MICROCREDITS AND THE RATIO OF THE SECTORIAL OUTPUT CONTRIBUTION TO OUTPUT IN NIGERIA

MICROCREDITS AND THE RATIO OF THE SECTORIAL OUTPUT CONTRIBUTION TO OUTPUT IN NIGERIA

This study aimed to investigate the dynamic relationship between microcredits and the ratio of the sectorial output contribution to output in Nigeria. This study takes into cognizance the price for the credit (interest rate) as a control variable.

GET RELATED RESEARCH PROJECT TOPICS HERE

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Capital is considered to be the life-blood of any investment.  As such, the creation and allocation of funds to juicy investment in various sectors of the economy is expected to increase output via the production of more goods and services in those sectors, resulting in general output growth of that economy. This, however, has been the focus of successive government in Nigeria by the implementation of several national plans and programmers aimed at boosting productivity, as well as diversifying the domestic economic base.

To make this possible, the bank is financial intermediaries whose principal responsibility is the acceptance of deposit from customers and channels the amount mobilized to productive sectors of the economy accessed by the borrowers in need of capital in the form of microcredits and are referred to as bank credits.

(Fapetu & Balada, 2015) Microcredit, therefore, is the extension over small loans (microloans) to impoverish borrow who typically lack collateral, steady employment, or verifiable credit history. It is designed to support entrepreneurship, alleviate poverty, and increase output growth. (Wright,  2000).

The output of the Nigerian economy comes from five main sectors namely; Agriculture, manufacturing and food processing, mining and quarrying, Real estate and construction, Transport, and commerce sectors. These sectors are also the main beneficiaries of microcredits. These sectors interact together using the stock of capital and other factors of production within the reach of the economy to facilitate the production of the desired goods and services as needed by its increasing population.

The availability of bank credit brings about product innovation within these sectors and ensures the use of unemployed resources channeled into economic activities. From the foregoing, it becomes apparent that bank lending is handicap without an inter-play of microcredits and interest rates on those credits.

Anyanwu (1993) explains that the interest rate can be seen as the price paid for the right to borrow and use the loanable funds. They are the price that must be paid to get people to forgo willingly the advantage of liquidity. That is, they refer to the costs of holding money. Hence interest rate is constantly to be a moderating variable in this study. Despite the moderating variable of interest rate on bank lending. Microcredits through bank lending are indisputably considered an important feature in the growth of the Nigerian output across all levels of her productive endeavors. (Fapetu & Obalade,  2015).

However, poor access to capital in developing countries like Nigeria has created a dependence on external sources of funding in order to finance productive activities. This is due to a low capital formation as a resultant effect of reduced savings reflective of the poor standard of living and poverty crises of these nations. The availability of external financing, mostly access to credit on a long term basis affects a firm’s productive level and influences it’s investment decision-makers understand that it is possible to enhance economic activities in specific areas by the delivery of microcredits as loans and advances to producers. (I’m,  2001).

Capital is, therefore, considered the lifeblood of all investments.  It enables the producers to procure the necessary input of production and thereby creates expansion possibilities in production. Therefore,  availability or non-availability influences to a greater extent,  the growth process in the various sectors and it’s a contribution to the total output growth of the entire economy.

Nnamdi ( 2014) explains that,  in the last two decades,  studies on,  the impact of credit from the financial sector to grow the output of the real economic sector (production and commerce) have stimulated extensive fascinating debate within the academic community. These debates took a fast pace into the academic and economic scene after the historic publication of studies of Schumpeter (1934), Goldsmith (1969), Shaw (1973, 1976), and mc Kinnin (1973). Following the rising research by the academic community, several scholars thereafter, such as fry (1988), king & Levine (1993), Levine (2004) and Deserres, Kobayakwa, Slok & Vartia (2006), have supported the significance of bank lending to output growth in an economy. Thus, the ratio of microcredits disbursement to gross domestic product (GDP) has become an increasingly popular benchmark as indicative of sustainable levels of credit.

At the policy level, Adeyemi (2007) explains that the government of Nigeria has consciously developed framework geared towards facilitating condition necessary for the creation of substance of the various institutions that provide microcredits within the financial institutions with a microscope view of achieving financial inclusion and growth of its output across all Levels.

It is supportive of such view, that the governors of the Central Bank of Nigeria (CBN), at its meeting held on 25th January 2011 .resolved that, microcredits must be well disbursed within the next coming years to the various sectors of the economy order to stimulate economic growth of the nation. (CBN Bulletin, 2011).

