COMERCIAL BANKS CREDIT AND ITS IMPACT
ON INDUSTRIAL GROWTH IN NIGERIA
By
MAYOWA, YEWANDE
NOU154723695
A PROJECT SUBMITTED TO THE DEPARTMENT OF ECONOMICS
FACULTY OF SOCIAL SCIENCE
NATIONAL OPEN UNIVERSITY OF NIGERIA (NOUN)
IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE
AWARD OF BACHELOR OF SOCIAL SCIENCE DEGREE IN
ECONOMICS
NOVEMBER, 2022
i
CERTIFICATION
I certify that this project work was carried out by MAYOWA YEWANDE of the Department of
Economics with matriculation number NOU154723695 and has satisfactorily completed the
requirements for the award of Bachelor of Social Science Degree in Economics, Faculty of Social
Science, National Open University of Nigeria (NOUN).
……………………………………..
..............................
DR. JANET OKEBIORUN
DATE
(Project Supervisor)
……………………………………..
..............................
DR. (MRS) OFE I. INUA
DATE
(Study Center Director)
…………………………………………
...............................
PROF. (Dean, Faculty of Social Science)
DATE
ii
DEDICATION
I respectfully dedicate this project to Almighty God and to Mr Abdulquadri Dahiru for his
endless financial support and words of encouragements. I appreciate every effort put in
shaping me into the woman I have become today. Thank you for encouraging me to dream,
and for providing a platform for me to achieve my dreams. It is with good pleasure and might
that I am able to conclude my B.Sc Honors.
iii
ACKNOWLEDGEMENTS
First and foremost, I give glory to Almighty God. He made me to start and complete this
research work. I thank Him for constant provision of theand He has graciously favored me.
Though the road was rough but God has been so good to me. Also not forgetting my
supervisor, Dr Janet Okebiorun, whose critiques, patience, encouragement, valuable ideas,
guidance, stimulating motivation, unadulterated support helped me through this research
process, her attention to details still lingers. My appreciation also goes to the Head,
Department of Economics whose commitments and leadership quality has encouraged and
smooth running of the program.
I will not also forget NOUN academic staff in the Department of Economics. I am also indebted to
my course mates who in one way or the other contributed immensely towards the completion of
my project research and to my admirable friends and siblings.
iv
TABLE OF CONTENTS
Page
Title Page
i
Certification
ii
Dedication
iii
Acknowledgment
iv
Table of Contents
v
List of Tables
vii
Abstract
viii
CHAPTER ONE: INTRODUCTION
1.1
Background to the Study
1
1.2
Statement of the Problem
5
1.3
Objectives of the Study
8
1.4
Research Questions
8
1.5
Research Hypotheses
9
1.6
Significance of the Study
10
1.7
Scope of the Study
11
1.8
Limitation of the Study
11
1.9
Operational Definition of Terms
12
v
CHAPTER TWO: LITERATURE REVIEW
2.0
Conceptual Review
14
2.1
Concept of Bank Credit
14
2.1.2
Types of Bank Credit
16
2.1.3
Forms of Credit
17
2.1.4
Credit Policy Formulation
19
2.1.5
Credit Appraisal Procedure
20
2.1.6
Developments in Nigerian Banking Sector
21
2.1.7
Structure of the Banking Industry
26
2.1.8
Concept of Industrial Growth
30
2.1.9
Challenges Facing Industrial Development in Nigeria
31
2.1.10 Bank Credit and Industrial Expansion
36
2.2
Theoretical Review
39
2.2.1
The Monetary Transmission Mechanism
39
2.3
Empirical Review on the Impact of Bank Credit on Industrial Growth
40
CHAPTER THREE: RESEARCH METHODOLOGY
3.0
Introduction
49
3.1
Research Design
49
3.2
Model Specification
49
3.4
Source of Data and Data Collection Procedure
50
3.5
Population of the Study
50
3.6
Sampling and Sample Technique
51
3.7
Instrument for Data Collection
51
vi
3.8
Validity of the Instrument
52
3.9
Reliability of the Instrument
52
3.10
Procedure for Data Collection
52
3.11
Method of Data Analysis
53
CHAPTER FOUR: DATA ANALYSIS AND RESULTS PRESENTATION
4.1
Data Analysis and Presentation
54
4.2
Analysis of Socio-Demographic Variable
54
Categorical Data Analysis
54
4.3.1
Credit Policies of Commercial Banks
55
4.3.2
Economic and Operational Factors Limiting Access to Commercial Banks Credit
57
4.3
4.3.3 Credit Policies and its Impact on Industrial Growth Cascade Down to the Consumers
59
4.4
