COMMERCIAL BANK LOAN AND ADVANCES ON THE PERFORMANCE OF MANUFACTURING SECTOR IN NIGERIA

COMMERCIAL BANK LOAN AND ADVANCES ON THE PERFORMANCE OF MANUFACTURING SECTOR IN NIGERIA

This study ascertains the impact of commercial bank loans and advances on the performance of the manufacturing sector in Nigeria.

CHAPTER ONE

Background of the Study:

The manufacturing sector plays a crucial role in the development of the modern economy the world over. The manufacturing sector as a sub-sector of the industrial sector refers to the production of goods and services through combined utilization of raw materials and other production factors such as labor force, land, and capital or utilizing the production process. Likewise, it can also be said to be a segment of the economy that deals with the conversion or transformation of raw materials into finished goods through value addition. The manufacturing sector refers to those industries which are involved in the manufacturing and processing of items and indulge in either the creation of new commodities or in value addition (Adebayo, 2010). To Dickson (2010), the manufacturing sector accounts for a significant share of the industrial sector in developed countries. The final products can either serve as finished goods for sale to customers or as intermediate goods used in the production process. In advanced economies, the manufacturing sector is a leading sector in many respects. It is an avenue for increasing productivity related to import replacement and export expansion, creating foreign exchange earning capacity; and raising employment and per capita income which causes unique consumption patterns. Furthermore, it creates investment capital at a faster rate than any other sector of the economy while promoting wider and more effective linkages among different sectors. In terms of contribution to the Gross Domestic Product (GDP), the manufacturing sector is dominant and it has overtaken the services sector in several Organization for Economic Co-operation and Development (OECD) countries (Anyanwu, 2010).

Manufacturing industries came into being with the occurrence of technological and socio-economic transformations in the Western countries in the 18th-19th centuries. This period was widely known as the industrial revolution. It all began in Britain and replaced the labor-intensive textile production with mechanization and the use of fuels. The manufacturing sector is categorized into the engineering sector, construction sector, electronics sector, chemical sector, energy sector, textile sector, food and beverage sector, metalworking sector, plastic sector, transport, and telecommunication sector.

In recent times, some manufacturing industries in Nigeria have been characterized by declining productivity rate, by extension employment generation, which is caused largely by inadequate electricity supply, smuggling of foreign products into the country, trade liberalization, globalization, high exchange rate, and low government expenditure. Therefore, the slow performance of the manufacturing sector in Nigeria is mainly due to the massive importation of finished goods and inadequate financial support, which has resulted in the reduction in capacity utilization and input of the manufacturing sector in the economy (Tomola, Adebisi and Olawale, 2012).

The economy of Nigeria could be said to be dependent on two major priority sectors as outlined by the Central Bank of Nigeria (CBN), and this is as a result of the need for distribution of loans accordingly. These sectors include the agricultural sector and the manufacturing sector. In recognition of these potential roles of the manufacturing sector, successive governments in Nigeria have continued to articulate policy measures and programs to achieve industrial growth incentives and adequate finance (Orji, 2012). To underscore the pivotal and critical role the manufacturing industry plays in capital formation, domestic savings and its effect in the realization of sustainable economic growth and general prosperity in Nigeria, the Federal government at different times introduced several schemes such as World Bank SME II Loan Scheme (1987), Small Scale Industries Credit Scheme (1971), established Industrial Development Centers, National Economic Reconstruction Fund( NERFUND), Nigerian Bank for Commerce and Industries, Nigerian Industrial Development Bank all aimed at improving and sustaining the performance of the sector. In 2010, the federal government through the Central Bank of Nigeria made available the sum of N200 billion as Manufacturers’ Intervention Fund. “The objectives of the fund include fast-tracking the development of the manufacturing sector of the Nigerian economy by improving access to credit to manufacturers; improving the financial position of the Deposit Money Banks; increasing output; generating employment; diversifying the revenue base, as well as increasing foreign exchange earnings. It is also meant to provide inputs for the industrial sector on a sustainable basis.”(CBN, 2010). Similarly, the involvement of the private sector such as the Dangote group, Honey Well industries among others in the manufacturing sector has boosted its development.

The deposit money banks (DMBs) as a mandate, promotes the availability of credits through intermediation from deposit made to the surplus economic unit. This act represents a risk to the commercial banks and to prevent the uncertainty, commercial banks charge interest and collateral to the borrower to backup or secure the loan of which the manufacturing sector benefit. By creating and packaging of loans,  the investors expand the level of investment with an effect on income and employment. The borrowed funds are utilized in the improvement of total capital stock enquired to enhancing total output in the economy. In this regard, commercial banks should give priority to manufacturing sectors rather than training enterprises. Manufacturing sector includes corporate strategy, business unit strategy, other functional strategies (marketing engineering, finance, etc) production selection, management of competencies. Because the manufacturing sectors have an opportunity to create and maximize value by strategically planning for environmental sustainability and becoming an important part of their customer’s success.