1.2 Statement of the problem

The policy framework establishing microfinance banks (MFBS) saddles them with the responsibility of providing diversified, affordable, and dependable financial services and products through the administration of microcredits to the active poor (Hope, 2009). The purpose of this microcredit is to bring about product innovation across economic section sectors and to ensure the use of unemployed resources channeled into economic activities. Microcredits increase the borrower’s access to more factors of production by so doing, creating the required funds necessary to ensure the production of more goods and services. As a result of all these, there is an increase in the growth of Sectoral output, lending also a favorable contribution to the total output of the nation’s economy.

However, despite the series of bank reforms such as deregulation and liberalization of the banking sector, a dynamic problem still lingers on such inefficiency in its allocation of microcredits to the real sectors of the economy. According to CBN (2012), these reforms began in 2004 through the consolidation of mergers and acquisitions raising the capital base form 2 billion nairas to 25 billion thus strategically reducing the 89 number of banks at the time to 24 in 2005. Haashim (2012), explains that all these are targeted at creating an effective and robust system capable of strengthening the ability of the bank to effectively deliver it’s service of credit mobilization, deepening her branch networking,  and funding the real sector of the Nigerian decoying becoming vibrant and economically viable.

As advocated by Abubakar and Gani (2013), the real sector of Nigeria is still finding it’s footings to access microcredits from the bank that arguably hold over 90% of the total asset of the financial sector (IMF Bullet, 1995)

Haashim (2012), explains that the reason for the distortion between reality and theory of the purpose of microcredits in Nigeria is the lack of sustainable long term funding, a decline in domestic credit and disbursement by the banking sector to the various sectors of the economy characterized of pure ownership, high concentration of microcredit to few sectors and mismatch of liquidity allocation to the various units in Nigeria has further effected the sectoral output performance and a such influenced the  Nigerian economy at large.

Adding to this Abubakar and Gani (2013), in their view noted that the inflation of the interest rate discourages many firms in the real sector from accessing credit facilities. More disturbing financing challenge is the overtly excessive concentration of the bank credits to specific sectors of the economy such as oil and gas, communication, and general commerce sector to the obvious neglect and disadvantages to the real sector such as agriculture and manufacturing sector which are drivers of the economy. Banks are also predisposed to the life of financing government financial projects as a clear indication of their asset comprising of 50% government debt, at the expense of private investors who are major players in other sectors of the economy.

Trying to reassess micro credits and it impacts on sectoral growth, (Imoughele et el 2013) ponders on the question; does bank microcredit has a significant impact on Nigeria economic growth with particular reference to agriculture, manufacturing and food processing, mining and quarrying, Real estate and construction, Transportation and commerce sector output?. He further asserts that the sectoral analysis is important given the fact that the differential impact and access of microcredits have implications for employment, poverty reduction, liquidity, and income, inflation, which of crucial significance in a typical emerging economy like Nigerian.

Imoughele et el (2013), further stated that some identified problems are that, most of the studies on the role of microcredit disbursement in output growth were investigated and researched in developed economies. Limited studies exist in the developing /emerging economies (especially in Nigeria), thereby creating a huge knowledge gap. According to research, Oluitan (2007), Josephine (2009), and Haruna, Yahya & Nasiru (2013), we’re the earliest studies on the impact of bank credits in output growth in Nigeria. However, the observance of the lack of clarity about the effect of different sectors level bank credit on output growth of the various sectors of a developing economy like Nigeria is the motivating factor for this study and how those sectors influence the overall economy.

This study intends to reduce this knowledge gap by examining the impact of microcredit output growth in Nigeria (using sector-level Productivity and microfinance credit data), specifically to ascertain whether sector level microcredit has any impact on output growth of the various sectors (namely; Agricultural, manufacturing and food processing, mining and quarrying, Real estate and construction, Transportation commerce sectors).

 1.3 Aim and objectives of the study

In light of the above problem, the aim of this is to investigate the dynamic relationship between microcredits and the ratio of the sectorial output contribution to output in Nigeria. This study takes into cognizance the price for the credit (interest rate) as a control variable, specifically, the study objective is to;

1. To examine the nature of the dynamic relationship between microcredits to the agricultural sector and the ratio of agricultural sector contribution to total output (GDP) in Nigeria.
2. To determine the nature of the dynamic relationship between microcredit and to the manufacturing and food processing sector and the ratio of the manufacturing and food processing sector contribution to total output growth (GDP) in Nigeria
3. Establish the nature of the dynamic relationship between microcredit and to the mining and quarrying sector and the ratio of the mining and quarrying sector contribution to total output growth (GDP) in Nigeria
4. To examine the nature of the dynamic relationship between microcredit to the real estate and construction sector and the ratio of the real estate and construction sector contribution to the total output (GDP) in Nigeria
5. To ascertain the nature of the dynamic relationship between microcredit to the Transportation and commerce sector and the ratio of the Transport and commerce sector contribution to the total output growth (GDP) in Nigeria