Test of Hypotheses
61
4.5
Discussion of Finding
67
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION
5.1
Summary
69
5.2
Conclusion
70
5.3
Recommendation
71
REFERENCES
73
vii
LIST OF TABLES
Page
Table 4.1:
Analysis of Credit Policies used by Commercial Banks and the Growth of
Industries in Nigeria
Table 4.2:
55
Analysis of Economic and Operational Factors Limiting Access to Commercial
Banks Credit
Table 4.3:
57
Analysis of Credit policies and its impact on industrial growth cascade down
to the consumers
Table 4.4:
60
Pearson test of relationship between Credit policies by Commercial Banks and
Growth of Industries in Nigeria
Table 4.5:
62
Pearson test of relationship between economic and operational factors Limiting
Access to Credit by industries and Commercial Banks
Table 4.6:
64
Pearson test of relationship between Policy Recommendations and Financing of
Industries
65
Table 4.7: Pearson test of relationship between Commercial Bank Credit and Industrial Growth 66
viii
ABSTRACT
ix
CHAPTER ONE
INTRODUCTION
1.3
Background to the Study
Sustaining economic development has been the paramount objective of all successive
government in the country since Nigeria independence in 1960. This led to the implementation
of several national development plans and programs aimed at boosting productivity and
diversifying the economic base. The agenda necessitates the intervention of financial sectors
especially banking industry by providing financial resources for large scale production of
industries and provision of other credit facilities within the economy.
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 been overtaken to the services sector in a number of
organization for Economic Co-operation and Development (OECD) countries (Anyanwu, 2003).
Before independence, agricultural products dominated Nigeria’s economy and accounted for the
major share of its foreign exchange earnings. Initially, inadequate capital investment permitted
only modest expansion of manufacturing activities. Early efforts in manufacturing sector were
oriented towards the adoption of an import substitution strategy in which Light Industry and
assembly related manufacturing ventures were embarked upon by the formal trading companies
up to about 1970. The prime mover in manufacturing activities was the private sector which
established some agro-based Light manufacturing units such as vegetable oil extraction plants,
1
turneries tobacco processing, textiles, beverages and petroleum products. The strategy of light
and assemblage manufacturing shifted somewhat to heavy industries from the period of the Third
National Development Plan (1975-1980) when government intervened to establish Core
Industrial Plants to provide basic imports for the downstream industries. The import dependent
industrialization strategy virtually came to a halt in the late 1970s and early 1980s when the
Liberal Import Policy expanded the imports of finished goods to the detriment of domestic
production (Ariyo, 2005) In this regard, industrialization constitute a veritable channel of
attaining the Lofty and desirable conception and goals of improved quality of life for the
populace. Thus, in a supportive mood, Lovis (1967), assumes that in any economy, one or more
sectors serve as a prime mover moving the rest of the economy forward. The role of engine of
growth or leading sector has usually been played by industrial sector under the industrialization
process.
Against this background, industrialization involves extensive technology based development of
the productive (manufacturing) system of an economy. Thus, the development of the industrial
sector represents the deliberate and sustained application and combination of suitable
technology, management techniques and other resources to move the economy from the
traditional low level of production to a more automated and efficient system of mass production
of goods and services. Arising from the foregoing affirmed centrality of industrialization as a
pivot of economic growth and development, industrialization process seems to be the main hope
of most Research Journal of Finance and Accounting.
