CREDIT TO AGRICULTURAL SECTOR AND NIGERIA ECONOMIC

PERFORMANCE

BY

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 ABSTRACT
The study examined the impact of credit to agricultural sector on economic performance in
Nigeria between 1981 and 2016. The co-objectives were to assess the impact of agricultural
credit on agricultural output and agricultural value-added in Nigeria. It was established that
agricultural credit is the examination and analysis of financial aspects of farm business. An
important variant of agricultural credit is the amount of investible funds made available for
agricultural production from resources outside the farm sector. The taxonomy of agricultural
credit based on purpose, repayment period, security, generation of funds, creditors and number
of activities for which credit is provided.
The study adopted secondary source and annual time-series data. The data were obtained from
the Central Bank of Nigeria Statistical Bulletin and World Bank Development Indicators. The
data spanned from 1981 to 2016. The study employed the ordinary least square (OLS) technique
to empirically estimate the models. The Econometric Views (EVIEWS) is used to electronically
analyze the data.
The findings revealed that: Agricultural credit guarantee scheme fund was the most influential
agricultural financing variable. Agricultural credit guarantee scheme fund contributed positively
and significantly to real GDP, agricultural output and agricultural value-added in Nigeria within
the sampled period. Government spending on agriculture had significant positive impact on
agricultural value-added in Nigeria, insignificant positive impact on agricultural output and a
weak negative impact on real GDP. Commercial banks loans and advances had insignificant
positive impact on real GDP and agricultural value-added in Nigeria, and a weak negative
influence on agricultural output.
The study concluded that Nigeria’s agricultural sector has not been adequately financed over the
years. The study further recommends that: Agricultural credits programmes should exert more
commitment in implementing the policy of granting loan by purpose so that those segments of
the nation’s agricultural produce that are targeted for improved productivity will be achieved.
Government are advised to pay more attention to the agricultural sector by compelling financial
institutions to supplement government efforts towards financing agriculture through the
disbursement of loans at low interest rate at appropriate time in order to avoid diversion of such
loans. Farmers should recognize the practice and advantages of accumulated savings, which is
often allowed to group when existing facilities are not fully adjusted. Machinery should be set up
to ensure that the loans given to farmers are utilized for right purpose. To resolve the problems
faced by farmers, good road networks should be constructed to enhance movement of food and
cash crops from one location to another. There is need for the Central Bank of Nigeria to reduce
the cash reserve ratio, so that funds that accrue from such policies must be added to agricultural
credit portfolios.

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 CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Agriculture is imperative in the process of growth and development of an economy. The benefits
of agriculture to mankind cannot be undermined. Firstly, agriculture provides food for the ever-
increasing populace of Nigeria. Secondly, through rearing of animals, agriculture provides agro-
allied products that are highly nutritious for the populace. Thirdly, agriculture is being depended
upon by other sectors of the economy for source of raw materials. Fourthly, agriculture has been
regarded as the largest employer of labour force in Nigeria (Odu, 2007). Fifthly, agriculture
interlinks the subsistent sector with the modern sector to enhance economic growth. These
benefits demonstrate that agricultural development is fundamental for industrialization
(Ozurumba & Uzomaka, 2011). Okoh (2015) noted that almost 70% of the entire working
population in Nigeria is employed in the agricultural sector. Agriculture used to be the linch-pin
of the Nigerian economy in the 1950s, 60s and early 70s, whose contribution to the gross
domestic product (GDP) was above 50% in these periods. Furthermore, during this era,
agriculture generated huge foreign exchange earnings for the economy from exportation of
primary products such as rubber, cotton, cocoa, palm oil and groundnut amongst others. The
economic fortune of agriculture was shattered as a result of the emergence of crude oil as the
country’s major export products. Available statistics from the Central Bank of Nigeria indicated
that the contributions of agriculture to GDP fell from 57% in the 1960s to 30% in the 1970s.

The importance of credit to agricultural sector cannot be undermined. Credit to agricultural

sector has the capacity to eliminate the financial challenges facing farmers, paves way for
adoption of new technologies to spur productivity, promotes economic development through
increased income and improved living standards and helps to unveil talents, capacities, prospects
and opportunities, which are catalytic elements of sustainable development. The Central Bank of
Nigeria (2010) recognized agricultural credit as a veritable source of finance for agricultural
development. Agricultural credit can be grouped into two categories namely micro-sources and
macro-sources. Micro-source of financing involves accessing credit from commercial banks and
other financial institutions. On the other hand, macro-source of financing involves mobilizing

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capital from government through its rural banking programmes for agricultural development.
Access to financing enables massive acquisition of factor inputs for increased productivity.
According to Nzotta and Okereke (2009), there is a positive correlation between finance and
economic performance, while paucity of finance results in economic retardation. The essence of
agricultural credit is the enhancement of agricultural activities and serves as provision of
assistance to peasant farmers and other players in the sector. Accessibility to capital is as
germane as other factor inputs such as labour and land needed for production. Agbada (2015)
noted that the funding challenges faced by the agriculture sector does not emanate from paucity
of credit, but rather stems from the unwillingness of financial institutions to grant loans and
credit facilities to farmers without necessary collateral requirements. Often times, peasant
farmers are incapable to provide collateral requirements needed to access credit facilities, and
eventually left with the option of sourcing funds through personal savings, profit and aids from
family and friends, thereby drastically hampering agricultural activities.

Inadequate funding of the agriculture sector has been recognized as a leading setback for the
agricultural sector in Nigeria (Udoka & Duke, 2016). In attempt to lessen the cumbersomeness of
access to credit by farmers, several programmes and policy measures were instituted.
Commonest amongst them were Green Revolution, Nigerian Agricultural Cooperative and Rural
Development Bank (NARCDB), Nigerian Agricultural Insurance Corporation (NAIC),
Agricultural Credit Guarantee Fund Scheme (ACGSF) and National Agricultural and Co-
operative Bank (NACB). Majority of these programmes failed to achieve their stated objectives.
Ihenacho (2016) asserted that most of agricultural programmes targeted to revamp the
agricultural sector were literally inexistent evidenced by the increasing rate of rural poverty and
dwindled agricultural productivity. The Agricultural Credit Guarantee Scheme (ACGS) was
introduced to resolve the funding challenges faced by peasant farmers in Nigeria. In this scheme,
government acts as the middle man between farmers and providers of credit. Government also
acts as a guarantor for credit facilities to enable easy access to such facilities and reduce the
inherent risk associated in making such facilities available.

Agricultural credit is heavily limited in developing economies as a result of the imperfection and
costliness of information in the financial markets (Swinnen, 2005). Farm households in

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developing countries are heavily constrained to accessing credit from financial markets. Ranjula
(2011) posited that about 5% of Nigerian farmers and 15% in Asia and South-America had
benefited from formal credit and on the average, only 5% benefitted from 80% of credit in
developing countries. Available Statistics from the Central Bank of Nigeria revealed that
commercial bank credit equaled N7 million was allotted to the agricultural sector in 1970, rose to
N37.4 million in 1974, N462.2 million in 1980 and N1,310.2 million in 1985. Aggregate credit
to agricultural sector rose to N4, 221.4 million, depicting 16% of the total credit in the economy,
and N25, 278.7 million in 1995, which was 17% of the overall credit available in the economy.
Starting from the year 2000, the proportion of credit to agriculture sector increased in absolute
terms but decreased on relative grounds. For example, total credit to agriculture rose from N41,
028.9 million, representing 2.46% of total credit in 2005, to N128, 406.0 million in 2010,
representing 1.67% of total commercial bank credit to the economy. As at 2013 and 2014, the
share of agriculture credit in total commercial bank credit fell were 3.9% and 3.7% respectively.

Although, agriculture credit has been increasing in absolute terms over the years, but its share in
total credit to the economy is negligible. This analysis symbolizes disregard and relegation of the
sector. However, agricultural credit is pivotal to agricultural development and economic
performance, and has been among the policy thrusts of successive government. The Federal
Government of Nigeria has instructed financial institutions to make loans and credits available
for the sector. Despite the enormous investment in the agricultural sector via provision of loans
to farmers, agricultural sector is still performing below expectation, evident by its low share in
national output and massive importation of food products.

1.2 Statement of Problem

Nigeria is blessed with vast arable land for cultivation, mineral, natural and human resources and
a favorable climate that supports agricultural production, but it is disheartening that agricultural
sector in Nigeria is far from development. Poor funding or inadequate financing has been
identified as one of the principal challenges facing farmers and agro-allied entrepreneurs in
Nigeria (Agbada, 2015; Agunuwa, Inaya & Proso, 2015). The rigidity and cumbersomeness of
credit to agricultural in Nigeria is largely connected to the unwillingness of financial institutions
to grant loans to farmers as they are perceived as financially incapable to repay the loans. Credit

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providers in Nigeria prefer to disburse their funds to other viable sectors of the economy such as
commerce and industry where there is higher profitability. Often times, it has also been reported
that farmers find it extremely difficult to meet the collateral requirements for obtaining loans
from financial institutions and this has made financial institutions to conceive agriculture as a
risky sector (Ojeigbe & Duruechi, 2015).

Nwankwo (2013) noted that although the agricultural credit guarantee scheme was instituted to
make commercial banks provide loans to farmers, with the government acting as a guarantor in
order to reduce possible risks in lending, the scheme has not fully achieved its goals due to the
fact that agriculture is a labour and capital-intensive venture that requires enormous capital base.
Udoka and Duke (2016) remarked that the other challenges of credit to agricultural sector
include channeling loans by farmers meant for agricultural projects to personal activities,
outrageous rate of interest charged on loans, incapacity of farmers to meet the collateral
requirements of financial institutions, unnecessary politicking and nepotism involved in
disbursement of loans and non-readiness of the government to revamp the agricultural sector.

Okoh (2015) further commented that the share of government expenditure on agriculture to total
expenditure is less than 6%. The insufficiency of finance to fund agricultural projects
subsequently led to the failure of the agricultural sector evident by the increasing importation of
food commodities, acute food shortage, high price of food, importation of factor inputs and low
share of agriculture in national output. These adverse outcomes consequently contributed to the
escalating rate of unemployment and inflation and poor standard of living. This largely showed
that the efforts of the government to restructure the agricultural sector have not paid off.

1.3 Objectives of the Study

The broad objective of the study is to examine credit to agricultural sector (commercial banks
loans and advances to agriculture, Agricultural Credit Guarantee Scheme Fund and government
expenditure on agriculture) on Nigeria economic performance. The co-objectives are

1. To examine the impact of credit to agricultural sector on output growth in Nigeria.

2. To examine the impact of credit to agricultural sector on Nigeria economic performance.

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 3. To assess the impact of the credit to agricultural sector on agricultural value-added in
Nigeria.
1.4 Research Questions
Based on the research questions, the study attempts to provide the following research questions:
1. To what extent has credit to agricultural sector enhanced output growth in Nigeria?
2. To what extent has credit to agricultural sector promoted Nigeria economic performance?
3. To what extent has credit to agricultural aided agricultural value-added in Nigeria?

1.5 Research Hypotheses

In tandem with the research objectives and questions, the following hypotheses are stated in
order to be able to make valid conclusions:
H01: Credit to Agricultural sector has no significant impact on output growth in Nigeria.
H02: Credit to Agricultural sector has no significant impact on Nigeria economy performance.
H03: Credit to Agricultural sector has no significant impact on agricultural value-added in
Nigeria.

1.6 Justification for the Study

Credit to agriculture sector and economy performance today is expected to generate and make a
significant positive change to the net foreign exchange earnings of the Nigerian economy. This is
not so due to shortage of funding for the sector. Farmers have nothing attractive and acceptable
to offer as security. The land and building which they are using is probably owned by the
community or is obtained from rentage. Majority of these farmers are semi-educated and lack
required knowledge of the schemes and efforts towards agricultural development. The farmers
lacked courage to demand for credits as well as the desire to approach the bank for financial
assistance. Loan diversion is another challenge of credit to agricultural sector. At times, loans
given to farmers are not used for agricultural projects; rather they are invested on other purposes.
It has been on record that many farmers who were fortunate to secure loans meant for agriculture
used them to build houses and buy cars. Some used theirs to marry more wives, acquire
chieftaincy tiles and send their kids abroad. Another problem is loan default by farmers, which is
popular in Nigeria and other developing countries. The Food and Agriculture Organization
(FAO) in 1994 observed that the inability of farmers to repay loan is connected to the

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imperfection of the credit delivery system and some institutional factors such as poor managerial
skill, poor sale of agricultural products, low level of technology, natural disaster and unnecessary
rapid inflexible repayment arrangement.

