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Department Of Economics
Kogi State University, Anyigba.
Email: tondecobros@yahoo.com
08065499711, 08070539895
A strong agricultural sector would enable a country like Nigeria to meet
the challenges of the recent economic crises ravaging the whole world by
providing food for the teeming population, generate employment, foreign
exchange earnings and raw materials for industries. The paper therefore,
empirically analyse the effects of Credit Supply on Agricultural Output in
Nigeria. This study uses the time series data that span a period of
23years (1986-2008). The study specifies a Multiple regression Loglinear
Model (base on the theoretical framework of Cobb-Douglas production
function) with four explanatory variables. That is bank loans and
advances, government capital expenditure on agriculture, agricultural
credit guarantee scheme and foreign investment on agriculture. The
study makes use of the OLS method to test the significance of the
explanatory variables on output of agricultural sector in Nigeria. The
result revealed that except the foreign direct investment on agriculture,
other variables expressed significant influence on agricultural output in
Nigeria. The researcher concludes that, there is need to enhance and
monitor credit supplied for agricultural purpose to effectively attain the
expected growth in the sector.

Agricultural sector in Nigeria was the most dominant sector before the
early 1970s. Until the early 1970s, it was the major development drive of the
economy employing over 80% of the active population. (Anyanwu et’al,
1997). It also contributed to over 60% of the nation’s Gross Domestic Product
(GDP) and provided nearly 100% of the economy’s food requirement; raw
materials to industries and the country’s export earnings among others.
Prior to early 1970s there were significant growth in this sector, but
during the oil boom era when crude oil became a major export earner,
agriculture began to falter as its contribution to GDP began to decline from
over 60% in early 1970 to 30% and 40% (Aigbokhan, 2001) and less than

26% between 2000 and 2007(CBN, 2007). These indicate that the discovery
of oil as the fastest means of revenue brought about devastating neglect of
the agricultural sector.
Due to the aforementioned problems, over a decade, most government
policies have been directed towards accelerating economic development with
the ultimate aim of transforming the economy into an industrialized one, as
well as raising the welfare of the people. One of the sectors expected to act
as a catalyst towards the realization of this goal is the agricultural sector. This
is measured by increasing the output of agricultural sector to meet the
demand of the people and the industries.
In order to increase the output of agricultural sector, government over
the years has been given priority to agriculture in its budget, directing financial
institution to make credit available to farmers. Agricultural credit is expected
to play a vital role in agricultural development (Duong and Izumida, 2002).
Agricultural Credit has over the years been identified as a major input in the
development of the agricultural sector in Nigeria (CBN, 2005). The decline in
the contribution of the sector to the Nigerian economy has been attributed to
the lack of a formal national credit policy and paucity of credit institution,
which can assist farmers in the purchase of farm inputs (Rahji and Fakayode,
2009). The provision of these input by the sector is important because credit
or loan-able fund helps in determining access to all the needed inputs to
facilitate farming. Access to agricultural credit has been severely constrained
in developing countries. This is because of the imperfection and costly
information problems encountered in the financial markets (Swinnen and
Gow, 1999). Such problems are common and particularly important in
agriculture (Stiglitz, 1993).
To ameliorate the prevailing problem of credit supply to agricultural
sector, government of Nigeria came up with the Agricultural Credit Guarantee
Scheme (ACGS) in 1978, with the objective of providing guarantees in

respect of loans granted for agricultural purposes by any bank in accordance
with the provisions of the Act and with the aim of increasing the level of bank
credit to the agricultural sector (Anyanwu et’al 1997). In addition, were the
gentle appeals to make loans and advances available to agricultural sector by
commercial banks.
As the major objective of this research, we shall empirically estimate
how the various credit supplied by the government and other financial
institutions have contributed to the output growth of agricultural sector in
While this section introduces the subject, section 2 and 3 are for
literature review and methodology of research respectively. Section 4
estimates the model for this study, hypotheses are tested and regression
results are analyzed. Section 5 concludes the work and provides policy
recommendation that will boast agricultural development in Nigeria.

