrial development would not have been
possible. He also compared USSR to Japan in terms of their decision on
industry and agriculture. During the decade following 1929, the USSR
(now the …………..) concentrated its attention upon industrialization and
fought its peasants instead of teaching them how to increase output per
acre. This led to tremendous price inflation, but during the 30 years
preceding world war 1, the Japanese were more sensible. Overall, their
output increased just as rapidly as that of industry and agriculture. Thus,
supply of savings from agriculture was the critical factor in Japans rapid
industrialization and this is often understood as the main reason why she
succeeded in her supplying herself the necessary investment funds in the
early stages of industrialization (Binswanger, 1989).
37
The experience of Japan shows that appropriate expenditure by
government (on agricultural research, extension credit and roads) can
have spectacular effects on the output of peasants and that agriculture
instead of acting as a brake on the rest of the economy, can be turned
into a leader generating demand for other sectors, and also providing
them with capital.
38
CHAPTER THREE
METHODOLOGY
This research will examine to what extent commercial bank credit
advances will determine the level of agricultural output in Nigeria. Since the
data to be employed are time series data, an ordinary least square (OLS)
method will be used to estimate the model parameters. In order to facilitate
time series analysis, data such as GDP, interest rate., agricultural Output
(AOP) and commercial bank credit (CBC); shall be obtained from the
following sources:
 Central bank of Nigeria (CBN)statistical bulletin
 Federal government of Nigeria (FGN) national account
 Federal office of statistics (FOS) annual abstract of statistics and
digest of statistics
3:1
MODEL SPECIFICATION
3:1:1
DEPENDENT VARIABLE
Gross domestic product (GDP): This is chosen as a dependent
variable in the course of this study because it is used as an indicator for
assessing the growth of Nigeria economy.
39
Agricultural output (AOP) is also chosen as a dependent variable in
order to capture the effect of commercial banks credit on agricultural
output in Nigeria
3:1:2 EXPLANATORY VARIABLES:
Agricultural output (AOP) will also serve as an explanatory variable to
show how significant changes in the variable is to the economic growth of
Nigeria.
Interest rate (INTR) is employed as an explanatory variable in the
course of this study because it shows the rate of interest that causes the
change in GDP
Commercial bank credit (CBC) is also included in the explanatory
variable.
3:1:3 STRUCTURAL PRESENTATION OF THE MODEL
This is symbolically expressed as
GDP = F (CBC,RINTR,AOP)
Where
GDP - Gross Domestic Product
RINTR - Real interest rate
CBC - Commercial bank credit
40
AOP - Agricultural output
3:1:4 MATHEMATICAL PRESENTATION OF THE MODEL
MODEL 1
AOP = Bo + B1CBC + Ui ……………………….(1)
Where
AOP = Agricultural output
CBC= commercial bank credit
Bo = Constant term
B1 = Coefficient of parameter
Ui = Stochastic error term
MODEL 2
GDP = Bo = B1 AOP + B2 RINTR + Ui ………………………(2)
Where
GDP = Gross domestic product
AOP = Agricultural output
41
RINTR = Real Interest Rate
Bo = constant term
B1 – B2 = parameters to be estimated
Ui = stochastic error term.
3:2
ESTIMATION PROCEDURE
Based on a prior grounds, there should be a positive relationship
between commercial bank credit and agricultural output, agricultural output
and GDP, interest rate and Gross domestic product.
The researcher will base his judgment from the result of the
regression on whether the signs and sizes of each parameter estimates
conform with the received theory.
3:3
EVALUATION TECHNIQUES
After the estimation of the model, the researcher must proceed with
the evaluation of the results. The evaluation consists of deciding whether
the parameter estimates are theoretically meaningful and statistically
satisfactory (konstoyianis, 1977:25).
The evaluation of parameter estimates will comprise the following
42
I.
Economic A prior Criteria
This is determined by the principles of the economic theory and refer to
the sign and magnitude of the parameter estimates. That is, whether the
parameter estimates conform with the dictates of the economic theory.
ii.
The coefficient of multiple determinations: This will be used to determine
the explanatory power of the variables or the goodness of fit.
iii
Statistical Criteria:
These are determined by the statistical theory and aim at evaluating the
statistical reliability of the estimates.
First order tests that will be carried here are as follows
i.