My major aim in doing this project is to broaden our view over the concept credit to the agro
sector and to shade light on the total output of the sector and if it has been able to grow over the
years.

Has efforts been made to the gaps in agricultural sectors and has researchers develop integrated
research assessment approaches?

Has financial aid from the government and other private organization been able to develop the
sector that it can compete with foreign countries and has the sector been able to produce more
than enough performance for the ever growing population?

These are key questions that must be answered and I intend to be able to provide needed
information on this.

1.7 Scope of the Study

The time frame of the study ranged from 1981 to 2016. The study basically covered the Pre-
Structural Adjustment Programme (SAP); Structural Adjustment Programme (SAP) era and
Post-SAP era. The choice of the time period encapsulates the period when SAP was adopted in
Nigeria. Among the major objectives of SAP was to enlarge the productive base of the country,
diversify the economy and reduce overdependence on oil. The tenets of SAP advocate the need
for the Nigerian economy to generate revenue and foreign exchange from non-oil sources in a
view of enhancing economic growth devoid of inflationary pressures. Although, many scholars
believed that SAP had no economic benefits for the Nigerian economy, nevertheless, it is
imperative to determine the extent to which Nigerian agriculture sector (a critical non-oil sector)
has been financed between 1981 and 2016.

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 CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This chapter reviewed literature on agricultural financing and growth. The conceptual review,
theoretical review and empirical review are discussed in this section.

2.2 Conceptual Review

2.2.1 Overview of Agricultural Sector in Nigeria
Agriculture was the bedrock of the Nigerian economy before the oil boom era in the mid 1970s.
Nigeria was ranked among the largest exporter of agricultural commodities. Agriculture has
served and still serving as the main source of livelihood for most Nigerian populace. Agriculture
is the largest employer of labour, on sectoral comparison, employing about 66% of the country’s
labour force (Bekun, 2017). The sector is faced with series of challenges ranging from obsolete
land tenure system, low level of irrigation development, usage of rudimentary tools for farming,
high cost of farm inputs, inadequate funding, poor access to loans and credit facilities, inefficient
fertilizer procurement and distribution, inappropriate storage facilities, poor access to market and
low and unstable expenditures in agricultural research (Aliyu, 2012; Bekun, 2017). These
challenges have resulted in the retardation of agricultural productivity. Although, agriculture is
the largest employer of labour in Nigeria, inherent challenges in production have stagnated
agricultural performance in Nigeria. Akinyele, Akanni and Oladoja (2013) averred that the
growth of value-added per capita in agriculture is less than 1 percent per annum. According to
the Agricultural Research Council of Nigeria (ARCON), the country lost almost $10 billion per
annum from opportunities to export primary commodities owing to the persistent decrease in the
productivity of primary commodities. Food/crop production is not in commensuration with
growth of population, leading to massive importation of foods, absolute poverty and food
insecurity. The major factors militating agricultural production are heavy reliance on rainfed
agriculture, smallholder landing holding, low level of fertilizer application and ineffective
agricultural extension programmes (Ojeigbe and Duruechi, 2015).

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The country is the largest consumer of rice in Africa and doubles as a notable rice importer in the
world. In the year 2008, the country produced about 2 million MT of milled rice and imported
about 3 million metric tons. The country is also the largest producer of cassava in the world, with
an annual cultivation of about 50 million metric notes. Nigeria’s cassava contribution is equaled
20% of cassava production in the world, 34% in Africa and 47% in West-Africa (Bekun, 2017).
About 66% of cassava production in the country comes from the southern region, 30% from the
northern region and the other 4% from other regions in the country.

The government and private sector has combined efforts to strategize ways on foster the
competitiveness of rice and cassava as well as other primary commodities in the international
market. The government has showed readiness to stop massive food importation, especially rice,
and promote cassava and rice value chains to create value for these commodities and create local
and foreign markets for farmers. A lot of policy measures have been instituted to promote rice
and cassava value chains, but these policies failed because of the country’s heterogeneity and
different regions might encounter different challenges because of a decentralized approach to
design industrial policies that do not correlate with agricultural policies (FAO, 2012).

2.2.2 Concept of Agricultural Financing

Agricultural finance generally means studying, examining and analyzing the financial aspects
pertaining to farm business. This financial aspect includes money matters relating to production
of agricultural products and their disposal. Hopkins (2005) defined agricultural finance as the
means of acquiring and control of assets, ownership by cash purchase, borrowing, leasing or
custom-hiring. Lee (2008) described agricultural finance as the economic study of the acquisition
and use of capital in agriculture. It deals with the supply and demand for funds in the agricultural
sector of an economy. Murray (2007) defined agricultural finance as the economic study of
borrowing of funds by farmers; of the organization and operation of farm lending agencies, and
of society’s interest in agriculture. Tandan (2012) viewed agricultural finance as a branch of
agricultural economics that concentrates on the financial resources related to individual farm
units.

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Agricultural finance can be dealt at micro and macro level. Macro agricultural finance deals with
different sources of raising funds for agriculture as a whole in the economy. It is also concerned
with the lending procedure, rules, regulations, monitoring and controlling of different
agricultural credit institutions. Hence, macro-finance is related to financing of agriculture at
aggregate level. On the other hand, micro-finance refers to the financial management of
individual farm businesses and it is concerned with the study of how individual farmer considers
various sources of credit, quantum of credit to be borrowed from each source and how to allocate
the same among the alternative uses in the farm (Murray, 2007). Therefore, macro-finance deals
with the aspects relating to total credit needs of the agricultural sector, the terms and conditions
under which the credit is available and the method of use of total credit for the development of
agriculture, while micro-finance refers to sourcing for finance by individual farmers. Nwankwo
(2013) maintained that agricultural financing is the process of obtaining funds from off-farm
sources for use on the farm, repayable in the future with an interest agreed to either implicitly or
explicitly. Agricultural financing should the following characteristics – finance should be
extended to farmers for farm activities; finance should stimulate the productivities of farm
resources resulting in higher economic returns for investment; finance should promote economic
development of farm households and finance should be provided by an external agency for
strengthening the backward and forward linkages with country’s economic development.

Agricultural credit is the major source of financing agriculture in most developing economies
(Nwokoro, 2017). Agricultural credit is the amount of investment funds made available for
agricultural production from resources outside the farm sector (Ayeomoni & Aladejana, 2016).
Agricultural credit can be defined as a device for facilitating the temporary transfer of purchasing
power from those who have surpluses to those who are in need of it. Chidebelu (2004) viewed
agricultural credit as the act of obtaining control over the use of money at the present time in
exchange for a promise to pay at some future time. Agricultural credit can be classified based on
purpose, repayment period, security, generation of funds, creditors and number of activities for
which credit is provided (Agbada, 2015).

Classification by purpose
i. Based on the purpose for which loan is granted, agricultural credit is categorized into:

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 ii. Development credit: This is provided for acquiring durable assets or improving existing
assets. Under this, credit is extended for – purchase of land and land reclamation,
purchase of farm machineries, development of irrigation facilities, construction of farm
structures, development of plantation and orchards and development of dairy, poultry,
sheep, goat, fisheries, etc.
iii. Production credit: Credit is given for the purchase of input and for paying wages.
iv. Marketing credit: It is essential to carry out the marketing functions and to get higher
prices for the produce.
v. Consumption credit: It is the credit required by farmers to meet family expenses.

Classification by repayment period

Based on the period, for which the borrowers require credit, it is divided into:
i. Short-term credit: It is given to farmers for periods ranging between 6 and 18 months and
is basically meant to meet cultivation expenses, that is, purchase of seeds, fertilizers,
pesticides and payment of wage to labourers. It serves as working capital to operate the
farm efficiently and is expected to be repaid at the time of harvesting/marketing of crops.
It is meant to be repaid in one installment.
ii. Medium-term credit: Repayment is for the period of 2 to 5 years. It is used for the
purchase of pump-sets, farm machineries, bullocks, dairy animals and to carry out minor
improvement in the farm. It can be repaid either in half-yearly or annual installment.
iii. Long-term credit: It is advanced for periods more than 5 years and extends even unto
twenty five years against mortgage of immovable property for undertaking development
works, i.e., sinking wells, purchase of tractor and making permanent improvements in the
farm. It has to be repaid in half-yearly or annual installments.

Classification by security
i. Credit is provided to farmers based on the security offered by them.Farm mortgage
credit: It is secured against mortgage of land.
ii. Collateral credit: It is given against the security of livestock, crop or warehouse receipt.
iii. Personal credit: It is given based on the character and repaying capacity of the person and
not on any tangible assets. In general, long-term credit is usually advanced against

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 security of land while medium and short-term are sanctioned against personal and
collateral security.

Classification by generation of surplus funds

Based on generation of surplus funds, credit can be classified as self-liquidating and non self-
liquidating credit.
i. Self-liquidating credit: In this case, loan amount gets absorbed in the production process
in one year of production period and the additional income generated is sufficient to
repay the entire loan amount.
ii. Non self-liquidating credit: The resources acquired with borrowed funds are not
consumed in the production process during the project period. The investment is spread
over a period of years. The additional income generated in one year is not sufficient to
repay the entire loan amount and hence the repayment is spread over to number of years.

Classification from the point of view of creditors

Credit can be classified from the point of view of creditor.
i. Non-institutional agencies: They include money lenders, traders, commission agents,
friends and relatives. This kind of loan is generally exploitative.
ii. Institutional agencies: They include co-operatives, commercial bank, development bank
and merchant bank.

The role of agricultural financing in agricultural development in particular and economic

development in general cannot be undermined. According to Adetiloye (2012) and Nwankwo
(2013), the importance of agricultural financing includes the following:
i. Agricultural financing stimulates the agro socio-economic development of a country at
micro and macro level.
ii. Agricultural financing plays catalytic role in strengthening the farm business and
augmenting the productivity of scarce resources. When newly developed potential seeds
are combined with purchase inputs like fertilizers and plant protection chemicals in
appropriate proportion, it will result in higher productivity.

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 iii. Use of new technological inputs purchased through agricultural finance helps to increase
agricultural productivity.
iv. Accretion to in farm asses and farm supporting infrastructure provided by large scale
financial investment activities results in increased farm income levels leading to
increased living standard in rural areas.
v. Agricultural financing helps to reduce regional economic imbalances and is equally good
at reducing inter-farm assets and wealth variations.

1.2.3 Agricultural Credit in Nigeria

Agricultural credit is as important as other factor inputs like labour and land, for without
adequate credit to finance agriculture, agricultural activities would be redundant. The agricultural
lending market is constituted by financial institutions that would make funds available for
agricultural activities. The agricultural lending market contains the commercial banks, non-
financial institutions and other specialized institutions like the Nigerian Agricultural Cooperative
and Rural Development Bank (NARCDB) and Nigerian Agricultural and Co-operative Bank
(NACB). Adetiloye (2012) observed that farmers who have sufficient land for cultivation finds it
easier to obtain credit compared to smallholder farmers who lack sufficient land to optimize
credit peradventure it was made available. In addition, lenders failed to assist smallholders’
farmers owing to credit appraisal cost. Majority of the credit to the farmer could be for a period
of less than one year for arable crops which fits well into the Nigerian banks desired portfolio.
Between 1978 and 1989 with sectoral allocation of credit to agriculture, the lending portfolios of
banks to agriculture rose remarkably. The whole lending process has been shattered as a result
of the introduction of financial sector deregulation which made agricultural lending risky, un-
lucrative and uncertain in relation to other sectors (Nwokoro, 2017). The nominal value of bank
credit rose from N230 million in 1978 to about N262 billion in 2005; similarly, food imports
continue to increase steadily. The effectiveness of agriculture credit lies in soft landing for credit
providers and farmers with respect to cost and duration. Various policies and programmes have
been designed to encourage agricultural financing in Nigeria, commonest among them are:

Nigerian Agricultural Cooperative and Rural Development Bank (NACRDB): This is the
earliest institution established to encourage financing in agriculture and rural development in

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Nigeria. The bank is a limited liability company owned by the Federal Government. 60% of the
shares are owned by the Federal Ministry of Finance and the remaining 40% by the Central Bank
of Nigeria. The basic responsibility of NARCDB was to provide funds for agriculture especially
for small and medium-scale farmers. The NARCDB accepts deposits from customers, provide
loans and advances to customers, provide advisory serves and acts as a major partner for
investors in agricultural sector.

