CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Agriculture remains a central part of the Nigerian economy. It supplies food for a growing population, raw materials for industry, employment, foreign exchange and a market for industrial products, and it is the main source of livelihood in rural areas, so concern for agriculture and concern for rural development largely coincide. National accounts show how large the sector still is. According to the National Bureau of Statistics (NBS, 2024), agriculture contributed 28.65 per cent of real GDP in the third quarter of 2024 and 22.61 per cent in the second quarter, with the share varying with the crop season. Yet the sector has been unable to meet the country's basic food needs, and food imports have continued to rise. Nigeria is a large net importer of agricultural products, and the gap between agricultural imports and exports has remained a concern for policy. This situation also presents an opportunity, because well-designed policies and budgets could reduce this agricultural deficit.

Several structural features explain the sector's weak productivity. Production is dominated by small-scale farmers who operate small and scattered holdings, usually of only a few hectares, and who depend largely on traditional tools such as the hoe and machete. Improving output requires modern inputs such as fertilisers, improved seed, feed, plant protection chemicals and machinery, most of which must be purchased. Few farmers have the funds to buy them. Inadequate capital has therefore long been regarded as a major constraint on agricultural development. Credit is more than one resource among others. It determines access to the other resources on which farmers depend, including land, labour, equipment and raw materials. As farmers have recognised the value of improved inputs and new technologies, the need for agricultural credit has grown.

At independence in 1960, Nigerian agriculture was characterised by high production, achieved by mobilising small-scale farmers, together with infrastructure such as roads and railways geared toward export crops. Food was abundant and demand was largely met without imports. After independence, government interventions in the sector were implemented through development plans and annual budgets. The discovery and exploitation of oil later shifted attention away from agriculture, and the sector's relative importance declined. Public support for agriculture takes the form of research, extension services, commodity marketing, input supply and land-use legislation. The private sector contributes through investment, sponsorship of research, capacity building for farmers and, above all, financing of farm businesses. International agencies such as the World Bank and the Food and Agriculture Organization also support the sector through finance, inputs and technical assistance, and projects such as the Agricultural Development Projects were designed to raise output.

Within this context, the Agricultural Credit Guarantee Scheme Fund (ACGSF) was established in 1977 to encourage banks to lend to agriculture (Akerele, Ashaolu, Sanusi, & Egbetade, 2017). It was set up under the Agricultural Credit Guarantee Scheme Fund Decree 1977 and is managed under the supervision of the Central Bank of Nigeria (CBN). Its purpose is to provide guarantees on loans granted by banks for agricultural purposes, including agro-processing, to raise credit supply to agriculture and thereby increase output and the capacity for export and local consumption. It covers cash crops such as rubber, oil palm and cocoa, food crops such as tubers, cereals and fruits, livestock and fisheries.

The scheme has faced problems. Commonly cited ones include loan default, the reluctance of some banks to lend to farmers, delays in approving and releasing loans, and the "personal guarantee" requirement, whose meaning the enabling decree did not define and which is therefore left to the judgement of bank officials. Many rural farmers also lack clear title to land and so cannot offer the securities the scheme recognises. Awareness of the scheme among farmers has also been limited. Sulaimon (2021) argues that the CBN should reduce the requirements of the scheme to make it more inclusive of smallholder farmers, who dominate Nigerian agriculture.

Empirical evidence on the effect of the ACGSF is positive but mixed. Reuben, Nyam and Rukwe (2020) found that the scheme had a positive effect on agricultural output in Nigeria, although the supply of funds followed an uneven pattern. Akerele et al. (2017) analysed data for 1982 to 2013 across three subsectors. They found that the fund had a positive and significant influence on output in the crop subsector (p < 0.01) and the livestock subsector (p < 0.05). In fisheries the effect was positive but significant only at the 10 per cent level, which they described as a weak effect that raises questions for policy. Sulaimon (2021) found an inverted U-shaped relationship using threshold regression on data for 1981 to 2019. Below a certain level of funds, the ACGSF had a significant positive effect on agricultural performance, and beyond a higher level the effect turned negative. These differences suggest that the effect of agricultural credit may vary by subsector, by period and by the scale of credit. This study therefore examines the effect of agricultural credit on crop, livestock and fisheries output and on overall agricultural output and economic performance in Nigeria between 1981 and 2015.

1.2 Statement of the Problem

Agricultural credit is expected to play a critical role in agricultural development, and it has long been identified as a major input in the development of the sector in Nigeria. The decline in the sector's contribution to the economy has been linked to a lack of a formal national credit policy and a shortage of credit institutions that can assist farmers. The ACGSF was established partly in response, but agricultural productivity has not improved as expected.

Several problems have been identified in the operation of the fund. They include loan defaults, loan diversion, natural disasters, poor farm management, low produce prices, farmers' difficulty in estimating their credit needs and the high cost of processing small loans relative to their size. Banks, for their part, complain of incomplete application forms. Loan approvals are often late, so funds arrive after the period for which they were needed. The "personal guarantee" condition is ambiguous. The other recognised securities, such as legal title to land and a life assurance policy, are hard for rural farmers to provide. Finally, limited publicity has kept many farmers unaware of the scheme. These problems have limited the contribution of the fund to the cash crop, livestock and fisheries subsectors and have contributed to low agricultural productivity.