Students –T- Test
This was used to determine the significance of the individual parameter
estimates. T-test will be made in the hypothesis format and the decision
rule is thus.
If the calculated t—value (Tcal) is greater than the observed or
theoretical T- value (Tobs) ie
43
If Tcal >Tobs reject the null hypothesis and accept the alternative of Tvalue being statistically significant etc.
2.
F. TEST
This was used to determine the significance of the entire regression
plane. It is a test of the existence of a significant Linear relationship
between the independent variables taken together and the dependent
variables.
Using hypothesis form
Null hypothesis for F- test
Ho: a1= a2 = a3 =0
Against the alternate hypothesis
H1: a1= a2 = a3 = 0
The F- value is also a test of overall goodness of fit.
3. STANDARD ERROR (SE)
It is a test of overall goodness of fit and more importantly of reliability in
prediction (Iyoha, 2004; 16). The lower the S.E is, the better the predictive
ability of the equation.
44
4.
ECONOMETRIC CRITERIA
These are tests set by the theory of econometrics and aimed at
investigating whether the assumptions of the economic method employed
are satisfied or not. The test carried out under this criteria include the
following:
NORMALITY TEST
This test was carried out to check whether the error term follows the
normal distribution. The normality test adopted is the Jarque-Bera (JB) Test
of normality. The JB test of normality is an asymptotic, or large- sample,
test and it is based on the OLs residuals and uses the chi-square
distribution (Gujaratii, 2004:148).
2
TEST FOR AUTO-CORRELATION
The underlying assumption of auto- correlation is that, the successive
values of the random variable are temporary independent. Auto-correlation
usually indicates that an important part of the variation of the dependent
variable has not been explained.
45
3
TESTS FOR MULTICOLLINEARITY
This test is carried out using partial coefficient of determination (partial R2).
When partial R2 is > R2; that is, coefficient of determination, we say that
there is presence of multicollinearity, otherwise there is no presence of
multicollinearity.
4
TEST FOR HETEROSKEDASTICITY
This test is basically focused on the variance of the error term. The test
helps to ascertain whether the variance of the error term is constant.
Ho: Homoskedasticity
Hi: Heteroskedasticity
Decision Rule: Reject Ho if x2> x2 0.05 and accept if otherwise.
3:4
SOURCES OF DATA:
As stated earlier, the time series data to be used will be sourced from
the following control Bank of Nigeria (CBN), Statistical Bulletin (various
years)
Federal
government
of
Nigeria
National
accounts
and
Supplemented with federal office of statistics annual abstract of Statistics
and Degest of Statistics.
46
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
In order to avoid what Granger and Newbold (1974) call a spurious
regression, we examined the time series properties of the underlying data
before estimating the model. The unit root test of stationerity using the
augmented dickey-filler (ADF) test was conducted. The result is presented
below. This is because loading of the endogenous variable is minuscule
when in fact a long –run relationship exists between the dependent variable
and the economic fundamentals driving it. Thus each of the variables would
be examined for unit root and co integration. The empirical result of this
analysis is in two model and the two models will be analyzed together. The
first is in log
linear model which examines a simple relationship of
agricultural output and commercial banks credit, while the second is also a
log linear model the seeks to know the relationship of agricultural output
and commercial banks credit, while the second is also a log linear model
that seeks to know the relationship shown by agricultural output to
economic growth.
4. 1
UNIT ROOT TEST
47
As mentioned above, the first point of our analysis is to conduct the
unit root test of stationarity using the augmented dickey-filler
(ADF)
test. The result shows that real interest rate was stationary at first differenced
1~(1),while gross domestic product, agricultural output and commercial banks
credit to agricultural sector were stationary at second differenced 1~(2).the
summary result presented in table 4.1below .
ADF TEST FOR STATIONARY
Employing the augmented dickey-fuller test, unit roots test was run on
the variables up to their 2nd differences with the following result:
Table 4.1: ADF Unit Root Test on the Annual Series
variable
DDLGDP
DDLAOP
DDLCBC
DRIR
1~(d)
2
2
2
1
lag
2,1,0
2,1,0
2,1,0
2,1,0
t-adf
-4.0192*
-6.0393*
-4.2488*
-4.5463**
-3.9066**
-6.9775**
-5.5409**
-4.7982**
-6.3923**
-6.3362**
-7.5291**
-4.8954**
5% & 1%
-1.958
-1.958
-1.958
-1.957
Critical
-2.682
-2.682
-2.682
-2.676
48
values
NB **indicates significance at both 5% and 1% critical value D, DD indicates
the order of stationary.
