CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
From the period of independence (1st of
October 1960) to 1970s, the Nigerian economy was dominated by agricultural
commodity exports. The immediate post independent Nigeria heavily depended on
export of agricultural commodities for her foreign exchange earnings. By 1960
precisely, share of agriculture to total export accounted for virtually 90%
Agricultural exports particularly cocoa and rubber (Onayemi and Akintoye, 2009;
Central Bank of Nigeria, 2010; and Eleje, 2013). According to Ogunkola, Bankole and Adewuyi
(2006) and Okoh (2004), the situation later changed in the mid-1970s, crude oil
now constitutes 96% of total exports as against 4% for non-oil exports in
Nigeria (a negative trend). The performance of the non-oil sector has little
significance influence in the economy as a whole and the policies aimed at
reversing the trend have been to expand Agricultural exports in a bid to
diversify the nation’s export base. Okoh (2004)
Agriculture
contributes to employment, food production, Foreign exchange earnings and
industrial inputs. In 2001, agriculture was about 41 per cent of GDP. Some 60
per cent of the workforce is employed in agriculture, predominantly
smallholders (CBN, 2002). Nigeria has a total land area of 98.3 million
hectares, of which only 71.2 million hectares are cultivable. Only 34.2 million
hectares (about 48 per cent of the cultivable area) are actually being
cultivated, and less than 1 per cent of the arable land is irrigated (FMARD,
2001). The modest growth between 5.5 per cent and 7.5 per cent in the
agricultural sector over the period 1999–2005 has been traced to the favourable
weather conditions, while servicesand commerce expanded following improvements
in the purchasing power of consumer.
One of the ways of boosting exports is making
finance available to the export sector. This can be done through provision of
enough and cheap credits to the sector (Phillips 1991). Nwagu (2009), observes that it is not enough
to remain in one place blaming and waiting for government for everything;
instead you need to plan your life within the available resources. Checking out
to her countries cannot bring you the comfort you desire in life. Think of
becoming your own boss and tap on the opportunities provided by this non-oil
export crusade. While you are busy waiting for your share of the oil resources
a lot of Nigerians are smiling their way to their banks with proceeds from
exports of agricultural products such as cocoa, cashew, fried snail, garri,
gallstones, ginger, dried vegetable, cassava chips/leaves/roots, bones, sesame
seeds, pepper, honey, charcoal, spices etc. The unceasing of Agricultural
products and its exportation played a significant role in enticing foreign exchange in boosting economic
activities from independence to the early 1970s. Banks are important subset
under financial institutions that can provide finance to the farmers which
would subsequently facilitate the exportation of agricultural products in
Nigeria. Banks are internationally recognized financiers and guarantees payment
to exporters.
Nigeria, over the years has engaged
herself in export trade. This is not only very pertinent in foreign exchange
earnings, but also in its significant contribution to economic growth and
development. In some country (countries not endowed with crude oil as Nigeria),
Agriculture have been found to perform as the engine of growth especially
through high productivity exports, a nation can take advantage of international
division of labour and acquire desired goods and services from abroad at
considerable savings in term of inputs productivity resources, thereby helping
to increase the efficiency of export industry.
Today, the country is far
behind the New World major producers of agricultural products (especially cocoa
and crop) such as Cote‘d’Ivoire, Ghana and Indonesia. One of the most dramatic
events in Nigeria over the past decade was the devaluation of the Nigerian
Naira with the adoption of a Structural Adjustment Programme (SAP) in 1986. A
cardinal objective of the SAP was the restructuring of the production base of
the economy with a positive bias for the production of agricultural items for
exports. The foreign exchange reforms that facilitated a cumulative
depreciation of the effective exchange rate were expected to increase the
domestic prices of agricultural exports and therefore boost domestic production
(Adubi and Okunmadewa 1999).
The major agricultural
export commodities in Nigeria include cocoa, coffee, cotton, groundnut,
groundnut oil, palm kernel, soya beans, ginger rubber, and chili pepper (CBN,
2003). There are other commodities that are being demanded for in the world
market such as cassava and cassava products, banana, plantain and so on. The
Nigerian economy until today is still dependent on primary products both as
foreign exchange earner and as major component of its gross domestic product
(GDP).
With the high rate of loan default that
characterized developing countries, Commercial banks seldom approve loans to
farmers and often times do so at higher interest rates with other stringent
conditions such as the provision of collateral (Basseyet al., 2014a).
Credit is the trust which allows one party to provide money or resources to
another party where the second party does not reimburse the first party
immediately (thereby generating a debt), but instead promises either to repay
those resources (or other materials of equal value) at a later date. The
resources provided may be financial (e.g. granting a loan), or they may consist
of goods or services (e.g. consumer credit). Credit is considered as a catalyst
that activates other factors of production and makes under-used capacities
functional for increased production, Ijere (2013). Thus farm credit plays a
crucial role in agricultural and rural development as it enables farmers reap
economies of scale, venture into new fields of production, employ new
technologies and empower them to provide utilities for a widening market.