Government act in the form of loan guidelines, setting a mandatory minimum target for the different sectors of the economy, which the commercial banks are expected to meet and stick to the purpose of the policy by the government, which is to influence and restrict. Commercial banks lending to priority sectors in line with the growth and development objectives of the government. The government usually pursues these objectives by using its major financial agency, the Central Bank of Nigeria (CBN) and series of directives through all its relevant ministries that are meant to facilitate government policies towards self-reliance and industrialization.

Since undergoing severe distress in the mid-1990s, Nigeria banking sectors have witnessed significant growth over the last few years as new banks enter the financial market. Harsh monetary policy Implemented by the Central Bank of Nigeria to absorb excess naira liquidity in the economy has made life more difficult for banks. Some of whom engage in currency arbitrage (round-tripping) activities that generally fall outside the legal banking mechanism. How equity Forster corporate growth remains underutilized by Nigeria private sector, although the Nigerian stock exchange since 1999 has enjoyed the strong performance.

The government policy on loan allocation to the manufacturing sectors is a result of the observation of the commercial banks in Nigeria not extending adequate loans to the manufacturing sector despite the importance of the sector in the growth and development of the Nigerian economy.

Furthermore, in Nigeria, the level of growth in the manufacturing sector has been affected negatively because of high-interest rate on lending and this high lending rate is responsible for the high cost of production in country’s manufacturing sector (Adebiyi, 2001; Adebiyi and Babatope, 2004; Rasheed, 2010). Hence, Okafor (2012) observed that the level of Nigerian manufacturing industries’ performance will continue to decline because of low implementation of the government budget and difficulties in assessing raw materials and stiff competition with foreign firms.

From 1982 to 1986, Nigeria’s value-added in manufacturing fell considerably partly because of inefficient resource allocation caused by distorted prices and prohibition of importation. Between 1986 to 1988, the World Bank induced structural adjustment program (SAP) in the economy’s economy contributed to a larger increase in manufacturing industry contribution to GDP, which grew 8 percent in 1988. The deregulation of the foreign exchange market was also reckoned to make manufacturing industries more competitive by increasing input costs (CBN, 2010). Looking at the manufacturing sector share in the GDP in recent years (1990-2010), it has not been relatively stable. In 1990, it was about 5.5% while it drops to 2.22% in 2010. Also at the same period, the overall manufacturing capacity utilization grew from 40.3% in 1990 to 58.92% in 2010. This may be attributed to the increase in government expenditure in recent times.

The essence of this study, therefore, is to look into the impact of the commercial bank’s loan and advances on the performance of the manufacturing sector in Nigeria 1981 – 2018; and examine some determinants responsible for the observed low performance and suggest measures for actualizing effective lending to the manufacturing sector in Nigeria.

Statement of The Problem:

The literature on manufacturing industry performance, both theoretical and empirical is tremendous. Upon several government policies on the stability of the Nigerian economy through the manufacturing industry, there has been a lot of challenges facing the growth of the Nigerian manufacturing industry. These challenges include lack of sufficient funds for manufacturing sectors, high-interest rate, inadequate raw materials, infrastructural challenges, high government bureaucracy, and illiteracy/inadequate skilled manpower.

For a manufacturing company, finance is always an important part of surviving and succeeding in any business. Many factors may necessitate the need for funding such as wanting to expand operations, increase productions or in acquiring more staff.

Depending on the stage in the manufacturing business there will be a need for some money to kick start and continue the operations. Unfortunately, money is not readily accessible to manufacturers in Nigeria. Even when finances are made available through loans from the bank the interest rates are very high.

The issue of interest rate is another problem facing the manufacturing sector, the rate at which banks make the fund available for the manufacturing sector or customers are very high (25% – 40%). At such rates, a good amount of the profit made by manufacturers is used to pay debts to the banks.

The foreign exchange rate is the relative value between two currencies.  It is the rate at which the amount of one currency can exchange for another (Kathleen Crislip, 2018). the surge for foreign currencies would raise the value of the foreign currencies at the expense of the domestic currency; leading to a reduction in the value of the nation’s currency. The lower the value of the nation’s currency, the higher and more expensive it would be the value of the foreign currencies; leading to increased costs of exchange. The more the costs of exchange increase, the less would the production lines consume foreign inputs which have been a big problem to the Nigerian manufacturing sector.

Due to the poor management of our agricultural sector, there are not enough raw materials needed by manufacturing companies to support massive production. Hence over-dependence on foreign raw materials for production places stress on manufacturing industries. This hinders industrialization in Nigeria.

Manufacturing industries in Nigeria are faced with a lot of infrastructural challenges. The main issue that hinders manufacturers in Nigeria is access to uninterrupted power supply. The use of alternative power such as Diesel generators can exorbitantly increase the cost of production by a magnitude that discourages manufacturers. Other infrastructural issues faced by the manufacturing companies include bad roads, poor storage facilities. These factors largely cripple the productivity of the manufacturing sector.