National Agriculture and Cooperative Bank (NACB): This scheme was established in 1973
with the overall objective of developing the economy through the provision of support for
agriculture and providing funds for farmers and co-operative societies. The need to finance
agricultural projects resulted in the establishment of NACB. After its emergence, there was a
remarkable change in the process of credit provision for farmers. NACB provides farmers loan to
enable them procure surplus crops during harvesting seasons. This method has reduced wastage
and act as a catalyst to farmers to produce more. The duration of the loans ranged from one
month to 21 months. Unfortunately, the NACB failed to achieve its objectives.

Nigerian Agricultural Insurance Corporation (NAIC): This scheme was established in 1977
at the period agricultural financing needs a specialized agricultural insurance firm to provide
insurance cover for farmers. The scheme was birthed as a result of unwillingness of conventional
insurance firms to provide cover for agricultural activities, which they tagged as risky. The
NAIC was basically established to provide insurance cover for farmers against havoc, natural
disasters, unforeseen contingencies and other risks inherent in agriculture production.

Refinancing and Rediscounting Facility: This scheme was instituted by the Central Bank of
Nigeria to provide support for agricultural exports. This scheme helps commercial banks to
provide short-term finance in domestic currency at favorable interest rates to support export
commodities. The objectives of the facility are to foster medium and long-term bank lending to
critical sectors of the economy in order to expand the productivity base of the country and also to
ensure that a significant fraction of total credits are channeled to the real sector for economic
growth and development.

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Agricultural Credit Guarantee Scheme Fund (ACGSF): The scheme as established in 1977
to provide assurance to banks that provides credits to farmers. The scheme was established to
stimulate credit flows to agricultural sector by making guarantees available to commercial banks.
The scheme has a capital base of about N3 billion and provide credit facilities to farmers to a
maximum limit of 75% of the amount of security accrued. Several measures have sprung in
ACGSF such as Self-Help Group Linkage Banking, the Trust Fund Model and the Interest
Drawback (Obilor, 2013). The interest drawback scheme was instituted to encourage easy access
to credit facilities at a cheap interest of 8%. ACGSF rose from N0.04 billion in 1981 to N0.16
billion in 1995, N3.31 billion in 2004, N7.74 billion in 2010 and N11.44 billion and N8.10
billion in 2015 and 2016 respectively.

Agricultural Credit Support Scheme (ACSS): This scheme was established by the Federal
Government with connivance with the Central Bank of Nigeria and Bankers’ Committee. The
scheme had an initial stated fund of N50 billion. The ACSS was introduced to enable farmers
take advantage of unharnessed potentials in the country, tackle inflation, reduce production cost
of agricultural products, enhance export of non-oil commodities, diversify the economy and
intensify the country’s foreign exchange earnings (Aliyu, 2012). The Central Implementation
Committee oversees the activities of the scheme at the central level and the state level, the State
Implementation Committee performs supervisory functions. Farmers wishing to access loans
under ACSS, would firstly apply to their respective state chapters of farmers’ association and
State Implementation Committee. However, large scale farmers are permitted to apply directly to
the bank. ACSS loans are provided to farmers and agro-allied entrepreneurs at 8% interest rate.
However, banks charge an interest rate of 14% to recipients at the beginning of the project.
Recipients who repay their loans promptly would be given a rebate of 6%, thus making the
interest payable on loans precisely 8%.

Commercial Agriculture Credit Scheme (CACS): The Central Bank of Nigeria collaborated
with the Federal Ministry of Agriculture and Water Resources to establish this scheme in the
year 2009. The scheme was birthed to finance agricultural value chain, boost agricultural
productivity, reduce inflation and ensure that the goal of price stabilization is achieved.
According to Obilor (2013), the basic objectives of CACS are (a) to spur agricultural
development in Nigeria through the provision of credit facilities to small scale and large scale

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farmers (b) to engender food security through the enhancement of food supply, reduction in
production cost on agricultural produce and reduce food inflation (c) to assist farmers take
maximum advantage of enormous opportunities and potentials available in the country and (d)
improve agricultural productivity, enhance foreign exchange earnings and provide raw materials
for industrial use. The scheme is part of the Federal Government Commercial Agricultural
Development Programme and is funded through a bond worth N200 billion raised by the Debt
Management Office. Loans under this scheme are provided at a maximal interest rate of 9%. The
Central Bank of Nigeria takes care of the administrative expenditure of the scheme as well as the
subsidy accrued at the maximal rate of interest.

2.2.4 Agricultural Credit: Commercial Bank Loans and Advances

Murray (2007) described credit as an extension of funds from a lender to a borrower.
Commercial banks act as financial intermediaries to collect funds from the surplus sector and
forward it to the deficit sector, applying for the fund for investment purposes. Commercial banks
are debtors to owners of funds (depositors) and creditors to borrowers of fund. Bank credit
refers to the loan facilities provided by commercial banks to individuals, organizations and
government (Odu, 2007). The Central Bank of Nigeria defined bank credit as the loans and
advances extended to economic players by the banking industry. Collateral requirement is
attached to bank credit to make sure the loans are repaid in default situations. The extension of
credit to economic agents facilitates financial intermediation which is a catalyst for economic
growth.

Adewole, Adekanmi and Gabriel (2015) averred that commercial banks perform two vital role in
agricultural financing namely pooling of credit and credit extension. Commercial banks pool
savings through the acceptance of deposits from the public and making the funds available to
borrowers primarily for investment purposes. Commercial banks accept deposits from farmers
holding a savings account with them. Banks pay little interest to holders of savings account,
peradventure their money remained untouched for a particular time period. The utilization of
time deposit accounts has equally facilitated savings culture amongst farmers. In addition,
commercial banks extend credit facilities to economic agents, which are imperative for the
economy, especially agricultural sector. The extension of credit facilities facilitates indirect

17
production in which consumable products are protected through the direct utilization of labour to
land or capital.

Over the years, commercial banks have assumed the responsibility of providing credit to all
sectors of the Nigerian economy. Commercial bank credit to agricultural sector rose from N0.59
billion in 1981 to N2.43 billion in 1987; N4.22 billion in 1990; N25.28 billion in 1995; N55.85
billion in 2001, N49.39 billion in 2006; N135.70 billion in 2009; N316.36 billion in 2012;
N401.90 billion in 2014 and N467.60 billion and N529.50 billion in 2015 and 2016 respectively.

Although, commercial bank credit to agricultural sector had been on the upward trend over the
years, but its share in the total credit extended to the economy is negligible. Table 2.3 below
showed the commercial bank credit to agricultural sector, total credit to the economy and its
relative share. Between 1981 and 1990, bank credit to agricultural sector averaged N1.97 billion,
and accounted for 12% share in total credit to the economy. Between 1991 and 2000, the share
rose averagely to 14% and dropped drastically to an average share of 3% and 4% between 2001
and 2010 and 2011 and 2016 respectively. The paltry share of bank credit to agricultural sector
in total credit supported most scholars’ claim that commercial banks in Nigeria are reluctant to
provide credit to farmers and agro-allied entrepreneurs.

Table 2.1: Bank Credit and Advances to Agricultural Sector and Nigerian Economy
Year Bank Credit to Total Credit to the Share of Bank Credit to Agriculture in
Agricultural Sector Economy Total Credit to the Economy
(N’Billion) (N’Billion)
1981-1990 1.97 15.44 12%
1991-2000 22.62 203.74 14%
2001-2010 86.35 3, 821.5 3%
2011-2016 385.71 10, 999.19 4%
Source: Author’s Computation from Central Bank of Nigeria Statistical Bulletin

18
Figure 2.1: Average Sectoral Allocation of Commercial Bank Loans and Advances in
Nigeria
(2014 1st Quarter – 2016 4th Quarter)

2500

2000

1500

1000
(N'Billion)

500

0
re g g s gy on ce t s
ltu in in Ga er er en ice
u rry ur En
cti nm rv
i c a ct l& rt u m
er e
gr Qu uf
a Oi nd ns Co
m v S
A
g
& an er
a Co & Go
in M w e
in Po ad
M Tr
Sectors

Source: Data obtained from Central Bank of Nigeria Statistical Bulletin

From figure 2.3 above, commercial bank credit to agriculture sector between the first quarter of
2014 and fourth quarter of 2016 averaged N454.4 billion. This is quite low compared to
manufacturing sector that received N1, 800.5 billion bank credit; oil and gas – N2, 336.2 billion;
services – N1,016.8 billion; trade and commerce – N954.9 billion; government – N948 billion
and construction –N543 billion. Mining and quarrying received the least allocation, averaged at
N36.1 billion.

The inadequate funding of agriculture sector by financial institutions is largely connected to the
sub-optimal performance of the sector. Adewole, etal, (2015) opined that financial institutions
encounter certain challenges in the course of extending credit to agriculture sector. The
challenges as outlined by them include;

19
  Paucity of funds in the custody of commercial banks: The introduction of the Treasury
Single Account, in which all revenues realized by governments’ ministries, departments
and agencies are forwarded to a single account with the Central Bank of Nigeria,
significantly reduced the funds in the custody of commercial banks. This policy forced
commercial banks to devise new strategies on how to generate funds.
 Perception that agricultural sector is a risky venture prompted commercial banks to easily
extend credit to other sectors of the economy where higher rate of return can be realized
within a shorter payback period.
 Perception that most farmers lack adequate managerial skills on how to utilize the credit.
It has been reported that sometimes, farmers apply for credit without cogent reasons
(Odu, 2007).
 Possibility of farmers to divert funds meant for agricultural projects to personal activities
(Odu, 2007), which eventually leads to inability to repay the loan.
 The obsoleteness of the country’s land tenure system discouraged commercial banks in
making credit available for agricultural purposes.
 Uncertainty in agricultural products: Most agricultural produce are seasonal in nature,
and this has resulted to partial access to such products. Economic and climatic factors
might exert adverse effects on agricultural produce. This has greatly made agricultural
sector unpreferred for credit provision by commercial banks.
 Inability of farmers to meet the collateral requirements of bank loans and advances and
outrageous interest rate charged on loans scares farmers away.

2.2.5 Agricultural Credit: Budgetary Allocation to Agriculture and Government Spending

on Agriculture
The importance of budget and budgeting cannot be undermined in planning, allocation of
resources, performance appraisal and projection. According to Nnadozie (2014), majority of
West African countries have been unable to provide basic public goods such as infrastructures,
research and amenities to their citizenry. It has been observed that these economies allocate less
than 5% of their budget to agricultural sector, yet a significant proportion of their labour force
are engaged in agriculture. The little budgetary allocation to the sector have not militated the
growth and development of the sector. According to the Central Bank of Nigeria, agricultural

20
sector received an average of 4.3% in the national budget between 1960 and 1965. The
budgetary allocation to agricultural sector was 2.2% between 1966 and 1975; 1% between 1976
and 1979; 2.8% between 1980 and 1983; 2.3% between 1984 and 1990 and 1% between 1991
and 1995 (Central Bank of Nigeria Statistical Bulletin, 1996; 2009).

It has been contended that inadequate spending on agriculture is a major challenge facing the
sector till date. Statistics from the Central Bank of Nigeria revealed an agricultural sector
received an average annual allocation of 1.45% between 1980 and 1997. Furthermore, an
average of 3.1% of the national budget was allocated to the agricultural sector between 1999 and
2001. This was far significantly less than the recommendation of Food and Agricultural
Organization that between 12% and 15% of a country’s budget should be apportioned to the
agricultural sector. Similarly, budgetary allocation to agriculture defied the recommendation of
Comprehensive African Agriculture Development Programme (CAADP) that at least 10% of the
budget of every African nation should be allocated to agriculture.