Bank credit is the aggregate amount of credit
available to a person or business from a banking institution. It is the total
amount of funds financial institutions provide to an individual or business. A
business or individual’s credit depends on the borrower’s ability to repay and
total amount of credit available in the banking institution. CBN (1992) sees
bank credit as money lent out by banks as loans and advances with a future date
of repayment.
Agricultural credit is defined as any
loan or other extension of credit that a bank provides for agricultural or
other rural use. Most agricultural credits
finances farmers or ranchers as
they plant crops, buy equipment, harvest, or do any other things necessary for
operations but from which profits will not be realized for quite some time. The
term of agricultural credit depends on how expensive the product or project it
intends to finance is. Agricultural credit enhances productivity and promotes
standard of living by breaking vicious cycle of poverty of small scale farmers.
Adegeye and Ditto (2005) described agricultural credit as the process of
obtaining control and palliative measures to assist rural farmers in enhancing
productivity. Some of these schemes include the agricultural credit guarantee
scheme established in 1977, the agricultural credit support scheme, Commercial
agriculture credit Scheme and the licensing of Micro Finance Banks.
Unfortunately, credits are not easily
available for most of the farmers because of collateral and other things that
are usually required by the commercial banks and other credit institutions.
This makes difficult for large scale agricultural investment in Nigeria. Ogunfowora
(2003) reported that credit is not only needed for farming purposes, but also
for family and consumption expenses; especially during the off season period.
It
is important to note that not all banks focus on agricultural finance.
Agricultural banks require a specialist skill which may not be the core
competency of some banks and financial institutions. In addition, agriculture
is perceived to be a high risk sector especially with Nigeria agriculture
dominated by smallholder farmer who quite often are not in a position to offer
traditional securities. Lack of useable collateral, together with production
climate and price risk in agricultural finance failing outside of the
traditional balance sheet lending approach.
With the recent move by the
leading country of the world to diversify their economy, Nigeria is conscious
of the danger signal this portray and this underscores the need to move away
from total reliance on petroleum related revenues. These signals according to
Soludo (2009) include the on-going global economic crisis that is threatening
the growth and development agenda of the present administration, the crisis in
the Niger delta which has interrupted petroleum operations in the past few
years, and the frightening revelation that the United States of America, the
highest buyer of Nigeria crude oil, Brazil and several other countries are
seriously engaged in research for an alternative source of energy.
In conclusion, there is need for the
Farmers in Nigeria to engage in agricultural training that will enable them to
be actively involved in the modern way of agricultural production. Alabi and Chime (2008) have attributed the
present economic problem in Nigeria to the poor performance of the agricultural
sector. One of the sectors expected to act as a catalyst towards the
realization of this goal is agriculture. At present Nigeria has lost its role
as one of the world’s leading exporters of agricultural commodities. In
addition, the country is currently suffering from a declining as well as
fluctuating income from its heavy dependence on oil exports. With the present
situation in the oil market, it has become necessary for the country to
reconsider its agricultural commodity export position. Therefore, this study is
intended to assess the bank financing of non-oil exports in Nigeria. Bank
financing exports in agricultural products in particular is capable of boosting
non-oil export sector which brings economic growth.
1.2 STATEMENT OF THE PROBLEM
With
the fall in the global price of crude and the naira’s poor performance against
dollar, policymakers and private sectors have begun to diversify towards
non-oil exports. The non-oil export
sector is faced with a lot of problems for example the problem of agricultural
exports and indeed the entire non-oil sector has been made more complicated
with influx of importers, customs agents and all manner of businessmen seeking
to raise foreign exchange or generate income through exports.
According
to Ijaiya (2003), commercial banks credit to agricultural exports sector has
been very low. Also, high cost of finance does not allow non-oil exporting
industries to modernize outdated plants and machineries in Nigeria, which results
in poor quality goods of non-oil exports (Odularu, 2008).
Access to banks financial services for
agricultural exporters is one of the major problems stifling the growth of the
sector in Nigeria, because of high interest rates and little disbursement in
terms of the volume of credit (Ijaiya, 2003; Theodore, 2004; Sanusi, 2010a, 2010b).
There
is also the problem of increased cost arising from exchange rates fluctuations
which has been identified by (Elumelu, 2002). The agricultural exports sector
has been declining due to poor access to credit facilities at pre-shipment and
post shipment stages as opposed to what is happening in other countries of the
world (Azzam, 2000).