This observation of order of stationarity as explained above, led us to
a possible suspicion of co-integration between the dependent variables and
those explanatory variables that have the same order with it. Hence we
proceed to co integration test.
4.2 Co integration test
This test is conducted to check whether there is evidence of the co
integration between the explanatory variables having the same order of
stationarity with the dependent variables. As a result, we estimate their
linear combination at their level form without the constant term and obtain
their residual which was further subjected to unit root test of stationarity.
The result is represented below
Table 4.2 Co integration result
Residual
t-adf
1% critical value 5% critical value
-2.3061(2)
-2.672
-1.957
49
Residual
-2.2487(1)
-2.672
-1.957
Residual
-2.5050 (0)
-2.672
-1.957
The result shows a slight evidence of co integration. This is because the
residual obtained from the linear combination of the variables in question were
statistically significance 5% but not at 1% critical values, reading from lag
lengths 2, 1 and 0. The outcome of the co integration test did not invalidate
the formal specified model of log linear model and on this ground, we presents
the summary of the estimated models.
4.3 Presentation and Interpretation of Results
The summary of the results for the two models specified in chapter three are
represented below. The results were obtained using Pc-Give version 8.0.
MODEL 1: Modeling Log of AOP by OLS
Variable
Coefficient Std. Rrror T-value
T-prob
PartR2
Constant 9.2653
0.23922
38.732
0.0000
0.9862
LCBC
0.023295
8.336
0.000
0.7679
0.19419
R2 = 0.767931,
F(1, 21) = 69.49 [0.0000],
DW= 0.499
50
MODEL 2: modeling log of GDP by OLS
Variable
Coefficient Std. Error T-value
T-prob
PartR2
Constant 4.5479
1.0902
4.172
0.0000
0.4653
LAOP
0.72742
0.097012
7.498
0.0000
0.07376
RIR
0.0043151 0.0019970 2.161
0.0430
0.1893
R2 = 0.752486, F(2,20)= 30.402 [0.0000], DW= 1.573
4.3.1 INTERPRETATION OF REGRESSION RESULT
In this section, our analysis is centered on three different criteria, namely
Economic, statistical and Econometric criteria. Thus, to interpret these three
criteria mentioned above, we first of all interpret the coefficient of each of the
parameters. The elasticity coefficient observed from the two models presented
above, shows that any unit adjustment in the variables will transmit to positive
or negative adjustment to the dependent variable to the tune of the values of
the elasticity coefficient in each variable.
However, the result from the first model showed a great significant
relationship between agricultural output and commercial bank credit. This was
observed following a “2-t Rule of thumb,’’ a variable is statistically significant
51
if its t-value is greater than 2 in absolute value at any % level of significance.
In other hand, it statistically insignificant if its t-value is less than 2 in absolute
value at any % level of significance.(Gujarati,2004). The coefficient shows that
every unit increase in commercial bank credit to agriculture sector will
relatively contribute a 0.19419 units increase to the output of agricultural
sector, all things being equal.
Also judging from the second model, the result equally shows that
agricultural output and real interest rate is two major macroeconomic
indicators that exact much pressure on the growth variation of the economy. It
shows that every unit increase in agricultural output will on average bring
about 0.72742 increase to the economic growth. Also, the coefficient of real
interest rate shows that every unit changes in real interest rate will cause the
economic growth indicator to change by 0.0043151 units, all things being
equal.
4.4 Evaluation of empirical results
4.4.1 Economic criteria (a priori expectation )
in this stage, we check whether the parameters estimated in the
model conforms to the “a priori” expectation of the existing theories, in terms
of the size, signs and magnitudes.
52
Variable Meaning
Expected Sign
Constant There are other indicators outside the model The results shows a positive
AOP
that can affect the dependent variables at a
sign which conformed to the
constant basis
“a prior”expectation.
This is the value (tones) of agricultural
The result shows
products. According to the classification by
Positive coefficient, which
the united nations food and
conforms to a priori
agricultural organization (FAO) production
expectation.
year-Book, agriculture includes cereals,
starchy roots,, sugar, pulses, edible oil crops,
nuts, fruits, vegetables, wine, cocoa, tea,
coffee, livestock and livestock products.