In recognitions of these potential roles of the sector, successive governments in Nigeria have
continued to articulate policy measures and programs to achieve industrial growth incentive and
2
adequate finance. The central goal of government policy was to foster growth in the industrial
sector. Over the years, and largely in response to some of the previous policy strategies, the main
features of the Nigerian manufacturing sector in demerged.
The role of bank credits in the growth of industrial sector cannot be overemphasized. For
instance, the Federal Government’s Appropriation Bill for the year 2005 has as one of its broad
policy objectives to achieve a high economic growth rate i.e. GDP of at least 5%) through a
better mobilization and prudent use of economic resources. This objective is not achievable
without significant levels of resources from the financial sector being mobilized and deployed to
finance business expansion and growth. Banks have to be effective intermediaries for mobilizing
and channeling deposits to the productive sectors of the economy especially the manufacturing
sector.
The role of financial intermediation in sustaining economic development cannot be overemphasized. The development of this sector determines how it can effectively and efficiently
discharge its major role of mobilizing fund from the surplus unit to the deficit unit within the
economy. The importance of bank credit in developing economy has been acknowledge in
Schumpeter (1934) who argue that banking sector facilitate technological innovation through
their intermediary role. He emphasized on the efficient allocation of savings through
identification and funding of entrepreneur as well as implementation of innovative production
processes that are the main tools in order to achieve real economic performance.
According to Adekunle, Salami and Adedipe (2013), a well-developed financial system play
several roles to boost efficiency of intermediation through reduction of information, transaction
and monitoring costs. It will also enhance investment by identifying and funding good business
3
opportunities, mobilizes savings, encourage trading, hedging and diversification of risk as well
as facilitating exchange of goods and services. All these resulted in more efficient allocation of
resources, accumulation of physical and human capital and faster technological progress, which
in turn leads to economic growth. In the same vein, Shaw (1967) and McKinnon (1973) also
agreed the fact that financial development facilitates economic growth by increasing savings,
efficient allocation and investment of financial resources. These studies further explained that
development of financial markets is an essential condition for rapid growth. The level of
development and sophistication of a country's financial sectors could be relied on as one of the
valuable indicators of economic growth.
However, acknowledging the role of bank credit in an economy led to introduction of various
banking reforms and adoption of Structural Adjustment Programme in 1986 to enhance credit
accessibility. The intention of these reforms was to ensure financial stability so as to influence
Nigerian economy and enhance banks' financial intermediation role in the provision and
accessibility of credit to improve banking services in the economic units. Regrettably, these
reforms affected the level of financial development of the country and the relevance of financial
system to the economy. Since then, the rapid globalization of financial markets and increased
level of integration of the Nigerian financial system compare to global system generated interest
on the level of financial services required to guarantee steady economic growth. Access to
formal financial services for the poor and SMEs have remained very low.
Credit is the main channel through which savings are transformed into investments. However,
not all savings are used to finance investments despite high demand for credit because of the
limited accessibility to credits in Nigeria (Azege, 2007). Indeed, the lack of credit has been cited
4
by firm managers in the developing countries especially Nigeria as their major constraint
(Bigstein and Soderbom, 2005). Lack of funds has made it difficult for industries to invest in
modern machines, information technology and human resources development which are critical
in reducing production costs, raising productivity and improving competitiveness.
Also, low investments have been traced to unwillingness of banks to provide credits to
manufacturers, owing partly to the mismatch between the short-term nature of banks' funds and
the medium to long term nature of funds needed by industries.
1.4
Statement of the Problem
Hashim, (2012) posits that despite series of bank reformed aimed at strengthening the ability of
banks to efficient services delivery and branch networking as well as funding the real sector to
boost Nigerian economy, the dynamic challenges still lingers on the efforts. The problems such
as inefficient allocation of funds to the real sector, lack of long-dated funding, decline in
domestic credit by the banking sector to the private sector, mismatch of liquidity in the Nigeria
economy, etcetera were attributed to the financial inefficiency in the economy.
