ABSTRACT
The study investigated the effect of bank lending rate on output of manufacturing sector in Nigeria. Time series data spanning from 1995 to 2017 was sourced from Central Bank of Nigeria statistical bulletin and the method of data analysis was the ordinary least squares (OLS) technique. Manufacturing sector output was measured by manufacturing sector contribution to real gross domestic product. Having analyzed the data, it was found that lending rate has a negative and insignificant effect on output of manufacturing sector in Nigeria. On the other hand, the effect of exchange rate and loans and advances was positive and significant on output of manufacturing sector in Nigeria. Based on the findings, it was recommended among other things that there should be review of monetary policy with the target of increasing money supply so as to be able to reduce the costs of borrowing (interest rate). The achievement of this will encourage investors to borrow more for productive activities.
TABLE OF CONTENTS
Title
page i
Declaration
ii
Certification
iii
Dedication iv
Acknowledgement
v
Table
of contents vi
List
of tables vii
Abstract
viii
CHAPTER ONE
INTRODUCTION 1
1.1
Background of the Study 1
1.2
Statement of the Problem 3
1.3 Objective of the Study 4
1.4 Research
Question 4
1.5 Research
Hypotheses 5
1.6 Significance of the Study 6
1.7
Definition of Terms 6
1.8 Organization of the Study 6
CHAPTER TWO
REVIEW OF RELATED LITERATURE 7
2.0
Introduction 7
2.1 Conceptual Review 7
2.2.1 Conceptual Clarification of Interest
Rate 7
2.1.2 The Concept of Sustainability in
Manufacturing Sector 7
2.1.3 Interest Rate Charged on Borrowers 8
2.1.5 History
of the Nigerian Manufacturing Sector 13
2.1.6 Structure and Performance of the
Nigerian Manufacturing Sector 14
2.2 Theoretical Literature 17
2.2.1 Loan Pricing Theory 17
2.2.2 Firm Characteristics Theories 18
2.2.3. Theory of Multiple-lending 18
2.2.4 The Signaling Argument 18
2.2.5 Credit market theory 19
2.3 Empirical Review 22
CHAPTER THREE
RESEARCH METHODOLOGY 26
3.1 Research Design 26
3.2 Study Area 26
3.3 Sources of Data Collection 26
3.4 Method of Data Analysis 26
3.5 Model Specification 27
3.6 Technique for Analysis 27
CHAPTER FOUR
PRESENTATION OF DATA, ANALYSIS AND DISCUSSION 28
4.1 Presentation of Data 28
4.1.1 Descriptive Statistic 29
4.2 Analysis and
Discussion of Findings 29
4.2.1 Regression Analysis 30
4.2.2 Hypotheses
Testing 31
CHAPTER FIVE
SUMMARY OF
FINDINGS, CONCLUSION AND RECOMMENDATIONS 33
5.1 Summary
of Findings 33
5.2 Conclusion 33
5.3 Recommendations 34
References
Appendix
LIST OF TABLES
Table
4.1: Data presentation 29
Table
4.2: Summary of the Descriptive Statistic 30
Table 4.3: Regression analysis (dependent variable; OMS) 31
CHAPTER
ONE
INTRODUCTION
1.1
Background
of the Study
Granting
that no country of the world can ever attain an expected level of economic
development without a virile and highly productive manufacturing sector makes
it imperative that Nigeria as a country must pursue policies aimed at
stimulating a rapid growth capable of increasing the productivity of the
manufacturing sector and thus, improve national economy. This very important
sector transforms our numerous raw materials into marketable finished products
that are required in our daily existence as a people and as a nation.
The
sector generates foreign exchange through the exportation of its finished
products. Realizing the importance of this sector, Nigerian government had
before now, made concerted efforts to give reasonable support and assistance to
the realization of the growth of the manufacturing sector in Nigerian economy. It
is greatly accepted that the oil boom of the 70's greatly improved Nigeria’s economy
and earned her industries need foreign exchange to import raw materials.
