IMPACT OF BANK LENDING ON NIGERIA’S ECONOMY: SECTOR BASED ANALYSIS

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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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