ABSTRACT
This thesis investigated the effect of commercial banks' lending on the economy of Nigeria for the period 1986 to 2017. The study was necessitated by the recognition that bank loans to the private sector are a very important avenue to economic growth. In order to achieve the objectives of the study, seven hypotheses were proposed and data collected from the CBN statistical Bulletin (2018). Data collected include those on bank lending to agriculture, manufacturing, mining and quarrying, export, production, trade and commerce and services sectors.Data analysiswas conducted using Auto-Regressive Distributed Lag, Co-integration and Granger Causality methods of analysis. However, the data was first tested for unit root using ADF and Phillip Perron methods.The findings showed among other things that: commercial banks' lending to the manufacturing, production, trade and commerce and services all had positive impact on the economy. However none of the lot was statistically significant in their impact on the economy. Commercial banks' lending to agriculture, mining and quarrying and export sector(s) had negative impact on the economy. Based on the findings, it was concluded that: commercial Banks' loans to the manufacturing, mining and quarrying, production and services sector(s) is not enough to have the desired effect on the economy. It was also concluded that bank loans to the agriculture and export sector(s) affect the economy negatively. Based on the conclusions, it is recommended that: Regulators and policy makers should focus more attention on other sectors of the economy which has been proven to have the capacity to promote economic growth like agriculture, manufacturing and services and mining and quarrying.
TABLE OF CONTENTS
Title
Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Table
of Contents vi
List of
Tables viii
Abstract ix
CHAPTER 1: INTRODUCTION
1.1
Background
to the Study 1
1.2 Statement of the Problem 3
1.3 Objectives of the Study 6
1.4 Research Questions 6
1.5 Hypotheses 7
1.6 Significance of the Study 7
1.7 Scope of Study 8
1.8 Limitations of Study 8
CHAPTER 2: LITERATURE REVIEW
2.1 Conceptual Framework 10
2.1.1 Bank lending 10
2.1.2 Factors affecting bank lending 11
2.1.3 The Nigerian economy 13
2.1.4 The agriculture sector 15
2.1.5 The production/manufacturing sectors 18
2.1.6 The mining sector 19
2.1.7 The trade and commerce sector 22
2.1.8 The services sector 24
2.1.9 The export sector 25
2.2 Theoretical Framework 26
2.2.1 The classical theory 26
2.2.2 Liquidity preference theory 27
2.2.3 Loanable fund theory 28
2.2.4 Real bill theory 30
2.2.5 Shiftabilty theory 31
2.3 Review of Empirical Literature 32
2.3.1 Summary of empirical literature review 44
2.4 Gap in Previous Studies 48
CHAPTER 3: RESEARCH METHODOLOGY
3.1 Research Design 49
3.2 Area of Study 49
3.3 Sources of Data 49
3.4 Model Specification 49
3.5 Description of Variables 53
3.6 Methods of Data Analyses 55
CHAPTER 4: DATA PRESENTATION, ANALYSIS AND
DISCUSSION OF FINDINGS
4.1 Data Presentation 56
4.2 Data Analyses 61
4.3 Test of Hypothesis 70
4.4 Discussion of Findings 72
CHAPTER 5: SUMMARY OF FINDINGS,
CONCLUSIONS AND RECOMMENDATIONS
5.1 Summary of Findings 77
5.2 Conclusion 79
5.3 Recommendations 80
5.4 Contribution to Knowledge 80
References 83
Appendices 90
Research
Data 91
Data
Analyses and Results 93
LIST OF TABLES
Table
2.1 Summary
of empirical literature review 44
4.1 GDP
and commercial bank lending to the production,
trade
and commerce and services sectors of the economy. 56
4.2:
Descriptive statistics
forGDP,commercial banks’ lending to
the
production, trade and commerce and services sectors of
the
economy (before log transformation). 57
4.3:
Descriptive statistics
forGDP,commercial banks’ lending to
the
production, trade and commerce and services sectors of
the
economy (after log transformation). 58
4.4:GDP
and commercial bank lending to the agriculture,
manufacturing,
mining & quarrying and export sectors of
the
economy. 58
4.5: Descriptive statistics for GDP, commercial
banks’ lending
to the
agriculture, manufacturing, mining and quarrying and
export
sectors(before log transformation). 59
4.6: Descriptive statistics for GDP, commercial
banks’ lending
to the
agriculture, manufacturing, mining and quarrying and
export
sectors (after log transformation). 60
4.7:Summary
of Unit Roots Test Results using Augmented Dickey
Fuller
and Phillip Perron Methods 61
4.8:
Regression Results using the ARDL method for RGDP, loan to the
production,
trade and commerce and services sector of the economy 62
4.9:
ARDL Bounds test results summary
forRGDP, production,
trade
