An empirical investigation of the impact of bank lending on agricultural output in Nigeria: A vector autoregressive (VAR) approach

Before the discovery of oil in 1956, agriculture was the mainstay of the Nigerian economy as it accounted for more than 70% of the country’s gross domestic product. It served as a major source of employment, a key foreign exchange earner for the nation, and the provider of raw materials to industries. By the 1970s, oil had replaced agriculture as the country’s primary export. As crop exports declined, the nation became a net importer of basic food items. This change resulted in a decline of the agriculture sector’s contribution to gross domestic product (GDP). One of the basic challenges now facing the agricultural sector in Nigeria is access to finances by farmers due to inadequate funding. This study examines the impact of bank lending on agricultural output in Nigeria. The study applied a VAR (Vector Autoregressive) approach over the period 1981-2013 with the use of time series data sourced from the Central Bank of Nigeria (CBN) Statistical Bulletin. The variables used in the study are agricultural output (AGO), commercial loan to agriculture (CLA), and money supply (M2). The methodology adopted to test the impact of bank lending on agricultural output in Nigeria is the impulse response function and the variance decomposition of the VAR. The empirical findings of the VAR result show that there is no cointegration among the variables (AGO, CLA, and M2). The results also indicate that both CLA and M2 positively affect agricultural output in Nigeria, but the effect of CLA as shown by the variance decomposition is very low. Hence, it is pertinent for the government and monetary authorities to design favorable policies and create an enabling environment that will encourage banks to make more funds available to the agricultural sector; this will impact positively by increasing the level of agricultural output in the country thus contributing more to economic growth.