Abubakar and Gani, (2013) also agreed that the real sector in Nigeria still face difficulty in the
accessibility of financial resources especially from the commercial banks that hold about 90% of
the total financial sector assets and high rate of interest rate causing many firms to avoid bankborrowing. Other formidable financing challenges include concentration of bank credit to the oil
and gas, communication and general commerce sectors to the disadvantage of the core real
sectors such as agriculture and manufacturing sectors. Also, banks are more disposed to
financing government financial need as almost 50% of their assets are tied up by government
5
debt. Based on this premise, the study therefore investigates the impact of bank credits on
Nigerian economy growth.
This study employed stage of development theory as presented by Patrick, (1966) as its
theoretical framework. This theory states that the direction of causality relationship between
financial development and economic growth changes over the course of the development.
That is, at the early stage of development, the supply-leading impetus is well known when the
real growth occurs within the economy as a result of demand for financial services. The theory
also suggested a demand following relationship between financial services and economic
development. High economic growth creates demand for financial services and allows financial
markets to respond to such demands. At this stage, the level of demand for financial services
depends on the growth of real output, commercialization and monetization of agriculture and
other traditional substance sectors. King and Levine (1993) agreed that finance does not only
follow growth; it is an important instrument that leads economic growth.
Greenwood and Jovanovic (1990) also discovered that financial institutions produce better
information, improve resource allocation (through financing firms with the best technology) and
thereby induce growth.
Several studies have made attempts to evaluate the significant impact of bank credits on
economic growth and development of a specific country(s) or region(s). These studies were
drawn from the submissions of Aliero, Abdullahi and Adamu (2013), Abubakar and Gani
(2013), Bhusal (2012) and others. Aliero, Abdullahi and Adamu (2013) adopted Autoregressive
6
Distributed Lag Bound Approach (ARDL) to examine the relationship between commercial
banks' sector credits and economic growth in Nigeria for the period of 37 years (i.e. 1974-2010).
Also, Demetriades and Hussein (1996) investigate the relationship between financial
development and economic growth of 16 less developed countries between 1960 and 1990 with
the aid of time series technique. They uncover a long run relationship between financial
development and per capital GDP in 13 countries.
The findings revealed that all variables except domestic credit are non-stationary at the level,
when time series properties of variables help to detect the impact of policy reforms are examined
with a structural break; only economic growth experienced a shock, growing positively after the
liberalization. Similarly, domestic credit provided by banks witness negative growth, and it
decreased in pace after policy reforms, which implies that the role of government declined after
the liberalization.
However, there is no impact of policy reforms on some of the indicators. Some problems in the
banking sector, such as inadequate expansion of commercial banks and their branches in the
rural non-monetized sector, nonperforming loans that discouraged credit allocation, and so on,
may be the reasons policy reforms for financial development were ineffective. Nuno, (2012) also
investigates the nexus between bank credit and economic growth in the European Union (EU-27
for the period 1990 to 2010.
The results show that while savings promotes economic growth, inflation and bank credits
negatively impact on economic growth. The study concludes that domestic credit boom if not
properly managed, has the potential of weakening the banking system because it has inherent
capacity to discourage savings, accumulation and investment.
7
1.3
Objectives of the Study
The broad objective of this study is to examine the effect of commercial bank credit policies on
industrial growth in Nigeria. The specific objectives are:
1. To examine the relationship between credit policies used by Commercial Banks and the
growth of industries in Nigeria.
2. To identify factors that limits industries from gaining access to credit from the
commercial banks.
3. To make relevant policy recommendations that enhances the financing of industries in
Nigeria.
4. To examine the impact of commercial banks credit policies on industrial growth in
Nigeria.
1.4
Research Questions
In other to achieve the objectives of the study, the following research questions are hereby
posited:
1. What is the relationship between credit policies used by Commercial Banks and the
growth of industries in Nigeria?