Olorunsola, etal, (2017) observed that despite the paucity of funds expended on the agriculture;
the share of agriculture in national budget has been on the downward trend over the years. For
instance, in the year 1991, the percentage allocation to agriculture in federal capital budget stood
at 4.2%, fell to 1.8% in 1994; 2.6% in 1998; 5.1% in 1999; 1.9% in 2000; 2.2% in 2001; 10.1%
in 2002, 3.5% in 2003; 11% in 2004 and 11.6% and 12.2% in 2005 and 2006 respectively.

Another way of measuring government’s commitment to agriculture sector is to compare the

ratio of expenditure on agriculture to total expenditure. Public recurrent expenditure on
agriculture has been rising and falling over the years. It rose from N0.01 billion in 1981 to N1.18
billion in 1994; reached its peak at 59.32% in 1999, then started dropped drastically to N7.06
billion in 2001; N32.5 billion in 2007; N33.3 billion in 2012 and N41.27 billion and N36.58
billion in 2015 and 2016 respectively.

Based on the information in Table 2.4, recurrent expenditure on agriculture increased averagely
to N7.74 billion between 1990s, from N0.06 billion in the 1980s. Recurrent expenditure on
agriculture averaged N25.41 billion between 2001 and 2010 and N38.08 billion between 2011

21
and 2016. However, the share of recurrent expenditure on agriculture in total recurrent
expenditure is infinitesimal. The average share of agriculture recurrent expenditure in total
expenditure was 0.3% in 1980s, 2.4% in 1990s, 1.4% between 2001 and 2010 as well as 1.1%
between 2011 and 2016. The meager percentage allocation to agriculture and the paltry share of
recurrent expenditure on agriculture in total recurrent expenditure is an attestation that
government is not fully committed to develop the agricultural sector (Bekun. 2017; Olorunsola,
etal, 2017).

Table 2.2: Federal Government Recurrent Expenditure on Agriculture in Nigeria

Year Recurrent Total Recurrent Share of Recurrent Expenditure on
Expenditure on Expenditure Agriculture in Total Recurrent
Agriculture (N’Billion) Expenditure
(N’Billion)
1981-1990 0.06 13.35 0.3%
1991-2000 7.74 181.08 2.4%
2001-2010 25.41 1,475.10 1.4%
2011-2016 38.08 3,626.15 1.1%
Source: Author’s Computation from Central Bank of Nigeria Statistical Bulletin

Figure 2.2: Agriculture Recurrent Expenditure and Recurrent Expenditure on Economic

Services
600

500

400

300

200

100

0
2009 2010 2011 2012 2013 2014 2015 2016

Agriculture Recurrent Expenditure

Recurrent Expenditure on Economic Services

Source: Data obtained from Central Bank of Nigeria Statistical Bulletin

22
The proportion of recurrent expenditure on agriculture in economic services (comprising
agriculture, road and construction, transport and other economic services) is negligible.
Recurrent expenditure on agriculture accounted for 5% in recurrent expenditure on economic
services in 2009; 5% in 2010, 13% in 2011; 14% in 2012, 2013 and 2014; 15% in 2015 and 14%
in 2016.

2.2.6 Prospects and Problems of Agricultural Credit in Nigeria

The adequate provision of funds to finance the agricultural sector is a potent way of achieving
agricultural development. Finance is analogous to capital which is needed to be combined with
other factor inputs to produce output. The need for giving credit to agriculture in Nigeria
emanates from periodic nature of farming which led to the seasonality and instability in farmers’
income; need to settle labour expenditure; need to acquire storage facilities; need to acquire
farming equipments and procure factor inputs and the need to settle external financial obligations
(Nwokoro, 2017). It is imperative for credit providers, especially financial institutions, to
mobilize a tangible fraction of their funds to agriculture in a bid to achieve agricultural
development and economic development. Loans and credit facilities are important in agriculture
and rural development. However, a giant fraction of credit in Nigeria are sourced privately, most
of which are ineffective. The prospects of a well-funded agricultural sector include:
 Massive increase in food supply which would commensurate with population growth.
 Expansion of the country’s productive base which would further enhance the exportation
of non-oil commodities.
 Local sourcing of agricultural raw materials which would be useful for the industrial
sector.
 Promote rural development, reduce rural poverty and unemployment and create
opportunities for the rural populace.

Financial institutions are established basically to make and maximize profits. Financial
institutions prefer disbursing their funds to areas where there is tendency for maximal
profitability. Agriculture is conceived as a less-lucrative venture compared to industry, trade and
commerce, and has made the sector less attractive to receive bank loans and advances.

23
According to Ayeomoni and Aladejana (2016), the following measures are needed to be
implemented to make agricultural sector attractive for bank credit and they are:
 Agriculture must be made to become very lucrative like trade and commerce and
industry. To accomplish this, government should guarantee prices of farm products by
purchasing excess in period of harvest. Storage facilities, fertilizers, pesticides and pest
control facilities should be provided to farmers. Also, farm produces should be made
accessible and competitive in the world market.
 Government policies must be consistent. Government policies as regard agricultural
financing should be consistent.
 A low rate of interest should be charged on loans and advances for agricultural projects.
This would greatly encourage farmers to access these loans and repay back as at when
due.
 A supervisory agency should be established by the government and financial institutions
to make sure farmers utilize the loans accordingly. This would propel banks’ willingness
to provide credit for agricultural purposes.

Agricultural credit is bedeviled with series of challenges which have existed from time
immemorial. Odu (2007) argued that the adoption of structural adjustment programme and
liberalization of the financial sector discouraged financial institutions from funding agriculture.
The challenges encountered by financial institutions in agricultural financing are internal and
external in nature. Financial institutions are profit-motivated and prefer to provide loans and
advances for a short time period due to the nature of their deposits. Financial institutions trade
with deposit funds provided by their customers. Thus, financial institutions prefer collateral that
are very marketable which they could sell to recoup the principal and interest, in situation of
default. Commercial bank credit to agriculture has been low over the years simply because the
collateral requirements attached to the loans are beyond the capacity of farmers.

The external challenges facing financial institutions in supplying credit comprised of

government policies, inappropriate infrastructures and problems on the part of the farmers.
Government policies such as withdrawal of government ministries, departments and agencies
accounts from commercial banks, annulment of concessionary interest rate policy, winding up of

24
unviable branches of banks in rural areas and dissolution of banks that could not meet the N25
billion capitalization requirements in 2005, and financial institutions were greatly discouraged
from granting credits to farmers (Ojeigbe & Duruechi, 2015). The challenges facing financial
institutions as regard farmers include inability to provide collateral or securities, illiteracy and
lack of managerial skill to utilize the loan. It has also been reported that often times farmers
divert bank loans and advances to non-agricultural projects. Some of the farmers used the loans
to acquire land properties, marry more wives and get chieftaincy titles in their village and send
their children abroad (Egwu, 2016). Default of loans is yet another problem preventing financial
institutions from granting credit for agricultural purposes. Imosi, Sogules and Itoro (2012) stated
that about 61% of loans granted to farmers in Nigeria are not repaid within the stipulated time.
Loan default is prominent in developing countries, largely caused by the imperfect nature of
financial system. The Food and Agricultural Organization (FAO) asserted that inability of
farmers to repay loans are traceable to lack of business acumen, poor market for their products,
seasonal nature of agriculture produce, low level of technology, natural disasters, unfavorable
repayment conditions and high rate of interest.

25
2.2.7 Concept of Economic Performance
Economic performance has long been considered an important goal of economic policy with a
substantial body of research dedicated to explaining how this goal can be achieved. Economic
performance refers to the steady process by which the productive capacity of an economy is
increased overtime to bring about rising levels of national output and income (Todaro & Smith,
2011). Economic performance is a long-term expansion of the productive potential of the
economy. Economic performance and growth is the increase in the market value of the goods
and services produced in economy overtime. It is conventionally measured as the percent rate of
increase in real gross domestic product (IMF, 2012). Of more importance is the growth of the
ratio of GDP to population (GDP per capita), which is also called per capita income. An increase
in per capita income is referred to as intensive growth and performance. GDP growth caused
only by increase in population is called extensive growth (Gordon, 2009). Growth is usually
computed in real terms, i.e., inflation-adjusted terms- to eliminate the distorting the effect of
inflation on the price of goods produced. Economic performance typically refers to performance
of potential output, i.e., production at full employment level (Fashola, 2001). Economic
performance is generally distinguished from development economics. The former is primarily
the study of how countries can advance their economies while the latter is the study of the
economic aspects of the development process in developing countries (Fashola, 2001). Since
economic performance is measured as the annual percent change of gross domestic product, it
has all the advantages and drawbacks of that measure. For instance, GDP only measures the
market economy, which tends to overstate performance during the change over from a farming
economy with household production. An adjustment was made for growth on and consumed on
farms, but no correction was made for other household production. Also, there is no allowance in
GDP calculations for depletion of natural resources (Gordon, 2009).

In discussing economic performance, three strands of measure of performance can be identified

namely measurement of performance from nominal perspective (nominal GDP or GDP at current
year prices, performance rate of nominal GDP); performance defined from real magnitudes (real
GDP, real GDP performance rate) and performance measured in terms of per capita values (GDP
per capita; performance of GDP per capita). The determinants of economic performance are

26
different in every country. Each determinant will vary in importance for a country at a given
point in time. According to Jhingan (2007), the main determinants of economic performance in
developing and developed countries include performance in physical capital stock; growth in the
size of the active labour force available for production; growth in the quality of labour (human
capital); technological progress and innovation; institutions (rule of law, democracy); rising
demand for goods and services; natural resources, population growth; economic policies and
macroeconomic condition; government policy, foreign aid, openness to the world economy;
foreign direct investment; foreign portfolio investment; economic migrants remittances;
sociocultural factors; demographic trends; output volatility; religious diversity and debt
overhang.

Available statistics from the Central Bank of Nigeria revealed that real gross domestic product
has been on the upward trend over the years. Real GDP, which comprised the output of
agricultural, industrial, services, construction and trade sectors, was N15, 258.00 billion in 1981,
rose to N19, 305.63 billion in 1990; N22, 332.87 billion in 1998; N39, 995.50 billion in 2006;
N54, 612.26 billion in 2010; N67, 152.79 billion in 2014 and N67, 931.24 billion in 2016.
Similarly, performance rate of real GDP in Nigeria had been fluctuating over the years. It rose to
6.46% in 1989 from -13.12% in 1980, reached a peak of 33.73% in 2004 and declined to 8.21%
in 2006, 6.93% in 2009, 5.39% in 2013, 2.65% in 2015 and -1.54% in 2016.

Figure 2.3: Trend in Performance Rate of Real GDP in Nigeria (1981-2016)

Performance
GrowthRate (%)
Rate(%)
40

30

20

10

-10

-20
1985 1990 1995 2000 2005 2010 2015
27
 Source: Data obtained from World Bank Development Indicators

The information in Figure 2.12 showed that average annual performance of real GDP and real
GDP per capita of some dominant African economies between 2009 and 2016. Kenya had the
highest average real GDP performance rate of 5.65%, followed by Nigeria: 4.59%, Angola:
3.69%, Morocco: 3.63%, Egypt: 3.15%, Algeria: 3.19% and South-Africa: 1.60%. However,
economic performance (angled from real GDP performance rate) was very slow during this
period, and less than the benchmark of 7-10% recommended for the developing countries in
order to catch-up with advanced countries (Jhingan, 2007). Furthermore, the average annual
performance rate of GDP per capita of selected countries between 2009 and 2016 was less than
5%. Jhingan (2007) asserted that an annual performance rate of GDP per capita of at least 5% is
an indication of performance growth. This is an attestation that economic performance of Nigeria
and other selected countries was not rapid.

Figure 2.4: Average Annual Performance of Real GDP and Real GDP Per Capita of
Selected African Countries (2009-2016)
6

3
Average Annual Growth of Real
GDP (%)
%

2 Average Annual Growth of Real

GDP per capita
1

0
la ia t a co ca ia
go er yp ny oc fri er
An lg Eg Ke or g
A M h-
A Ni
out
S

Source: Data obtained from World Bank Development Indicators

28
2.3 Theoretical Review
There are several performance theories and models in economic literature. However, the study
reviewed three prominent theories amongst them namely Harrod-Domar model of growth, Solow
growth model and endogenous growth model.

