1.1 Introduction
Agricultural growth refers to the increase in the output of agricultural products over time, which is often measured in terms of productivity, yield per hectare, or total agricultural output (Diao et al., 2020). Agricultural growth is a crucial component of economic development, especially in rural areas where the majority of the population often depends on agriculture as a primary source of income. However, rural farmers frequently face challenges such as limited access to capital, modern farming technologies, and efficient supply chains, which hinder their productivity and growth potential. According to Okojie et al. (2021), the provision of credit by banks has been shown to have a positive effect on agricultural output by reducing the financial burden on farmers, thereby enabling them to adopt more effective farming practices. Additionally, commercial banks often contribute to the development of rural infrastructure, such as rural roads and irrigation facilities, which are essential for enhancing the accessibility and efficiency of agricultural markets (Ajayi & Okoye, 2019).
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitation of the study and Definition of terms.
1.2 Background of Study
The role of commercial banks in supporting rural agricultural growth dates back to the early 20th century, when banks began to recognize the potential of agriculture as a driver of economic development. Initially, commercial banks were hesitant to engage in agricultural financing due to the high risks associated with agriculture, particularly in rural areas where farming is often dependent on unpredictable weather conditions and limited infrastructure (Aluko & Fajuyi, 2017). However, as countries sought to boost agricultural productivity and rural incomes, governments encouraged banks to extend financial services to rural areas through subsidies, incentives, and the establishment of agricultural finance programs (Obi, 2018).
In many developing countries, including Nigeria, the 1970s marked a turning point, as commercial banks were increasingly involved in government-led agricultural development initiatives. In Nigeria, for example, the Agricultural Credit Guarantee Scheme (ACGS), established in 1977, provided guarantees to commercial banks for loans extended to the agricultural sector, which reduced banks' lending risks and encouraged them to finance rural agricultural projects (Eze & Eboh, 2020).
In the 1980s and 1990s, structural adjustment programs implemented by various governments placed further emphasis on the private sector's role in rural development, thereby prompting commercial banks to innovate in their lending practices and introduce tailored credit schemes. During this period, commercial banks began exploring microcredit and cooperative lending models, which proved effective in reaching smallholder farmers who often lacked collateral and credit histories (Udoh & Idiong, 2019). These approaches underscored the adaptability of commercial banks in addressing the unique challenges of agricultural financing in rural areas.
Agriculture has traditionally been the backbone of many rural economies, especially in developing countries where it serves as a primary source of livelihood and employment. Despite its importance, rural agriculture often faces severe limitations in productivity and growth due to inadequate access to essential resources, including capital, modern farming technology, and reliable infrastructure. These challenges frequently stem from the isolation of rural areas from mainstream financial services and economic opportunities (Kanu & Idachaba, 2018).
One of the primary solutions to these challenges lies in enhancing access to financial services, where commercial banks can play a transformative role. By providing rural farmers with access to credit, commercial banks enable them to invest in high-quality seeds, fertilizers, and farming equipment, which are essential for modernizing agricultural practices and improving yields (Eze & Obi, 2020). Furthermore, commercial banks are pivotal in fostering economic stability in rural communities by supporting entrepreneurship and creating jobs that are essential for sustainable development (Abubakar & Garba, 2019). However, the involvement of commercial banks in rural agriculture is often met with challenges, such as the high cost of lending, difficulty in assessing creditworthiness, and the risks associated with lending to smallholder farmers who lack collateral. To overcome these barriers, many banks have developed specialized credit products and partnerships with government agencies or non-governmental organizations to reduce lending risk and expand their reach into rural areas (Onyeagocha & Emetere, 2021). Such initiatives demonstrate that commercial banks are not only instrumental in providing financial support but also in structuring financial services that are better suited to the unique needs of the agricultural sector.
In addition, commercial banks have contributed to agricultural growth by participating in rural infrastructure projects, such as road construction and improvement of market access, which directly benefit the agricultural sector by lowering transportation costs and enhancing market integration. According to Akinyemi and Bamidele (2019), infrastructure development facilitated by commercial banks has been shown to have a positive impact on agricultural productivity and income levels in rural communities. Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the role of commercial banks in rural agricultural growth.
1.3 Statement of Problems
Investigation revealed that there is high level of risk associated with lending to smallholder farmers, who often lack collateral and a formal credit history, making them less attractive to traditional banking models. According to Adamu and Okon (2020), this lack of collateral is one of the most significant barriers preventing commercial banks from fully engaging in agricultural financing. As a result, many rural farmers are left with limited access to the credit they need for essential investments in modern farming equipment and inputs. Moreover, many rural farmers lack adequate financial literacy, which affects their ability to manage credit and make informed financial decisions. This lack of financial literacy is a challenge for commercial banks as it increases the likelihood of loan defaults and reduces the overall effectiveness of agricultural financing programs (Obi & Nwosu, 2018).