Also included in the group are industrial
oilseeds, tobacco, fibres, vegetable and rubber.
But National Bureau of statistics grouped all
these into, staples, livestock, fishery and
forestry. However, an increase in these
products will bring better economic
growth (GDP).
CBC
This is the value (amount ) of money disbursed
The elasticity
53
to agricultural development by commercial
coefficient
conformed
to
bank in form credit or loan and advancement.
theoretical expectation, having
An equal increase in this is expected to bring
a positive sign, and this
Nigeria agricultural productivity to its desired
size is appreciable.
level that will bring about the needed growth in
the entire economy
RIR
A higher real interest rate, is expected to to
The result shows a positive
discourage investment in one way but in the
sign which conforms to some
other ways, it encourage saving.
theoretical expectation.
Though it was widely argued that it is
disincentive to economic growth (paradox of
thrift). By implication, its effects to economic
Growth are bidirectional.
4.4.2 Statistical Criteria (First-Order Test)
These tests are determined by statistical theory and aims at evaluating
the statistical reliability of the estimates and parameters of the model
(koutsoyiannis, 1977), from the sample observation. The first order test is carried
out based on the following : R 2,t –probability (t-prob ) and F-test.
54
Coefficient Of Determination (R 2 )
In our models, R2 =0.767931, and 0.752486 respective, which implies that 77%
of the variation in the dependent variable is explained by the explanatory variables
in the first model, and 75% in approximation is explained in the second model.
Obviously, one can claim that the two models showed justifiable evidence of good
fit.
The t-statistic:
In this section, we use t- statistic to test for the individual significant of the
parameters. The significance of the result is shown below:
Hypothesis I :
Ho; µ=0 (the parameter is statistically insignificant).
HI;µ / 0 (the parameters are statistically significant).
Following a 2-t Rule of thumb, a variable is statistically significant if its t- value is
greater than 2 in absolute value at any % level of significance. In other hand, it
statistically insignificant if its t-value is less than 2 in absolute value at any % level
of significance. (Gujarati, 2004).
The result summary tables are presented below:
55
Model 1
Variable
t-value
2
t-Rule
of
t-Prob
Remark
thumb
constant
38.732
2.000
0.0000
Statistically Significant
LCBC
8.336
2.000
0.00000
Statistically Significant
Variable
t-value
Critical value
t-prob
Remark
Constant
4.172
2.000
0.0005
Statistically
Model 2
Significant
LAOP
7.498
2.000
0.0000
Statistically
Significant
RIR
2.161
2.000
0.0430
Statistically Significant
From the result above, we can observe from the remark column all the
variables in the two models were statistical significant.
The F-Test
The F- test is used to determine the overall significance of an estimated
model. It follows an F-distribution with degree of freedom (d.f) k-1 (V1) and in –
k (V2)
56
Ho: all Bis = 0
H1: all Bis ≠ 0
The decision rule is such that we accept the claim of goodness of fit the
estimated F exceeds the tabulated F – value with K-1 (V1) and N-K (V2)
degrees of freedom. The F calculated for our two models is given as:
F(1,21) -69.49 sands F (2, 20)-30,402 respectively.
The tabulated F0.05 (1, 20) for both models are 4.32 and 3.47, while
calculated F (1, 21) values which are F (1, 21) – 69.49 and F (2, 20) - 30,402
respectively, which exceeded our tabulated F0.05 value, thus we conclude
that model has a good fit.
4.5
ECONOMETRIC CRITERIA (SECOND ORDER TEST)
These tests are based on econometric theory and are aimed at finding
out whether the econometric assumptions are satisfied.
Test for Normality
This test was carried out to check whether the error term follows the
normal distribution. The normality test adopted is the Jarque-Bera (JB) Test
of Normality. The JB test of normality is asymptotic, or large-sample, test,
and it is based on the OLS residuals. This test computes the skewness and
57
Kurtosis measures of the OLS residuals and the Chi-square distribution
(Gujarati, 2004:148)
Hypothesis: Test
Ho:
1
= 0 (the error term follows a normal distribution)
Against:
H1:
1
≠ 0 (the error term does follow a normal distribution)
At α = 5% with 2 degree of freedom.