Literature review
Theoretical Literature
Ekpebu (2006), reviews that the performance of the agricultural sector
has been unsatisfying over the years due to insufficient funding or credit
facilities, inadequate infrastructural facilities, low technology base, high cost
of farm input and inadequate extension services. Trzeciak-Daveal (2003), in
his own view opined that agriculture like all other sectors of the economy
needs credit for its development. Experience was drawn from Organization for
Economic Cooperation and Development (OECD) countries. He
demonstrated that in a competitive financial environment, profitable
agriculture can obtain the credit it needs, also suggested that government
have a vital role in channeling fund to agricultural sector through its policy
making. Radolphe (2005), bringing together loan commitment theories and
credit rationing theories, within a framework of asymmetric information

between lenders and borrowers and under costly termination of lending
arrangements, commitment may explain the accumulation of non performing
loans by banks. In this theory, two additional results follow: That banks favour
borrowers with well known production functions and long-term credit history
and that interest rate may be large if significant market imperfection prevail. In
agricultural household models, farm credit is not only necessitated by the
limitation of self-finance and government expenditure, but also by uncertainty
pertaining to the level of farm inputs and outputs and the time lag between
inputs and outputs (Sighh et’al 1980). CBN (2003) identified access to
agricultural credit as factor responsible for the sustainable growth in the
agricultural sector. Also, government has a vital role in the growth of
agricultural sector in Nigeria (Obiechina, 2007).
Ekechi (1977) supported the view that raising the volume of financial
savings will increase the volume of total deposit of the banking sector which
will further lead to increase in the supply of credit to other sectors of the
economy (agricultural sector inclusive).
The theoretical basis of this study is anchored on the 2-Gap models or
the Harrod-Domar model and the Cobb-Douglas production function.
According to Harrod-Domar model, there exists a domestic saving gap and
foreign exchange gap in developing countries. The domestic savings gap
exist when the domestic savings capacity falls bellow that necessary to
permit the level of investment required to achieve a particular rate of growth in
the economy. While available inputs are adequate. In this situation foreign
financial resources cover this gap or make up the deficit and permit
achievement of the expected growth rate. By implication, the foreign
exchange gap exists if with adequate domestic savings, the flow of import is
not sufficient because there is inadequate foreign exchange to finance it.
Again, foreign capital breaks the import bottleneck and permits the target
growth rate to be realized.

The Cobb-Douglas (CD) production function is also a substantial guidance for
specifying supply–side agricultural potential output which is primarily
determined by measurable input factor (Q=AkαLß). This theory is to a large
extent consistent with the theory of supply of production function that
underlies specification of the supply-side of agricultural output. The Cobb-
Douglas (CD) production function was derived from the observation by Cobb (1928)
and Douglas (1948) that over the long-run, the relative share of National Output
earned by Labour (L) and Capital (K) tends to be constant. The CD function further
assumes constant returns to scale and unitary elasticity of substitution. The CD
production is generally given by the equation:
Q = AKβLα 1
Where: Q = Total Output
K = Capital
L = Labour
A Efficiency Factor
β and α = Substitution Parameter
β = (1- α) and β + α = 1

Linear homogeneity of CD Production Function

If we increase each factor in equation (1) by a constant λ, we have
Q = A (λK)β (λL)α 2

Q = Aλβ + α KβLα

Q = λAKβLα ( since β + α =1) 3

Therefore, λ = 1

From equation (3), we observed that the CD production is linearly homogeneous in

Labour and Capital. This implies that, if we increase all inputs by a constant multiple
(λ), output will increase by that same constant. Thus the Cobb-Douglas function is to
be characterised by constant return to scale.