and commerce and services sectors of the economy 63
4.10: ARDL co-integrating and long run form results
for RGDP,
production,
trade and commerce and services sectors of the economy 63
4.11: Granger Causality results summary for RGDP,
loan to the
production,
trade and commerce and services sectors of the economy. 64
4.12:Summary
of Unit Roots test results using Augmented Dickey
Fuller
and Phillip Perron methods 65
4.13: Regression results using the ARDL method
for RGDP, loan to
agriculture,
manufacturing, mining and quarrying and export sectors. 66
4.14: ARDL Bounds test results summary for RGDP,
loan to
agriculture,
manufacturing, mining and quarrying and
export
sectors of the economy 67
4.15: ARDLCointegrating and long run form results
for RGDP,
loan to
the agriculture, manufacturing, mining and quarrying
and
export sectors of the economy. 68
4.16:
Granger Causality results summary for RGDP, loan to the
agriculture,
manufacturing, mining and quarrying and export
sectors
of the economy. 69
CHAPTER
1
INTRODUCTION
1.1 BACKGROUND
TO THE STUDY
The
economy to a large extent depends on investments to grow. It is however
recognized that the accumulation of the needed quantum of investment capital
that will sustainably drive economic growth is a problem faced by public and
private organizations alike. In order to generate the necessary capital for
investment, organizations look to other sources like banks for facilities.
However, banks as profit oriented organizations themselves will only provide
funds at a price. Hence, bank lending and the associated costs are very
important factors in stimulating the economy. The availability of bank
facilities can be critical to organizations, especially during the early stages
of growth or where the organization desires to expand its activities, recruit
more staff or invest on new product lines.
Without easy access to bank facilities, many firms
will likely decide to stop expanding their productive activities, lay off
staff, stop recruiting and in extreme cases, close down operations permanently.
The consequent reduction in disposable income of individuals reduces spending
and affects economic growth. Bank lending therefore provide firms the ability
to leverage and invest in order to grow capacity and hence boost economic
activities.
Ugoani (2013) asserted that banking activities have
continued to play a critical supporting role in the growth and development of
the economy, particularly through the loan facilities they grant to the
different productive sectors of the economy. These credits facilities are
expected to improve investments and impact positively on the economy.
Adeniyi (2006) asserted that the role of bank loans in
economic growth and development has been acknowledged as credits are obtained
by different economic agents in order to meet operating costs. Business
organizations obtain credit facilities to acquire equipment and machinery. To
farmers, credit facilitates the acquisition of seeds, fertilizers and construction
of necessary farm buildings. Similarly, governments at all levels often finance
both recurrent and capital expenditures using credits facilities. Also,
individuals take credit to pay for goods and services. Through these channels,
economic activities are made buoyant.
However, Essien and Akpan (2007) observed that lending
activities in Nigeria have over time suffered setbacks as a result of the fact
that banks in many cases do not have the ability to provide the quantum of
funds required to boost economic activities in the country. Further, the
failure of economic units who require loans to meet the necessary requirements
due to low earnings capacity and poor documentation also hamper the lending
activities of banks. The resultant effect is the diminution in investments and
corresponding low economic activities that is expected to drive growth in the
economy.
Bank lending to the economy has over the years
increased considerably. For example, bank lending to economic agents in 1986
was about N15.70 billion out of which the agricultural sector and manufacturing
sector received 40.16% of the total. By 1996, total bank loans to the economy
had grown by almost 980% to N169.44 billion. Again, by 2006, bank lending to
the economy had grown to N2.524 trillion a growth of about 1390% from the previous
balance ten years earlier. However this time, the share of agriculture and
manufacturing had fallen drastically to less than 20% of the total from 62.30%
in 1996. In 2016, total bank loan to the economy stood at N16.117 trillion a
growth of about 540% from 2006. Thus, we observe a decreasing rate of growth.