Test statistics:
Residual (JB) = n [s2 + (k-3)2] = 1.4077
6
24
Where n = sample size,
S =Skewness coefficient, and
K= Kurtosis coefficient
Decision Rule: Reject H0 if x2cal > xtab2(0.05) at 2 degree of freedom, and
accept H0 if otherwise.
58
From the result obtained from Jarque- Bera (Jb) Test of Normality, JB=
1.4077 which is shown in appendix, and from chi-square table x2 tab = 5.99147.
Therefore, since x2cal = 1.4077,< x2(0.05)
tab=
5.99147 at 5% level of
significance, we accept H0 and conclude that the error term follows a normal
distribution.
Test for Auto –Correlation
The underlying assumption of auto-correlation is that, the successive
values of the random variable (u) are temporary independent, Auto-correlation
usually indicated that an important part of the variation of the dependent
variable has not been explained. The problems of autocorrelation are usually
dictated by Durbin Watson (DW) statistics.
The decision rule is thus
D-W Statistic
Positive Autocorrelation
Between 1.5and 2.5
No positive autocorrelation
Below 1.5
Positive autocorrelation
Above 2.5
Negative autocorrelation
59
Since our D-W statistic form the two models presented above are 0.499
and 1.573 respectively, we conclude that the first model shows positive serial
autocorrelation,
while
the
second
model
proves
no
positive
serial
autocorrelation.
Test for Multicollinearity
This test is carried out using partial coefficient of determination (Partial
R2). When the partial R2 is > R2; that is, coefficient of determination, we say
that there is presence of multicollinearity, otherwise there is no presence of
multicollinearity, judging from the two modeles there is no presence of
multicollinearity as has been remarked in the table above.
Test for Heteroskedasticity;
This test is basically focused on the variance of the error term. The
test helps to ascertain whether the variance of the error is constant.
H0: Homoskedasticity
H1: Heteroskedasticity
Decision Rule: Reject H0 if x2 > x2 0.05 and accept if otherwise. From our
result, the calculated chi-square (x2) at (4) degrees of freedom is 10.003,
while the tabulated x2
0.05
(4 degrees of freedom) is 111. Since our
60
estimated x2 < x2
0.05
we accept H0 of homoskedasticity and conclude that
the conditional variance of the error terms is equal.
Test for Adequacy of the Model
This test was conducted to test whether the model was well specified.
In this test, the RESET TEST was adopted. The test follows t – distribution.
Statement of Hypothesis;
H0: Normal specification of the model
H1; Wrong specification of the model
Decision rule; Reject H0 if F* > F – tab; and accept if otherwise; at a level of
significance of 0.05.
RESET F* = 1.31, where F 0.05, (1, 19) = 4.38.
Conclusion; Since F* = 1.31 < F
tab
= 4.38, we accept the null hypothesis
and conclude that the models used are adequately specified.
4.6
Evaluation of the hypothesis
The hypothesis have earlier been stated as;
H0: There is no significant impact of commercial bank credits on agricultural
out on economic growth in Nigeria.
61
H0: Changes in macroeconomic variables (real interest rate on credits to
farmers) have no significant impact on the agricultural output in Nigeria.
Going strictly by the result of the models, all the variables in both
models have simply proven that both agricultural output and real interest rte
of borrowing money to farmers is a necessary incentive toward economic
growth of the economy.
Nevertheless, all the variables conformed to the “a priori” expectation,
although the adjusted R2 showed that the model has a good fit. The result
is also shown to be robust to possible sources of specification test.
62
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1
SUMMARY OF FINDINGS
The study examined the impact of commercial banks credit on
agricultural output in Nigeria over the period of 1982 – 2007. The study
employs Ordinary Least Square (OLS) method of estimation. Preliminary
test of stationary and co integration of variables using the Augmented
Dickey Fuller (ADF) test and the co integration test using the Residual
procedure were conducted respectively. The respective test shows that
some of the variables including the dependent variable were stationary at
second differenced except real interest rate which was stationary at first
differenced. The accompany co integration test provided no evidence of co
integration among the variable.
However, following the empirical findings in this study, we observed
that, agricultural output as well as commercial banks credit to agriculture
and real interest rate contributed a lot to economic growth in Nigeria. These
findings can be traced with look at the public spending on agriculture in
Nigeria over times.