Slope and Convexity of Isoquant
dK = ‫־‬β/L = - β . K 4
dL α/K α L
Strict Convexity is established by the expression
dK2 = ‫־‬β . 1 LdK – K > 0 5
dL2 α L2 dL

Therefore, Isoquant is Strictly Convex

Average and Marginal Physical Product

From equation (1)

APPL = Q = AKβLα = AKβLα – 1 6

APPk = Q = AKβLα = AKβ -1Lα 7

MPPL = ∂Q = α AKβLα – 1 8
MPPK = ∂Q = βAKβ - 1Lα 9
Output Elasticity of Inputs
Output Elasticity of Capital
MPPK = βAKβ - 1Lα = β 10
APPk AKβ -1Lα

MPPL = α AKβLα – 1 = α 11
APPL AKβLα – 1
Elasticity of Substitution
Assuming that firms behave rationally (minimizing cost) then,
∂Q ∂Q
∂L w ∂K r 12

Where w = wage rate and r = unit cost of Capital

∂K = w
∂L r 13

From equation (4) above, α = ∂K . L 14

β ∂L K

Consequently, K = β . ∂K 15
L α ∂L
Combining equation (13) and (14), we have
K = β .w
L α r
This implies that a given percentage change in ∂K will lead to an equal percentage in
Input ratios.

However, due to the peculiarity of the objectives of the study, the

specification of the production function shall incorporate variables such as;
commercial banks loans and advances to agricultural sector, government
capital expenditure on agriculture, agricultural credit guarantee scheme and
foreign direct investment on agriculture. Most of the variables are not as
specified by Harrod-Domar and Cobb-Douglas but are regarded as capital
and fund for investment that strongly influence the domestic output growth.

Empirical Literature
Otu and Balogun (1991) in their study of credit policies and agricultural
development in Nigeria tested two hypotheses that credit policies influence to
a large extent the behaviour of both constitutional lenders and borrowers.
That is, credit policies can influence favourably the supply and demand for
agricultural credit. Secondly, that a positive relationship exists between
agricultural credit and a host of other variables such as output and use of
modern inputs. Empirically they concluded that credit policies play very little
role in influencing both lenders and borrowers behaviour. Credit subsidies are
also major sources of production disincentive. They further contend that there
is need to re-examine the overall objective of agricultural credit policies
largely because it will be erroneous to infer that finance plays little role in
agricultural development of the economy. Raji and Fakayode (2009) tried to
identify the determinants influencing commercial banks decision to ration
credit in South-Western Nigeria. Data analyzed were from agricultural credit
transaction of banks in Nigeria. Evidence from the multinomial model
estimated shows that borrowers are heterogeneous.
Akpan (1999) uses time series data of 33 years, and the OLS method of
regression to analyze the contribution of government expenditures to the
growth process in Nigeria. He concluded that capital expenditure on
agriculture though not statistically significant but influence positively on
Oguamanam (1996) did an empirical work on commercial bank credit to
agriculture sector in Nigeria. From the analysis, commercial bank loans and
advances has positive relationship with the level of agricultural output, federal
government capital expenditure contributed positively to the growth of
agricultural output in Nigeria. Similar work was carried out by Nnanna (2001),
on bank lending behaviour and output growth with implication on monetary
policy in Nigeria. He revealed a significant relationship between banks lending
behaviour and output growth. He further suggested that in the medium-term,
the decline in output has negative influence on bank credit to private sector.
Also Isijola (2000) revealed a significant relationship between credit supply
and agricultural output in Nigeria. isijola also identified commercial banks’
loans and advances, Agricultural Credit Guaranteed Scheme as the
determinant of agricultural credit supply in Nigeria.
Shanggen et’al (1998) in their empirical analysis on government
spending, growth and poverty, supported the view that government spending
enhance the growth in agricultural productivity. His managerial analysis also
shows that additional government expenditures on agricultural research and
extension have the largest impact on agricultural productivity growth.
Conclusively, this study deviates a little bit from the studies reviewed by
segregating activities thereby looking at the effect of credit supply on
agricultural output in Nigeria.

Methodology of Research
Secondary data on credit supply and agricultural outputs are employed
for this study. The data are obtained from Central Bank of Nigeria (CBN)
This study makes use of analytical tools which consist of the use of
ordinary least square (OLS) regression.
The research adopts the Harrod-Domar model but in a modified form
based on the theoretical assertion for this study.

