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