63
According to Tewodaj M., Michael, M., Chinedum N., and Olufemi T.,
(2008) between 2001 and 2005, the aggregate federal spending budget
averaged 824 billion naira per year. Of that amount, the agricultural sector
budget constituted a very small share, averaging only 14.7 billion naira per
year, or slightly less than 1.8 percent of the total budget. In contrast, during
the same period the education sector budget averaged 7.8 percent of the
total budget, the water sector budget 5.7 percent of the total budget, and
the health sector budget 5.1 percent of the total budget. The share of actual
expenditure that went to agriculture was similar to the share budgeted.
Between 2001 and 2005, actual federal spending averaged 681
billion naira per year, of which 11.4 billion naira went to agriculture, or
slightly less than 1.7 percent. Again the share of actual expenditure that
went to the agriculture sector compared unfavourably with the shares that
went to other sectors.
There is general agreement that Nigerian agriculture is grossly
underfunded. Worse still, pattern of agricultural sector spending hardly
represent the best and most effective use of public resources. In line with
the structure of the funding problem, we address two dimensions here
volume
of
funding/agricultural
share
of
capital
quality/impact of agricultural sector funding/ spending.
budget
and
the
2003 2004 2005
1997 1998 1999 2001 2002
1992 1993 1994 1995 1996
1989 1990 1991
1984 1985 1986 1987 1988
1982 1983
1977 1978 1979 1980 1981
64
Agricultural sector funding comes from then federal government, state
governments, organized private sector, informal sector and international
development partners including bilateral and multilateral agencies.
Perhaps, because the society sees agriculture as a small-farmer activity,
less than 1% of Nigeria’s annual GDP is ploughed back into agriculture as
productive investment. In 2003, agriculture share of the budget was mere
….% of agriculture GDP.
Over the years, the agricultural sector has suffered inadequate and
unstable funding from the government. At the federal level, funding for
agriculture has been very unstable as shown in fig. 1.
65
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
Source: Federal Government Budgets, various years
Such a funding pattern clearly does not befit the sector that is
acknowledged to be a prime driver of growth and poverty reduction in the
country. Currently, agriculture share of federal capital budget (1.5%) falls
short of the target of 4% set by the National Economic Empowerment and
Development Strategy (NEEDS)
Even though this estimate of the share of federal- level spending
going to agriculture is very small, the 1.7 percent figure may actually be too
high. A significant amount of federal-level spending in Nigeria occurs offbudget, and analysis done as part of the recent Public Expenditure
66
Management and Financial Accountability Review suggests that very little,
if any, extra-budgetary spending has gone to agriculture (World Bank
2007a).If That is true, and given that extra-budgetary funds constitute as
much as 30 percent of total public funds, then the share of agricultural
spending at the federal level is significantly lower than 1.7 percent.
Federal government spending represents only a portion of the public
resources going to the agricultural sector in Nigeria. Additional spending is
effected by state and local government authorities, but that spending is
hard to quantify because it is not tracked centrally.
5.2
CONCLUSION
The study re-affirms the fact that one of the most important functions
of the commercial banks and other monetary authorities is to make credit
available to the investors at affordable rate most especially the agricultural
sector. This is because low credit or high lending rate will amount to low
level of investment which transmits to low agricultural output.
The government through its relevant authorities should design a
favourable monetary policy that will enable commercial bank to make credit
more available to the agricultural sector for masses development of that
sector. This is because, the fiscal posture for the reform period, and
67
monetary policy outcomes will depend largely on the government’s fiscal
stance. The disparity between monetary targets and outcomes is wide
largely because of the statutory financing of budget deficits and the inability
of the apex bank to sterilize the liquidity effects of government expenditure.
Thus monetary policy intervention has been basically reactionary and term,
leading to missed targets and ineffectiveness in performance towards
increasing the agricultural output in Nigeria, and except urgently measure is
taken, the present economic objectives in Nigeria may be achieved in the
nearest future.
5.3
POLICY RECOMMENDATION
Based on the findings from the empirical estimation of these models
and
the
reviewed
of
related
literatures,
the
following
policy
recommendations is designed.