Specification of Model and Definition of Variables

Q = α BL 1GE 2AC 3FI 4℮µ…………………………….1
β β β β

Applying the logarithm transformation:

InQ = lnα +β 1lnBL+β 2lnGE+β 3lnAC+β 4lnFI+µ…………..2
Note lne =1, therefore, eµ = µ and ln =logarithmic
Q = Output of major Agricultural Commodities (staples and other crops)
BL = Bank’s loan and advances to Agricultural sector
GE = Government Capital Expenditure on Agricultural Sector
AC = Agricultural Credit Guarantee Scheme Fund
FI = Foreign Direct Investment on Agriculture
α = Intercept term.
β 1, β 2, β 3 and β 4 = Elasticity of Output (Q) or the Coefficients of the
µ = error term.
The sum of the estimated coefficients (β 1+β 2+β 3+β 4) gives the
homogeneity of the functions. If the sum is = 1, we have a constant return to
scale in agricultural output, If >1 we have an increasing return to scale and

<1, we have a decreasing return to scale in output. On the a priori, β 1>0,
β 2>0, β 3>0 and β 4 >0.
Q = lnQ
α = lnα
BL =lnBL
GE =lnGE
AC =lnAC
FI = lnFI
Plug these into equation 2.
Q* = α *+β 1BL*+β 2GE*+β 3AC*+β 4FI*+µ ……………3
Therefore, the OLS can be applied to the linearised model (eqn 3) to
obtain the estimate of the coefficients. The (*) indicates natural logarithms,
Hypothesis to be tested are:
β 1 =0, credit supply has significantly influenced the output of agriculture in
β 1 ≠ 0, Credit supply has not significantly influenced the output of agricultural
credit in Nigeria.
Where: β i = 1-4.
Estimation of Model and Analysis of Results.
Estimation of Model:
Variables Coefficient

β Std. Durbin-
Error t Change Statistics Watson
Constant 0.355 2.981 0.119 R Square= 0.866
BL 0.501 0.262 1.910 Adjusted R2=0.837
GE 0.365 0.230 1.584 F = 29.140
AC 0.683 0.289 2.363 df1 = 4
FI -0.357 0.360 -1.034 df2 = 18 2.065
n = 23
Except the Foreign Direct Investment on agriculture, other variables
conformed to the economic a priori expectation. A 100 percent point increase
in bank loans, government capital expenditure and the agricultural credit
guarantee scheme lead to about 36%, 50% and 36% increase in agricultural
output as influenced by each variable respectively. And a 100 percent point
increase in foreign investment in agricultural leads to 35% fall in agricultural
output in Nigeria.
Comparing the calculated t-value of each variable and the theoretical t-
value of 1.730, other variables are significant at 90 percent level of significant
except the foreign direct investment that is not significant at that level of
significance. With the four variables employed, we can explain 87 percent of
the systematic variation in agricultural output in Nigeria. This result is quite
good. The remaining 13 percent may be explained by other variables that
could influence agricultural output though, not specified in the model. Such
variables could include fertilizer, pesticide, rainfall, soil fertility, availability of
farmland and the demand for agricultural products. The F-value is highly
significant at 95% level of significance. The result also suggests the absence
of autocorrelation and multicollineariity in the model. However, this satisfies
the desirable properties of unbiasedness, efficiency and consistency in the
use of OLS.

Conclusions and Recommendations

An increase in credit supply through the approval of commercial banks’ loans
and advances, government capital expenditure on agriculture and agricultural
credit guarantee scheme fund lead to increase in the output of agricultural
commodities in Nigeria. Also, over the period, foreign direct investment on
agriculture has not been significant in increasing the output of the sector. The
study also concluded that the sector experienced a slight increasing return to
scale over the years. Despite this, the rate of increase is not enough to meet
the challenges facing the agricultural sector vis-à-vis , food insecurity over the

The study confirmed the use of credit supplied to agricultural sector in Nigeria
as a panacea for the growth in the sector. The government of Nigeria should
see agriculture as the core of economic activities in terms of its employment
and income generation; inter linkages with other sectors of the economy.
Above all, is the supply of food to the teaming population.
As factor identified as the determinants of agricultural output, government
should make policies that will direct credit inflows through banks’ loans and
advances to the sector, good percentage of government budget should be
made available for agricultural activities. To encourage foreign investors to
the sector, government should make policies that can strengthen Public-
Private-Partnership in the sector and a conducive economic atmosphere for
their existence.
It is recommended that government should monitor credit meant for
agriculture purpose to facilitate the efficient utilization of the credit.
This study serves as baseline information to policy makers in the formulation
of policy measures on credit administration, allocation and provision in the
agricultural sector in Nigeria.


