PROJECT TOPIC- IMPACT OF BANKING CREDIT ON ECONOMIC GROWTH IN NIGERIA, 1987-2012
Globally, it is expected that banks should play vital roles in financing economic activities as their contribution at ensuring sustainable economic growth and development. The intermediary role of banks can foster economic growth through raising of savings, improving efficiency of loan-able funds and promoting capital accumulation. In Nigeria, the banking industry as well as the entire economy assumed a new dimension in September 1986 when the then Military government introduced the Structural Adjustment Programme (SAP). Expectedly, this restructuring brought certain changes not only to the banking system but also the entire economy of Nigeria. However, whether continuation of policies allied to the programme has increased access to loan-able funds through the intermediation functions of banks is still contentious. It is against this background that this study examined the impact of
bank credit on economic growth in Nigeria from 1987 to 2012, and specifically sought to evaluate the impact of bank credits advanced to the private sector on Nigerian economic growth, ascertain the effect of bank credits extended to the public sector on Nigerian economic growth and ascertain the impact of the aggregate bank credits to the private and the public sectors on the Nigerian economy. The study adopted the ex-post facto research design and times series data were collated from the Central Bank of Nigeria Statistical Bulletin and Annual Reports. The OLS regression statistic was used to test the hypotheses stated. The estimated regression results indicate that private sector credits, public sector credits and the aggregate bank credits to the private and the public sectors impact positively and significantly on economic growth over the period of the study. The study concludes that for the Nigerian economy to grow, policy frameworks that favour more credits to the private sector of the Nigerian economy with minimal interest rate to stimulate economic growth should be pursued by government. This will assist in making more loan-able funds available for investment into the real sectors of the economy. The study, therefore, recommends among others that policies on public sector borrowing and spending should be reviewed in order to discourage gross unproductive “white elephant” investments and more credits channeled into subsectors with more linkage effects such as agriculture, manufacturing, energy and infrastructural development.
1.1 BACKGROUND OF THE STUDY
Globally, banks in developing countries are expected to play vital and effective roles in financing their economic projects and activities as their contribution in ensuring sustainable economic growth.
Theoretical discussions about the importance of credit development and the role that the banking industry plays in economic growth have occupied a key position in the literature of development finance. According to Osada and Saito (2010), financial or credit development can foster economic growth by raising savings, improving efficiency of loan-able funds and promoting capital accumulation. Banking industry credit in Nigeria assumed a new dimension and was transformed by the recapitalization and consolidation of banks which restructured them for better performance.
Access to bank credit or financing can be said to improve commensurately in response to competition and the healthy sate of soundness the banks attained. Availability of credit allows firms to increase production, output and efficiency and in turn increases the profitability of banks through interest earned (Agada, 2010).
The role of credit in economic growth has been recognized as credits are obtained by various economic agents to enable them meet operating expenses
(Nwanyanwu, 2008). Furthermore, according to Ademu (2006), the provision of credit with sufficient consideration for the sector’s volume and price system is a way of achieving economic growth through self–employment opportunities. While highlighting the role of credit to the growth of any economy, he further explained that credit can be used to prevent an economic activity from total collapse in the event of unforeseen circumstances.
The debate on the intermediary role of banks in the economic development has dominated many discussions in literature.
However, there seem to be general consensus that the role of intermediary role of banks helps in boosting economic growth and development. Akintola (2004) identifies banks’ traditional roles to include financing of agriculture, manufacturing and syndicating of credit to productive sectors of the economy. When the banking industry discharges these important functions satisfactorily the outcome would be that the economic growth, as proxied by the Gross Domestic Product (GDP), will improve commensurately.
Akpansung and Babalola (2008) have stated that the central Bank of Nigeria has been seen to be playing a leading and catalytic role by using direct control not only to control overall credit expansion but also to determine the proportion of bank loans and advances to “high priority sector” and “other”. According to them, this sectoral distribution of bank credits is often meant to stimulate the productive sectors and consequently lead to increased economic growth in the country. Citing Driscoll (2004), they opine that financial development can foster economic growth by raising savings, improving allocative efficiency of loanable funds and promoting capital accumulation. Arguing along this path, Jayaratne and Strahan (1996) maintain that well-developed financial markets are necessary for overall economic advancement of less developed and emerging economies.
PROJECT TOPIC- IMPACT OF BANKING CREDIT ON ECONOMIC GROWTH IN NIGERIA, 1987-2012
1.2 STATEMENT OF THE PROBLEM
There still remains a gap in understanding the causal relationship between banking industry credit and economic growth in developing economies. And
particularly, little studies have been done to find out the impact the various types of deposit money bank credits have on the growth of national economies. The influence of such types of credit (like those advanced to the public sector and the private sector) on economic growth has received little interest from researchers. Tuuli (2002) posits that although there have been numerous empirical studies on the determinants of growth in transition economies the relationship between bank credits and economic growth, however, has largely been ignored. Thus, studying the impact of the deposit
money bank credits on the growth of the Nigeria economy has become very necessary. And until this vacuum is filled, the unavoidable questions on the study will remain unanswered.
Generally, economic growth has long been considered an important goal of economic policy with substantial body of research dedicated to explaining how this goal can be achieved. But unfortunately, such concerted efforts in both researchers and policies have yielded no meaningful result. The questions, therefore, remain why is it so? And what practical measures should be taken to plug the situation? Central Bank of Nigeria (2009) notes that flow of credit to the priority sectors fell short of prescribed targets and failed to impact positively on investment, output and domestic price level. Certainly, these comments have triggered questions on the effectiveness and productivity of bank credits on the Nigerian economy. In similar perspective, Taiwo and Abayomi (2011) note that the justification of public sector credits is for the provision of infrastructural facilities, which will consequently drive economic growth. However, they further posit that the effects of such government spending on economic growth are still an unresolved issue theoretically as well as empirically.
1.3 OBJECTIVES OF THE STUDY
The general objective of this study is to ascertain the impact of deposit money bank credits on Nigeria’s economic growth. In line with this, the specific objectives of the study include the following:
1. To evaluate the impact of bank credits advanced to the private sector on the Nigerian economic growth.
2. To ascertain the effect of bank credits extended to the public sector on Nigerian economic growth.
3. To ascertain the impact of the aggregate bank credits to the private and public sectors on the Nigerian economy.