THE IMPACT OF BANK SECTORAL LENDING’S AND ECONOMIC GROWTH IN NIGERIA

THE IMPACT OF BANK SECTORAL LENDINGS AND ECONOMIC GROWTH IN NIGERIA

The main purpose of this study is to evaluate the impact of bank sectoral lendings and economic growth in Nigeria.

OTHER RELATED PROJECT TOPICS

CHAPTER ONE: INTRODUCTION – Overview of the Study

A  typical capitalist or mixed economy is made up of surplus and deficit units. In performing their primary function of intermediation, banks collect a deposit from the surplus unit of the economy and lend it out to the deficit unit in form of loans and advances (Kalu,  2009). The role of the financial system in mobilizing and channeling of funds to the real sectors of the economy cannot be taken for granted. A sound financial system is recognized as a necessary and sufficient condition for rapid growth and development for every modern economy (Sanusi, 2012). A typical capitalist or mixed economy is made up of surplus and deficit units.  In performing their primary function of intermediation, banks collect a deposit  from the surplus unit of the economy and lend it out to the deficit unit in form of loans and advances  (Kalu,  2009).  The role of the financial system in mobilizing and channeling of funds to the real sectors of the economy cannot be taken for granted.  A sound financial system is recognized as a necessary and sufficient condition for rapid growth and development for every modern economy (Sanusi, 2012). A typical capitalist or mixed economy is made up of surplus and deficit units. In performing their primary function of intermediation, banks collect the deposit from the surplus unit of the economy and lend it out to the deficit unit in form of loans and advances (Kalu, 2009).  The role of the financial system in mobilizing and channeling of funds to the real sectors of the economy cannot be taken for granted. Sound financial systems recognized as a necessary and sufficient condition for rapid growth and development for every modern economy (Sanusi, 2012)

The financial system consists of institutions like banks, insurance, stock market, and other financial institutions. In Nigeria, the banking sector is an important part of the financial system. The banking sector dominates the Nigerian financial system as it accounts for about 90 % of the total assets in the system and about 65 % of the market capitalization of the Nigeria Stock Exchange (Soludo, 2009). However, the banking sector has not contributed significantly to the growth and development of the Nigerian economy as expected. The poor performance of the sector has been attributed to numerous problems that faced the sector such as inadequate capital, high nonperforming assets which had led to frequent distress in the sector and collapse of some banks in the past (Sanusi, 2012).

A study by the Federal Republic of Nigeria (2011) held that the flow and quality of bank funding to the private sector went down increasingly as the risk aversion of banks increased in the aftermath of the financial meltdown. Funding has made it difficult for firms to invest in modern machines, information and communication technology, and human resources development which are essential factors in trimming down costs, raising productivity, and improving competitive strength.

Even when credit is available, a high lending rate which sometimes goes over 30%, makes such credits unattractive, given the fact that returns on investments in the sub-sector have been below ten percent (10%) on the average (Nwasilike, 2006). The place of a sector like manufacturing in the development of any nation’s economy cannot be over-emphasized. The catalytic role of manufacturing with an 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 of 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).

Economic growth entails a positive change in the national income or the level of production of goods and services by a country over a certain period of time (Oluitan, 2009). Economic growth is measured in terms of the level production within the economy, factor productivity, technological change, physical capital accumulation, and real Gross Domestic Product, (GDP) (Odedokun 1998; Allen & Ndikumama 1998; King and Levine 1993). According to Bencivenga & Smith (1991), the consumption of goods in the economy is produced from capital and labour. Capital is usually mobilized from either personal savings of entrepreneurs and/or loans from banks. This makes bank loans relevant to the economic growth of countries. Research findings have revealed that bank loans can be a causal factor for economic growth. For instance, according to Bayoumi & Melander (2008), a 2.5% reduction in overall credit causes a reduction in the level of GDP by around 1.5%. Demetriades & Hussein (1996) who studied 13 countries supported the causal relationship between a bank loan and economic growth but argued that the causality is time and country bound specific rather than general.