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Year Major Commercial Government Agricultural Foreign
Output Of Banks’ Loans Capital Credit Direct
Agricultural And Advances Expenditure Guarantee Investment
Commodities Scheme Fund In
(‘000 tones) N’Mill N’Mill N’Mill N’Mill
1986 9200.0 1830.3 892.5 68417.4 128.2
1987 9164.0 2427.1 365.1 102152.7 117.3
1988 9849.0 3066.7 595.7 118611.0 128.9
1989 10754.0 3470.5 981.5 129300.3 134.8
1990 11364.0 4221.4 1758.5 98493.4 334.7
1991 11892.0 5012.7 551.2 82107.4 382.8
1992 12227.0 6978.9 763.0 91953.0 386.4
1993 11456.0 10753.0 1820.0 80845.9 1214.9
1994 11448.0 17888.8 2800.1 91821.1 1208.5
1995 11270.0 25278.7 4691.7 163938.6 1209.0
1996 12891.0 33264.1 3882.8 243608.0 1209.0
1997 13042.0 27939.3 6247.4 244025.2 1209.0
1998 14302.0 27180.7 8876.6 217699.0 1209.0
1999 1476.0 118518.3 6912.6 246993.5 1209.0
2000 15230.0 146504.5 6761.7 357832.0 1209.0
2001 15367.0 200856.2 57879.0 810821.1 1209.0
2002 15645.0 227617.6 32364.4 1062391.8 1209.0
2003 16735.7 242185.7 8610.9 1894281.4 1209.0
2004 20389.6 261558.6 48047.8 3308704.3 1209.0
2005 17752.8 262005.5 7939.4 706969.0 1209.0
2006 18385.9 49393.4 15176.8 4265066.3 1209.0
2007 18505.9 82212.0 22618.7 4427868.9 1329.9
2008 18882.5 520311.0 29958.3 6721074.6 1397.2

Source: Central Bank of Nigeria Statistical Bulletin, 50years Special Anniversary Edition,
December, 2008.



Year Major Output Commercial Government Agricultural Foreign
Of Banks’ Loans Capital Credit Direct
Agricultural And Expenditure Guarantee Investment
Commoditie Advances Scheme Fund On
s Agricultural
N’Mill N’Mill N’Mill N’Mill
(‘000 tones)
198 9.127 7.512 6.794 11.133 4.854
6 9.123 7.795 5.900 11.534 4.765
198 9.105 8.028 6.390 11.684 4.859
7 9.283 8.152 6.889 11.770 4.904
198 9.338 8.348 7.472 11.498 5.813
8 9.384 8.520 6.312 11.316 5.948
198 9.411 8.851 6.637 11.429 5.957
9 9.346 9.283 7.507 11.300 7.102
199 9.346 9.742 7.937 11.428 7.097
0 9.330 10.138 8.454 12.007 7.098
199 9.464 10.412 8.264 12.403 7.098
1 9.476 10.238 8.740 12.405 7.098
199 9.568 10.210 9.091 12.291 7.098
2 7.297 11.683 8.841 12.417 7.098
199 9.631 11.895 8.819 12.788 7.098
3 9.640 12.210 10.966 13.606 7.098
199 9.658 12.335 10.385 13.876 7.098
4 9.725 12.397 9.061 14.454 7.098
199 9.923 12.474 10.780 15.012 7.098
5 9.784 12.476 8.980 13.469 7.098
199 9.819 10.808 9.628 15.266 7.098
6 9.826 11.317 10.027 15.303 7.193
199 9.846 13.162 10.308 14.334 7.242
Computed Logarithm*
Source: Central Bank of Nigeria Statistical Bulletin, 50years Special Anniversary Edition,
December, 2008.