THE RESPONSIVENESS OF COMMERCIAL BANK LOANS TO ECONOMIC GROWTH IN NIGERIA

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THE RESPONSIVENESS OF COMMERCIAL BANK LOANS TO ECONOMIC GROWTH IN NIGERIA 1999 2014
CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Finance is required by different people, organizations and other economic

agents for different purposes. To provide the needed finance, there are

varieties of institutions rendering financial services. These institutions are

divided into money and capital market. In the money market, we have

commercial banks that render financial services by way of intermediation.

This involves channeling funds from the surplus spending units the

deficient spending units of the economy therefore, transforming bank

deposits to loans.

The role of credit in economic development has been recognized as loans

obtained by various economic agents to enable them meet operating

expenses. For instance business firm obtained loan by machinery and

equipment. Farmers collect loans to buy seeds, fertilizers, erect various

kinds of farm buildings; government bodies obtain loans to meet various

kinds of recurrent and capital expenditures. Furthermore, individuals and

families also take loans to buy and pay for goods and services (Adeniyi,

2006). Ademu (2006) is of the view of the provisions of loans with

sufficient consideration for the sector’s volume and price system is a way

to generate self-employment opportunities. This is because loans help to

create and maintain a reasonable business size as it is used to establish

and/or expand the business, to take advantage of economies of scale. It

can also be used to improve informal activity and increase its efficiency.

This is achievable through resource substitution which is facilitated by the

availability of loans, Ademu (2006).

Further, explained that loans can be used to prevent an economic activity

from total collapse in the event of natural disaster, such as flood, drought,

diseases or fire. Loans can be garnered to revive such an economic activity

that suffered the set back.

The banking sector helps to make these loans available by mobilizing

surplus funds from savers who have no immediate need of such funds and

thus channel such funds in form of loan to investors who have brilliant

ideas on how to create additional wealth in the economy but lack the

necessary capital to execute the ideas. (Nwanyanwu 2010). It is instructive

to note that the banking sector has stood out in the financial sector as of

prime importance, because in many developing countries of the world, the

sector is virtually the only financial means of attracting private savings on a

large scale (Ademiji, 2006).

Adekanye (1986) observes that making loan available, banks are rendering

a great service, because through their action production is increase, capital

investment are expended and a higher standard of living is realized.

Furthermore economic growth is one major objective of macroeconomic

policy. It is the crucial means of uplifting the standard as well as achieving

economic development. Economists defined economic growth from various

perspectives, some economists view that it is an increase in the national

income or the level of production of goods and services by a country over a

certain period of time. Generally economic growth is defined as an increase

in Guess Domestic Product (GDP). Therefore, Gross Domestic Product

(GDP) is considered a proxy of economic growth in the study. Loan is the

aggregate amount of funds provided by commercial banks to individuals,

business consumptions and investment purposes.

1.2 STATEMENT OF THE PROBLEM

Bank have been lending to the economy but thr impact of these on growth

of the Nigerian economy is yet to be ascertained.

Since the new political dispensation economic growth rate have been

fluctuating, so how far banks have contributed to the growth has remained

an issue with some saying, it has made a significant effect on the economic

growth while others are of the view that it has no significant effect on

economic growth.

There are in the literature debates on the intermediary role of banks in the

economic growth. But, these seems to be a general consensus that the role

of intermediation of banks help in boosting economic growth, Akintola

(2004) identifies banks’ traditional roles to include financing of agricultural,

manufacturing and syndicating of credit to productive sectors of the

economy. The Nigerian banking industry has been subjected to varying

degree of regulations since the enactment of the 1952 Banking Ordinance.

This has seen the rise and fall of several banks in Nigeria.

According to (Obademi and Elumaro 2014), bank regulations have negative

impact on banks contribution to economic growth in Nigeria. Impact of

economic growth process in Nigeria are felt most under deregulation

regime considering the aforementioned and given the intermediary role of

commercial banks in economic growth, this study intends to examine the

impact of commercial bank credit on economic growth in Nigeria.

1.3 OBJECTIVES OF THE STUDY

The following are the major objectives of this research work.
1. Examine the impact of commercial banks credit on economic growth in

Nigeria

2. Examine the contribution of commercial banks credit to Gross Domestic

Product with aim of examining past and current trends based on

historical data to examine the effectiveness of this sector.

3. Examine the extent to which intermediation credit to private sector of

the economy has influence economic growth in Nigeria.

1.4 RESEARCH QUESTIONS

1. Does commercial banks really contribute significantly to economic

growth in Nigeria?

2. How far growth in commercial banks respond to real sector growth or

vice versa?

3. To what extent does intermediation credit to private sectors influence

economic growth in Nigeria?

1.5 RESEARCH HYPOTHSES

1. Ho: Commercial bank credit does not have a positive and significant

impact on the growth of the Nigerian economy.

2. Ho: Commercial bank credit does not have a positive and significant

effect on Gross Domestic Product.

3. Ho: Bank intermediation credit to private sector of the economy does

not have a positive and significant influence on economic growth

in Nigeria.

1.6 SCOPE OF RESEARCH

This research work centers mainly on the responsiveness of commercial

bank credit in economic growth of Nigeria. The scope of this research work

is determined and limited by the sample size chosen. It covers the period

1999 – 2014.

1.7 SIGNIFICANCE OF THE STUDY

This research will not be the first in the field as there exists abundance of

works on the role of commercial banks loan in economic development in

Nigeria but the research brings a unique addition to the various studies in

the field as it takes a deeper look at the institutional quality in driving

growth in Nigeria economy. This study provide a platform of relevant

reference for future researchers in the field as well as help policy makers in

making decision on the over sight of legal enforcement which has reduced

by over 45% in just 20yrs. This also depicts the level of weakness in

Nigerian institutions, supporting previous studies particularly Ross (2001)

and Acemoglu and Johnson (2007) who argue that institutions in

developing countries are weak.

1. GENERAL PUBLIC:
The result of this study will educate the general public on the relationship

between borrowing money from commercial banks and economic growth

in Nigeria. And to also tap into this to obtain loan from commercial

banks to enhance investment, job and employment opportunities which

on the other hand will boast economic growth in the country.

2. BODY OF LITERATURE:
This research will be a contribution to the body of literature in the area

of the responsiveness of bank loans to economic growth in Nigeria.

3. CENTRAL BANK OF NIGERIA:

CBN will be able to know how to regulate it minimum rediscount rate to

enable banks fix interest rates on their loan able funds.

4. COMMERCIAL BANKS:

Commercial banks on the other hand adopting direct credit control to

favour preferred sectors like Agriculture and manufacturing.

Monetary authorities should through monetary policy reduce legal reserve

requirement for banks to enable the banking sector to credit more credit

for the economy.

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