2.3.1 Harrod-Domar Model

The Harrod-Domar model is a classical Keynesian model of economic performance. The model
explains an economy’s performance rate in terms of savings and productivity of capital. The
model suggests that there is no natural reason for an economy to have balanced growth. The
model was developed independently by Roy Harrod in 1939 and Evsey Domar in 1946.
According to the model, there are three kinds of growth namely warranted growth, actual growth
and natural rate of growth (Jhingan, 2007). Warranted performance rate is the rate of
performance at which the economy does not expand indefinitely or go into recession. Actual
performance is the real rate increase in a country’s gross domestic product per year and natural
performance is the performance an economy requires to maintain full employment. The savings
rate multiplied by the marginal product of capital minus depreciation rate equals output
performance rate. Increasing the savings rate, increasing the marginal product of capital, or
decreasing the depreciation rate will increase the performance rate of output. These are the
means to achieve performance and growth in the Harrod-Domar model.

Although, the Harrod-Domar model was initially created to analyze the business cycle, it was
later adapted to explain economic performance. The implications of the model are that growth
depends on the quantity of labour and capital; more investment leads to capital accumulation,
which generates economic performance. The model carries implications for less developed
countries, where labour is abundant but physical capital is not, slowing down economic progress.
Less developed countries do not have sufficiently high incomes to enable sufficient rates of
saving; therefore accumulation of physical capital stock through investment is low. The model
implies that economic performance depends on policies to increase investment, by increasing
savings, and using that investment more efficiently through technological progress. The model
concludes that an economy does not naturally find full employment and stable growth rates.

29
The model is not free from criticisms. The main criticism of the model is the level of assumption
that there is no reason for performance to be sufficient to maintain full employment. This is
based on the belief that the relative price of labour and capital is fixed, and are used in equal
proportions. In terms of development, critics claimed that the model sees economic perfromance
and development as the same. In reality, economic performance is only a subset of development.
Another criticism is that the model advocates that poor countries should borrow to finance
investment in capital to trigger economic performance; however, history has shown that this
often causes repayment problems later.

2.3.2 Solow Growth Model

Professor R.W. Solow builds his model of economic performance as an alternative to Harrod-
Domar line of through without its crucial assumption of fixed proportions in production. Solow
postulates a continuous production function linking output to the inputs of capital and labour
which are substitutable. Solow assumed that one composite commodity is produced; output is
regarded as net output after making allowance for the depreciation of capital; there are constant
returns to scale; the two factors of production, labour and capital, are paid according to their
marginal physical productivities; savings ratio is constant; technical progress is neutral and
prices and wages are flexible. Given these assumptions, Solow shows in his model that with
variable technical coefficient there would be a tendency for capital-labour ratio to adjust itself
through time in the direction of equilibrium ratio. If the initial ratio of capital to labour is more,
capital and output would growth grow more slowly than labour force and vice-versa. Solow’s
analysis is convergent to equilibrium path (steady state) to start with any capital-labour ratio.

The Solow model is a major improvement over the Harrod-Domar model. The Harrod-Domar
model is at best a knife-edge balance in a long-run economic system where the saving ratio,
capital-output ratio and the rate of increase of the labour force are the key parameters. If the
magnitudes of these parameters were to slip even slightly from the dead center, the consequences
would be growing unemployment or chronic inflation. Solow pioneered the construction of the
basic neo-classical model where he retained the main features of the Harrod-Domar model like
homogenous capital, proportional saving function and a given growth rate in the labour force. He

30
takes a continuous production function, which has come to be known as the neo-classical
production function, in analyzing the process of growth.

Despite this assertion by Solow, his model is weak in many respects according to Sen (1976).
Firstly, the model is based on the assumption of labour-augmenting technical progress. It is
however, a special vase of Harrod-neutral technical progress of the Cobb-Douglas production
function type which does not possess any empirical justification. Secondly, Solow assumed
flexibility of factor prices which may bring difficulties in the path towards steady growth. For
instance, the rate of interest may be prevented from falling below a certain minimum level due to
the problem of liquidity trap. This may, in turn, prevent the capital-output ratio from rising to a
level necessary for attaining the path of equilibrium growth. Lastly, the model ignores the
problems of inducing technical progress through the process of learning, investment in research,
and capital accumulation.

2.3.3 Endogenous Growth Model

Endogenous growth economists believed that improvements in productivity can be linked
directly to a faster pace of innovation and extra investment in human capital. They emphasized
on the need for government and private sector institutions which successfully nurture innovation,
and provide the right incentives for individuals and firms to be inventive. There is also central
role for the accumulation of knowledge as a determinant of performance and growth. Supporters
of the model asserted that there are positive externalities to be exploited from the development of
a high value-added economy which is able to develop and maintain a competitive advantage in
fast-growth industries within the global economy. The main points of the endogenous growth
theory as outlined by Jhingan (2007) are:
i. The rate of technological progress should not be taken as a constant in growth model
government policies can permanently raise a country’s growth rate if they lead to more
intense competition in markets and help to stimulate product and process innovation.
ii. Private sector investment in research and development is a key source of technical
progress.
iii. The protection of private property rights and patents is instrumental in providing
appropriate and effective incentives for businesses and entrepreneurs to engage in

31
 research and development. Investment in human capital (including the quantity and
quality of education and training made available to the workforce) is an essential of long-
term growth.

2.4 Empirical Review

Series of studies have been carried out to examine the effect agricultural credit on economic
performance in Nigeria. The findings and submissions of previous studies are reviewed as
follows:

Aliyu (2012) investigated the relationship between agricultural production and supply of formal
credit supply in Nigeria between 1981 and 2009. The study developed three models in which the
impact of formal credit supply was sought on the productivity in crop production, livestock and
fishing sectors. The results showed that 1% percent increase in formal credit supply would
increase productivity of crop production subsector by 0.86%; livestock by 0.84% and fishing by
0.65%. The study concluded that formal credit supply had contributed significantly to
agricultural production in Nigeria.

Obilor (2013) analyzed the impact of commercial banks’ credit to agriculture on agricultural
development in Nigeria between 1980 and 2011. The study measured agricultural output by
agricultural production output index while commercial bank credit to agriculture sector,
agricultural credit guarantee scheme loan by purpose, government financial allocation to
agricultural sector and agricultural produce price. The study employed the unit-root test and
regression analysis. The results revealed agricultural scheme loan by purpose and government
financial allocation resulted to significant positive growth in agricultural development while
commercial bank credit and agricultural produce price had no significant positive impact on
agricultural productivity.

Ihugba, Nwosu and Njoku (2013) investigated the relationship between total government
expenditure on agriculture and agricultural output in Nigeria between 1980 and 2011. The study
employed the Engle-granger two-step modeling, cointegration and unrestricted error correction
model and pairwise granger causality test. The results revealed that agricultural output and total

32
government expenditure on agriculture are cointegrated. The speed of adjustment to equilibrium
is 88% within a year when the variables digress from their equilibrium values. It was discovered
that the growth of government expenditure on agriculture in Nigeria is not directly determined by
economic growth. The result of the granger causality test showed that reduction in total
government expenditure on agriculture would have an adverse implication on agricultural
productivity in Nigeria.

Obansa and Maduekwe (2013) investigated the impact of agricultural financing on economic
growth in Nigeria between 1975 and 2010. The study employed the Augmented-Dickey Fuller
unit root test, Granger Causality test and Ordinary Least Square technique. The results showed
the existence of bidirectional causality between agricultural financing and economic growth and
between agricultural development and economic growth. The study maintained that productivity
of investment should be more appropriately financed with foreign direct private loans, share
capital, foreign investment and development stocks to boost economic growth via agricultural
development.

Ojeigbe and Duruechi (2015) evaluated the impact of agricultural loans on agricultural gross
domestic product in Nigeria between 1992 and 2012. Agricultural loans in the study comprised
total loan on crop production, total loan on livestock, total loan on forestry and total loan on
fishery. The study employed secondary data and used the regression technique to estimate the
model. The results showed that total loan on livestock had significant impact on agricultural
GDP in Nigeria. Total loans on crop production, fishery and forestry subsectors had positive but
weak impact on agricultural GDP in Nigeria.

Egwu (2016) examined the impact of agricultural financing on agricultural output, economic
growth and poverty alleviation in Nigeria between 1980 and 2010. Agricultural output was
measured by the share of agricultural sector in GDP. Also, agricultural financing was surrogated
as agricultural credit guarantee scheme fund and commercial bank credit to agricultural sector.
The study employed the Augmented-Dickey Fuller test, Phillip-Perron test and Ordinary Least
Square technique. The results showed that agricultural credit guarantee scheme fund and

33
commercial bank credit positively and significantly impacted agricultural output, thereby
alleviated the poverty rate and induced economic growth within the period.

Kareem, etal, (2013) investigated the factors influencing agricultural production in Nigeria and
to determine causality between the variables and agricultural output. The variables used in the
study include food import, interest rate, commercial bank loan to agriculture, GDP growth rate
and foreign direct investment. The study employed descriptive statistics, unit root test, regression
analysis and granger causality test. The results revealed that 95% of the variations in agricultural
output were explained by the independent variables. The results further showed that foreign
direct investment, commercial bank loan, interest rate and food import have positive impact on
agricultural output while GDP growth rate had a negative impact on agricultural output.

Adetiloye (2012) examined the provision of credit to agricultural sector along with the
performance of agricultural credit guarantee scheme fund and also evaluated the food security
status of Nigeria between 1978 and 2006. The study employed descriptive statistics, regression
analysis and pairwise granger causality test. The results showed that credit to the agriculture
sector is significant but it has not grown relative to the economy. The results also showed that
Nigeria is food insecure as the import of food is on the upward trend.

Agbada (2015) analyzed agricultural financing and optimization of output for sustainable
economic development in Nigeria. Output is proxied by gross domestic product while
agricultural financing is proxied by the endogenous component of agricultural credit guarantee
scheme fund namely loan to individual farmers, loan to informal groups, loan to cooperative and
loan to companies. The study employed the regression analysis. The results showed a positive
relationship between agricultural credit guarantee scheme fund and output growth in Nigeria, but
the effect of the formal on the latter is low.

Ikpor, Afam and Eneje (2016) examined the impact of agricultural financing on rural economic
diversification in Nigeria between 1970 and 2015. The study represented rural economic
diversification by the normalized Herfindal Hirschman Index (HHI). On the other hand,
agricultural financing was captured by four variables namely percentage budgetary allocation to

34
agriculture sector, bank credit facilities extended to the agriculture sector, interest rate charged
on bank loans and demand deposit of banks (indicating the stock of loans to agriculture). The
results revealed that budgetary allocation to agriculture, bank demand deposits and bank credit to
agriculture had positive impact on rural economic diversification while interest rate charged on
loans exerted negative impact on economic growth. The study submitted that the diversification
effort of government is not all-encompassing. Moreover, budgetary allocation to agriculture and
public expenditure on agriculture in the period indicated that government is zealous to develop
its rural sector, but financial commitment to their plans had been insufficient.

Olorunsola, etal, (2017) investigated the relationship between agricultural sector credit and
agricultural output in Nigeria between the first quarter of 1992 to the fourth quarter of 2015. The
study adopted the nonlinear autoregressive distributed lag model. The results showed no
evidence of asymmetry in the impact of credit to output growth in the agricultural sector in the
short-run but different equilibrium relationships exist in the long-run. Furthermore, the results
showed that the cumulative agricultural output growth is mostly attracted by the impact of the
positive changes in credit to agriculture with a lag of four quarters of the prediction horizon.
Adewole, Adekanmi and Gabriel (2015) examined the contributions of commercial banks in
agricultural financing in Nigeria between 2002 and 2014. Commercial banks’ loans and
advances to agriculture sector was proxy as agricultural financing while liquidity ratio, cash
reserve ratio and discount rate were employed as the explanatory variables. The results of the
regression analysis showed that cash reserve ratio, discount rate and liquidity ratio has negative
but insignificant impact on agricultural credit. Agricultural credit was found as a decreasing
function of the explanatory variables. There is negative correlation between the ratios and
agricultural credit.

