Effect of financial technology on agribusiness development in transition economy

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Effect of FINTECH on agribusiness development in transition economy

CHAPTER ONE/ INTRODUCTION

 

Background to the study

In Nigeria, the government through the Central Bank of Nigeria has tried to achieve a financial inclusion as an integral part for promoting sustainable and inclusive growth by formulating policies that are expected to encourage country wide access to financial services at affordable cost particularly to the less privilege and vulnerable group Olatunji, (2015). The intent of these policies and mechanisms is to reduce the number of persons excluded from organized financial system by getting more people involved in the organized financial system. These consistent attempts to sustain and deepen financial inclusion have included the deployment of technological innovations in the financial sector

Technological advancements have evolved the social and economic landscape, evident from the emergence of industries like fintech. By properly leveraging modern technology’s financial and communication applications, agriculture, the oldest industry of human civilization, can experience rapid growth and sustainability. Again, with the financial technology accessible to Nigeria’s farmers, how has the employment of these technical tools affected agricultural productivity? On this note this research intends to measure the influence of financial technology on the productivity of small holder farmers.

The Nigerian economy was a predominantly agrarian one at independence in 1960, with agriculture contributing 63.8% to GDP, but the share of agriculture in output has dropped over the years. Agriculture contributed 41.2% to GDP in 1970, but this had dropped to 20.6% in 1980. Although it rose to 37% in 1990, it had fallen to 27% in 2000. New figures based on the rebased GDP show that agriculture’s contribution to GDP had fallen further to 23.8% in 2010, 20.2% in 2014 and 21.42% in 2018 (Central Bank of Nigeria, 2019). The primary trigger of the decline in agricultural output was the discovery of oil. The country has moved from being self-sufficient in food production to become an importer of food. In 1981, the value of Nigeria’s imported food and live animals was N1.8 billion, but this had surged phenomenally to N1.4 trillion by 2018 (Central Bank of Nigeria, 2019).

The 2006 population census put Nigeria’s population at 140,003,542, which makes it the country with the largest population in Africa. Nigeria occupies a land area of 923,768 kilometres, thus providing ample land for agricultural production. However, less than 50% of the cultivable agricultural land is under cultivation by small-holder farmers who use outdated techniques, thereby resulting in low yield (Manyong et al., 2005). The low yield of agricultural production is compounded by a variety of other problems such as poor access to modern inputs and credit, poor infrastructure, inadequate access to markets, land and environmental degradation and inadequate research and extension services (Manyong et al., 2005). These factors, combined with the diminishing income levels of agricultural households, have subsequently exacerbated poverty.

Low agricultural productivity has been identified as an important contributing factor to rural poverty in Nigeria (McKinsey Global Institute, 2014). Nigerian agriculture is characterised by low yields which reflect the dominance of small-holder farmers who lack knowledge about agricultural best practices and are unable to invest in seeds and fertiliser (McKinsey Global Institute, 2014, p. 17). Yield and fertiliser use in Nigerian agriculture are far below the global benchmarks in places such as China, Indonesia, Brazil, India and Ghana, and this is largely as a result of farmers’ lack of access to finance (McKinsey Global Institute, 2014, p. 17).

Although the share of agriculture in Nigeria’s GDP has fallen significantly, agriculture still remains an important source of livelihood for many Nigerians. Agriculture is the largest employer of labour, with 30.5% of employed persons engaged in agriculture (National Bureau of Statistics, 2010). There is an even greater percentage of young people engaged in agriculture, as 44% of youths are employed in agriculture (National Bureau of Statistics, 2013). Thus, agriculture features prominently in the lives of Nigerians, and there is hardly any family that does not have someone involved in agricultural activities.

However, despite agriculture’s prominence in economic activities and employment, the sector still suffers from a chronic inability to obtain finance from financial institutions. In the second quarter of 2019, agriculture received only 4.2% of commercial bank lending, while manufacturing received 15.3%, oil and gas received 22% and services broadly received 36.5% (National Bureau of Statistics, 2019). This suggests that agriculture is largely excluded from formal finance. This is supported by recent statistics which show that farmers are the largest group of financially excluded persons in Nigeria, as 37.6% of farmers are financially excluded (EFINA, 2017). Thus, agriculture is largely excluded from formal finance in Nigeria.

These facts highlight the supply shortfall in finance to agriculture in Nigeria which has contributed to the underinvestment in this sector recorded over the years. Availability of finance would go a long way in improving output and productivity in agriculture. Estimates suggest that availability of finance for African farmers could lead to an increase of over 300% of agricultural output, from $280 billion to $880 billion by 2030 (McKinsey Global Institute, 2010). Nigerian agriculture is dominated by small-holder farmers, who contribute over 75% to agricultural output. These small-holder farmers are characterised by simple techniques of production and bush fallow system of cultivation, thereby leading to low yields and minimal investment in seeds and fertiliser (McKinsey Global Institute, 2014; Aregheore, 2009). Availability of finance would go a long way in improving yields and output of Nigerian agriculture.

While considerable research has been conducted to examine how finance affects broad macroeconomic aggregates, little is known about the effects of finance at the household and individual level. Prior to this time, research has made use of variables measuring financial development, and there has been limited empirical research using variables measuring financial inclusion. This has largely been due to difficulties in measuring financial inclusion across countries and over time, while data are readily available on financial depth (CGAP, 2012). However, results from studies that make use of financial development measures cannot be generalised to cover financial inclusion. This is because, for example, high credit in a financial system could be skewed in favour of the wealthiest individuals and largest firms in the society, thus leading to a situation where the popular measures of financial development are capturing financial inequality, and not financial inclusion (GFDR, 2014). The implication of this is that financial depth and financial inclusion are distinct dimensions of financial development, and financial systems can become deep without delivering access for all (Demirguc-Kunt and Klapper, 2012). This has indeed been borne out by the data where use of formal accounts by the poorest group in the population is not correlated to private credit (Demirguc-Kunt and Klapper, 2012). Thus, it is important to explicitly account for financial inclusion when examining the effects of finance on individuals and households.

This study improves on existing research and offers new insights into the effects of financial inclusion on the economic activities of agricultural households in Nigeria. Since a large proportion of the Nigerian population is engaged in agriculture and are rural dwellers; and since there is a higher incidence of poverty in rural areas, an examination of agricultural households will be particularly insightful in understanding poverty in Nigeria. Also, rather than using broad macroeconomic measures of financial development, we will use new data that explicitly measure access to and use of financial services by households, thus providing a proper measure of financial inclusion. This study makes use of the Living Standards Measurement Study–Integrated Surveys on Agriculture (LSMS-ISA), which provides data on households, to examine how financial inclusion has affected agricultural productivity of households in Nigeria. This will provide important insight concerning whether financial inclusion affects agricultural productivity in Nigeria, and the results will prove useful in designing policies aimed at low agricultural productivity and ultimately poverty in Nigeria.

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