2. What are those factors that limits industries from gaining access to credit from the
commercial banks?
3. What policy recommendations that enhances the financing of industries in Nigeria?
4. Is there a positive relationship between commercial bank credit policies and industrial
growth in Nigeria?
8
1.5
Research Hypotheses
The following hypotheses are hereby posited to guide the research:
Formulation of hypothesis using Ho and HI
Where:
Ho (null hypothesis)
HI (alternative hypothesis)
Hypothesis One
Ho:
Credit policies used by Commercial Banks has no significant relationship with the growth
of industries in Nigeria.
H1:
Credit policies used by Commercial Banks has significant relationship with the growth of
industries in Nigeria.
Hypothesis Two
Ho:
There is no significant relationship between commercial banks credit scheme and the
growth of industries
H1:
There is significant relationship between commercial banks credit scheme and the growth
of industries
Hypothesis Three
Ho: Policy recommendations does not enhance the financing of industries in Nigeria.
H1: Policy recommendations does enhance the financing of industries in Nigeria.
9
Hypothesis Four
Ho:
There is no positive relationship between commercial bank credit policies and industrial
growth in Nigeria.
H1:
There is a positive relationship between commercial bank credit policies and industrial
growth in Nigeria.
1.6
Significance of the Study
The research is significant for the following reasons:
Government: This study will enlighten the government and government agencies and serve as a
guide towards designing and implementation of fiscal policies on commercial lending that will
improve industrial growth in Nigeria.
Policy makers: This study will add to the knowledge of policy makers towards making policies
that will enhance industrial growth in Nigeria. The significant of this study lies in the fact that it
will expose the extent to which commercial credit policies has contributed to industrial growth
and the economic development of Nigeria. It will highlight some obstacles hindering commercial
credit policies which affects the industries that depend solely on their internal generated income
to finance the industry. This will help the policy makers on making adequate policies that will
encourage industrial growth in Nigeria through commercial credits.
Investors: This research work will also be of importance to investors by providing information
on industrialization policies and availability of commercial credit policy and capacity of the
industry they intend to invest on, thereby helping the investor in understanding the possible
outcome of his investment and how to channel his investment for maximum gain.
10
Academics: This research upon completion will add to the bunch of academic materials related
to the impact of commercial credit policies on industrial growth. This research study tends to
serve as an academic book, to impact knowledge on the area concerning commercial credit
policies, industrial sector and economic growth.
Researchers: The study will serve as a guide for researchers who research on the topic under
study or related topics. It will provide relevant information for references. The relevance of this
work also lies in the fact that it adds to the already existing literature on commercial credit
policies and its impact in industrial growth in Nigeria.
General Public: As no knowledge is a waste, the study will equally enlighten the general public
on issues relating to commercial credit policies and industrial growth in Nigeria. It will serve as a
guild for those who which to invest in the industrial sector of the economy.
1.7
Scope of the Study
This research work deals on the impact of commercial credit policies on industrial growth in
Nigeria. The variables used in the study includes industrial production index (IPI) as a proxy for
industrial growth, interest rate, exchange rate and bank credits. Data used covered the period of
2000 to 2017.
1.8
Limitation of the Study
This study is constrained by the following:
i.
Financial constraints: the researcher, based on his limited pocket economy faced
challenges relating to finance.
11
ii.
Time constraints: The time seems to be limited and much occupied during the period of
conducting this research work. The research work was done alongside other academic
works of the researcher, as such, limits the time scheduled for this research work.
iii.
Insufficient availability of materials: this also pose a threat to smooth execution of this
research study as materials for this study was not gotten in abundance as the case of
Nigeria and some other developing countries who lacks adequacy on data collection and
dissemination.
1.9
Operational Definition of Terms
It would be very important for me to define clearly some of the terms used ion the study to
enable the reader realize quickly what is being written to avoid any controversial interpretation
of terminologies or phrases.
Commercial Banks: Commercial banks are profit seeking and risk-averse institutions. These are
banks which give short-term loans using money from current accounts.
