ABSTRACT
This study examined the impact of commercial banks credit on industrial growth in Nigeria using time series data from 1986-2017. The data for the study were sourced from the Central Bank of Nigeria’s statistical bulletin. Manufacturing GDP (MGDP) Agricultural GDP (AGDP) and building and construction GDP (BCGDP) were used as proxies for industrial while commercial banks credit to manufacturing industries (BCMA), commercial banks credit to mining (BCMI), commercial banks credit to agriculture (BCA), commercial banks credit to estate and reconstruction (BCER) and lending interest rate (LINR) were proxies for commercial banks credit. Multiple regression analysis was used to analyze the data. The study found that commercial banks credit to manufacturing industries has positive and significant impact on industrial growth in Nigeria within the study period. The study recommends that commercial banks should provide more credit to manufacturing industries and lower interest rates in Nigeria so as to encourage emerging firms to demand for credit while existing will increase productivity.
TABLE OF CONTENTS
Title Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Table of
Contents vi
List of Tables vii
List of Figures x
Abstract xi
CHAPTER 1: INTRODUCTION
1.1
Background
to the Study 1
1.2 Statement of the Problem 4
1.3 Objectives of the
Study 5
1.4 Research Questions 6
1.5 Research Hypotheses 6
1.6 Significance of the
Study 6
1.7 Scope of the Study 7
1.8 Operational
Definition of Terms 7
CHAPTER 2: REVIEW OF RELATED LITERATURE
2.1
Conceptual Framework 9
2.1.1
Banks credit and economic development 12
2.1.2
Offering liquidity 13
2.1.2.1
Payment service 14
2.1.2.2
Lending function 14
2.1.2.3 International trade
services 14
2.1.2.4 Currency
transaction 15
2.1.2.5 Performance bond
services 15
2.1.3
Concept of credit creation
by commercial banks 15
2.1.4
Banks lending conditions and considerations 17
2.1.5
Industrial sector/
industrialization 24
2.1.5.1
History of
industrialization 25
2.1.5.2 Events since Mid-1980s 28
2.1.5.3 Industrial sector and economic development in Nigeria 29
2.1.6 Bank
capital, capital adequacy and economic development 35
2.1.6.1 Bank credit and industrial sector development in Nigeria 44
2.1.6.2 Problems with financing the industrial sector 50
2.2
Theoretical Framework 51
2.2.1 Commercial
loan theory 51
2.2.2 Shiftability theory 52
2.2.3
Anticipated income theory 53
2.2.4
Liability management theory 53
2.3 Empirical Review 54
2.3.1 Commercial banks
credit and panel data analysis 55
2.3.2 Determinants of banks capital structure 56
2.3.3 Bank credit and small scale industries 56
2.3.4
Bank credit and entrepreneurship
development 58
2.3.5 Bank credit and
economic growth 61
2.4 Summary of Reviewed Literature 66
CHAPTER 3: RESEARCH METHODOLOGY
3.1 Research
Design 67
3.2 Area of Study 67
3.3 Sources of Data 68
3.4 Model Specification 68
3.4.1 Description of
research variables 70
3.4.1.2
Independent variables 70
3.4.2 Unit root test
analysis 71
3.4.3 Test statistics (TS) 71
3.5 Technique for Data Estimation 73
CHAPTER 4: DATA PRESENTATION, ANALYSIS AND
INTERPRETATION
4.1 Data Presentation 74
4.2 Data
Analysis 75
4.3 Descriptive
Statistics 76
4.4 Unitroot Properties of the Variable
under Study
78
4.5
ARDL Cointegration and Long-run form
for Industrial GDP Model 82
4.5.1 Regression
result on the effect of commercial to manufacturing industries
on
industrial growth 84
4.6
Cointegrating and Long-run form for
Agricultural GDP model 88
4.7 Regression
Result on the Effect of Commercial to Agriculture on
Industrial growth 90
4.8
Cointegrating and Long-run form for
Building and Construction GDP model 94
4.9 Regression
Result on the Effect of Commercial to Building
and
Reconstruction on Industrial Growth 96
4.10 Discussion of Results 98
CHAPTER 5: SUMMARY,
CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings 99
5.2 Conclusion 100
5.3 Recommendations 100
5.4 Contributions to
knowledge 101
References 103
Appendices 107
LIST OF TABLES
4.1 Data presentation 75
4.2 Descriptive statistics 76
4.3 Unit root test result 79
4.4 Bound
test for industrial GDP model 81
4.5a Co-integrating form for industrial GDP model 82
4.5b Long run coefficient
form for industrial GDP model 83
4.6 Regression result of industrial growth
model 84