Commercial banks in Nigeria were unwilling to
grant credits to small scale Farmers because of the high rate of default
associated mostly with loan repayment and lack of Collateral Security often
demanded by banks during lead agreement (Kehinde 2012).
According to Okojie (2010), the lack of bank
accounts, collateral, and information
regarding the procedure for accessing credits from banks limit peasant farmers and rural women‘s access to
credit from formal institutions.
1.3 JUSTIFICATION OF THE STUDY
The
financial sector is expected to make significant contribution to Agricultural
exports in Nigeria. This study is set to review the role of financial sector in
the promotion of Agricultural exports. It becomes important to carry out a
research on this area of study so as to suggest ways of combating the perceived
problems of Farmers and to identify how the financial sector has been of help
to Agricultural exports. Also it sets out to proffer solutions to the problems
being faced by the sector.
The
relevance of this study will be useful to the Government and to the policy
maker for policy making and implementation in Nigeria. Also, understanding the role of banking
sector on agricultural exports on how the banking sector will make more immense
concern on the promotion of Agricultural exports in Nigeria. Monetary
authorities (Central Bank of Nigeria and the regulatory bodies under the CBN)
also serves as the regulator which is charged with the responsibility of
regulating and monitoring how the banking sector and other schemes will help in
promoting Agricultural exports in Nigeria. This study will be serving as a
background for those intending to carry out further research work in related
topics. The interest of this study is to examine whether the provision of
credit facilities and granting of loans and advances by the banks will have impact
on the agricultural exports in Nigeria.
1.4 OBJECTIVE OF THE
STUDY
Based
on the identified problems, the following objectives are formulated for the
study;
- To examine the contribution of banking sector to the promotion of Agricultural exports in Nigeria.
- To determine the impact of exchange rate on the Agricultural exports in Nigeria.
- To determine the impact of interest rate on Agricultural exports in Nigeria.
1.5 RESERCH QUESTIONS
Based
on the research objectives, the following Question are raised by the research:
- In what ways have the banking sector contributed to the promotion of Agricultural exports?
- What is the effect of increased cost arising from exchange rate fluctuation on Agricultural exports?
- What is the effect of interest rate on loans given to promote agricultural export?
1.6 HYPOTHESES OF THE
STUDY
Based
on the research Questions, the following are the hypotheses are formulated by
the research:
HO1:
The banking sector has no significant impact in the promotion of Agricultural
exports in Nigeria.
HO2:
Exchange rate does not have significant impact on Agricultural exports in
Nigeria.
HO3:
Interest rate on Bank credit does not have significant impact on Agricultural
exports in Nigeria.
1.7 SCOPE
OF THE STUDY
This
study provides an insight in the role of banking sector in the promotion of
Agricultural exports in Nigeria for the periods of 2005-2015.This period covers
the period when the naira was overvalued to the present period where it has
been devalued.Data is got from various sources including; Central Bank of
Nigeria statistical bulletin, National Bureau of Statistics, journals and
articles.
1.8 DEFINITION OF TERMS
AGRICULTURE -
This is the cultivation and breeding of animals, plants and fungi for food,
fibre, biofuel, medicinal plants and other products used to sustain and enhance
life.
AGRICULTURAL EXPORTS -
this is the process of trading agricultural products from one country to
another. For example in Nigeria, cocoa, rubber, groundnut, cassava etc. are
being exported in order to facilitate international trade and strengthen the
value of Naira against dollar.
CREDITS - Credit
is the trust which allows one party to provide money or resources to another
party where the second party does not reimburse the first party immediately
(thereby generating a debt), but instead promises either to repay those
resources (or other materials of equal value) at a later date.
BANK CREDITS - Bank
credit is the aggregate amount of credit available to a person or business from
a banking institution. It is the total amount of funds financial institutions
provide to an individual or business. A business or individual’s credit depends
on the borrower’s ability to repay and total amount of credit available in the
banking institution.
AGRICULLTURAL CREDITS -
Agricultural credit is defined as any
loan or other extension of credit that a bank provides for agricultural or
other rural use. Most agricultural credits
finances farmers or ranchers as
they plant crops, buy equipment, harvest, or do any other things necessary for
operations but from which profits will not be realized for quite some time.
EXPORT PROMOTION- Banking
involve in some export promotional activities such as sponsoring, organising
and participating in seminars, workshops, trade exhibitions. In the process of
getting involved in the above mentioned, they expose the public to their export
and will help stem the flow of crop export.
FINANCIAL INSTITUTION -
financial institution is a company
engaged in the business of dealing with monetary transactions, such as
deposits, loans and advances, investments and currency exchange. Financial
institution is categorised into four (4). These are
a. The
banking sector
b. The
insurance companies
c. Trust
companies and;
d. Capital
market.
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