The complexity and difficulty presented by the government when starting or carrying out any business in Nigeria is a destabilizing factor for most intending manufacturing industries.

Also in terms of loan, commercial banks no longer provide clients with unsecured short-term loans as a result of government policy; if a business wishes to receive a loan from a commercial bank, they must provide some type of security or collateral to back up the loan, such as real estate or a financial assets or a long term loan, if they want the bank to approve the transaction.

All these are the problems facing the performance of the manufacturing sector in the Nigerian economy. It is against this backdrop that this research is undertaken to analyze the effect of deposit money bank loan on performance to the manufacturing sector in the Nigerian economy.

Aim and Objectives of the Study:

In light of the above problem, the broad aim of the study is to ascertain the impact of commercial bank loans and advances on the performance of the manufacturing sector in Nigeria.

The specific objectives of this research are:

1. To determine the impact of commercial Bank loan and advances on Nigeria manufacturing sector output.
2. To ascertain the relationship between the interest rate and the manufacturing sector.
3. To assess the nature of the relationship exchange rate and manufacturing sector output.

Research Question:

In the process, an attempt will be made to provide answers to these questions.

1. What impact do commercial bank loans and advances have on the performance of the manufacturing sector output in Nigeria?
2. What effect does interest rate have on manufacturing sector output?
3. To what extent does the exchange rate affect the activities of the manufacturing sector?

Research Hypothesis:

The hypothesis to be tested in this research endeavor is put as follows:

HO₁; Commercial bank loans and advances have no significant impact on the manufacturing sector output in Nigeria.

HO₂; There is no significant relationship between the interest rate and manufacturing sector output.

HO₃; There is no significant relationship between exchange rate and manufacturing sector activities.

Significance of the Study:

This research will serve as a guide to a successful investment opportunity for the manufacturers.

1. The economy as a whole stands the opportunity of growing and developing as this work tends to reconcile the conflicts of economic interest between the commercial banks ( Lenders ) and the manufacturers ( Borrowers ) that will bring about mutual benefits to both parties.
2. The Government will benefit from this research work because it will expose the level of knowledge of the commercial banks and their profitable maintaining and efficiency in the flow of money, loans, and advances toward the performance of the manufacturing sector in Nigeria’s economy. This research work will help to evaluate the strength and weaknesses of Nigeria’s commercial banking sectors.
3. To the academic institutions, it would make the existing theories and new ideas.
4. The study will equally form a basis for further research into other variables that are likely going to be omitted in this work.
5. Finally, the significance of this work lies in the fact that effective implementation of the suggestions that are made will not only help in improving the work of commercial Banks but will equally curb the high. It will also mean an increase and erasers of finance, which will alleviate their problem of inadequate finance for investment purposes.

Scope of the Study:

For this study, the researcher will concentrate on one of the high priority sectors; the manufacturing sector in the Nigerian economy. Furthermore, only commercial banks loans and advances, interest and exchange rates from 1981-2018 based on the availability of data.

This classification becomes necessary because other financial houses or development banks are involved in the distribution of loans and advances to the manufacturing sector.

Limitation of the Study:

The main task of this study is to give in full details the impact of commercial bank loans and advances on the performance of manufacturing sector in Nigeria but due to insufficient time frame for simple and articulate analysis, the study is restricted to only commercial bank loan, data sources from the Central Bank of Nigeria statistical bulletin may not be void of errors which is beyond the control of the researcher. The study is limited to the period of 1981 – 2018.

Organization of the Study:

This project report is divided into five chapters; chapter one introduction the concept and gives a background to the problems. Chapter two examples some relevant literature with the view of providing the background for a theoretical and conceptual framework. Chapter three discussed methodological issues together with model specification, evaluation and sources of data required. Chapter four presents and analyzed the effect of the impact of the study while chapter five contains summary, conclusion, and recommendations.

Definition of Terms:

Manufacturing sector: can be defined to be a segment of the economy that deals with the conversion or transformation of raw materials into finished goodss through value addition.

Manufacturing sector performance: is the amount of useful work accomplished by the manufacturing sector compared to the time resources used.

Commercial bank is a financial firm that accepts deposits subject to withdrawal by cheques on-demand, and invest those depositor funds in interest loans and marketable investment.

Gross Domestic Product (GDP): defines the total money value of all final goods and services produced within the geographical boundary of a country by both indigenes and foreigners within a specified period of time usually a year.

Industrialization: is the process by which an economy is transformed from primarily agricultural to one based on the manufacturing of goods. Individual manual labor is often replaced by mechanized mass production, and craftsmen are replaced by assembly lines.

Bank credit: this is the total amount of loanable fund granted to the manufacturer industrialist over a period of time.

Interest rate: this is the price of money paid per unit as a percentage of borrowed funds or amount.

Currency arbitrage: is a forex strategy in which a currency trader takes advantage of different spreads offered by brokers for a particular currency pair by making trades.

CBN Central Bank of Nigeria: which is the apex bank in Nigeria and it regulates the commercial banks in Nigeria.