4.7 Bound test of agricultural GDP model 87
4.8a Cointegration test
form for agricultural GDP model 88
4.8b, Long run coefficient
form for agricultural GDP model 89
4.9 Regression
result on the effect of commercial to agriculture
on
industrial growth 90
4.10 Bound test for building and construction GDP model 94
4.11a Co-integration test
form for building and construction GDP model 95
4.11b Long run coefficient
form for building and construction GDP model 95
4.12 Regression
result on the effect of commercial to building and reconstruction
on industrial growth 96
LIST OF FIGURES
4.1 Akaike information criteria 80
4.2 Cusum test 81
4.3 Akaike information criteria 86
4.4 Cusum test of agricultural GDP model 87
4.5
Akaike information criteria 92
4.6 Cusum test of building and construction
GDP model 93
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND
TO THE STUDY
The quest to achieve sustainable industrial sector
growth all over the world appears to have caught the interest of the economic
agents as well as researchers especially among the emerging economies like
Nigeria. To achieve this target however, banking system credit (Bank credit) becomes
the yardstick; for the purpose of financing economic activities such as
manufacturing, production, commerce amongst others, through the provision of
loans and overdrafts by banks (Nwaru
and Okorontah, 2014). The amount of loans and advance given by the banks
to deficit economic units constitute bank credit. Lending is, thus a vital function
in banking operations owing to its direct effect on economic growth and
business development of the nation (Okwo,
Mbajiaku and Ugwunta, 2012). It is also a major source of revenue to
banks. The principal aim of banks in providing service is to promote economic
growth, banks profitability and liquidity to the economy.
The input of banks as financial intermediary involves channeling
funds from the surplus unit to the deficit unit of the economy, thus
transforming deposits into loans or credits (Salami, 2011).
The role of bank credit in economic development has been recognized through the
issuance of credits to various economic agents to enable them meet investment targets.
For instance, business firms obtain credit to buy machinery and equipment,
farmers obtain credit to purchase machines such as tractors, seeds,
fertilizers, and erect various kinds of farm real estates (Okoi and Stephen, 2014). Government
bodies obtain credits to meet various kinds of recurrent and capital
expenditures.
The provision of credit with sufficient consideration for the
sector’s volume and price system is a way to create and encourage self
employment opportunities (Salami, 2011). This is because credit helps
to facilitate and maintain an improved business size and aid the establishment
and expansion of the business to take advantage of economy of scale. It can
also be used to improve informal activity and increase its efficiency (Solomon,
2013).
Credit can serve as an instrument used to prevent economic activity
from total collapse in the event of natural disasters such as flood, draught,
disease or fire. The banking sector helps to make these credits available by
mobilizing surplus funds from savers who have no immediate needs for such funds
and thus channels such funds in form of credit to investors who have brilliant
ideas on how to create additional wealth in the economy but lack the necessary
capital to execute the ideas (Okoi and
Stephen, 2014).
Bank lending function is basically classified into two, lending by
purpose and lending by maturity. The classification by purpose simply indicates
the purpose for which credits are being granted to either private business
enterprise or government and its agencies. This classification comprises loans
for production (for manufacturing of goods); general commerce (loans for trade
and other commercial activities/ investment; services (for provision of social
amenities/infrastructure); and others (loans to government and/or its agencies).
The second classification of bank lending is by maturity which emphasis on the
nature and time frame of the credit. It simply indicates the period the loan
would stay with the borrower before repayment. It shows whether the loan is a
short-term loan, medium term loan and long- term loan (Adolphus, 2011, Felicia,
2011).