Ayeomoni and Aladejana (2016) examined the relationship between agricultural credit and
economic growth in Nigeria between 1986 and 2014 using the Autoregressive Distributed Lag-
Model. Economic growth was regressed on agricultural sector credit, private domestic
investment, real exchange rate, interest rate and inflation rate. The results showed that short-run
and long-run relationship existed between agricultural credit and economic growth in both short-

35
run and long-run respectively. Also, real exchange rate and private domestic investment had
direct effect on economic growth whereas inflation rate had negative effect on economic growth.

Nwokoro (2017) assessed the impact of banks’ credit on agricultural output in Nigeria between
1980 and 2014. The study also examined the effect of interest rate, foreign exchange rate,
government expenditure on agriculture and money supply on agricultural output. The study
employed the unit root test, cointegration test, ordinary least square technique and error
correction model. The results showed that all the variables were stationary at first difference and
there also exist both short-run and long-run relationship between agricultural output and the
regressors. The study found that apart from interest rate that had significant negative impact on
agricultural output, bank credit to agriculture sector, foreign exchange rate, government
expenditure on agriculture and money supply had positive and negative impact on agricultural
output.

Imosi, Sogules and Itoro (2012) examined credit facilities and agricultural output and
productivity in Nigeria between 1970 and 2010. Agricultural output was proxied by agricultural
GDP while credit facility was measured by deposit money bank credit to agricultural sector and
foreign private investment to agricultural sector. The result of the regression analysis showed
that deposit money banks’ credit and foreign private investment to agricultural sector positively
and significantly impact agricultural output in Nigeria.

Udoka and Duke (2016) examined the effect of agricultural financing on agricultural
productivity in Nigeria between 1970 and 2014. Agricultural output was measured by
agricultural GDP and agricultural financing was proxied by commercial banks’ credit to
agriculture sector, government expenditure on agriculture, agricultural credit guarantee scheme
fund and lending interest rate. The study employed the multiple regression analysis. The result
showed that agricultural credit guarantee scheme fund, commercial bank credit to agriculture and
government expenditure on agriculture had positive and significant effect on agricultural output.
In addition, lending interest rate exerted negative but weak effect on agricultural output in
Nigeria.

36
Bada (2017) examined the impact of banks’ credit on agricultural and manufacturing outputs in
Nigeria between 1981 and 2014. Agricultural and manufacturing outputs were proxied by the
share of agricultural and manufacturing GDP in the aggregate real GDP, and modeled against six
independent variables credit to private sector, prime lending rate, broad money supply, interest
rate, exchange rate and agriculture credit guarantee scheme fund. The results of the Vector Error
Correction Model showed that bank credit to private sector contributed positively to the growth
of agricultural and manufacturing sectors in Nigeria.

2.5 Gap in Literature

There is consensus in the findings of prior studies that the underdevelopment of agricultural
sector in Nigeria is largely caused by inadequate funding. Scholars unanimously opined that a
well-funded agricultural sector would result in higher agricultural production. Majority of prior
studies discovered that agricultural credit had positive impact on agricultural productivity and
GDP in Nigeria.

It was observed that the prior studies have not investigated the impact of agricultural credit on
agricultural value-added, which is another veritable indicator of agricultural productivity.
Furthermore, the study extended the coverage of prior studies to year 2016, to determine if result
would corroborate with the past findings of empirical studies.

37
 CHAPTER THREE
RESEARCH METHODOLOGY

3.1 Introduction
This chapter presented the methodology employed in the study to answer to the research
questions and achieve the stated objectives specification, nature and sources of data and
estimation techniques.

3.2 Theoretical Framework

The theoretical underpinning of the study is predicated on the Harrod-Domar growth model. The
model considered the process of economic performance. Investment according to the theory
creates income as well as augments the productive capacity of the economy by increasing the
capital stock, in as much as there is net investment real income and output will continue to
expand. For full employment equilibrium level of income and output to be maintained, both real
income and output should expand at the same rate with the productive capacity of the capital
stock. According to the theory, for the economy to maintain a full employment, net investment
must increase continuously as well as growth in the real income at a rate sufficient enough to
ensure full capacity use of a growing stock of capital. It follows that any net addition to the
capital stock in the form of new investment will bring about corresponding increase in the flow
of national output.

Defining the capital-output ratio as K and assume that the national net savings ratio, S is a fixed
proportion of national output and that total new investment is determined by the level of total
savings, economic performance model could be constructed, net savings S is some proportion of
national income Y, such that it becomes

S=Y … … … . ( 3.1 )

Net investment is defined as the change in the capital stock, K and can be represented by ∆ K ;

I =∆ K … … … ..(3.2)

But because the total capital stock, K, bears a direct relationship to total national income, Y, as
expressed by the capital-output ratio, k, it follows that:

38
 K ∆K
=k∨ =k
Y ∆K

¿ ∆ K =k ∆ Y … … … … ( 3.3 )

Because net national savings, S, must equal net investment, I, this equality can be written as:

S=I … … … … … .. ( 3.4 )

But from equation (3.4), it is known that S= sY, and from equation (3.2) and (3.3);

I =∆ K =k ∆ Y

S=Y =k ∆Y =∆ K =I … … … .(3.5)

SY =k ∆ Y … … … .(3.6)

Dividing both sides of equation (3.6) first by Y and by k, it becomes:

∆Y S
= … … … (3.7)
Y K

Equation (3.7) states that the rate of growth of GDP is determined jointly by the net national
saving ratio (s) and the national capital-output (k). In the absence of government, the
performance rate of national income will be positively related to the savings ratio, that is, the
more an economy is able to save and invest out of a given GDP, the greater the performance of
GDP and the less the economy’s capital-output ratio. To grow, an economy must save and invest
a certain proportion of their GDP.

3.3 Model Specification

As earlier stated, the objective of the study is to examine the impact of agricultural credit on
economic performance, agricultural output and agricultural value-added. Three models are
developed to achieve these objectives.

The first model estimated the impact of agricultural credit (represented by agricultural credit
guarantee scheme fund, commercial banks loans and advances to agricultural sector and

39
government expenditure on agriculture) on output growth (represented by real gross domestic
product) in Nigeria.

The second model estimated the impact of agricultural credit (represented by agricultural credit
guarantee scheme fund, commercial banks’ credit to agricultural sector and government
expenditure on agriculture) on agricultural output in Nigeria and the third model captured the
impact of agricultural credit on agricultural value-added in Nigeria.. Gross capital formation
(proxy as capital) and population growth rate (proxy as labour) are incorporated in the models as
control variables because factor inputs are needed to produce output

The functional forms of the models are expressed as:

Model One: Agricultural Financing and Output Growth in Nigeria

RGDP= f (ACGSF, CBLA, GEXPA, GCF, PGR)……………… (3.8)

Model Two: Agricultural Financing and Nigeria Economy Performance

AGDP= f (ACGSF, CBLA, GEXPA, GCF, PGR)……………… (3.9)

Model Three: Agricultural Financing and Agricultural Value-Added in Nigeria

AVA= f (ACGSF, CBLA, GEXPA, GCF, PGR)……………… (3.10)

Where:
AGDP = Agricultural gross domestic product (N’Billion)
RGDP= Real gross domestic product (N’Billion)
AVA= Agricultural value-added (N’Billion)
ACGSF= Agricultural credit guarantee scheme fund (N’Billion)
CBLA= Commercial banks’ loans and advances to agricultural sector (N’Billion)
GEXPA= Government expenditure on agriculture (N’Billion)
GCF= Gross capital formation (N’Billion)
PGR= Population growth rate (%)

The functional form of the model can be transformed to a standard econometric model and it is
expressed as:

40
Model One: Agricultural Financing and Output Growth in Nigeria
RGDP= β0 +β1ACGSF+ β2CBLA + β3GEXPA + β4GCF + β5PGR + µ…… (3.11)
Where:
β0 = Constant term of the regression model.
β1-3 = Coefficients of the explanatory variables.
µ= Error term

Model Two: Agricultural Financing and Nigeria Economy Performance

AGDP= β0 +β1ACGSF+ β2CBLA + β3GEXPA + β4GCF + β5PGR + µ …… (3.12)
Where:
β0 = Constant term of the regression model.
β1-3 = Coefficients of the explanatory variables.
µ= Error term.

Model Three: Agricultural Financing and Agricultural Value-Added in Nigeria

AVA= β0 +β1ACGSF+ β2CBLA+ β3GEXPA + β4GCF + β5PGR µ …… (3.13)
Where:
β0 = Constant term of the regression model.
β1-3 = Coefficients of the explanatory variables.
µ= Error term.

The models are transformed to their logarithmic form to enable estimation to done on growth
basis.

Model One: Agricultural Financing and Output Growth in Nigeria

LnRGDP= β0 +β1 LnACGSF+ β2 LnCBLA + β3 LnGEXPA + β4 LnGCF + β5PGR µ…… (3.14)

Model Two: Agricultural Financing and Nigeria Economy Performance

LnAGDP= β0 +β1 LnACGSF+ β2 LnCBLA + β3 LnGEXPA + β4 LnGCF + β5PGR µ …… (3.15)

Model Three: Agricultural Financing and Agricultural Value-Added in Nigeria

41
LnAVA= β0 +β1 LnACGSF+ β2 LnCBLA + β3 LnGEXPA + β4 LnGCF + β5PGR µ …… (3.16)

Based on theoretical postulation, it is expected that the coefficients of the explanatory variables
will positive in the three models; i.e, β1; β2; β3; β4; β5 <0.

3.4 Sources of Data

The study used annual time-series data. The data were obtained from the Central Bank of Nigeria
Statistical Bulletin and World Bank Development Indicators. The data spanned from 1981 to
2016.

3.5 Estimation Technique

The study employed the ordinary least square (OLS) technique to empirically estimate the
models. The choice of this technique is informed by its properties of unbiasedness, efficiency,
consistency and sufficiency. The technique is commonly used to estimate the cause-effect
relationship between two or more variables. The Econometric Views (EVIEWS) is used to
electronically analyze the data.

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42
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Ikpor, M.I., Afam, I.I. & Eneje, B.C, (2016). Agricultural Financing and Rural Economic
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47
 CHAPTER FOUR
ANALYSIS AND DISCUSSION OF RESULTS
4.1 Introduction
This study focused on the analysis of results and discussion of findings. As earlier stated, the
ordinary least square technique was employed for the empirical estimation of the models.

4.2 Trend Analysis in Variables

The trend in the dependent variables, independent variables and control variables between 1981
and 2016 are presented as follows:

Figure 4.1: Trend in Real Gross Domestic Product in Nigeria (1981-2016)

RGDP
70,000

60,000

50,000

40,000

30,000

20,000

10,000
1985 1990 1995 2000 2005 2010 2015

Real gross domestic product is used to represent output growth. Real GDP refers to the market
value of goods and services produced in an economy by nationals and non-nationals at a
specified time period. Within the context of the study, real GDP is captured as the summation of
output of agricultural, industrial, construction, service and trading sector. Real GDP had its
maximum value of N69, 023 92 billion in 2015 and minimum value of N13, 779.26 billion in
1984. Real GDP averaged N31, 757.15 billion between 1981 and 2016.

48
Figure 4.2: Trend in Agricultural Output in Nigeria (1981-2016)
AGDP
18,000

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000
1985 1990 1995 2000 2005 2010 2015

Agricultural output refers to the market value of productivity in the agricultural sector.
Agricultural output is measured by the summation of output of crop production, forestry, fishery
and livestock subsectors. Agricultural output had its peak of N16, 607.34 billion in 2016 and
minimum value of NN2, 303.51 billion in 1984. Agricultural output averaged N7, 156. 40 billion
between 1981 and 2016.

Figure 4.3: Trend in Agricultural Value-Added in Nigeria (1981-2016)

AVA
24,000

20,000

16,000

12,000

8,000

4,000

0
1985 1990 1995 2000 2005 2010 2015

49
Agricultural value-added refers to the net output of forestry, hunting and fishing, cultivation of
crops and livestock production (subsectors of agriculture sector) after adding up all outputs and
subtracting intermediate inputs. Agricultural value-added had its maximum value of N21, 523.5
billion in 2016 and minimum value of N13.58 billion in 1981. Agricultural value-added averaged
N4, 805.39 billion between 1981 and 2016.

