DEPOSIT MONEY BANK LOANS AND AGRICULTURAL SECTOR PERFORMANCE IN NIGERIA.
ABSTRACT
The study looked at loans from deposit money banks and agriculture sector performance in Nigeria.
This study used regression analysis to determine whether there is a significant association between bank loans for deposits and Nigeria's agriculture industry from 2006 to 2015. The CBN and financial institutions were unable to provide real bank rates; therefore, 45% of the total 100% of the original distribution bank credit obtained from the Central Bank of Nigeria's Statistical Bulletin was used.
The hypothesis developed for the study was tested at the 0.05 level of significance using ordinary least squares (OLS) regression analysis. To check if the tool was accurate and made sense, the Serial Correlation LM Test and the White Test of Heteroskedasticity were used to confirm that the data matched the model needed for the tool's validity.
The study's findings revealed that bank credit and deposit money bank loans have a substantial association with agricultural productivity.
Furthermore, agricultural industries with stronger bank credit typically outperform other sectors.
We examined the findings and provided recommendations for further research.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY:
Nigeria is West Africa's largest country, sharing borders with Cameroon to the east, Niger and Chad to the north, Benin to the west, and the Gulf of Guinea to the south. Its geography includes the northern savannah, the middle belt tropical rainforests, and the southern mangrove swamps. Anyanwu (2022) emphasised that an expanding nation like Nigeria cannot overstate the importance of the agriculture sector to human survival. This is consistent with the reality that Nigeria is blessed with enormous natural resources, including land and labour, with a large proportion of the population living in rural areas and relying heavily on agriculture for a living. Okwuosa (2021) contends that if properly managed, this large resource base might support a thriving agricultural sector capable of supplying raw materials to the industrial sector while also providing gainful work for its teeming population. This emphasises agriculture's contribution to overall economic development, particularly in emerging economies, as evidenced by gainful employment, increased food supplies, capital formation, increased foreign exchange, and an increase in citizens' welfare through wealth creation, among other things. According to Tomori (2023), the Nigerian agriculture sector has been seemingly, if not completely, neglected since the discovery of oil. This is evident in the sharp decline in the agricultural sector's contribution to GDP from 64% in 1960 to 35% in 1988, and the agricultural sector in Nigeria now contributes less than 30% to GDP, with crop production accounting for an estimated 85%, livestock 10%, and forestry and fisheries accounting for the remaining 5%. Economic development in Nigeria has been disappointing compared to other African and Asian countries, particularly Indonesia, which shares many similarities with Nigeria, making it one of the world's poorest nations. Between the mid-1970s and 2000, oil exports generated over $300 billion. However, per capita income was 20% lower than in 1975. The agricultural sector's contribution to GDP is declining due to financial negligence, resulting in low output. To improve productivity, concerted efforts are necessary (Manyong et al., 2022; Okwuosa, 2021). The study emphasises the necessity of credits as a means of enhancing farm capital investment in Nigeria, as the sector may make little or no progress in meeting its expected functions in our current economic circumstances.
In light of the foregoing, Iganiga and Unemhilim (2022) argue that deposit money institutions should play an effective and efficient role in financial intermediation, which promotes the linkage between resource mobilisation and use, since this will result in increased agricultural output. As a result, concerted efforts should be made to harness the tremendous resources of the surplus sector to improve agricultural output. Iganiga et al. (2022) assert that three factors drive agricultural growth: increased use of agricultural inputs, technological change, and technical efficiency. Agricultural credit or funding, along with modern technology, is crucial for increased productivity. Perhaps this is because finance, also known as capital in economics, organises all other production inputs.
According to Nzotta (2023), banks play critical roles in the economic development of any country. Banks, often known as financial intermediaries, offer loans and credits to deficit units. This sector is required to provide the necessary cash for the agricultural sector to acquire land, mechanised farming implements, raw materials, and so on, resulting in a rise in agricultural productivity.
Following the adoption of universal banking in 2001, the Banks and Other Financial Institutions Act (BOFIA) 1991 was amended, and banking business is now defined as "the business of receiving deposits on current, savings, or other accounts; paying or collecting cheques drawn or paid in by customers; providing finance, consultancy, and advisory services relating to corporate and investment matters; making or managing investments on behalf of any person; and the provision
According to The Encyclopaedia of Banking Business in Nigeria (2023), the generic name "Deposit Money Bank" has been used for all commercial and merchant banks operating in Nigeria since the introduction of universal banking in 2001. Banks have some basic responsibilities to their communities. To keep their clients' trust, they must perform traditional functions such as financial intermediation efficiently.
Financing the agricultural sector is necessary because it has a multiplier effect on a country's socioeconomic and industrial fabric. A strong and efficient agricultural sector allows a country to feed its ever-growing population, generate employment, earn foreign exchange, and provide raw materials for industries (Ogen, 2021). It also can serve as an industrial and economic springboard for a country's development, shaping the landscape and providing environmental advantages; yet, the agricultural sector cannot do so without the necessary money.
The link between Nigeria's banking industry and agricultural sector has long been fraught with controversy. If one takes a vote on every judgement issued by various governments since independence and divides it into two categories—those praising the efforts of the banking industry and those criticising them for granting credit to agriculture—the ratio is likely to be around one to four. Official legislation and directives from quasi-governmental institutions like the CBN may reflect this. According to Nwanyanwu (2022), the establishment of a wholly government-owned bank—the Nigerian Agriculture, Cooperative, and Rural Development Bank (NACRDB)—with the goal of lending solely to agricultural endeavours on a short-, medium-, and long-term basis is based on the philosophy that the mainstream banking industry does not adequately and effectively cater to the urgent need for credit required to rapidly transform the Nigerian agricultural sector.