Need for improvement of public expenditure tracking systems
There is an urgent need to improve internal system for tracking,
recording, and disseminating information about public spending in the
agricultural sector. Consolidated and up-to-date expenditure data are not
available within the Ministry of Agriculture, not even for its own use. Without
this information, authorities cannot undertake empirically-based policy
68
analysis, program planning, and impact assessment. The lack of reliable
data and information prevents Ministry officials from tracking and
monitoring spending, increasing the risk of corruption.
2.
Need for clarification of the role the three tiers of government in
agricultural services delivery.
With its federal system of government, Nigeria faces the same
challenge faced by other developing countries with decentralized and
federal systems: defining the roles and responsibilities of each tier of
government with respect to public services and public investments.
Government must clarify the roll and responsibilities of each tier of
government. This is important to reduce overlaps and gaps in agricultural
interventions
and
improve
efficiency
and
effectiveness
of
public
investments and service delivery in the sector. In agriculture, as in other
sectors, the distribution of responsibilities to the federal, state, and local
governments should take into account the following factors:
(i)
Subsidiarity: Responsibilities should be assigned to the lowest level of
government that can effectively carry out the function.
(ii) Externalities: Assignment of responsibility should be at a jurisdictional level
at which most of the impact of intervention is subsumed.
69
(iii) Economies of scale: When possible, the provision of a service should be
undertaken by a higher tier of government where it is potentially more
efficient to do so.
(iv) Expertise and capacity: Differing levels of technical expertise and capacity
should be taken into account in the distribution of responsibilities.
Two more critical issues to consider in designing a decentralization strategy
concern
(i)
State and local access to and control over resources in accordance with
expenditure assignments, and
(ii)
State
and
local
government
accountability.
If
subnational
governments do not have discretionary power over their budgets, key
benefits of decentralization-e.g. the ability of these governments to tap into
local knowledge—may be undermined. And when local leaders are held
accountable for their performance, decentralized management can ensure
better quality service provision.
Finally, Nigeria faces a challenge more important than the depth of
administrative decentralization. The legal of corruption in administration at
all three tiers of government is starting to be tacked, but corruption
continues to undermine the efficient and effectiveness of service delivery in
agriculture, along with that of other sectors
70
3. Need for applied research targeted at priority issues
Applied research is urgently needed to address critical knowledge
gaps in several areas.
Fertilizer subsidies: Spending on fertilizer programs makes up a sizeable
portion of overall agricultural spending in Nigeria, yet very little is known
about the impact of this spending, Have government supported fertilizer
programs increased overall use of fertilizer? Is subsidizing fertilizer the
most efficient way to pursue these policy goals?
Strategic grain reserves: To date, only a small portion of the national
grain storage system has been constructed, but if the entire network is
completed as planned, the cost will be enormous. Supporting even the
current mode level of an investment on this order of magnitude desirable?
What has been the impact of these investments? Have producers and
consumers benefited?
Food security: There is a need for an analytical study focusing on the
economics of the National Special Program for Food Security (NSPFS).
71
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74
APPENDIX
YEAR
GDP
AOP
CBC
RIR
1982
199685.3
1616445
786.6
0.57
1983
185598.1
14240
940.4
-15.47
1984
183563
29552
1052.1
-30.96
1985
201036.3
31601
1310.2
5.08
1986
205971.4
32512
1830.3
4.36
1987
204806.5
37106
2427.1
4.92
1988
219875.6
47015
3066.7
-42.34
1989
236729.6
52772
3470.5
-29.07
1990
267550
55964
4221.4
14.6
1991
265379.1
67581
5012.7
7.4
1992
271365.5
75085
6978.9
-22.71
1993
274833.3
78691
10753
-33.18
1994
275450.6
81802
17888.8
-42.03
1995
281407.4
84286
25278.7
-58.85
1996
293745.4
88080
33264.1
-15.86
1997
302022.5
90817
27939.3
-3.21
1998
310890.1
93401
27180.7
2.12
1999
312183.5
96789
118518.3 5.97
2000
329178.7
102646
146504.5 3.73
2001
356994.3
88266.8
200856.2 -8.89
2002
433203.5
91927.5
227617.6 3.61
2003
477533
98568.4
242185.7 -0.99
2004
527576
104695.3
261558.6 -1.69
75
2005
561931.4
111780.7
262005.5 -7.03
2006
595821.6
120470.7
49393.4
2007
634251.1
121247.7
149578.9 3.34
0.11