Existing studies have not settled how much agricultural credit actually affects output in each subsector, and their results differ in significance and direction (Akerele et al., 2017; Reuben et al., 2020; Sulaimon, 2021). This study therefore examines agricultural credit and Nigeria's economic performance over the period 1981 to 2015.

1.3 Objectives of the Study

The general objective is to examine agricultural credit and Nigeria's economic performance (1981–2015). The specific objectives are:

1. to examine the impact of agricultural credit on crop output in Nigeria;
2. to examine the impact of agricultural credit on livestock output in Nigeria;
3. to examine the impact of agricultural credit on fisheries output in Nigeria; and
4. to examine the impact of agricultural credit on overall agricultural output and productivity in Nigeria.

1.4 Research Questions

1. To what extent does agricultural credit to the cash crop subsector have a significant impact on crop output in Nigeria?
2. To what extent does agricultural credit to the livestock subsector have a significant impact on livestock output in Nigeria?
3. To what extent does agricultural credit to the fisheries subsector have a significant impact on fisheries output in Nigeria?
4. To what extent does agricultural credit have a significant impact on overall agricultural output in Nigeria?

1.5 Research Hypotheses

Hypothesis One
H₀₁: Agricultural credit does not have a significant positive impact on cash crop output in Nigeria.
H₁₁: Agricultural credit has a significant positive impact on cash crop output in Nigeria.

Hypothesis Two
H₀₂: Agricultural credit does not have a significant positive impact on livestock output in Nigeria.
H₁₂: Agricultural credit has a significant positive impact on livestock output in Nigeria.

Hypothesis Three
H₀₃: Agricultural credit does not have a significant positive impact on fishery output in Nigeria.
H₁₃: Agricultural credit has a significant positive impact on fishery output in Nigeria.

Hypothesis Four
H₀₄: Agricultural credit does not have a significant positive impact on agricultural output in Nigeria.
H₁₄: Agricultural credit has a significant positive impact on agricultural output in Nigeria.

1.6 Scope of the Study

This is an empirical analysis of agricultural credit and Nigeria's economic performance. It covers the period from 1981 to 2015 and examines the crop, livestock and fisheries subsectors as well as overall agricultural output.

1.7 Significance of the Study

The study contributes to the literature on agricultural credit and gives reasons why further research in this area can support the growth and development of emerging economies such as Nigeria.

It will be useful to government. Policymakers who wish to enact policies that promote agricultural productivity and output can use its findings to design credit schemes and to adjust the requirements and funding of the ACGSF (Sulaimon, 2021). Better agricultural performance in turn supports economic growth and the standard of living of citizens.

It will also help the CBN, deposit money banks and farmers' organisations to understand which subsectors respond most to credit and where funding is most effective.

Finally, the study advances knowledge by adding to the body of research available to students of finance and economics, widening the perspective of readers and researchers, and updating the literature on the subject.

1.8 Operational Definition of Terms

Agricultural credit: Funds made available to farmers and agricultural enterprises, including loans guaranteed under the ACGSF, to acquire inputs and technology for production.

Agricultural credit guarantee scheme fund (ACGSF): A fund established in 1977 and managed under the supervision of the Central Bank of Nigeria to guarantee bank loans granted for agricultural purposes (Akerele et al., 2017).

Agricultural output: The value of production in the crop, livestock and fisheries subsectors, measured by their contribution to GDP.

Agricultural productivity: The increase in the contribution of the agricultural sector to the gross domestic product of the nation.

Economic performance: The overall growth and level of national output, measured by gross domestic product.

1.9 Organisation of the Study

Chapter One introduces the study. Chapter Two reviews related literature and the theoretical framework. Chapter Three describes the methodology and the data. Chapter Four presents and analyses the results. Chapter Five summarises the findings, draws conclusions and makes recommendations.

References

Akerele, D., Ashaolu, O. F., Sanusi, R. A., & Egbetade, A. (2017). Analysis of partial effects of agricultural credit guarantee scheme fund on outputs in Nigeria's agricultural subsectors. Sarhad Journal of Agriculture, 33(4), 630–638.

National Bureau of Statistics. (2024). Nigerian gross domestic product report: Q3 2024. NBS.

Reuben, J., Nyam, C. M., & Rukwe, D. T. (2020). Agricultural credit guarantee scheme fund and its effect on agricultural output in Nigeria. Review of Agricultural and Applied Economics, 23(2), 102–111. https://doi.org/10.15414/raae.2020.23.02.102-111

Sulaimon, M. (2021). Agricultural credit guarantee scheme fund (ACGSF) and agricultural performance in Nigeria: A threshold regression analysis (MPRA Paper No. 105564). University Library of Munich. https://mpra.ub.uni-muenchen.de/105564