Topic: IMPACT OF AGRICULTURAL CREDIT GUARANTEE SCHEME FUND ON AGRICULTURAL PRODUCTION IN NIGERIA, 1978-2011.

Chapter One

INTRODUCTION

1.1 Background of the Study

In Nigeria, credit has been recognized as an essential tool for promoting Small and Medium Enterprises (SMEs). About 70 percent of the population is engaged in the informal sector or in agricultural production. The federal and state governments in Nigeria have recognized that for sustainable growth and development, the financial empowerment of the rural areas is vital, being the repository of the predominantly poor in the society and particularly the small and medium enterprises (SMEs). If this growth strategy is adopted and the latent entrepreneurial capabilities of this large segment of the people is sufficiently stimulated and sustained then positive multipliers will be felt throughout the economy (Olaitan, 2006; Olowu, 2011). The Federal Government of Nigeria has severally instituted various agricultural financing policies through schemes, programmes and institutions, aimed at improving agricultural production capabilities, positively channel the potential of SMEs to alleviate the standard of living and place the sector in the forefront of Government’s development strategy. Eze (2010) opined that the objective of these policies in Nigeria is to establish an effective system of sustainable agricultural financing schemes, programmes and institutions that could provide micro and macro credit facilities for the micro, small, medium and large scale producers, processors and marketers. Several intervention programmes have been put in place to alleviate the complaints of SMEs in the past, yet the problem still persists. There were also a myriad of foreign funds that came in from the World Bank, International Monetary Fund (IMF), International Finance Corporation (IFC), etc. In a bid to accomplish these schemes, programmes, and institutions, the government over the years has made budgetary allocations to agriculture which when compared with the total budget; fell short of meeting policy intentions. Some of these efforts have failed to actualize their intended objectives as rural poverty seems to be on the increase and a large portion of the population is engaged in agricultural activities. Olowu (2011) notes that the problem of access to finance for agriculture is not solely as a result of non availability of finance but could as well be caused by the reluctance of credit providers to give out loans without a certainty of recovering them. Banks are not to be blamed solely for this as they are profit oriented organizations and on the other hand, farmers should not be made to bear the whole brunt of this due to their inability to secure bank loans without adequate collateral. In order to alleviate this predicament, the federal government instituted the Agricultural Credit Guarantee Scheme Fund (ACGSF). The government acts as an intermediary through the scheme and also as a guarantor for agricultural loans in order to alleviate the risk involved in agricultural financing. Diverse studies have shown that credit plays an important role in enhancing agricultural productivity of the farmer (Okorji and Mejeha, 1993; Nweze, 1991; Mafimisebi, et. al., 2008; Nwosu, et. al., 2010) and shortage of primary production credit has been identified as one of the major causes for declining Agricultural production. The ACGSF is one of the existing agricultural finance schemes in Nigeria which has been operating as a specialized development finance scheme since 1978 to date. The main purpose of the Nigerian Agricultural Credit Guarantee Scheme Fund is to encourage banks to lend to those engaged in agricultural production and agro-processing activities. Consequently, the primary aim of the scheme is the motivation of total agricultural production for both domestic consumption and export; and the encouragement of financial institutions to contribute towards increasing the nation’s agricultural productive capacity through a capital lending programme. The scheme is expected among other functions to provide guarantee on loans granted by financial institutions to farmers for agricultural production and agro-allied processing. The cover pledges to pay to the banks, 75% of the amount in default net of any amount realized by the lending bank from the sale of the security pledged by the borrower (Nwosu, et. al., 2010). This study therefore, focuses on the importance of determining the extent to which the ACGSF has impacted credit delivery to the small and medium enterprises in Nigeria’s agricultural sector which employs the largest number of workers and generates a significant share of GDP in the country. It is also intended that the study will throw more light on the effects of the ACGSF on agricultural production output and seek ways by which the operation of the scheme in enhancing access to finance will create an opportunity to increase the level of entrepreneurial capabilities of the agricultural sector in Nigeria.