Commercial Banks Credit: A bank loan to a company; also called commercial lending or
business credit. A commercial loan is a debt-based funding arrangement between a business and
a financial institution such as a bank, typically used to fund major capital expenditures and/or
cover operational costs that the company may otherwise be unable to afford, as opposed to a loan
made to an individual.
Commercial Banks Credit Policies: these are fiscal policies that guides commercial bank
lending or credits.
Industry: This involves all the people and the processes that are involved in manufacturing or
producing a particular thing.
12
Industrial growth: this is the measure of the output of the industrial sector in Nigeria. The
proxy used for industrial growth in this study is the Industrial Production Index (IPI).
Interest rate: Public finance (a modern approach 2007) by Augustine O. Idomkeh defines
interest rate as a loan or it can be seen as the earnings of capital or payment made for using
capital (money capital). It is also the amount of interest due per period, as a proportion of the
amount lent, deposited or borrowed (called the principal sum). The total interest on an amount
lent or borrowed depends on the principal sum, the interest rate, the compounding frequency, and
the length of time over which it is lent, deposited or borrowed.
13
CHAPTER TWO
LITERATURE REVIEW
2.0
CONCEPTUAL REVIEW
2.1
Concept of Bank Credit
The primary function of a bank is to deposit which in turn are used as a bank credit or bank loan
to service certain areas of the economy. The role of the financial system of any nation is to
provide adequate directing of assets to the different divisions of the economy for growth to be
achieved. Aliyu and Hashin (2014) defined bank credit as credit extended to banks to borrowers.
It is an understanding between cash loaning banks and borrowers where the loaning bank trust a
borrower or pay back the money borrowed and certain interest for either a loan, credit card or a
credit line as a later date. It is also money banks lend or having already lent to customers within
a specific time frame in mind. Olowufeso et al. (2015) opined that bank credit is the total
borrowing capacity bank provides to borrowers. It gives the establishment or organization,
borrowers or the sector that requires the credit for the ability to use the credit as capital to start a
business or to invest in an already growing business. The borrower involved pays off the credit
with a certain amount of interest.
CBN briefs (2003) define bank credits as the amount of loans and advances given by the banking
sector to the various economic agents. CBN Monetary policy circular (2010) identifies such bank
credit facilities to include loans, advances, commercial papers, bankers’ acceptance, bill
discounted with a bank credit risk. Bank credit is often accomplished with some collateral that
helps to ensure the repayment of the loan in the event of default. Credit channels savings into
productive investment thereby encouraging economic growth. According to Nzotta (2004), it is
generally accepted that bank credits influence positively the level of economic activities in any
14
country; it influences what is to be produced, who produces it and quantity to be produced. Bank
credit affects and alters the level of money supply in an economy or country. It is the most
important source of bank income and it promotes the activities of banks and non-bank financial
institution and this influences the level of growth of production, the level of entrepreneurship and
the realization of aggregate economic performance, development and growth. It could thus be
said with absolute assurance that banking industry credit is of crucial importance both to the
bank, the monetary authorities, business community and the economy in general.
Emecheta and Ibe (2014) also defined is as a capacity to borrow in advanced which is given to an
individual firm or an organization in the form of cash loan. The relative quantity and cost of
bank credit is a product of the creditworthiness of the borrower through past relationship, income
and use of the funds are critical factors. Other intricate factors which are involved are the
collateral involved in the bank credit given and what other competing banks are offering. Bank
credit is very critical because if banks are incapable of granting a loan to another part of the
economy that needs the credit in the immediate operational environment, the growth of the
business sector of that place will be impeded, the deposit will be insufficient which will thwart
the capacity of banks to create income. Aliyu and Hashin (2014) opined that the lending function
of a bank is the most important function because of certain features and they are;
-
Bank credit given is used to access the stability of a bank. A bank that is eager and
competent to give out advances and bank credit are thought to be more steady and
reliable than those banks that reject an advance proposition from clients.
