ABSTRACT
This study examined the effect of bank credits on private domestic investment in Nigeria for the period 1980 – 2019. The objectives of the study are to; examine the impact of bank credits on private domestic investment in Nigeria. Determine whether there are structural breaks on bank credits and private domestic investment existing in Nigeria during the period of the study and ascertain the shock impact of fluctuation in bank credits on private domestic investment growth in Nigeria from 1980 – 2019. Secondary time series data were used to carry out the empirical analysis. The study employed Vector Error Correction Model (VECM), Chow test, impulse response analysis in VAR model, Augmented Dickey Fuller (ADF) and Philips-Perron (PP) tests, co-integration test and Granger Causality approach. With the above econometric and statistic techniques conducted, it was observed that bank credit to private sector do have significant impact on private domestic investment in Nigeria. There is significant structural breaks on bank credit and private domestic investment existing in Nigeria during the period of the study. Fluctuations in bank credits does not significantly affect shock to private domestic investment growth in Nigeria during the period of study 1980 – 2019. The results revealed a bi-directional and directional nature of causality relationship between the variables in the model. These empirical results do exhibit evidence of instability from the results estimated which implies the presence of structural breaks that occurred during this period of 1990 – 2000. One per cent increase in credit to private sector (CPS), interest rate (INTR) and public investment (PUI) in the long run will lead to (7%, 4% and 16%) increase in private domestic investment (PDI) respectively in Nigeria during the periods of the study. Meanwhile, one per cent increase in inflation rate (IFR) and exchange rate (EXCR) in the long run will lead to (9% and 5%) decrease on private domestic investment (PDI) respectively in Nigeria during the periods of the study. Based on these findings, the study recommended: direct manipulation of interest rates other than money supply should be a better monetary policy tool to impact on the real sectors private domestic investment (PDI) of the economy. More emphasis should be placed on the use of interest rate, inflation rate and exchange rate since it can significantly influence investment in Nigeria. The country should learn how to develop credit policy with an average and attractive interest rate that will encourage investors to borrow money and as well give access to lenders (banks) to get their borrowed money back as at when due. The Nigerian government should create an enabling environment by ensuring security for the growth of the economy because no economy can grow her investment in the presence of insecurity. This gives room for instability and frustration in investment and economic growth.
TABLE
OF CONTENTS
Title Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Table of Contents vi
List of Tables vii
Abstract viii
CHAPTER 1: INTRODUCTION
1.1 Background
to the Study 1
1.2 Statement
of the Problem 11
1.3 Objectives
of the Study 14
1.4 Research
Questions 14
1.5 Research
Hypotheses 15
1.6 Significance
of the Study 15
1.7 Scope
of the Study 16
1.8 Limitations
of the Study 17
CHAPTER 2: REVIEW OF RELATED LITERATURE
2.1 Conceptual
Review 18
2.1.1 Bank credits 18
2.1.2 Concept of
private domestic investment 21
2.1.3 Bank credits
and private domestic investment 23
2.1.4 Determinants
of private investment 25
2.1.5 Determinants
of private investment in developing countries 36
2.1.6 Efficiency
gains 44
2.1.7 Types of
bank credits 55
2.1.8 Importance
of bank credit 58
2.1.9 Bank credit
analysis 59
2.1.10 Criteria
for choosing a bank for credit 64
2.1.11 Bank credit
policies and procedures 67
2.1.12 Bank
consolidation program of 2004 68
2.1.13 Financial
intermediation roles of deposit money banks 70
2.1.14 Banks as
delegated monitors 72
2.1.15 Banks as liquidity providers 76
2.1.16 Bank credit and economic growth 78
2.2
Theoretical Literature Review 80
2.2.1
Theories of credit market 80
2.2.1.1 Neo-classical 80
2.2.1.2 Credit rationing theory 81
2.2.1.3 Neo-classical theory of credit market 82
2.1.1.4 Theory of financial intermediation 83
2.2.2 Theories of investment 83
2.2.2.1 Investment multiplier theory 83
2.2.2.2 The Principle of acceleration
theory 84
2.2.2.3 The financial theory of
investment 85
2.2.2.4 Jorgenson's neoclassical
theory of investment 86
2.2.2.5 Schumpeterian development
theory 87
2.2.2.6 Tobin's q theory of investment 90
2.2.2.7 Financial regression
hypothesis 91
2.3 Empirical Literature Review 93
2.4 Summary of
Empirical Review 126
2.5 Identified Gap
in Empirical Literature 140
CHAPTER 3: METHODOLOGY
3.1 Research
Design 142
3.2 Theoretical