1.2 Statement of Problem

There has been a renewed interest globally in the study of sectorial lending and its ability to generate growth. These studies concluded that firms that constitute the private sector that is able to get external finance are more likely to grow than those limited to internal finance only. Recent studies by Beck et al 2005; Levine 2002 and Boyreau-Debray 2003 emphasized the importance of efficiency of the allocation of lending than an all bank intermediation. According to them, lending to the public sector is weak in generating growth within the economy because they are prone to waste and politically motivated programs that may not deliver the best result. Financial development has a positive impact on growth if efficiently channeled, they concluded. Based on this assertion, it is important to examine whether the above postulation holds for the Nigerian economy. Can we say that the private sector is sufficiently mobilized by the availability of lending to generate growth within the economy? Similarly, there is detailed information about Nigerian banking history, but little information is available about the activities of the financial industry and how they affect the economy where they operate. Specifically, factors that motivate or drive credit growth within the economy are largely under-researched. This is considered very crucial to ensure that financial institutions have the desired effect on the economy. In summary, both credit growth and economic growth have attracted little attention from researchers in Nigeria. There is a dearth of information on critical areas relative to the industry. This work will attempt to stimulate ideas within these relatively under-researched areas. Basically, the Nigerian deposit money banks dominate the financial sector and account for a large proportion (above 90%) of transactions within the system. This is measured as a percentage of total assets of the deposit money banks to other financial institutions within the system. The above clearly shows that the deposit money banks dominate the Nigerian banking scene. It, therefore, becomes very important to study the effectiveness of these banks on the economy and the factors that are very crucial to their continued relevance to the system.

Behind this view lies the more fundamental question: for example, what is the nature of Deposit Money Bank credit in the Nigerian economy, does bank credit has any significant impact on Nigeria economic growth with particular reference to private and public sector output. Therefore this study intends to examine the impact of Banks sectoral lending sand economic growth in the Nigerian.

1.3 Purpose of the Study

The main purpose of this study is to evaluate the impact of bank sectoral lendings and economic growth in Nigeria. Specifically, the study aims;

1. To examine the effect of deposit money banks’ lending to the Agricultural sector on Gross Domestic Product in Nigeria.
2. To evaluate the influence of deposit money banks’ lending to the manufacturing sector on the gross domestic product in Nigeria.
3. To ascertain the impact of deposit money banks’ lending to mining & quarrying on the gross domestic product in Nigeria.
4. To verify if there is a significant relationship between Deposit money banks’ lending to the general commerce sector on the gross domestic product in Nigeria.

1.4 Research Questions

In line with the above objectives, the study proposes the following question.

1. To what extent does deposit money banks’ lending to the Agricultural sector influence gross domestic product in Nigeria?
2. What nature of relationship exists between deposit money banks’ lending to the manufacturing sector and Gross Domestic Product in Nigeria?
3. To what extent does deposit money banks’ lending to mining & quarrying influence gross domestic product in Nigeria?
4. To what extent does deposit money banks’ lending to the general commerce sector affect the gross domestic product in Nigeria?

1.5 Research Hypotheses

The following hypotheses are formulated to guide this study;

H₀₁    There is no significant relationship between deposit money banks’ lending to the Agricultural sector and gross domestic product in Nigeria.

H₀₂    There is no significant relationship between deposit money banks’ lending to the manufacturing sector and gross domestic product in Nigeria.

H₀₃:   There is no significant relationship between deposit money banks’ lending to mining & quarrying and gross domestic product in Nigeria.

H₀₄:   There is no significant relationship between deposit money banks’ lending to the general commerce sector and gross domestic product in Nigeria

1.6 Significance of the Study

The study which explores the effect of bank sectoral lendings and economic growth in Nigeria can be used by the monetary authorities as a guide in formulating efficient and effective lending policies that will aid to improve bank sectoral lendings practices by Deposit Money Banks in Nigeria. To the financial advisers, this study will aid them to have in-depth knowledge of the appropriate period and sectors to borrow funds.

To the Government: it will help in creating avenues of suitable economic policy formulation and implementation.

To the Scholars: it will assist in understanding the working and role of bank lendings in the Nigerian Economy.

To practitioners: it will help them in previewing and utilizing these practices to their taste towards achieving the full benefits of bank lendings in both sectors of the economy.

Furthermore, the study will serve as reference material for future studies in a related area and also add to empirical knowledge in this area of study.

1.7 Scope of the Study

This study centers solely on deposit money bank sectoral lendings and economic growth in Nigeria, Spanning over a period of 1986 to 2018.

1.8 Definition of Terms

• Crowding-Out: This is a situation where personal consumption of goods and services or loans and investments by the business is reduced because of an increase in government spending and deficit financing sucking up available financial resources and raising interest rates.

1.9 Limitation of the Study

There are certain limitations that the researcher encountered in the course of carrying out this study, they include:

Financial Constraint: financial constraint which limited the scope of the study on the bank

Time constraint: A research of this nature certainly required a lot of time to make the research a complete one.

Political instability and government policy on bank lending is considered to have strong effects on bank lending.

1.10   Organization of Study

This study comprises of five distinct chapters.  Chapter one deals with the introduction of the background of the study, statement of problem, objectives, hypotheses, significance, scope, limitations, organization, and the definition of terms.  Chapter two reviews related Theoretical, Conceptual, and Empirical literature on bank lending and economic growth.  Chapter three describes the employed research methodology; chapter four is the presentation and analysis of results, also the discussion of findings. Chapter five is devoted to the discussion of findings, conclusion, and recommendation.