Figure 4.4: Trend in Agricultural Credit Guarantee Scheme Fund (1981-2016)

ACGSF
14

12

10

0
1985 1990 1995 2000 2005 2010 2015

ACGSF guarantees credit facilities extended to farmers by banks up to 75% of the amount in
default net of any security realized. Agricultural credit guarantee scheme fund was at peak of
N13 billion in 2014 and lowest value of N0.03 billion in 1982. ACGSF averaged N2.94 billion
between 1981 and 2016.

50
Figure 4.5: Trend in Commercial Banks Loans and Advances to Agriculture (1981-2016)
CBLA
600

500

400

300

200

100

0
1985 1990 1995 2000 2005 2010 2015

Commercial banks loans and advances refer to the money and other credit facilities provided by
deposit money banks to farmers and agro-allied entrepreneurs to finance agricultural projects.
Commercial banks loans and advances was at maximum at N520.90 billion in 2016 and
minimum at N0.59 billion in 1981. Commercial banks loans and advances averaged N95.10
billion between 1981

Figure 4.6: Trend in Government Expenditure on Agriculture in Nigeria (1981-2016)

GEXPA
70

60

50

40

30

20

10

0
1985 1990 1995 2000 2005 2010 2015

51
Government spending on agriculture refers to the amount disbursed by the Federal Government
to finance capital and recurrent needs of the agricultural sector. Government spending on
agriculture had a peak of N65.40 billion in 2008 and lowest value of N0.01 billion in 1981.
Government spending on agriculture averaged N14.62 billion between 1981 and 2016.

Figure 4.7: Trend in Gross Capital Formation in Nigeria (1981-2016)

GCF
24,000

20,000

16,000

12,000

8,000

4,000

0
1985 1990 1995 2000 2005 2010 2015

Gross capital formation refers to the outlays on additions to the fixed assets of the economy plus
net changes in the level of inventories. It described the net capital accumulation at a specified
time period in a country. Gross capital formation was at peak at N23804 billion in 2016 and
minimum value of N8.79 billion in 1985. Gross capital formation averaged N2, 950.96 billion
between 1981 and 2016.

52
Figure 4.8: Trend in Population Growth Rate in Nigeria (1981-2016)
PGR
2.72

2.68

2.64

2.60

2.56

2.52

2.48
1985 1990 1995 2000 2005 2010 2015

Population growth rate is the rate at which the size of population increases in a given time
period, expressed as a percentage of the initial population. Population growth rate in Nigeria
spanned between 2.48% and 2.71% between 1981 and 2016.

53
Table 4.1: Regression Result of the Impact of Credit to Agricultural Variables on Real
Gross Domestic Product in Nigeria (1981-2016)

Dependent Variable: LNRGDP

Method: Least Squares
Date: 09/12/18 Time: 09:07
Sample: 1981 2016
Included observations: 36

Variable Coefficient Std. Error t-Statistic Prob.

C 3.236121 0.336883 9.606066 0.0000

LNACGSF 0.067999 0.022426 3.032139 0.0050
LNGEXPA -0.011903 0.012769 -0.932206 0.3587
LNCBLA 0.007443 0.033714 0.220764 0.8268
LNGCF 0.155812 0.024041 6.481208 0.0000
PGR 0.319565 0.127482 2.506742 0.0178

R-squared 0.989890 Mean dependent var 4.438630

Adjusted R-squared 0.988206 S.D. dependent var 0.232558
S.E. of regression 0.025256 Akaike info criterion -4.368465
Sum squared resid 0.019137 Schwarz criterion -4.104545
Log likelihood 84.63237 Hannan-Quinn criter. -4.276350
F-statistic 587.4971 Durbin-Watson stat 1.919729
Prob(F-statistic) 0.000000

The result in Table 4.1 presented the regression estimate of the impact of credit to agricultural
variables on real GDP (proxy for output growth). The estimated coefficient of the intercept was
3.23. This connotes that the real GDP would grow at a constant rate of 3.24% on the assumption
that the independent variables are zero.

The estimated coefficients of agricultural credit guarantee scheme fund, commercial bank loans
and advances to agriculture, population growth rate and gross capital fixed formation were
positively signed. A one percent increase in these variables would increase real GDP
approximately by 0.07%, 0.007%, 0.16% and 0.32% respectively. On the other hand, the
estimated coefficient of government spending on agricultural sector was negatively-signed,
indicating a negative relationship between it and real GDP. A one percent increase in
government expenditure on agriculture would reduce real GDP approximately by 0.011%.

54
Based on the magnitude of their influence, agricultural credit guarantee scheme fund, gross
capital formation and population growth rate robustly predicted real GDP as their probability
values are less than the standard 0.05.

The coefficient of determination indicated that agricultural financing variables as well as

population growth rate and gross capital formation accounted 98.9% variation in real GDP
within the estimated period. The Durbin-Watson statistics of 1.91 indicated that the model is free
from the problem of autocorrelation. Also, the probability value of the F-statistics which was less
than 0.05 implied that the independent variables had significant combined impact on output
growth in Nigeria.

Table 4.2: Regression Result of the Impact of Credit to Agricultural Variables on

Agricultural Output in Nigeria (1981-2016)
Dependent Variable: LNAGDP
Method: Least Squares
Date: 09/12/18 Time: 09:08
Sample: 1981 2016
Included observations: 36

Variable Coefficient Std. Error t-Statistic Prob.

C 3.525870 0.464890 7.584313 0.0000

LNACGSF 0.203591 0.030947 6.578646 0.0000
LNGEXPA 0.002335 0.017621 0.132527 0.8955
LNCBLA -0.010220 0.046525 -0.219677 0.8276
LNGCF 0.099078 0.033175 2.986507 0.0056
PGR 0.020584 0.175922 0.117006 0.9076

R-squared 0.987529 Mean dependent var 3.761225

Adjusted R-squared 0.985451 S.D. dependent var 0.288951
S.E. of regression 0.034853 Akaike info criterion -3.724336
Sum squared resid 0.036442 Schwarz criterion -3.460416
Log likelihood 73.03804 Hannan-Quinn criter. -3.632221
F-statistic 475.1295 Durbin-Watson stat 1.457438
Prob(F-statistic) 0.000000

The estimated coefficient of the intercept stood at 3.52. This connotes that the agricultural output
would grow at a fixed rate of 3.52% on the axiom that the explanatory variables are zero. The
estimated coefficients of agricultural credit guarantee scheme fund, government spending on
agriculture, gross capital formation and population growth rate were positively signed. A percent
rise in these variables would increase agricultural output approximately by 0.20%, 0.002%,

55
0.099% and 0.02% respectively. On the other hand, commercial banks loans and advances had
an estimated coefficient of -0.01%. This indicates that one percent in commercial banks loans
and advances on agriculture would reduce agricultural output approximately by 0.01%.

With regards to the magnitude of their impact, agricultural credit guarantee scheme fund and
population growth rate had tremendous impact on agricultural output as their probability value is
less than 0.05.

The coefficient of determination revealed that the explanatory variables accounted for 98.8% in
the total variation in agricultural output. The Durbin-Watson statistics of 1.45 indicates the
presence of mild positive autocorrelation in the model. The probability value of the F-statistics,
which was less than 0.05, indicated that the joint impact of the explanatory variables on
agricultural output is statistically significant.

Table 4.3: Regression Result of the Impact of Credit to Agricultural Variables on

Agricultural Value-Added in Nigeria (1981-2016)

Dependent Variable: LNAVA

Method: Least Squares
Date: 09/12/18 Time: 16:35
Sample: 1 36
Included observations: 36

Variable Coefficient Std. Error t-Statistic Prob.

C 7.120420 0.969828 7.341942 0.0000

LNACGSF 0.496993 0.064560 7.698114 0.0000
LNCBLA 0.177481 0.097058 1.828612 0.0774
LNGEXPA 0.177523 0.036759 4.829310 0.0000
LNGCF 0.276523 0.069209 3.995497 0.0004
PGR -1.966432 0.366999 -5.358132 0.0000

R-squared 0.996064 Mean dependent var 2.902046

Adjusted R-squared 0.995408 S.D. dependent var 1.072956
S.E. of regression 0.072709 Akaike info criterion -2.253700
Sum squared resid 0.158597 Schwarz criterion -1.989780
Log likelihood 46.56659 Hannan-Quinn criter. -2.161585
F-statistic 1518.366 Durbin-Watson stat 1.888486
Prob(F-statistic) 0.000000

The estimated coefficient of the constant term was 7.12. This implied that agricultural value-
added would grow at a constant rate of 7.12% on the notion that the explanatory variables are

56
zero. The estimated coefficients of the explanatory variables were positively signed except
population growth rate. The result showed that a one percent rise in agricultural credit guarantee
scheme fund would raise agricultural value-added by 0.49% in isolation, commercial banks loans
and advances to agriculture as well as government expenditure on agriculture would raise
agricultural value-added approximately by 0.17% in isolation. Also, one percent rise in gross
capital formation is associated with 0.28% increase in agricultural value-added and one percent
rise in population growth rate is affiliated with 1.97% reduction in agricultural value-added.

Based on the magnitude of their influence, agricultural credit guarantee scheme fund,
government expenditure on agriculture, population growth rate and gross capital formation had
significant on agricultural-value added as their probability value is less than 0.05.

The explanatory variables accounted for 99.6% variation in agricultural value-added. This
connotes that the predictive influence of agricultural financing variables and the control variables
is very strong on agricultural value-added. The Durbin-Waston statistics of 1.89 indicated the
absence of autocorrelation in the model. The probability value of the F-statistics, which was less
than 0.05, denoted that the combined impact of agricultural financing variables and control
variables is statistically significant on agricultural value-added in Nigeria.

4.3 Discussion of Findings

The findings of the study revealed that agricultural credit guarantee scheme fund had significant
positive impact on economic performance, growth or output growth, agricultural output and
agricultural value-added in Nigeria within the estimated period. Also, government expenditure
on agriculture had weak negative impact on output growth, weak positive impact on agricultural
output and a tremendous positive influence on agricultural value-added. In addition, commercial
banks loans and advances had a weak positive impact on output growth and agricultural value-
added and weak negative influence on agricultural output. The result demonstrated that
agricultural credit guarantee scheme fund is the most influential variable of agricultural credit
that contributed immensely to output growth, agricultural output and agricultural value-added in
Nigeria within the estimated period.

57
The finding is consistent with the empirical findings of Adetiloye (2012); Aliyu (2012); Obansa
and Maduekwe (2013); Obilor (2013); Agbada (2015); Ayeomoni and Aladejana (2016); Egwu
(2016); Udoka and Duke (2016) and Nwokoro (2017) that agricultural credit guarantee scheme
fund significantly contributed to agricultural productivity as well as economic growth in Nigeria.
As regard government expenditure on agriculture, the finding supported that Ihugba, Nwosu and
Njoku (2013) that public spending on agriculture had negligible impact on agricultural
development in Nigeria. The finding negated the submission of Obilor (2013) that government
expenditure on agriculture had significant positive impact on agricultural sector growth in
Nigeria. As regard commercial banks loans and advances, the finding was consistent with that of
Obilor (2013) and Egwu (2016) that bank loans and credit extended to the agriculture sector had
no robust impact on agricultural output in Nigeria, and opposed the findings of Imosi, Sogules
and Itoro (2012) Ikpor, Afam and Eneje (2016); Udoka and Duke (2016) and Bada (2017) that
bank loans and advances contributed tremendously to agricultural sector growth in Nigeria.

Available data on agricultural financing clearly indicated that Nigeria’s agricultural sector is
poorly funded. Although the absolute value of government expenditure on agriculture and banks
loans and advances are rising, but their relative share is negligible For instance, the share of bank
credit to agriculture in total credit to the economy was within the range of 1% - 20% from 1981
to 2016. On the other hand, the share of government expenditure on agriculture in total
expenditure was within the range of 0.2% and 13.2% between 1981 and 2016. Agricultural
sector in Nigeria has not been sufficiently financed to generate rapid growth in agricultural
productivity and national productivity.