Framework 142
3.3 Model
Specification 145
3.3.1 A priori
expectation 147
3.4 Estimation
Procedure 148
3.4.1 Unit root
test 148
3.4.2 Serial
correlation test 149
3.4.3
Impulse response analysis in VAR models with near unit roots
identified by long-run restrictions 149
3.4.4
Co-integration test 150
3.4.5 Granger
causality test 150
3.4.6 The Chow
test estimation procedures 151
3.4.7 Stability
test 152
3.5 Sources of
Data 152
3.6 Description of
Variables 153
CHAPTER 4: DATA PRESENTATION AND ANALYSIS
4.1 Pre-Estimation
Test Results 158
4.1.1 Unit root
test analysis 158
4.1.2
Co-integration test 159
4.2 Post
Estimation Test Results 161
4.3 Discussion of
Results 166
4.6 Evaluation of
Research Hypotheses 180
CHAPTER 5: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1 Summary of
Findings 184
5.2 Conclusions 186
5.3 Policy
Recommendations 187
5.4 Contribution
to Knowledge 188
5.5 Suggestion for
Further Studies 189
References 190
Appendices 202
LIST OF TABLES
e
4.1 Unit root test 158
4.2 Co integration
test 160
4.3 Vector error
correction estimates 161
4.4 VEC residual
serial correlation LM tests 170
4.5 VEC residual
heteroscedasticity tests 171
4.6 Ramsey reset test of post diagnostic test 171
4.7 Pairwise granger
causality tests 172
4.8 Chow Test
Results showing three sub periods 174
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The nature and stability of domestic
investment have attracted enormous debate in economic literature, particularly
in advanced market economies. The preponderance of studies on this subject
includes Uremadu (2006), Adegbite & Owulabi (2007); Raphael (2020) where
they argued that although foreign direct investment (FDI) is beneficial to host
countries by speeding up the process of economic growth and development, the
multiplier effect of domestic investment is greater than that of FDI. In other
words, developing countries should depend greatly on domestic investment rather
than foreign direct investment (FDI). This is because, borrowing from outside
is not a proper strategy for growth and development since it does not only have
adverse effect on the balance of payment as these loans will be serviced in the
future with the use of domestic resources, but it equally carries a foreign
exchange risk such as devaluation of their currency which is one of the
specific conditions for borrowing from International Monetary Fund (IMF).
Hence, domestic investment through capital formation is not just paramount but
serves as a prerequisite for the geometric acceleration of growth and
development of every economy as it provides domestic resources that can be used
to fund the investment effort of the economy.
Investment is categorized into public and
private sector investments. Private sector investment refers to investment by
individuals, people or firms as opposed to the government as an entity which is
referred to as public sector investment. Economic theories have shown that some
critical factors influencing private sector investment are those of bank credit
to the private sector, the cost of capital, the rate of return, public sector
investment, exchange rate etc. Among these critical determinants of private
sector investment is private sector credit. Private sector credit refers to
financial resources provided by deposit taking corporations, except central
banks, to the private sector. These financial resources made available to the
private sector are regulated by credit policies. Credit policies involve
imposition of quantitative ceiling on the overall and/or sectoral distribution
of banking system loans and advances by monetary authorities (Anyanwu, 1993).
The broad objectives of credit policies in
Nigeria, over the years, have been the enhancement of availability, reduction
of cost and access of credit to the private sector as well as the stimulation
of growth in the productive sectors of the economy. The study by Okafor (2011),
established that credit delivery constitutes the primary platform through which
banks promote the social and economic endeavours of customers. Credit policies
therefore, constitute key instruments relied upon by monetary authorities to
promote national economic growth and balanced development. Accordingly, bank credit is the most
important source of investment financing among private enterprises in
developing countries, Nigeria inclusive. The volume of and access to bank
credit available for private sector borrowers have direct influence on private
investment activity. The portion of total credit in the economy allocated to
private sector was 66.7 percent in 1980, 59.7 percent in 1981 and 52.1 percent
in 1982. Afterward credit to private sector of the Nigerian economy shrunk. It
reduced to 28.9 percent in 1986 and 34.0 percent in 1993, but increased to 81.8
percent in 2016, 90.2 percent in 2017 before decreasing to 82.3 percent in 2018.
