How low credit, budgetary allocations hampers output in agric sector

Deposit money banks, microfinance banks and other players in the financial industry have different ways of influencing economic growth. This is because one of the fundamental roles of financial intermediaries such as the aforementioned institutions is to determine the amount of credit to the economy and distribute such resources to economic agents that can best utilise them.

As the main source of credit to the private sector, the banking sector has the mechanism to mobilise financial resources for productive investment needed for the realisation of the desirable economic growth path, and this implies that an efficient banking system makes extensive contribution to a nation’s economic growth through credit to the private sector.

According to the National Bureau of Statistics (NBS), the total banks’ credit to private sector trended downward by 2.34 per cent to N15.74 trillion in the fourth quarter of 2017 from N16.12 trillion in fourth quarter of 2016, which could be attributed to the economic recession witnessed in the country in 2016.

Meanwhile, the amount of credit that is allocated to different sectors shows the extent of opportunities and risks in those sectors as evaluated by players in the financial sectors. In addition, the sectoral credit distribution is also an indication of the structure financial sector’s players had on ground to reclaim their loans and advances.

Industry and the services sectors, for instance, accounted for the highest proportion of credit when expressed as a percentage of banks’ credit to the private sector. In the last quarter of 2017, both sectors accounted for 96.64 per cent in Q4, 2017 compared with 96.74 per cent of the private sector credit in the last quarter of 2016.

The agricultural sector was allocated 3.26 per cent and 3.36 per cent of the credit to the private sector in the fourth quarters of 2016 and 2017 respectively. On a quarterly average, the credit allocated to agriculture was 3.27 per cent and 3.29 per cent of the total credits to private sector in 2016 and 2017 respectively.

While industry got 37.27 per cent of the total credits in 2016, it increased to 39.40 per cent in 2017.  In 2016, the services sector received 59.46 per cent of credit allocated by the banking sector to the private sector and that shrank to 57.32 per cent in 2017.

The essence of the write-up is to establish a nexus between credit to the private sector, which is the engine of growth of any economy and the growth of the economy, measured by the gross domestic product (GDP). The GDP grew at 6.99 per cent from N29.17 trillion in the last quarter of 2016 to N31.21 trillion in similar period in 2017.

An analysis of the contributions of these sectors to the GDP showed that, although, the agricultural sector received the lowest credit allocations from banks, the sector contributed more to the GDP than the industrial sector.  In Q4, 2016, the contribution of the primary sector (Agriculture) to GDP was about 25.60 per cent, which increased to 26.18 per cent in the last quarter of 2017.

On the contrary, the contributions of the industrial sector, comprising mining &quarrying, manufacturing, oil & gas, power and energy, to the GDP rose from 19.98 in the fourth quarter of 2016 to 20.38 per cent in the same period in 2017.  The contribution of services to GDP was the highest, as the sector contributed 53.45 per cent in Q4, 2017. Notwithstanding, the contribution was higher at 54.42 per cent in Q4, 2016.

An analysis done by BusinessDay Research and Intelligence Unit (BRIU) reveals that the contribution of the industry sector to GDP is low relatively to others and this may be due to a number of factors.

Prominent among these constraints is the lack of infrastructural facilities, which hinder industrial productivity in the country. Also, since the country depends heavily on foreign technologies and technical know-how, this leads to the neglect of the domestic factor endowments. Apart from that, the volatility of foreign exchange, unavailability of raw materials and intermediate inputs are other factors causing the unimpressive performance of the industrial sector.

Taiwo Ojapinwa, a senior lecturer in the Department of Economics at the University of Lagos opined that even though agriculture is contributing more to the economy than industry, productivity per labour in the agric sector compared with productivity per labour in industry is not significant considering the fact that almost 70 per cent of the labour force in Nigeria is involved in agribusiness.

He further said that the sector is receiving little attention from the banking sector in respect of credit facilities because most agricultural firms cannot provide collaterals to back up their loans while their payback is usually long.

The agric sector is not only deprived of adequate credit from banks, but also reasonable budgetary allocations from the government. Out of the total budgetary allocation of N7.441 trillion and N8.612 trillion in 2017 and 2018, the sector received about 1.39 per cent and 1.38 per cent in the respective years. A sector with a key multiplier impact shouldn’t have been neglected in this manner.

The huge disproportionate credit to agriculture than industry and services is because revenue generated from agriculture is relatively lower and it is generally known that banks lend against cash revenue. There are more risks involved in giving credits to agricultural sector as there is no guarantee of the market prices of their products and the sector is highly fragmented.

The ratio of private sector credit to GDP, which has become an increasingly popular benchmark of the sustainable levels of credit, shows that in Q4, 2017, the banking sector credit to private sector reached 50.44 per cent of the country’s nominal GDP, against 55.25 per cent in Q4, 2016.

Ayo Akinwunmi, head, research department at FSDH Merchant Bank, posited that loans to the agricultural sector are highly risky and that is one of the major reasons they are being allocated the lowest portion of credit and the government must focus on de-risking the sector in order to boost access to adequate credit. The sector basically requires restructuring to be able to contribute to the economy.

The private sector is essentially important in driving growth, creating jobs, generating wealth and increasing government revenue through taxation. The provision of private sector credit to key economic sectors of the economy holds great potential to promoting sectoral economic growth. Therefore, policies that ensure the deepening of the financial sector whilst reducing the cost of credit should be enacted. Strategies with the capability of enhancing the productivity and consequently growth of key sectors of economy should be put in place.


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