The impact of banking sector reforms and credit supply on agricultural sector: Evidence from Nigeria

Nigerian government embarked on various banking reforms over a period of three decades with the aim of enhancing competitiveness in financial services, promoting investment, and ensuring efficiency in resource allocation to the real sector and other sectors of the Nigerian economy. One sector of the Nigerian economy that has remained of paramount interest to the government is the agricultural sector. Since the country attained political independence in 1960, the agricultural sector has remained the mainstay of the Nigerian economy contribution significant to GDP and employment generation. Despite the increased role of the agricultural sector in providing the much-needed inputs and raw materials needed for improved productivity in other sectors of the economy, not much has been done in the area of tracking and evaluating the success of discretional credit allocation and commercial bank lending to the agricultural sector. This study examined the impact of the increased discretionary allocation of credit to the private sector due to the banking sector reforms and the various directed funding programs by the regulatory authority on agricultural output in Nigeria over the period of 1986-2013. The study used time series data sourced from World Bank and the Central Bank of Nigeria Statistical Bulletin. The method applied to test the impact of banking sector reforms and agricultural sector credit supply on agricultural sector output in Nigeria was the impulse response functions and the variance decomposition of Vector Error Correction Model (VECM). Impulse response function explains the reaction of an endogenous variable to one of the innovations while the variance decomposition gives information on the relative importance of each random innovation. The results revealed that both the banking sector reforms and credit supply to agricultural sector have positively affected agricultural output in Nigeria. However, the impact of agricultural credit supply on agricultural output proved to be very weak and insignificant. This study suggests that the discretionary allocation of credit particularly by the monetary authorities or the banking sector, may not necessarily achieve the goal of massive growth in the agricultural sector. There is an urgent need for the Federal Government to embark on institutional and infrastructural reform to remove the various credit supply bottlenecks and make the financing of the agricultural sector more productive.