The availability of bank credit for private investment and access to available
bank credit by private sector operators in Nigeria had been greatly constrained
by credit to the government and high interest rate prevalence during
market-based monetary policy regime (Selçuk and Alper, 2020; Ekpo, 2016). In
Nigeria and elsewhere, the aggregate bank credit is always allocated to both
private sector and public sector. However, studies have shown that credit to
the private sector has more significant effect on economic activities than
credit to the public sector (George & Nneka, 2019; Idih Oluwagbemigun &
Adewole, 2020).
Private
domestic investment involves an increase in human, social, technological and
physical capital of a nation, brought about by the residents of the country. It
is often referred to as gross private investment. The private domestic
investment includes all expenditure made by private citizens of a nation for
the acquisition of capital goods and services. It is usually measured cither as
aggregates, growth rates or as ratios to the gross private domestic product
(lyoha, 1998 cited in Nwokoye, Metu & Kalu, 2015). Meanwhile, private
domestic investment has been described as one of the major contributors to
economic growth in any economy. This is because, through investment, new
technology can be adopted, employment opportunities can be created, incomes can
grow and living conditions of the people can improve and eventually, leading to
eradication of poverty (Naftaly, 2017). Consequently, the need to re-focus
development policies towards private domestic investment in developing
countries has been of major emphasis of many analysts of recent, to help boost
economic growth and reduce poverty. This means that private investment is a
crucial pre- requisite for economic growth as it allows entrepreneurs to set
economic activities in motion by bringing resources together to produce goods
and services.
In
most Sub-Saharan African nations, the major concern for private investment is
that the level of private domestic investment is so low, compared to developed
nations. This was attributed to a variety of factors; and one of the critical
factors include the relatively small size of the formal private sector,
especially in modernization and industrialization, and the difficulty in
gaining access to funds for investment. Another factor is that many Sub-Saharan
African countries are characterized by high levels of economic and political
instabilities, which discourage both private domestic and foreign investments,
then exchange rate, interest rate, exchange rateand publc investment (Naftaly,
2017). Unarguably, improved financial environment is one of the greatest
drivers of economic development. It stimulates the level of investment and
income as well as enhances manufacturing sector capacity utilization of a
nation. The ultimate effect is poverty reduction, increased per capita income,
and by extension, economic growth (Amanu, 2020; George & Nneka, 2019; Vincent,
Oluchukwu, Nnaemeka & Francis, 2014). The importance of private domestic
investment for economic development of nations recently cannot be
over-emphasized. This is primarily because of the adaptability, flexibility and
regenerative tendencies of the private sector to propel economic development.
The
private sector is conceived as the bedrock of industrialization based on its
expected impact and potential contributions towards a diversified production
base cannot be overemphasised. Its accelerative effect tends to gear towards
achieving macroeconomic objectives such as sustainable economic growth, full
employment, equitable income distribution, balance of payment equilibrium,
development of local technology as well as diffusion of management skills and
stimulation of indigenous entrepreneurship (Vincent, Oluchukwu, Nnaemeka &
Francis, 2014). Roles of private sector becomes very strong since most
developing nations, especially in Africa have for several decades tried public
sector driven economic development with little or no success. It was found that
the return on the huge public investment was negative as a result of monumental
waste, gross inefficiency in operations, mismanagement of resources and worst
of all they became conduit pipes for personal enrichment of government
officials (Onodugo, 2013).
The attempt to strengthen the private sector
by the government led to the implementation of financial liberalization policy
in 1986 as part of the Structural Adjustment Programme (SAP). The Structural
Adjustment Programme (SAP) was an economic reform programme aimed at
restructuring the economy and averting economic collapse. The key objectives of
SAP were to lay the basis for sustaining noninflationary or minimal
inflationary growth and improve the efficiency of the public and private sectors.
Therefore, the financial liberalization (reform) policy entails the provision
of an appropriate legal and regulatory framework for effective private
participation in the economy.
The country also adopted a medium-term
strategy, called the National Economic Empowerment and Development Strategy
(NEEDS) in 2004, as a response to the numerous challenges facing the nation.
Equally, the government approved vision 20-2020 for transforming the country
into a modern economy, among the 20 leading countries in the world by 2020 (The
Times of Nigeria 2008). The objective of the vision 20-2020 is in line with
various studies and projections by Goldman Sachs that Nigeria will be the 20th
and 12th largest economy of the World by 2025 and 2050 respectively ahead of
Italy, Canada, Korea, among others(Skyscraper City 2006), and Africa biggest
economy by 2050 (Business Economy, 2008). The vision 2020 is to be realized
through the growth of the private sector.