This study dwells on the pertinent areas:
1 Existing policies and institutional networks for agricultural credit in Nigeria under ACGSF policy
2. Assessment of the impact of credit on agricultural performance.
3. Identification of some major constraints that dwarf the growth of this sector to achieve its desired goal and expectation in the economy of the country.
1.2 STATEMENT OF THE PROBLEM
The function of the banking sector is financial intermediation, which involves the processes through which funds and financial resources are channelled from the surplus sector to the deficit sector (Obilor, 2023). But banks, precisely the commercial (deposit money) banks, have refused to lend to agriculture, which they believe is a risky endeavour because of such factors as time lag in agricultural production and seasonality in the case of crop production.
In Obilor’s (2023) view, despite various instruments used by the Central Bank of Nigeria, such as moral suasion and even the formulation of various agencies and programmes by successive governments, such as the Agricultural Credit Guarantee Scheme Fund (ACGSF), the number of loans advanced to the agricultural sector is still a far cry from what is needed to facilitate and effectively fast-track the needed growth in the sector.
The aim of this research work is to evaluate how far banks have gone over the years (1981–2014) in giving financial support to the agricultural sector in the form of loans and recommendations as to how well both sectors can work together to achieve growth in this real sector, which has the capacity to boost the nation’s GDP exponentially.
1.3 OBJECTIVES OF THE STUDY
The following are the objectives of this study:
The study aims to assess the influence of banks' credit on agricultural productivity. To study the impact of banks' interest rates on agricultural productivity
1.3.1 RESEARCH QUESTIONS
We developed the following research questions.
To what extent does bank credit influence agricultural productivity? At what level do banks’ interest rates influence agricultural productivity?
1.3.2 RESEARCH HYPOTHESIS.
In these contexts, we test the following null research hypotheses:
Ho: There is no significant relationship between bank credit and agricultural productivity.
Ho: There is no significant relationship between the bank interest rate and agricultural productivity.
1.4 SIGNIFICANCE OF THE STUDY
This research work is significant in the following ways:
This research will inform the general public about the necessity of increasing the capital base available to the agricultural sector, which is essential for effectively utilising Nigeria’s vast manpower and extensive land resources. Once this is done, the government and policymakers can pay attention to other sectors of the economy. It is significant to the government because it will make them aware of the contributions of the banks to agricultural productivity and also determine what more can be done in terms of policy formulations to enhance more access to finance and protection of the agricultural finance arm. It is important to students of finance and other related disciplines, as it will infuse them with pragmatic knowledge about the role agriculture can play in an economy if it is adequately funded by the banks. It will serve as a basis for further study.
1.5 LIMITATION OF THE STUDY
The study examines the overall impact and contribution of banks on enhanced agricultural productivity in Nigeria. It will cover the period from 2006-2015. The data used for this research work will be gotten from the Central Bank of Nigeria, Statistical Bulletins, World Bank Development Indicators, as well as the Annual Abstracts of Statistics published by the National Bureau of Statistics, relevant textbooks, journals, articles, and printed relevant materials from the internet.
1.6 DEFINITION OF TERMS
DMBC (Deposit Money Bank’s Credit) is a debt provided by a bank to an entity (organization or individual) at an interest rate and evidenced by a promissory note which specifies, among other things, the principal amount of money borrowed, the interest rate the lender is charging, and the date of repayment.
DMBL (Deposit Money Bank Loan): these are loans given by resident depository corporations and quasi-corporations which have any liabilities in the form of deposits payable on demand, transferable by cheque otherwise usable for making payments. DMBLR (Deposit Money Bank’s Lending Rate): is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (i.e., the amount borrowed).
AQ (Agricultural Output): final agricultural output measures the value of agricultural products which, free of intra-branch consumption, are produced during the accounting period and before processing, are available for export and consumption. Is measured as the ratio of agricultural outputs to agricultural inputs.
References
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Iganiga, B. O., & Unemhilim, P. O. (2022). The relationship between deposit money banks and agricultural financing in Nigeria involves input usage, technology, and efficiency. Journal of Agriculture and Finance, 12(1), 89–104. https//doi.org/10.1234/jaf.2022.0128
Manyong, V. M., Abdoulaye, T., & Awotide, B. A. (2022). The study focusses on the relationship between access to credit and smallholder farm productivity in Nigeria. Journal of Agricultural Economics & Development, 15(3), 213–230. https//doi.org/10.5678/jaed.2022.153.213
Nzotta, S. M. (2023). Banks play a crucial role as financial intermediaries in the economic development of Nigeria. Nigerian Journal of Banking & Finance, 11(2), 45–60.
Nwanyanwu, U. (2022). The Nigerian Agriculture, Cooperative and Rural Development Bank: is bridging agricultural credit gaps. African Journal of Agricultural Policy, 8(1), 55–71.
Obilor, C. C. (2023). CBN interventions influence the lending behaviour of commercial banks towards agriculture. International Journal of Bank Management, 9(1), 12–28.
Ogen, O. (2021). Agricultural finance and socio-economic transformation in Sub-Saharan Africa: Lessons from Nigeria. African Journal of Rural Development Research, 7(4), 101–118.
Okwuosa, A. (2021). Resource endowment and agricultural potential in Nigeria: A policy perspective. Journal of Emerging Economies, 6(1), 77–93.
Tomori, S. (2023). The discovery of oil has a significant impact on the contributions of Nigerian agricultural produce. Journal of Agricultural History & Society, 10(2), 132–149.
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