However, the share of the total to the agriculture sector witnessed some
marginal growth from the 2006 balance of almost 2% to 3.26% in 2016.
Another problem that exacerbates the inability of commercial
banks to provide loans to the economic units in the country involves the high
lending rates that banks charge their customers. For example, a cursory look at
the CBN statistical bulletin indicates that at a stage (1993) lending rates
were as high as 36% (See Appendix 1). The high lending rates discourage
borrowing especially for businesses that are in very competitive industries
with low returns, leading to closure of businesses, job losses, low productive
capacity and high import bills for such products.
Considering
the importance of commercial banks’ lending in stimulating the economy and the
attendant challenges, this thesis is intended to provide an in depth
investigation into how the lending activities of commercial banks affect the
performance of the economy.
1.2 STATEMENT
OF THE PROBLEM
Bank
lending is a very critical factor that considerably determines the direction of
economic growth, and considerable attention has been focused on investigating
how it interacts with the economy. In the literature regarding bank lending,
there are quite a number of studies that evaluated the relationships between
commercial bank lending activities and the economy. While some of these studies
focused on the effects of interest rate on the economy, others lay emphasis on
the effects of bank loans on economic growth.
Onoh
(2007) held that since investment plays a crucial role in the formation of
fixed capital formation and hence on the economy’s growth and development, it
becomes evident that commercial bank lending through apparent influence on
investment plays a developmental role that is an increase in lending is
hypothesized to invigorate investment activities which leads to increased fixed
capital formation and eventually to economic growth and development.
Oluitan
(2009) posited that bank lending is employed as a tool for the implementation
of monetary policies of governments which affects money supply and demand in
the economy. Furthermore, bank lending affects the pattern of production,
entrepreneurship activities and ultimately aggregate economic output and
productivity. Another important reason for the lending function of commercial
banks is that it is generally accepted that there is positive relationship
between commercial banks’ lending and economic growth (Aliyu & Yusuf, 2014).
Nwanyanwu
(2010) agreed with this position by stating that providing commercial bank
credit with adequate consideration for the growth potential in the economy is
one of the ways to create employment opportunities and by extension
contributing to economic growth of the country at large. This is made possible
because bank credit contribute to immensely to
increasing scale of production, expanding in productivity of business
enterprises, which results to growth and development in the economy. According
to Ademu (2006), bank credit helps to create and maintain a reasonable quantum
of business activity as it is utilized to establish and expand businesses and
to take advantage of economies of scale.
The
recurring theme in the above is that bank lending is an important factor
determining the direction of flow of economic activities. Thus, it should be
recognized that the flow could be in either direction. The volume of lending,
whether high or low can have negative effect on the economy. However, bank lending
can also be inimical to the economy. For example, excessive lending to economic
agents can lead to rising inflation and increased bad loans. Conversely, if
lending to economic agents were to be too low, investments and productivity may
slowdown leading to poor economic performance.
Considering
the importance of commercial banks’ lending to the economy, numerous empirical
studies have been done in the area (Mamman & Hashim, 2014; Akujuobi &
Nwezeaku, 2015; Nwanyanwu, 2010; Oluitan, 2009; Yakubu & Affoi, 2014;
Adeniyi, 2006). However, an obvious gap in literature can be observed in how
the subject matter is treated. For example, previous studies tend to pay little
attention to the sectoral allocation of banks loans to economic agents and how
such sector based bank lending affect the economy.
Furthermore,
much of the existing research on the topic appear not to be in agreement on the
nature of the relationship between banking lending to various sectors and how
it affects the economy. For example, Neelam (2014); Olowofeso, Adeleke and
Udoji (2015); Akinwale (2018) found a positive relationship between bank credit
to the private sector and economic growth. On the other hand, the findings of
Owolabi and Nasiru (2017); Emmanuel and Odum (2019); Modebe, ugwuegbe and
Ugwuoke (2014) point to a negative effect of bank lending on economic growth.
Thus, there is an obvious controversy on the nature of the relationship between
the variables.
In
recognition of the above mentioned issues in previous studies, will provide a
comprehensive insight on how bank lending to all relevant sectors affect the
economy by conducting an in depth investigation into how loan facilities to the
three major sector - Production, Trade and Commerce and Services as well as
some specific subsectors - Agriculture, Manufacturing, Mining and Quarrying,
and Export sectors of the economy affect the overall performance of the
economy. The thesis will also seek to resolve the controversy existing in
findings of previous research by employing robust analytical methods like
Auto-Regressive Distributed Lag, Co-Integration and Units root tests.