However, as Solanke (2007) argued, the state
of the private sector, its characteristics, disposition and resilience would
determine in substantial respects how far the lofty objectives of repositioning
Nigeria’s economy can be achieved. Accordingly, the Nigeria government has also
adopted the public private partnership (PPP) strategy. PPP schemes are designed
to lead to dramatic improvement in quality, availability and cost-effectiveness
of services. These include Service Contracts; Management Contracts; Leases;
Build, Operate and Transfer; and Concessions. As a compliment to the various
programmes of the government to accelerate the rate of growth of the economy,
it has been suggested that the level of dependence on the oil sector should be
reduced, while concentration should be on the manufacturing, energy, transport
and agriculture (Papka, Innocent & Enam, 2019; Hale, 2002). This means that
efficient allocation of funds to the real sector has high tendency of improving
the economy.
In the mid-80s, the direct control of credit
allocation and regulated interest rate structure were used to channel banks
credit to the real sectors of the economy by that arrangement, banks were
statutorily required to allocate most of the loan-able funds to the key sectors
like agriculture, manufacturing, solid minerals, housing at low rate of
interest which would result in high investments and outputs and invariably
growth of the domestic economy, however, the weakness that characterized the
policy in September 1986 to eliminate inefficiency and enhance effective
mobilization and utilization of resources which ultimately would translate to a
sound and stable banking system( Agu, 2015). The Central Bank of Nigeria, after
the deregulation of the financial sector, has made concerted effort via several
bank reforms which focused on effective surveillance and prudential guidelines,
more stringent procedure for licensing and increaseing the capitalization base
among others to ensure a sound and stable banking system capable of providing
effective intermediation that would stimulate growth, encourage medium and
long-term lending to the real sectors capable of diversifying the productive base
of the economy (Iwedi & Igbanibo 2015).
It would be recalled that the bank crisis in
Nigeria in the 1990s was associated with sharp increases in interest rate,
large currency depreciation and devaluation and lasting decline in the supply
of credit. It is worth knowing that access to bank credit allows firms to
increase production, output and efficiency and in turn increases the
profitability of banks through interest earned and improves economic growth
(Adeniyi 2015). Abubakar and Gani, (2013) also agreed that the real sector in
Nigeria still face difficulty in the accessibility of financial resources
especially from the commercial banks that hold about 90 percent of the total
financial sector assets and high rate of interest rate causing many firms to avoid
bank-borrowing. Other formidable financing challenges include concentration of
bank credit to the oil and gas, communication and general commerce sectors to
the disadvantage of the core real sectors such as agriculture and manufacturing
sectors. Also, banks are more disposed to finance government financial need as
almost 50 percent of their assets are tied up by government debt.
In
Nigeria, private domestic investment is heavily skwed towards Micro, small and
medium scale enterprises (SMES) which constitute the most dynamic and
heterogeneous sub-sector in the Nigerian industrial sector (Nwokoye, Metu &
Kalu, 2015). Between 1990 and 1995, SMES accounted for an average of 84 percent
of the new jobs created in the country. Estimating the gross domestic product
of the sector is very hard because of its scale and widespread informality.
Policies formulated towards promoting SMES in the Nigerian economy majorly have
three fronts including microfinance, changes in regulatory framework and
business development services. Others include infrastructural development and
childcare programmes for female workers (Nwokoye, Metu & Kalu, 2015).
Generally,
SMES are acknowledged as the bedrock of industrial development of any country
(Nnanna, 2003). Despite the numerous commodities produced by SMES, they provide
veritable means of large scale employment as they are usually labour intensive.
Similarly, they provide training grounds for entrepreneurs even as they
generally rely more on the use of local inputs. Moreover, if well managed, SMES
can turn into giant corporations of tomorrow. These contributions explain why
commercial banks, governments and international agencies mobilize efforts
towards the realization of sustainable industrial growth and the creation of
mass employment through the rapid growth and development of SMES. According to
Nwabude (2014), small and medium enterprises (SMES) provide an effective means
of stimulating indigenous entrepreneurship, enhancing greater employment
opportunities per unit of capital invested and aiding the growth of local
technology. Adelaja (2005) opined that SMES account for more than 60 percent of
all regional entrepreneurship and up to 50 percent of paid employment.
