Social Sciences

The Impact of Interest Rate Deregulation on Agricultural Production in Nigeria (1995-2009)

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This work focuses on the impact of interest rate deregulation on agricultural production in Nigeria. To this effect, this study, seeks to find out the extent to which interest rate deregulation affects agricultural productivity, the hindering factors to attaining the policy objective of interest rate deregulation as regards to agricultural output. The secondary source of data was used as a means of data collection. The secondary data was gathered by consulting some books, journals related to the subject matter. Base on the review on the documented source and analysis of the results from the regression, it was concluded that the regression coefficients are statistically significant our alternative hypothesis is therefore accepted. It means interest rate, non – oil import and non – export have direct relationship with agricultural production in Nigeria. This study therefore recommended that monetary policy should formulated appropriately to determine an interest rate level that will break the double edge effect of interest rate on savers and on local investors, proper monitoring and control of the macro-economic indicator such as inflation, income level, level of investment, etc.

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Chapter One

1.1     Background to the study

The financial sector of Nigeria economy was highly regulated. During the period government controlled interest rates the Central Bank (CBN) had the sole responsibility of controlling the financial sector of the economy. It is not surprising that all over the world both developed and developing economies. The agricultural sector is the most heavily regulated sectors. This is due to the nature of its activities as provision of raw materials for industries and for food production, which could serve as source of foreign exchange (CBN, 2005).

According to Aluko (1992), deregulation was supported by the banking sector. In its economic news letter of 2007, the Union Bank of Nigeria PLC which 60% of its share is owned by the federal government commented that it is unfortunate that the government still believed in controlling the interest rate instead of allowing it to be moved by the market forces during the period. In another perception, the structure of agriculture namely the period of agricultural discrimination and Structural Adjustment Programme.

According to Abel (2002), the financial market was a perceptible encouragement of consumption and trading activities. Giving the existing rate of inflation of 12% real interest rate on loan was almost negative and this makes it cheaper to borrow than to save, Hence people have easy access to fund for consumption purpose (CBN, 2002). Interest rates for saving deposit were too low (9.5%) to increase saving habit among Nigerians to accumulate enough deposits to finance the industrial project under the new environment of the Structural Adjustment Programme (SAP).

The Central Bank (CBN) Circular No. 21 July 31, 1997 effective from 1st August 1997 abolished all forms of control of interest rates of demand and supply. This development in the rate of interest rate was coming against the back drop of the 2007 federal government budget in which the minimum interest payable on bank savings deposits was to be 25% and the banks were almost to negotiate higher rates with their customers bearing in mind the forces of demand and supply of funds.

According to Aluko (1992) the deregulation of interest rate policy win the contemporary Nigeria as argued by many is fulfillment of bankers rates in the country, such review ought to reflect the prevailing demand and supply of capital. In line with SAP in which the interest rate deregulation rests on the decisions to let off administratively determine interest rate is quite welcome and timely to some extent. This is seen as a break away from rigidities of the past and also a logical extension of what has been done to the Foreign Exchange Market (FOREX) under SFEM and now FEM.

Logically, interest rate deregulation is seen as rational approach in the search for efficiency in resource allocation and mobilization in a situation where the economy has been in the hands of few individual who make law that regulate the entire economy.

1.2     Statement of the problem

This study aims at determining the impacts the deregulation of interest rate on agricultural sectoral productivity in Nigeria.

Although, the deregulation of interest rate is working to bring agriculture to it’s highest and it effort was complemented by the introduction of some, programmes such as Structural Adjustment Programme, Nigeria Agricultural Co – operative Bank (NACB), the establishment of micro – financial institutions to make credit available for farmers at affordable interest rate and other financial intermediaries channeled towards the achievement of the overall objectives of SAP etc.

However, in spite the intense effort by government and some non governmental organization to enhance agricultural productivity through manipulation of interest rate, agriculture has suffered from low productivity. The level of interest rate has positive and negative impact to agricultural productivity by either encouraging farmers to take loan or discouraging them from taking loans for agricultural investment purposes. The lower level of agricultural productivity has allowed for the persistence of poverty and hunger, child mortality, maternal mortality, diseases and negative environmental practice has become a recurring phenomenon in Nigeria’s economy.

1.3     Objectives of the study

The main objective of this study is to assess the impact of interest rate deregulation on agricultural production in Nigeria economy. The specific goals of this study are:

  1. To reexamine the necessary recommendations for the policy makers use towards achieving agricultural production in Nigeria.
  2. Identification of the problems hindering the deregulation policy the realization of its set objectives.
  3. It will help the infant industries to grow when the interest rate on agriculture is reduced.
  4. It reduced the rate of dependency on interest rate before taking into agriculture.
  5. It brings about self employment for the citizens of the economy.

1.4     Hypothesis

The hypothesis is formulated as follows:

H ╪ 0 null hypothesis

H1 = 0 alternative hypothesis.

H0 ╪ 0 null hypothesis. Interest rate deregulation has no significant relationship on agricultural production in Nigeria economy.

H1 = 0 alternative hypothesis. Interest rate deregulation has a significant relationship on agricultural production in Nigeria.

1.5     Significance of the study

This study is to critically assess the impact of interest rate deregulation on agricultural productivity in Nigeria.

The findings and recommendations of this study will be of great contribution to academic works as it is a contribution to the body of knowledge on interest rate deregulation, its effect on agricultural productivity, the financial system and the economy at large, it would also studious research on areas not covered by this study.

The study will also help financial analysts, financial consultants, financial institutions, bankers and professionals alike to improve in their analytical, consulting and operational strategies to boost their clients’ performance in determination of interest rate suitable for encouraging agricultural production.

This research will also be useful to the government in enhancing its regulatory and supervisory roles as well as formulation of policies to ensure that the financial system is well reformed to ensure stable interest rate that will encourage increase in agricultural output to enhance the growth of the economy.

1.6     Scope of the study

The study will basically look at analysis of the subject by scholars, Professionals and review some of the reforms policies by the government. For the purpose of the study, attention will be focused in the impact of interest rate deregulation on agricultural production in Nigeria economy between the periods 1995 to 2009.

1.7     Organization of the study

This study is made up of five chapters, chapter one is the introduction, chapter two comprises the literature review and theoretical framework. Chapter three is the research methodology. Chapter four is the data presentation and analysis and chapter five is the summary, conclusion and recommendations of the study.

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