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Full Project – ROLE OF BANKING SECTOR IN THE DEVELOPMENT OF AGRICULTURAL EXPORTS IN NIGERIA

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CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

From the period of Nigerian independence 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. In 1960 precisely, share of agricultural export particularly cocoa and rubber to total export accounted for virtually 90% (Onayemi & 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 when crude oil constitutes 96% of total exports as against 4% for non-oil exports in Nigeria (a negative trend). As a result of that, the performance of the non-oil sector had 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 services and commerce expanded following improvements in the purchasing power of consumer.

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 countries that were not endowed with crude oil as Nigeria, agriculture have been found 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 (Kehinde, 2012).

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 & Okunmadewa, 2009). Bank credit is the aggregate amount of credit available to a person or business from a banking institution. It constitutes 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 (Adubi & Okunmadewa, 2009).

One of the bank credits is agricultural credit which 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. 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 specialised 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 usable collateral together with production climate and price risk in agricultural finance failing outside of the traditional balance sheet lending approach (Adegeye& Ditto, 2005).

With the moves 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.

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 intends to assess the role of banking sector in the development of agricultural exports in Nigeria.

1.2 Statement of the Problem

With the fall in the global price of crude and the naira’s poor performance against dollar recently experienced in Nigeria, 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, 2010). There is also the problem of increased cost arising from exchange rates fluctuations which has been identified by (Elumelu, 2016). 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, 2015).

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 loan agreement (Kehinde, 2012). According to Okojie (2016), the reason could be 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. In view of these issues raised, this study aims at assessing the role of banking sector in the development of agricultural export in Nigeria.

1.3 Research Questions

Based on the problems, the following questions are raised by the researcher:

To what extent does banking sector contribute to the development of agricultural export in Nigeria?
What is the effect of increased cost arising from exchange rate fluctuation on agricultural export in Nigeria?
To what extent does interest rate affect the loans granted to the agricultural sector in Nigeria?

1.4 Objective of the Study

The general objective of the study is to examine the roles of banking sector in the development of agricultural export in Nigeria. However, the specific objectives include:

To examine the contribution of banking sector to the development of agricultural exports in Nigeria.
To assess the impact of increased cost arising from exchange rate fluctuation on agricultural exports in Nigeria.
To evaluate the impact of interest rate on loans granted to the Agricultural sector in Nigeria.

1.5 Hypotheses of the Study

The following hypotheses are formulated by the researcher to actualise the objective of the study:

Ho₁: The banking sector has no significant impact in the development of agricultural exports in Nigeria.

Ho₂: Increased cost of 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.

1.6 Justification for the Study

The financial sector is expected to make significant contribution to agricultural exports in Nigeria. This study is set to examine the role of banking sector in the development 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 banking 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 the policy maker in making informed policies that will help in promoting agricultural exports in Nigeria. Also, this study will be of help to the regulators of financial sector to ensure effective monitoring of banks and implementation of policies that will boost the agricultural sector in Nigeria. This study will add to the body of existing literature that will provide a guide to those intending to carry out further research work in related topics.

1.7 Scope of the Study

This study provides an insight in the role of banking sector in the development 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 sources such as Central Bank of Nigeria statistical bulletin, National Bureau of Statistics, journals and articles.

1.8 Organization of the Study

The study is divided into five (5) chapters. Chapter one forms the introductory part of the study.This is where the main theme of the research is given. It comprises of the background to the study, statement of the problem, research questions, objectives of the study, hypotheses of the study, justification of the study, scope of the study and organization of the study. In chapter two, relevant literatures are reviewed on various concept and theories relating to the study. Also, the empirical works of previous researchers on this issue are reviewed. The next chapter which is chapter three which gives details of the methodology employed. Included in chapter four, are result and discussion of findings. Chapter five, which is the last chapter, concludes the study with summary, conclusions and also recommendations.

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