Furthermore, Okonjo-Iweala (2005) strongly argued that SMES is an essential
driver of economic growth and prosperity in a modern economy. It empowers the
populace and provides greater possibilities for the use of available local raw
materials and this goes a long way in encouraging vertical and horizontal
linkages. The study further argued that from the World Bank to the tiny local
government organizations, development interventionists have embraced domestic
enterprises as the key to unlocking the potentials of stagnant economies and
improving the livelihood of the poor.
However,
in the less developed countries, Nigeria inclusive, a low level entrepreneurial
ability is a strong factor responsible for the low rate of capital formation in
the countries (Jhingan, 2003; and Metu & Nwokoye. 2014). They noted that
less developed countries are characterized by small size of the market, lack of
private property and deficiency in capital and funds. Firms in developing
nations rely mostly on internal sources and informal credit markets for funds
because their money and capital markets are not well developed. Consequently,
long- term investments are discouraged. The role of capital in the growth of an
economy cannot be over emphasized, since it facilitates the mobilization of the
needed inputs for production of goods and services. Most entrepreneurs
recognize that a well-organized money market is crucial for mobilizing domestic
capital for short and medium-term investments. Lending is one of the most
important services that banks render to their customers. It refers to a
situation where banks grant credit facilities, loans and advances to
individuals, business organizations as well as the government in order to
facilitate investment and development activities (Nwokoye, Metu & Kalu,
2015). Lending, which may be on short, medium or long-term basis, is also a
means of aiding the growth in aggregate output of a nation, thereby
contributing toward the economic development of a country.
Banks
are the formal financial intermediary machinery in any market-oriented economy.
They are the most important savings, mobilization and financial
resource-allocation institutions. Consequently, these roles make them an
important phenomenon in economic growth and development because in performing
their roles, banks have the potential, scope and prospects for allocating
scarce financial resources to productive investments. Banks are not the only
financial intermediaries in the economy but their widespread liabilities are
the greatest and the most recognized.
In
accepting demand and time deposits, banks differ from other financial
intermediaries; in that, their liabilities are readily acceptable and are
liquid since demand deposits are a medium of exchange and are in essence money.
More so, the time deposits are very close substitute for currency and demand deposit.
By comparison, the liabilities of non-bank financial intermediaries are not
directly a medium of exchange nor are they perfect substitutes for it. This
special role of the liabilities of the banks in the economy makes them a rather
distinctive type of financial intermediary and makes a study of their behavior
and reaction to monetary policy very essential.
Financial
intermediation defined as the institution responsible for the mobilization of
excess funds from the surplus-spending unit and channeling of funds to the
economic activities of the deficit spending unit is an index for measuring the
extent to which the financial sector of an economy is developed and alive to
its responsibilities. A well-functioning banking system, by raising the
spectrum of sources of finance for domestic entrepreneurs, play a critical role
in allowing the investors source for long-term credit facilities knowing well
that the greater the technological-knowledge gap between current practices and
new technologies, the greater the need for external finance (Nwokoye, Metu
& Kalu, 2015). In most cases, external finance is restricted to domestic
sources. Thus, low level of financial intermediation limits potential
entrepreneurs, especially if the arrival of a new technology brings with it the
potential to tap not just domestic markets but export markets. Specifically, to
take advantage of the new knowledge, domestic firms need to re-organize their
structure, buy new machines and hire new managers and skilled labour. Although
some domestic firms are strong enough to finance new requirements with internal
funding, it is essential to understand that the spillovers for the host economy
may critically depend on the extent of the development of domestic financial
markets. This is because a well-developed financial intermediation enhances
technological innovation, capital accumulation, and economic growth because
well-functioning financial markets, by lowering costs of conducting
transactions, ensure that capital is allocated to projects that yield the
highest returns.
The
extent of financial intermediation in Nigeria may be a decisive factor in
determining the extent to which domestic investors have access to finance with
which to begin and sustain their business enterprises; and also the extent to
which these investors can access new techniques and methods of production. This
is the crux of the matter and informs the basis for the present research as it
sets out to determine if commercial bank credits have influence on private
domestic investment in Nigeria.
1.2 STATEMENT OF THE PROBLEM
Nigeria
being a bank based economy relies heavily on bank ceredit for its financing
needs, especially on domestic investment. Schumpeterian argue that innovation
financed by bank credit expansion creates investment. Since investment is
assumed to be financed by the creation of bank credit, it increases incomes,
prices and helps to create a cumulative expansion throughout the economy
(Akinleye, Ojenike & Afolabi, 2012).