-
Lending is very important because it is seen as a legitimate prerequisite by the financial
authorities which set forth certain banking sum be lent to some sectors in the economy
like;
15
Agricultural sector, small and medium scale enterprises, real estate sector, government,
industries.
-
Lending affect money supply and demand in an economy
-
Lending or bank credit goes a long way to affect production, level of entrepreneurship,
aggregate output,and productivity
-
Bank credit also has a positive relationship with economic development and inflation
which is the heartbeat of our study.
2.1.2
Types of Bank Credit
Olowefeso et al. (2015) gave types of bank credit which is based on the following basis; By
purpose of the credits, By duration of the credit and By nature of the credit.
-
By purpose of the credit; Real estate loans are secured for the construction of real
properties which include short term loans that are used for construction and land
development and also longterm credit which are also used for financing the buying of
land, homes, foreign properties and business structures. Loans to financial institution
incorporate credits that are given to insurance companies, banks, and some other
budgetary establishments. Farmers are given Agricultural loans which are used in farm
development, ranches, bringing fertilizers, harvesting ,and processing of farm produce,
feeding and caring of livestock. Loans to individuals are seen in mortgages, credit to
finance the purchase of automobile, appliances, covering of medical care cost, personal
expenses, and loans which are extended straight to either individual or the retail dealers.
Lease financing receivable is seen where lenders buy equipment and lease them to its
customers.
16
-
By duration of the credits; Short term loans are bank credits which are scheduled to be
repaid within one year. They are usually given against inventory and accounts
receivables. They are unsecured loans such as a line of credit and revolving credit.
Businesses take short term loans to meet their working capital needs. Midterm loans are
bank credits which are scheduled to be repaid over a period of one year to five years.
Midterm loans are mostly given against immovable properties, and the interest rates on
mid-term loans are higher than short term loans. Long term loans are loans which
repayment period extends beyond five years. They are used for constructing plants and
factories, housing construction, land purchase, purchasing of equipment and machinery.
Immovable properties are used as collateral to protect such loans.
-
By nature of the credit; Funded credit or non-documentary credits are given out of the
bank’s funds to individual or organization through current account or loan accounts.
These credits are also called financed credits,and they include loans, cash credit,and bank
overdraft. Son- funded credits or documentary credits are credits which are given through
using various documents, this form of credit banks provides the loan, but the use of cash
is not involved. Reputations and good name of the bank is the credit involved, and they
include a letter of credit (LC) and bank guarantee.
2.1.3
Forms of Credit
Credit can be classified into the following forms:
i.
Overdraft – An overdraft is an open ended credit facility which is repeatedly used until
the balance on the account reaches a certain pre-arranged borrowing limit. Theoretically,
it is payable on demand but in practice, it may run from year to year without being called
in. it is used mainly to finance working capital requirement of raw materials, payment of
17
pressing current liabilities like salaries, creditors and taxes. According to Onanuga (1998)
overdraft can be issued to overcome difficult periods like payment of school fees,
medical bills, expenses during festivals etc. It is created by allowing the account holder to
withdraw a certain amount in excess of the amount standing to the credit of his account.
It is short term in nature, non-specific and normally made available to meet general
trading requirements.
ii.
Advances – Nwanko (2000)) defined advances as any facility apart from overdrafts and
loans, granted to a customer for a short period of time by means of which the customer
obtains cash or credit in advance of collection by the bank of relative counterpart funds
from another bank’s third party. It is a short term credit extension which is granted for a
definite period usually 30 and 180 days. Advances are usually granted for a specific
purpose, for example, payment of various collections, refinancing of maturing loans,
project bridging finance, refinancing of letters of credit for project equipment imported
etc. The exact maturity date of an advance is normally determined at the onset and this
makes it possible for the project to have a lower interest charge on the advance due to the
reduced risk.
iii.