58
 CHAPTER FIVE
SUMMARY, CONCLUSION AND POLICY RECOMMENDATIONS
This chapter focuses on summary of the findings, limitations of the study. conclusion,
implication of the study, recommendations and suggestions for further studies.

5.1 Summary of the Findings

The study examined the impact of credit to agricultural sector on economic performance in
Nigeria between 1981 and 2016. The co-objectives were to assess the impact of agricultural
credit on agricultural output and agricultural value-added in Nigeria. It was established that
agricultural credit is the examination and analysis of financial aspects of farm business. An
important variant of agricultural credit is the amount of investible funds made available for
agricultural production from resources outside the farm sector. The taxonomy of agricultural
credit based on purpose, repayment period, security, generation of funds, creditors and number
of activities for which credit is provided. Among the various policies and programmes designed
to encourage agricultural financing in Nigeria are Nigerian Agricultural Cooperative and Rural
Development Bank (NARCDB), National Agriculture and Cooperative Bank (NACB), Nigerian
Agricultural Insurance Corporation (NAIC), Refinancing and Rediscounting Facilities,
Agricultural Credit Guarantee Scheme Fund (ACGSF), Agriculture Credit Support Scheme
(ACSS) and Commercial Agriculture Support Scheme (CASS). Agricultural credits with regard
to commercial banks loans and advances and government spending on agriculture were
reviewed. Available data revealed that the relative share of commercial banks loans and
advances to agriculture and government spending on agriculture had been on the downward
trend. Also, government budgetary allocation to agriculture was far less from the benchmark of
15% pegged by the Food and Agricultural Organization. The study established that the prospects
of agricultural credits in agricultural sector in Nigeria are massive increase in food supply,
expansion of the country’s productivity base and promotion of rural sector development. The
problems of agricultural financing in Nigeria are unwillingness of deposit money banks to grant
credit for agriculture purpose, inconsistency in government policies, deregulation of the financial
markets, lack of business acumen amongst farmers, tendency to divert the loans for non-
agricultural projects, loan default, high interest rate charged on loans and inability of most
farmers to meet the collateral requirements of banks. Output growth or economic growth was
conceptualized is a long-term expansion of the productive potential of the economy. Economic

59
growth is the increase in the market value of the goods and services produced in economy
overtime. It is conventionally measured as the percent rate of increase in real gross domestic
product. The study reviewed three theories of output growth namely Harrod-Domar growth
model, Solow growth model and endogenous growth model. Findings of prior studies revealed
that agricultural credits contributed to agricultural productivity and economic performance.
However, there is yet to be an agreement among findings on the magnitude of its impact on
agricultural output and output growth. While some studies reported that agricultural credits
significantly promoted output growth, other asserted that agricultural credits negligibly enhanced
output growth in Nigeria.

The theoretical underpinning of the study was predicated on the Harrod-Domar model of growth.
The model stipulated that for the economy to maintain a full employment, net investment must
increase continuously as well as growth in the real income at a rate sufficient enough to ensure
full capacity use of a growing stock of capital. It follows that any net addition to the capital stock
in the form of new investment will bring about corresponding increase in the flow of national
output. Three models were developed to achieve the objectives. Agricultural credits was
represented by agricultural credit guarantee scheme fund, government spending on agriculture
and commercial banks loans and advances to agriculture. The dependent variables were real
GDP, agricultural output and agricultural productivity. Gross capital formation (proxy as capital)
and population growth rate (proxy as labour) were utilized as control variables. The models were
estimated via the ordinary least square technique. The findings revealed that

1. Agricultural credit guarantee scheme fund was the most influential agricultural financing
variable.
2. Agricultural credit guarantee scheme fund contributed positively and significantly to real
GDP, agricultural output and agricultural value-added in Nigeria within the sampled
period.
3. Government spending on agriculture had significant positive impact on agricultural
value-added in Nigeria, insignificant positive impact on agricultural output and a weak
negative impact on real GDP.
4. Commercial banks loans and advances had insignificant positive impact on real GDP and
agricultural value-added in Nigeria, and a weak negative influence on agricultural output.

60
5.2 Limitation of the Study
The methodology of the study is delineated to secondary source of data collection and regression
analysis used to estimate the cause-effect-impact relationships between proxies of agricultural
credits and economic performance. Also, the findings of the study is plausible to only Nigeria
economy.

5.3 Conclusion
Based on the findings, the study maintained that Nigeria’s agricultural sector has not been
adequately financed over the years. Agriculture, which used to be the mainstay of the Nigerian
economy in the 1950s, 60s and early 70s, is now conceived as a risky and unprofitable venture.
This conception in collaboration with the financial incapacity of majority of Nigerian farmers
and agro-allied entrepreneurs discouraged financial institutions from granting credit for
agriculture purpose. Financial institutions prefer to channel their funds to industrial and service
sector where the payback period is short and the return rate is high. The dearth of funds has
constrained the agricultural sector to achieve rapid growth of agricultural productivity and
national output.

5.4 Implication of the Study

The findings of the study has demonstrated that agricultural credits requires continual planning,
sponsoring, monitoring, analysis and assessment of all that is necessary for an economy to meet
its goals and objectives. The findings prompt Nigeria economy to be more proactive rather than
reactive as it would aid them to foresee agricultural sector future and prepare accordingly. The
implications of the findings to Nigeria economy is that effective agricultural financing sets up
sense of direction, boost agricultural efficiency, helps to increase agricultural market and can
make Nigeria GDP more durable.

5.5 Policy Recommendations

In order to ensure that agricultural credits enhance output growth in Nigeria as well as
agricultural productivity, the following recommendations are put forward.

61
 1. Agricultural credits programmes should exert more commitment in implementing the
policy of granting loan by purpose so that those segments of the nation’s agricultural
produce that are targeted for improved productivity will be achieved.
2. Government are advised to pay more attention to the agricultural sector by compelling
financial institutions to supplement government efforts towards financing agriculture
through the disbursement of loans at low interest rate at appropriate time in order to avoid
diversion of such loans.
3. Farmers should recognize the practice and advantages of accumulated savings, which is
often allowed to group when existing facilities are not fully adjusted. This can help banks
to hope that the loans will be repaid as at when due.
4. Machinery should be set up to ensure that the loans given to farmers are utilized for right
purpose. Farmers caught using the loan for other purposes should be sanctioned.
5. To resolve the problems faced by farmers, good road networks should be constructed to
enhance movement of food and cash crops from one location to another. This will
consequently make agriculture more profitable and attractive to get aids.
6. There is need for the Central Bank of Nigeria to reduce the cash reserve ratio, so that
funds that accrue from such policies must be added to agricultural credit portfolios.
7. There is need to review the land use decree to enable farmers have free access to land.
This would consequently increase the farmers that could eventually serve as collateral for
credit facilities from banks.
8. There is need for government to put in place policies that would enhance agricultural
commercialization through cooperative system.
9. Government should fight against corruption in the disbursement process of ACGSF and
ACGS loans, commercial banks and other agencies in the agricultural sector.
10. Government should play an important role in contract enforcement in agricultural
development by ensuring timely and recourse against the failure to meet contract
obligations or other abuses in agricultural policies. The existing infrastructural facilities
should be improved and a sound macroeconomic policy should be pursued.

5.6 Suggestions for Further Studies

62
In an attempt to enrich literature on agricultural financing and output growth, the following
suggestions are proposed:

1. Further studies should examine the effectiveness of agricultural credits on the

accomplishment of macroeconomic goals (such as export diversification, price
stabilization, industrialization, rural sector development and employment) in Nigeria.
2. Further studies should adopt advanced econometric techniques such as vector error
correction model, vector autoregressive model and augmented lag distributed model.
3. Further studies should examine the linkage or interdependence between agricultural
sector and industrial sector in Nigeria.
4. It is equally imperative to extend the subject matter among West-African countries.

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 APENDIX
GEXP LnAGD
Year
RGDP AGDP AVA ACGSF CBLA A LnRGDP P LnAV
1981 4.18349761 3.37371
15258.00 2364.37 13.58 0.04 0.59 0.01 1 6 1.13
1982 4.17565906 3.38488
14985.08 2425.96 15.91 0.03 0.79 0.01 6 4 1.201
1983 4.14144130 3.38185 1.275
13849.73 2409.08 18.84 0.04 0.94 0.01 7 2
1984 4.13922589 3.36238 1.376
13779.26 2303.51 23.8 0.03 1.05 0.02 5 9
1985 4.17475476 3.43633 1.419
14953.91 2731.06 26.25 0.04 1.31 0.02 3 2
1986 4.18292768 3.47521 1.445
15237.99 2986.84 27.89 0.07 1.83 0.02 4 1
1987 4.18366636 3.46114 1.593
15263.93 2891.67 39.2 0.1 2.43 0.05 6 9
1988 4.20992686 3.50168 1.762
16215.37 3174.57 57.94 0.12 3.07 0.08 3 5
1989 4.23791253 3.52191 1.843
17294.68 3325.95 69.71 0.13 3.47 0.15 1 5
1990 4.28568397 3.53966 1.926
19305.63 3464.72 84.34 0.1 4.22 0.26 9 8
4.28327996 3.55519 1.988
1991
19199.06 3590.84 97.46 0.08 5.01 0.21 6 6
1992 4.29270320 3.56523 2.162
19620.19 3674.79 145.23 0.09 6.98 0.46 9 3
1993 4.29946349 3.57329 2.365
19927.99 3743.67 231.88 0.08 10.75 1.80 7 7
1994 4.30057635 3.58429 2.543
19979.12 3839.68 349.25 0.09 17.76 1.18 5 5
1995 3.59959 2.792
20353.20 3977.38 619.81 0.16 25.28 1.51 4.3086327 7
1996 4.32588330 3.61632 2.925
21177.92 4133.55 841.46 0.24 33.26 1.59 3 3
4.33823929 3.63404 2.971
1997
21789.10 4305.68 935.55 0.24 27.94 2.06 2 2
1998 1057.5 4.34894453 3.65081 3.024
22332.87 4475.24 8 0.22 27.18 2.89 8 6
1999 1127.6 4.35120493 3.67243
22449.41 4703.64 9 0.24 31.05 59.32 2 4 3.052
2000 1192.9 4.37453352 3.68493 3.076
23688.28 4840.97 1 0.36 41.03 6.34 8 2
2001 4.40256296 3.70109 3.202
25267.54 5024.54 1594.9 0.81 55.85 7.06 2 6
2002 28957.71 7817.08 3357.0 1.06 59.85 9.99 4.46176421 3.89304 3.525

69
 6 5 5
2003 3624.5 4.50118870 3.92245 3.559
31709.45 8364.83 8 1.89 62.10 7.54 9 7
2004 3903.7 4.54432296 3.94883 3.591
35020.55 8888.57 6 3.31 67.74 11.26 2 2
4.57374106
2005
37474.95 9516.99 4773.2 3.06 48.56 16.33 2 3.9785 3.678
2006 5940.4 4.00955 3.773
39995.50 10222.47 5 4.26 49.39 17.90 4.60201113 6
4.63268409 3.829
2007
42922.41 10958.47 6757.8 4.43 149.58 32.50 9 4.03975
4.66287601 4.06615 3.902
2008
46012.52 11645.37 7981.4 6.72 106.35 65.40 9 3
2009 9186.3 4.69771830 4.09097 3.963
49856.10 12330.33 1 8.35 135.70 22.44 3 5
2010 13048. 4.73729014 4.11557 4.115
54612.26 13048.89 9 7.74 128.41 29.56 9 4
2011 14037. 4.75975122 4.12805 4.147
57511.04 13429.38 8 10.19 255.21 41.17 1 6
4.77764348 4.15623 4.199
2012
59929.89 14329.71 15816 9.71 316.36 33.30 1 7
16816. 4.80084569 4.16880 4.225
2013
63218.72 14750.52 6 9.42 343.70 39.43 8 7
18018. 4.82706406 4.18696 4.255
2014
67152.79 15380.39 6 13 401.90 36.70 1 7
4.20282 4.293
2015
69023.92 15952.22 19637 11.44 467.60 41.27 4.83899962 1
21523. 4.83206954 4.332
2016
67931.24 16607.34 5 8.1 529.50 36.58 2 4.2203

70