Indeed,
in most African countries, Nigeria in particular, limited access to credit facilities
has been the bane of private sectors. It has been for the most part, the major
cause of widespread poverty and unemployment in developing countries. The
vision of granting loans and advances that are focused on the priority sectors
of the economy with the aim of stimulating entrepreneurship in the preferred
sectors has been widely canvassed in many literature. In the opinion of Ojo
(1992), direct bank credit has been in use in developing economies, especially
where money and capital markets were less developed. In Nigeria, bank credits
are often short-term loans which must be secured with collateral if the
borrower has poor credit history. Bank credits have three main variants
including loans, advances and overdrafts.
However,
banks and government policies regarding credit administration to private sector
in Nigeria are fraught with skepticism, inconsistencies and ineffectiveness.
For instance, private domestic investment sector in Nigeria consists majorly of
micro, small and medium sized businesses, which made the sector to lack basic
requirements to raise commercial loans. Most of them lack basic business
financial plan and documentation as well as the required collateral to attract
loan and advances from commercial banks. Their credit history is even more
doubtful, as they are known to divert credits to less economic yielding
ventures. It is against this backdrop that commercial banks prefer to pay
penalty imposed on it by the Central Bank of Nigeria, for not channeling loans
to such sectors than to risk toxic loans to this very risky sector (Vincent,
Oluchukwu, Nnaemeka & Francis, 2014).
Thus,
banking business in Nigeria is quite risky and a lot of fear is being exercised
in establishing bank branches in both rural and urban areas of the country, so
as to exercise their ultimate purpose of existence; which is their ability to
lend confidently and sufficiently; and to undertake risky but economically
beneficial development oriented investments which rather depends crucially on
profits being earned by depositors. Justifiably, about 65-70 percent of banks
total revenue is derived from investment being loans granted by banks to their
customers (James & Henry, 2015) It should be pointed out here, that those
profitable business of banks are associated with several risks which may either
be as a result of exogenous or endogenous factors including lack of adequate
capital in banks, increasing rate of bad debts, inherent and sprawling fraud
rate in the economy, meeting the security requirements by financial institutions
and fluctuation of interest rates due to unstable level of inflation (James
& Henry, 2015). Incidentally, private sector makes the desired effect in an
economy when sustainable development is realized in areas of operational
efficiency, volume of businesses and increased number of investors. These
indices are only attainable when the financial sector provides desired credit
facilities. Where the desired financial support is lacking, the operators in
the private sector tend to only operate below optimum level. The resultant
effect is stagnation in the economy as the public sector lacks the muscle to
shoulder the burden alone.
Consequently,
sustainable growth, full employment, equitable distribution of income, balance
of payments equilibrium, development of local technology, diffusion of
management skills and stimulation of indigenous entrepreneurship appear to have
been eroded by limited access to credit facilities. In addition, the small and
medium scale enterprises operations are characterized by inefficiency and
ineffectiveness, resulting from banks and government policies inconsistencies
and ineffectiveness in Nigeria.
Given
the perceived importance of commercial bank credit in lubricating the engine of
the economy through domestic investment in Nigeria, the government and Central
Bank of Nigeria have evolved various measures that has increased the amount of
credit to the private sector. For instance, credit to the private sector
increased by 29.6% in 1988, 11.3% in 1998, a drastic increase of 88.6% in 2008
and 1.96% in 2018. Putting in perspective the level of growth in commercial
bank credit with the level of domestic investment in the corresponding period
revealed that domestic investment increased by 6.68% in 1988, 1.39% in 1998, a
contraction of -2.6% in 2008 and an increase of 9.73% in 2018 (Central Bank of
Nigeria, CBN 2019). This unfavourable scenario has become a source of worry to
the policy makers and researchers
Furthermore, previous empirical works
adopting different methodologies presented divergent views on the subject. The
mixedbag of results has indicated that no consensus has been reached by
different researchers on the impact of commercial bank credit on private
domestic investment. For instance the works of Thuy, Anh and Diem (2020) in
Vietnam, George and Nneka (2019) in Nigeria, Josephine, Emmanuel and Kofi
(2018) in Ghana Emmanuel, Abiola and Anthony (2015) in Nigeria and Ghura and
Goodwin (2010) in Asia, Sub-Saharan Africa and Latin America supported the view
that commercial bank credit impacted private domestic investment. While the
studies of Raphael (2020) in the Gambia, Chimere, Simplice, Kingsley and
Patrick (2020) in West Africa Adelegan (2018) in Nigeria and Eric and Dawud
(2016) in Ghana oppose the view. This lack of constitutes a serious problem. It is against this background, that the study
investigated the impact of bank credits on private domestic investment in the
Nigeria's economy.