Additionally, banks often struggle with inadequate knowledge of agricultural cycles and rural market dynamics, which hinders their ability to develop tailored financial products that match the specific needs and cash flow patterns of rural farmers (Ibrahim & Musa, 2021). There is also a lack of adequate infrastructure, such as roads and communication networks, which makes it difficult for commercial banks to establish a presence in rural areas and for farmers to access markets. This limited infrastructure is a barrier to rural development and constrains commercial banks from expanding their agricultural finance services (Ogunleye & Taiwo, 2019). Without accessible financial services, rural farmers remain dependent on informal and often exploitative sources of credit, which perpetuates cycles of poverty and limits agricultural growth.
1.4 Aim and Objectives of Study
The aim of the study is to examine the role of commercial banks in supporting and promoting agricultural growth in rural areas. In achieving this aim, the following specific objectives were laid out as follows:
- To explore potential solutions and strategies that could improve the accessibility and effectiveness of agricultural financing by commercial banks.
- To assess the impact of commercial bank financing on agricultural productivity and rural economic development.
- To analyze the extent to which commercial banks provide financial support to rural agricultural sectors.
- To identify the specific challenges that commercial banks face in financing rural agriculture.
- To evaluate the role of government policies and programs in facilitating or hindering commercial banks' participation in rural agricultural growth.
1.5 Research Questions
The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:
- To what extent do commercial banks provide financial support to the rural agricultural sector?
- What challenges do commercial banks face in financing rural agriculture?
- How does commercial bank financing impact agricultural productivity and economic development in rural areas?
- What solutions or strategies could enhance the accessibility and effectiveness of agricultural financing by commercial banks?
- What role do government policies and programs play in influencing commercial banks' involvement in rural agricultural growth?
1.6 Research Hypothesis
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
- H01: There is no significant relationship between commercial bank financing and agricultural productivity in rural areas.
- H02: The challenges faced by commercial banks in rural areas significantly hinder their ability to provide effective agricultural financing.
- H03: Government policies positively influence the involvement of commercial banks in rural agricultural development.
1.7 Significance of Study
The study will provide policymakers with valuable insights into the factors influencing commercial bank engagement in rural agricultural financing, aiding in the formulation of policies that encourage financial inclusion and economic growth in rural areas. It will also help rural farmers understand how commercial banks can be a viable source of financial support, improving their access to credit and resources necessary for enhancing productivity and expanding agricultural activities.
Additionally, commercial banks will benefit from the study by gaining a better understanding of the unique challenges and opportunities in rural agricultural financing, enabling them to design products and services that are better suited to the needs of rural farmers.
Furthermore, agricultural development organizations and NGOs will find the study useful for designing programs and interventions that complement commercial bank efforts in rural finance, ultimately helping to improve rural livelihoods.
Finally, the study will contribute to the academic and research community by providing a foundation for future studies on agricultural finance, particularly in developing economies, thus enriching literature in the field of rural agricultural development.
1.8 Scope of Study
The scope of the research is focused on the role of commercial banks in rural agricultural growth using United Bank of Africa Dadin-Kowa, Jos-South in Plateau State as a case study.
1.9 Limitations of the Study
During the course of this study, there were some problems encountered which stood as limitations to the research work. Some of the limitations include:
- Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
- Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
- Initial Cooperation Delay from Respondents: A particular limitation of this work came as a result of the respondent refusal to offer their cooperation at the initial time they were contacted. This contributed in making the success of this research study difficult.
1.10 Definition of Terms
Agricultural Growth: Agricultural growth refers to the increase in the output of agricultural products over time, which is often measured in terms of productivity, yield per hectare, or total agricultural output (Diao et al., 2020). This growth is crucial for enhancing food security and improving the livelihoods of rural populations.
Commercial Banks: Commercial banks are financial institutions that offer a range of financial services, including accepting deposits, providing loans, and facilitating transactions for individuals and businesses (Akanbi, 2021). They play a vital role in the economy by mobilizing savings and providing credit, particularly in sectors such as agriculture.
Rural Financing: Rural financing encompasses the provision of financial services to individuals and businesses in rural areas, specifically tailored to meet the unique needs and challenges of these communities (Meyer et al., 2019). This financing can include loans, savings accounts, insurance, and other financial products designed to support agricultural activities and rural development.