1.3 OBJECTIVES OF THE STUDY
The
major objective of this study is to evaluate the impact of commercial banks’ lending
on Nigeria’s Economy. More specifically, the study undertakes to:
i. determine
the extent to which bank lending to production sector affect Nigeria’s economy;
ii.
determine the impact of bank lending on
the trade and commerce sectors of the economy;
iii.
determine the impact of bank lending to
the services sector on Nigeria’s economy;
iv.
evaluate the extent to which bank lending
to the agricultural sector affect Nigeria’s economy;
v.
determine the extent to which bank lending
to the manufacturing sector affect Nigeria’s economy;
vi.
examine the extent to which bank lending
to the mining and quarrying sector affect Nigeria’s economy;
vii.
ascertain the impact of bank lending to
the export sector on Nigeria’s economy.
1.4 RESEARCH
QUESTIONS
i.
How does bank lending to production sector
affect Nigeria’s economy?
ii.
In what way does bank lending to the trade
and commerce sector affect Nigeria’s economy?
iii.
How does bank lending to the services
sector affect Nigeria’s economy?
iv.
To what extent does bank lending to the
agricultural sector affect Nigeria’s economy?
v.
How does bank lending to the manufacturing
sector affect Nigeria’s economy?
vi.
To what extent does bank lending to the
mining and quarrying sector affect Nigeria’s economy?
vii.
What is the effect of bank lending to the export
sector on Nigeria’s economy?
1.5 HYPOTHESES
Ho1: Bank lending to the production sector does
not significantly affect Nigeria’s economy.
Ho2: Bank lending to the trade and commerce
sector does not significantly affect Nigeria’s economy.
Ho3: Bank lending to the services sector does
not significantly affect Nigeria’s economy.
Ho4: Bank lending to the agricultural sector does
not significantly affect Nigeria’s economy.
Ho5: Bank lending to the manufacturing sector
does not significantly affect Nigeria’s economy.
Ho6: Bank lending to the mining and quarrying sector
does not significantly affect Nigeria’s economy.
Ho7: Bank lending to the export sector does not
significantly affect Nigeria’s economy.
1.6 SIGNIFICANCE OF THE STUDY
The
significance of this research depends on the category of users of the
information contained in it. For the disbursement of bank credit facilities to
play the necessary critical function in the economy, it is imperative that the
right policies are made. For this reason, the contents of this thesis provides
useful insights on the mechanisms of commercial banks’ lending to regulatory
agencies and other policy makers, on how to engineer the right policies to
guarantee that the right economic outcomes are achieved. Furthermore, future
researchers on topics related to the subject matter of this thesis will also
benefit from its contents as a source of literature and useful findings to help
channel their research direction.
1.7 SCOPE
OF STUDY
The
scope of this research centre around bank lending and the way this variable
affects the economic performance of Nigeria in terms of the Production, Trade
and Commerce, Services, Agriculture, Manufacturing, Mining and Quarrying and
Export sectors. For this purpose, the geographic scope of the study was limited
to Nigeria although literature and other information about these issues in other
countries of the world were also investigated and cited where necessary.
The
period covered for the research is 1986 to 2017 considering that this is the
period for which published data is available. However, theories and empirical
literature investigated are much broader. Finally the content scope was limited
to issues concerning bank lending and how they affect Nigeria’s economy in
terms of the production, trade and commerce, services, agriculture,
manufacturing, mining and quarrying and export sectors.
1.8 LIMITATIONS
OF STUDY
The
most important limitation of this research thesis is the the lack of a
comprehensive data and information on bank lending activities to the economic
agents in Nigeria. In the course of the research, it was observed that some
subsectors under general commerce like domestic trade and imports had several
years of missing data. The same thing was also observed in the subsectors under
the services sector - including Credit to Financial Institutions; Transport and
Communications and Public Utilities. In the production sector, the Real Estate
and Construction subsector also had several periods of missing data. This
problem associated with data availability informed the decision to aggregate
data first into major sectors and second into the most active subsectors with
complete data.
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