The role of bank credit in development process cannot be under
explained as they play so many functions. Owing to this, banks also contribute
to the stimulation of the economy by lending money to small and medium scale
business settings. Thus, industrialization will not be achieved without bank
credit (Oluitan, 2012). Industrialization acts as the catalyst that speeds up
the pace of structural transformation and the different sector of the economy,
enabling the country to fully utilize its factor endowment, depending less on
foreign supply of finished goods or raw materials for its economic growth,
development and sustainability (Ademola, 2012). Industrialisation which is a
deliberate and sustained application with the combination of an appropriate
technology, infrastructure managerial expertise and other important resources
has attracted considerable interest in development economies in recent times (Oluitan,
2012).
Manufacturing contributed of 4.2%
GDP in 2009, up from 3.6% in 2008. The sectors contribution to GDP has changed
little over the years. Even as industries like cement and beverages attract
investment from home and abroad, other industries are closing up shop, between
2000 and 2010, more than 850 manufacturing companies either completely shut
down or temporarily halted production. In 2014, the manufacturing sector
contributed over 3.05 percent to GDP. Capacity utilization in manufacturing is around
53%. Import manufactured goods small sales of home made products (CBN, 2014). In the early banking in Nigeria before
deregulation, banks were made to give certain percentage of their total credit
to the SMEs which continued until 1999 when the universal banking was introduced
and such regulation was removed. Financing of industrial sector by banks controlled
and governed the earlier policies of the government and the CBN between 1960
and 1986.
Commercial banks were made to
provide certain allocation of the yearly loans and advances for the development
of small industries (Emecheta, and
Ibe, 2013). This continued until 1986 when the banking industry was deregulated
and such policies were also removed. Loans and advances created by commercial
banks in Nigeria still remains the major source of capital for industries in
Nigeria. The relative importance of banks in Nigeria funding the growth and
development of industries in Nigeria cannot therefore be over emphasized. The
lending policies of banks to small and large industries in Nigeria are almost
similar, except for the documentation relating to company
registration/incorporation (Loto, 2012).
Obamuyi posited that while the big industries are required to submit
Certificate of Incorporation, names of directors and good track records, the
small industries, especially sole proprietorship are required to submit
evidence of business name. Often times, the same types of forms are used by
both the small and large firms, with the firms filling the areas relevant to
them (Loto, 2012). To the extent
of the explanation above, one may be tempted to say that the lending practices
towards small and medium scale businesses are not different from those for
large industries. This research study takes further indepth look at banks
credit delivery and role in Nigeria’s industrial development.
1.2 STATEMENT OF THE PROBLEM
In Nigeria, CBN (2014) report reveals that a large volume of deposit
money banks total credit goes to the government rather than the private sector
which are the major industries that make up the economy. Deposit money banks
have abandoned their traditional services and engaged in speculative business
such as trading in stock and oil business thus reducing their credit allocation
to productive sectors such as the industrial sector. This has made it difficult
for industries in Nigeria to raise funds to engage in new investment or
expansion. CBN statistics reveals that even though credit allocation to the
manufacturing sector has steadily increased from ₦72,238m in 1996 to ₦117,691.0m
in 2013, however, the total percentage to aggregate credit to the economy fell
from 12% to less than 8%.
The problem of poor and falling index
of production and capacity utilization also arise. Most industries do not have access to
capital market so they naturally depend on banks for funding. Dependence on
banks makes them even more vulnerable as shocks on the banking system would
have significant effects on the supply of funds to SMEs. Thus, SMEs are subject
to funding problems and these problems are exacerbated during periods of
financial instability. Shocks to economic environment in which both banks and
SMEs exist can significantly affect the willingness and capability of banks to
lend to SMEs. These shocks come in a variety forms such as technological
innovation, regulatory regime, shifts in competitive conditions and changes in
the macro-economic environment.
Another problem is the credit creation of banks. Huge
capital base is seen as a pre-condition for banks to be able to provide more
loans and advances to the economy (Sanusi, 2010). Although banks credit seems
to have improved lack of access to credit and high interest rate has been found
to be the main reason for the poor performance of Nigerian industries.