Regrettably, thus boom changed drastically in the 80's with the dwindling oil
revenue. The effect however saw the folding up of some industries, thus,
negatively affecting the manufacturing sector of the economy. The harsh
economic situation of the time wholly informed that sectors should be opened so
as to supplement the poor oil revenue. This unpleasant economic condition got
worse with military leadership which was considered unstable. Yet, the
manufacturing sector remains the most wanted sector to supplement the foreign exchange
earnings of the oil sector through exportation of their finished products.
Nevertheless, military regimes are known not to offer enabling environment for
effective industrial growth but with the emergence of a democratically elected
government in May 1999, the Nigerian nation started the creation of enabling
opportunities and environment to promote the gradual development of the
manufacturing sector. However we must realize that the manufacturing sector of
the economy has been the most unfortunate and hardest hit by the high interest
rates.
Odimaya
(2000) noted that "banks no longer want to lend on long-term it is usually
at cut-throat interest rates". This situation has continued to affect the
manufacturing sector, even in this democratic dispensation with the federal
government economic policy of deregulation of the banking sector. This condition
according to Kazeem (2004) has greatly affected the manufacturing sector. This
opinion of Kazeem is made stronger when he wrote that the banks high interest
lending rates continue to threaten the agreement reached by the Nigerian
government, the central bank of Nigeria (CBN) and the banks that lending rates
should not be more than the minimum rediscount rate. The above agreement was to
encourage bank lending to industrialists and so, stimulate the manufacturing
sector development and improvement of the national economy which would
guarantee rapid industrialization in line with development objectives. Manufacturing
which cannot afford the high bank lending rates hardly survive and they are
mostly neglected by government policies and it’s these small scale industries
that respond to the lives and needs of the ordinary citizen. Libanio (2006)
argues that the manufacturing sector has an important role in the growth and
performance of the economy but the manufacturing output was not enough to
generate sizeable Growth in the economy. Regrettably, the performance of the
manufacturing sector in Nigeria has been constrained due to inadequate funding
culture of the Nigerian banks and even when banks lend, they lend on a high
rate of interest on the loan and banks are the primary source of capital for
manufacturers or industrialists. Goldman Sachs (2008) talks about the objective
of the approved vision 20-2020 study projections that Nigeria will be 20th and
12th largest economy of the world and Africa respectively. This vision is to be
realize through the growth of the private sector therefore, overconcentration
and overdependence should be reduced on the oil sector because there have been
a growing concern on the decline of the output of the manufacturing sector in
Nigeria which is faced with the problem of accessibility of funds and high
interest rates of banks.
1.2
Statement
of the Problem
Manufacturing as a process involves conversion
of raw materials into finished consumer goods or intermediates/semi-finished
goods. Like other industrial activities, manufacturing creates employment,
boost agriculture and diversifies the economy while helping the nation to
increase its foreign exchange earnings. Additionally, it enables local labour
to acquire skills. The history of manufacturing in Nigeria can be traced to
pre-colonial times. In village - based societies of Hausa, Benin and the Ibo’s
among others, small scale manufacturers of goods for trade and other social
purposes abound (Charles-Anyaogu, 2012). The place of the manufacturing sector in the development of
any nation’s economy cannot be over-emphasized. The catalytic role of
manufacturing with emphasis on the overall economic growth and development of
any nation has been largely studied and documented in economic and finance
literature.
Regrettably, Nigeria regardless its enormous
natural endowments, has been a pathetic case as the manufacturing sector still
accounts for a very low percentage of the gross domestic product (GDP). This is
a cause for worry even as the nation’s quest to becoming a leading world
economy by 2020 increases (Omankhanlen and Owonibi, 2012).
Chronicling the performance of the manufacturing
sector Ade-Agoye (2011) submitted that manufacturing sector’s contribution to
GDP dropped from 15% in the 1970’s to 4.21% in 2010. The poor performance led
to the closure of over 1000 manufacturing companies nationwide. He also adds
that capacity utilization also dropped from 70% in the 1980’s to 45% in 2010.