1.3 OBJECTIVES OF THE STUDY
The
broad objective of this study is to investigate the impact of commercial bank
credits on private domestic investment in Nigeria. Specifically, the research
focused on the following objectives. They are to:
i. Examine the impact of commercial bank
credits on private domestic investment in Nigeria.
ii. Determine whether there are structural
break effects on commercial bank credits and private domestic investment existing
in Nigeria during the period of the study.
.iii. Ascertain the shock impact of fluctuation
in commercial bank credits on private domestic investment growth in Nigeria.
1.4 RESEARCH
QUESTIONS
The
research focused on the following research questions, they include:
i. Do commercial bank credits have any
impact on private domestic investment in Nigeria?
ii. Is there any structural breaks effects
on commercial bank credits and private domestic investment existing in Nigeria
during the period of the study?
iii. Does fluctuation in commercial bank
credits significantly impact shock to private domestic investment growth in
Nigeria?
1.5 RESEARCH HYPOTHESES
This
study is guided by the following null hypotheses:
i. Commercial bank credits do not have
significant impact on private domestic investment in Nigeria.
ii. There is no structural breaks effects
on commercial bank credits and private domestic investment existing in Nigeria
during the period of the study?
iii. Fluctuation in commercial bank credits
does not significantly impact shock to private domestic investment growth in
Nigeria.
1.6 SIGNIFICANCE
OF THE STUDY
The
significance of this study is classified into the theoretical significance and
practical significance. The theoretical significance deals with how the
research will contribute to the pool of existing knowledge in the chosen field
of study.
Practically,
this research will be significant to commercial banks, monetary authorities,
investors, policymakers, intellectuals, researchers and investment think-tanks
whose responsibilities are to prescribe and suggest policy options to the
government on the effects of bank credits to private sectors on macroeconomic
objectives of nations by providing insightful knowledge and empirical evidence
to guide actions. More so, the research will be beneficial to federal
government itself as it will help to show the effectiveness of bank credits to
private sector and its impact on macroeconomic stability in the economy. The
study will also act as a guide and provide insight for future studies on the
topic under consideration to the academia that may deem it necessary to improve
their knowledge on this topic. Furthermore, the research will also educate the
general public on various policies of the monetary authorities regarding its
policy framework to improve bank credits to private sector in stimulating
private domestic investment in the economy. It will also form an interesting
reading material to those who may particularly want to expand their knowledge
on the issue of bank credits and private domestic investment in Nigeria.
1.7 SCOPE OF THE STUDY
This
research investigates the impact of bank credits on private domestic investment
in Nigeria for the period 1980-2019. The choice of the period was predicated on
the fact that it accommodated various important stage in the economy. This
period marked a new era of monetary policy implementation in Nigeria with
market friendly approach, deregulation of the financial sector, the SAP and
post post-SAP eras in Nigeria. The SAP era, marked the period of financial
sector reform in which the economy experienced financial liberalization policy.
On the other hand, the post-SAP era further deepened the degree of financial
liberalization in the country with various banking reforms, such as the bank
liberalization era and bank consolidation era. Also, the availability of
consistent data over the period under review influenced the choice of this
period. The choice of the scope is also
made as a condition for the test of second order econometric test, in which it
was acknowledged that a minimum of 40 years is a required number for the
application of econometric packages in any time series study.
The
key variable employed in the investigation is bank credits to private sector;
basically to investigate its effect on private domestic investment in Nigeria.
Other variables which the study is delimited to include; public investment,
exchange rate and interest rate.
1.8 LIMITATION OF THE STUDY
Conducting
any reaserch work without limitations may not be possible and this research is
no exception. The research work encountered and experienced some limitations
such as measurement errors and choice of estimation methodology. On measurement
error, given that the data was coming from a reliable source, relied on the
general acceptance of the data. The choice of estimation methodology was
carefully selected after due consideration of the limitations of other
techniques, which was also able to reduce and overcome the effect of
measurement errors, making the result more reliable and robust.
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