1.2 Statement of Problem

One of the major challenges facing many developing economies in Africa is devising appropriate development strategies that will address the financial service requirements of small and medium entrepreneurs who constitute about 70 percent of the populace. The Nigerian government views this segment of the population as very important for the realization of its development efforts and over the years has come up with various policies aimed at achieving this objective (Olaitan, 2006). Some of these include; a commercial bill financing scheme, regional commodity boards, an export and financing and rediscount facility, the Nigerian Agricultural Cooperative and Rural Development Bank, Community Banks, Peoples Bank, The Agricultural Credit Guarantee Scheme Fund (ACGSF) amongst others. Nigeria’s agriculture is faced with a major problem of inadequate funding by the government budget and the private sector, and about 65% of Nigeria’s economically active population lack access to formal financial services (CBN, 2007). This has led to various efforts by government at all levels to address the issue. There is need to put in place an effective financing approach in the agricultural sector which can help achieve increased productivity, growth and sustainability. Adequate credit delivery to the agricultural sector of a developing economy like Nigeria could have positive effects on the Gross Domestic Product (GDP) growth, and as well improve the economy. The ACGSF is aimed at solving one of the most important challenges facing the sector, i.e. increasing the level of bank credit to the SMEs in the agricultural sector. It is vital to mention that since the inception of the scheme, the objectives on which it was founded seemed hardly to be realized. Previous studies conducted indicate that the Nigerian farmers who are mostly SMEs have not fared better in the area of access to agricultural credit. This could be as a result of decline in agricultural production as well as other sectors of the economy. In addition to this, the agricultural system in Nigeria is still largely of the traditional and primitive type which could result from lack of funds to procure modern farm technological inputs. Olowu (2011) notes that, several financial institutions exist in Nigeria which can adequately provide the financial needs of farmers. More so, the risk perception faced by banks to lend to farmers who cannot provide adequate security in form of collateral for such loans has been eliminated by the credit guarantees of ACGSF. However, studies by Olomola (1989), Ojo (1998), Manyong, et. al., Olaitan (2006) and Olowu (2011) concurred that inadequate finance still remains a major problem of agriculture in Nigeria both by private and government financial institutions. The above pertinent situation calls for the need for an enquiry into the functions of the ACGSF in providing finance to SMEs in Nigeria’s agricultural sector with a view to increasing productivity, the nation’s Gross Domestic Product, GDP and ultimately delivering its intended objectives. An evaluation of the impact of ACGSF in financing agricultural production is very essential in emphasizing the need for continuous credit finance policies in agricultural sector. Against this background, one begins to wonder, has the credit finance provided by the ACGSF been effective in enhancing agricultural productivity of the Nigerian farmers and/ or what level of impact has the ACGSF made on the nation’s Gross Domestic Production (GDP)? All these form the problem of this study.

1.3 Aim and Objectives of the Study

For the purpose of this study, emphasis was laid on only one aspect of the Nigerian government’s lending programme, which is the Agricultural Credit Guarantee Scheme Fund, (ACGSF). The objective is to evaluate the impact of ACGSF credit finance on agricultural production in Nigeria. The specific objectives of the study are therefore; i. To determine the impact of credit from Agricultural Credit Guarantee Scheme on agricultural production in Nigeria. ii. To evaluate the extent to which ACGSF has impacted the output of the crop subsector of the agricultural sector in Nigeria. iii. To evaluate the extent to which ACGSF has impacted the output of the livestock subsector of the agricultural sector in Nigeria. iv. To evaluate the extent to which ACGSF has impacted the output of the forestry subsector of the agricultural sector in Nigeria. v. To evaluate the extent to which ACGSF has impacted the output of the fishery subsector of the agricultural sector in Nigeria. vi. To articulate the policy implications of findings and to recommend possible intervention that could help in improving the scheme’s effectiveness.

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