Besides, Central Bank of Nigeria (2005) complained that growth in the
manufacturing output was unimpressive. Omankhanlen and Owonibi (2012) observed
that this sector is riddled with multifarious challenges. Outside
infrastructure, there are other challenges such as the suffocating high
interest rate and banks’ unwillingness to lend to the sector even though the
monetary authorities classify it as a priority sector. The manufacturing
sector’s contribution to GDP, following the negative state of the economic
indicators, stood at 4.23% in 2013.
In view of the above
situations this study is to situate the relative effect of Bank lending rate on
the manufacturing sector in Nigeria 1995-2017.
1.3 Objective of the Study
The main objective of this study is
to analyze effects of bank lending rates on the manufacturing sector in Nigeria.
The researcher intends to achieve the following sub-objectives;
- To
examine the impact of Interest rates on the output of the manufacturing
sector in Nigeria.
- To
examine the effects of exchange rate on the output of the manufacturing
sector in Nigeria.
- To
ascertain the relationship between bank loans and advances on the output
of the manufacturing sector in Nigeria.
1.4 Research Question
The following
research questions will guide this study:
1. What
impact does Interest rates have on the output of the manufacturing sector in
Nigeria?
2. What
effect does exchange rate have on the output of the manufacturing sector in
Nigeria?
3. What
relationship exists between bank loans and advances on the output of the
manufacturing sector in Nigeria?
1.5 Research Hypotheses
For the successful completion of the
study, the following research hypotheses were formulated by the researcher;
HO1: Interest rates has
no significant or positive effect on the output of manufacturing sector in
Nigeria
HO2: Exchange rate has
no significant or positive impact on the output of manufacturing sector in Nigeria
HO3:
there is no significant or positive
relationship between bank loan and advances and the output of manufacturing
sector in Nigeria.
1.6
Significance of the Study
The significance of this study could be
reflected in many ways:
In the first
place, it could help to appraise the relationship between the banking sector
and the manufacturing sector towards the economic development of the nation.
Secondly, the study could make things clearer to workers in both sectors to
realize their co-operative relationship in the development of the economy. Also,
the study would make the masses realize the relevance of the sectors in the
overall development of our national economy.
Furthermore, to
the educationists and researchers, this could serve as a reference material to
them. More so, to the government, this could throw more light on how the
government could effectively utilize the roles of the two sectors in the
economic development of the nation. Finally, the study could make the central
bank of Nigeria (CBN) realize how to use policy concerning lending rates to
strike a good balance or parity between the sectors and so, facilitate National
Economic Development.
1.7 Definition of Terms
BANK: A bank is
a financial institution that accepts deposits from the public and creates
credit. Lending activities can be performed either directly or indirectly
through capital markets.
BANK LENDING: In finance, a loan is the lending of
money from one individual, organization or entity to another. If the borrower
defaults on the loan, the bank would have the legal right to
repossess the house and sell it, to recover sums owing to it.
MANUFACTURING: Manufacturing is the use of machines, tools and labor to
produce goods for use or sale. It includes a range of human activity, from
handicraft to high-tech, but most commonly refers to industrial production,
where raw materials are transformed into finished goods on a large scale.
1.8 Organization of the Study
This research work is organized in
five chapters, for easy understanding, as follows;
Chapter
one is concern with the introduction, which consist of the (overview, of the
study), historical background, statement of problem, objectives of the study,
research hypotheses, significance of the study, scope and limitation of the
study, definition of terms and historical background of the study. Chapter two
highlights the theoretical framework on which the study is based, thus the
review of related literature. Chapter three deals on the research design and
methodology adopted in the study. Chapter four concentrate on the data
collection and analysis and presentation of finding. Chapter five gives summary, conclusion, and
recommendations made of the study.
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