The Impact of Finance on Agricultural Output in Nigeria 1981-2018

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

In the 1960s and early 1970s, agriculture was the backbone of Nigeria’s economy. It contributed the highest share to the Gross Domestic Product (GDP) and export earnings. However, the discovery of crude oil in the mid-1970s shifted attention away from agriculture. By the 1980s, the sector’s performance had declined sharply, leading to a fall in its contribution to GDP and foreign exchange.

In response, the Nigerian government introduced several agricultural financing schemes. These programs aimed to boost food production, improve rural livelihoods, and restore agriculture’s contribution to economic growth.

One of the earliest efforts was the Nigerian Agricultural Cooperative and Rural Development Bank (NACRDB). Established to provide loans, accept deposits, and offer microfinance services, NACRDB became a key source of credit for small-scale farmers (Ozurumba & Uzomaka, 2011).

The Nigerian Agricultural Insurance Corporation (NAIC) followed in 1977. It provided insurance coverage for farmers against natural disasters and production risks, addressing the reluctance of conventional insurers to cover agriculture.

The Refinancing and Rediscounting Facility, introduced by the Central Bank of Nigeria (CBN), supported agricultural exports through short-term financing at preferential rates. It encouraged commercial banks to lend to productive sectors, thereby promoting economic diversification.

In 2009, the government launched the Commercial Agriculture Credit Scheme (CACS) with a ₦200 billion fund. This initiative financed large-scale agricultural projects and supported the entire value chain.

Similarly, the Agricultural Credit Guarantee Scheme Fund (ACGSF) and the Agricultural Credit Support Scheme (ACSS) were established to encourage credit flow to farmers and reward timely loan repayments.

Despite these interventions, financing gaps persist. Although commercial bank lending to agriculture rose from ₦48.6 billion in 2006 to ₦1.87 trillion in 2015 (CBN, 2016), the sector’s overall growth remains below potential. Agriculture still employs over 40% of Nigerians but contributes less than 30% to GDP today.

The sector’s stagnation is linked to inadequate financing, poor infrastructure, and soil degradation caused by oil pollution. Effective financial support remains vital for farmers to access modern equipment, inputs, and technology for improved productivity.

1.2 Problem Statement

Agricultural financing remains a major obstacle to growth in Nigeria. Many commercial banks view agriculture as high-risk and unprofitable. Consequently, most farmers rely on informal sources like personal savings, family support, and cooperative societies (Akinleye et al., 2013). These sources cannot meet large-scale credit needs.

Government efforts, including the establishment of NACRDB and ACGSF, have not fully resolved this problem. Limited budget allocations, loan defaults, and corruption continue to weaken the impact of these programs.

As a result, the agricultural sector still suffers from:

• Low productivity: Poor access to finance reduces farmers’ capacity to invest in inputs and technology.

• High unemployment: Inadequate funding discourages youth participation in agriculture.

• Food insecurity: Reduced output contributes to hunger and dependence on food imports.

Despite Nigeria’s vast natural resources, the country continues to import basic food items, highlighting the poor performance of the agricultural sector. Understanding how finance affects agricultural output is therefore crucial to achieving sustainable growth.

1.3 Research Questions

1. Does agricultural financing influence productivity growth in Nigeria?

2. How does credit to the agricultural sector affect output levels?

3. What is the relationship between agricultural financing and overall economic growth?

1.4 Objectives of the Study

The main objective of this study is to examine the impact of finance on agricultural output in Nigeria between 1981 and 2018. The specific objectives are to:

1. Assess the effect of agricultural financing on productivity growth.

2. Determine how credit to agriculture influences sectoral output.

3. Evaluate the relationship between agricultural finance and Nigeria’s economic growth.

1.5 Significance of the Study

This study is important for policymakers, researchers, and financial institutions. It provides insights into how adequate financing can improve agricultural productivity, enhance food security, and reduce unemployment.

For farmers, the findings may reveal how access to credit affects productivity and income. For government agencies, it emphasizes the need for better-targeted agricultural credit policies. The research also contributes to academic discussions on finance and development in Nigeria.

Loan diversion and defaults remain key challenges. Many farmers misuse agricultural loans for non-farming purposes such as building houses or financing social obligations. This weakens the effectiveness of credit schemes. Identifying and addressing such issues can help strengthen future financing initiatives.

1.6 Scope of the Study

The study covers the period between 1981 and 2018, focusing on the relationship between financial support and agricultural output in Nigeria. It assesses both government-led schemes and commercial bank financing.

1.7 Definition of Terms

Gross Domestic Product (GDP): The total monetary value of all goods and services produced within a country during a specific period.

Agricultural Credit Guarantee Scheme Fund (ACGSF): A fund established in 1977 to guarantee up to 75% of loans given by banks to farmers.

Commercial Agriculture Credit Scheme (CACS): A loan program by the CBN and the Federal Ministry of Agriculture to support large-scale farming at low interest rates.

Central Bank of Nigeria (CBN): The main regulatory institution responsible for monetary policy and financial system stability in Nigeria.