1.4 Research Questions

In line with the objectives above, this work is being guided by the following research questions;

1. To what extent do changes in microcredit to the agricultural sector affect the ratio of agricultural sector contribution to total output (GDP) and in Nigeria?
2. Are adjustments in micro to the manufacturing and food processing sector important in explaining adjustment in the ratio of manufacturing and food processing sector contribution to total output (GDP) and in Nigeria?
3. To what extent do changes in microcredit to the mining and quarrying sector contribution to total output (GDP) and in Nigeria?
4. Are adjustments in microcredit to the real estate and construction sector important in explaining adjustment in the ratio of the real estate and construction sector contribution to total output (GDP) and in Nigeria?
5. To what extent do changes in microcredit to the transport and commerce sector affect the ratio of transport and commerce sector contribution to total output GDP) in Nigeria?

1.5 Research Hypothesis

Any study that adopts a scientific method proceeds by making a conjectural statement about the relationship between variables. In view of this, the following hypothesis regarding the question above as stated in their null forms are;

Ho₁: There is no dynamic relationship between credit to the agricultural sector and the proportion of agricultural sector contribution to total output (GDP) in Nigeria

Ho₂: There is no dynamic relationship between credits to manufacturing and food processing sector and proportion of manufacturing and food processing sector contribution to total output (GDP) in Nigeria

Ho₃: There is no dynamic relationship between credit to the mining and quarrying sector and the proportion of mining and quarrying sector contribution to total output (GDP) in Nigeria

Ho₄: There is no dynamic relationship between credit to the real estate and construction sector affect the proportion of real estate and construction sector contribution to total output (GDP) in Nigeria

Ho₅: There is no dynamic relationship between credit to Transport and commerce sector and the proportion of Transport and commerce sector contribution to total output (GDP) in Nigeria

1.6. Significance of the study

This study when completed will benefit a wide spectrum of people;

1. Firstly, among them is the academic community as it will form a basis for further studies on the subject matter.
2. The recommendations and findings accruable on the result of this research will provide more information to help Nigerian policymakers in their efforts for efficient credit disbursement to the various sectors of the Nigerian economy.
3. It will provide an objective view that will inform players in the government and financial industry on the approach towards microcredits and it’s the relationship to the growth of the real sector of the economy.
4. Finally, the study will provide an economic basis upon which to examine the effect and relationship of microcredit disbursed to the five (5) cited sectors as used in this study and their influence on total output growth proxy of (GDP).

1.7 Scope of the study

Geographical scope

This study will focus on investigating the nature of the dynamic relationship between microcredit disbursed to five (5) sub-sectors of the Nigerian economy namely, agricultural, manufacturing and food processing, mining and quarrying, real estate and construction, Transportation and commerce sectors and the ratio of their sectoral output growth to total output in relation to the Nigerian economy as measured by the Gross Domestic Product. This will be investigated empirically with time series data spanning from the year 1987-2017.

Content Scope

Sectoral output for the five selected sectors, total output, sectoral output ratio, and interest rate are the dependent variables of this study. Microcredit and the effect of these variables on total output growth in Nigeria’s economy been measured by the Gross Domestic Product as the independent variable. The pattern of microcredits disbursed to these five sectors over the years is discussed and their various sectoral contributions to the Nigerian economy are considered in this study. The concept of Microcredit, interest rate, and Microfinance bank is also analyzed in this study.

1.8. Limitation of the Study

As always in every research work, certain factors tend to act as constraints and this work is by no means an exception. The convenient sample technique used for collecting secondary data for this study possesses the challenge of reliability of the result of this study. This is due to the quest for consistency of data employed in the study searching for data on the same economic variable within the same period over time. Furthermore, it is impossible for any instrument of measurement to be 100% valid and thus. Possesses the challenge of the validity of the result of this study. Finally, there were other significant problems encountered but not paramount to warrant their discussion here. Suffice it however to say these limitations did not introduce any form bias into the work as it was successfully done on a record time.

1.9 Organization of study

This research would be organized into five Chapter one contains the background of the subject matter justifying the need for the study, chapter two reviews some of the existing theoretical and empirical literature while trying to establish the gap in the literature.  The research methodology of the study was started in chapter three. The data collected would be presented, analyzed, and interpreted with the use of tables and figures in chapter four. Concluding comments in chapter five reflects the summary,  conclusion, and recommendations based on the findings of the study.