According to CBN (2013) statistics, while manufacturing capacity utilization
hovers around 58.81% in 2013, the industrial index fell from 140.60% in 1996 to
139.20% in 2013. The problem therefore is if there is relationship between
access to credit and index of industrial production which this study will
solve. It is therefore increasingly evident on the
greater need and effort to mobilize domestic savings for onward credit delivery
to develop industries in Nigeria, if a desired economic development is to be
achieved.
1.3 OBJECTIVES OF THE STUDY
The broad objective of this study is to determine the impact of
commercial banks credit on industrial growth in Nigeria. The specific
objectives include:
1.
To determine the extent to
which commercial banks credit to manufacturing industries influences industrial
sector growth.
2.
To examine the impact of commercial
bank credit to mining and quarry on the growth of industrial sector in Nigeria.
3.
To determine the extent to
which commercial banks credit to agriculture impacts on industrial growth.
4.
To determine the impact of
commercial banks credit to real estate and reconstruction on industrial growth.
1.4 RESEARCH QUESTIONS
The following research questions have been constructed to guide and sharpen
the study:
1
To what extent do commercial
banks credit to manufacturing industries influenced industrial sector growth?
2
What is the impact of
commercial bank credit to mining and quarry on the growth of industrial sector
in Nigeria?
3
How has commercial banks credit
to agriculture impacted on industrial growth?
4
What is the impact of
commercial banks credit to real estate and construction on industrial growth?
1.5 RESEARCH HYPOTHESES
The following hypotheses will further help guide the work and have
been stated in their null form:
H01: There is no significant and
positive effect of commercial banks credit to manufacturing
industries on industrial sector growth.
H02: Commercial banks credit to mining and quarry does not have
significant and positive impact on
the growth of industrial sector in Nigeria.
H03: There is no positive and significant impact of commercial banks
credit to agriculture on industrial
growth.
H04: Commercial banks credit to real estate and construction does not
have positive and significant effect
on industrial growth.
1.6 SIGNIFICANCE OF THE STUDY
This study is aimed at assessing the traditional role of deposit
money banks in delivery credit to the industrial sectors of the economy in
Nigeria. Thus, an exposition into the effect of this credit on industries will
help to evaluate the significance of the banks in Nigeria.
- Public: this study enlightens the public on how banks create credit
and the various channels through which credit can be borrowed from the
banks. This research enlightens the citizen on what impact the industrial
sector has made on the economic development of Nigeria with a view to
encouraging them to patronizing made in Nigerian goods to enhance
development of the sector.
- Monetary authorities: this study helps monetary authorities assess the impact of banking
policies on the performance of banks as it relates to their intermediation
functions for industrial development.
- Government/policy
maker: the study opens a thoroughfare for
government in their effort at revolving plans and policies targeted at
developing the industrial sector.
- Prospective
researchers: the study serves as a reference
material to prospective researchers.
1.7 SCOPE OF THE STUDY
A critical evaluation of banks loan allocation and delivery
activities to the industrial sector in Nigeria is the focus of this study. The
work will be reviewed empirically between 1986 and 2017 using data collected
mainly from the secondary source such as the CBN annual report and statistical
bulletin.
1.8 OPERATIONAL DEFINITION OF TERMS
Bank: A bank is a financial intermediary that accepts deposits and
channels those deposits into lending activities either directly or through
capital market.
Banking industry: In general term, it is the business activity of accepting and
safeguarding money owned by other individual and entities and then lending out
these money in order to earn a profit.
Bank regulation: A body of specific rules or agreed behaviour either imposed by some government or other
external agency, or self impose by explicit or implicit agreement within the
industry that limits the activities and business operations of financial
institutions e.g. CBN/NDIC.
Bank supervision: Is the process of monitoring banks to ensure that they are carrying
out their activities in accordance with laws, rules and regulations and in self
and sound manner.
Credit: A credit is a sum of money that is paid into your account
increasing your account balance credit.
Industrial development: Industrial development therefore is the application of modern
technology, equipments and machineries for the production of goods and
services, alleviating human suffering and to ensure continuous improvement in
their welfare.
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