Loan – According to Agene (1995), a loan is regarded as a financial assistance rendered
by a bank to its customers in monetary term and repayable over a specific period of time
with interest element. Unlike overdraft facility which is a short term credit, loan may be
medium or long term for the finance of fixed assets acquisition. Loans and advances are
important sources of bank revenue as it yields the bulk of the bank’s revenue. They
constitute the highest percentage of the total assets of a bank as can be seen below from
an extract of Zenith Bank’s financial statement.
18
2.1.4
Credit Policy Formulation
The management of any loan started with the credit policy, the formulation of with is the
responsibility of which is the bank board of directors and management. It is the base for
determine what type of credit to grant to customers. Nwankwo (2000) define credit policy as a
blue print containing management guidelines for use by line officer of a bank in the handling of
credit applications. Its objective is to provide corporate direction through a standardized
procedure, derived from operational interest of the bank, in satisfying the customer credit need
but with full cognizance of the prevented monetary and fiscal policy guidelines of the
government.
Adekanye (2010) however identify three basic types of credit policy. They are the restrictive
credit policy, moderate credit policy and liberal credit policy. A restrictive credit policy is
adopted by a bank that has no plan to grow at a rate that is more than minimal. Such a bank is not
willing to take my risk more than minor one and prefer to do business with customer whose
paying habit almost never vary within terms.
Moderate credit policy is a mixture of restrictive and liberal policy approaches to credit. It tends
to match receivable to provide adequate cash flow, while a liberal policy is a high risk policy
with the probability of heavy loss of receivable the danger of such bank survival can be real
because they are usually prone to undercapitalization and occasionally liquidity problem.
Therefore, to minimize risks, enhance lending and maintain standard, the loan policy should
specify the quantity of loan to be made the type of securities to be accepted and limits for the
different types of loan
19
2.1.5
Credit Appraisal Procedure
The purpose of credit appraised is to solicit enough information about the applicant in order to
determine willingness and capability to serve the loan if granted, in accordance with the term of
the loan agreement it enable bank to determine the degree of risk they are willing to assume and
the amount of credit that can prudently be expected, given the risk involving and the term and
condition for granting the loan. it is therefore expected that a good credit appraisal should follow
the established cannot of good lending which include: character, capital, capacity, collateral,
condition and duration (Ibitoye, et al 1999, Ekezie, 1997).
i.
Character – This refer to the person or the entity borrowing the money. It relates to the
borrower integrity, responsibility and credit worthiness based on past insure. Ones
inherent character cannot be change overnight, hence this factor is very important in
starting off a debt relationship.
ii.
Capital – This is essential in credit appraised as it represents the sales of the borrower in
the business being financial with the borrower fund. The underling principal here is that,
the higher the stake of the loan seeker in the venture for which assistance is though the
greater in commitment to the success of the venture. The loan portfolio of the leading
bank should also be consideration.
iii.
Capacity – The past performances of customer will give an insight into whether he has
technical and management capacity to execute the project for which credit is being
requested.
Establishing the capability of the loan seeker involves the credit officer’s perception of
the liability of the proposed project in mobilizing enough fund for repayment in
20
establishing the possibility of the project being self-liquidation (Aremu, 2001; Obisesan,
2005).
iv.
Collateral – this is otherwise known as security. It is the right conference on a creditor to
make him redeem in is loan obligation. A security base arrangement usually creates
additional moral state on the side of the customer which result in a prudent and effective
utilization of available resources. According to Osayameh (1986), “security are
particularly relevant in our sit nation in this country, where banking education and habits
are still relatively low. Loan should not be disabused until a customer has satisfied all
security formalization and no disbursement should be granted again anticipatory
approval”.
v.
Condition – this consider the external micro-environment and the attendant force over
which the borrower has no control. This can render a good credit today bad in future if
condition becomes in favorable to business. For example, government policy reversal,
technological change, terrorist attack etc. can jeopardize the objective of taking loan.
vi.
Duration – this is the length of time for which the customer requires the loan. Bank is
expected to be liquid on demand. This is the reason why some banks cannot afford to
lend on long term. It is therefore very germane for any banking institution in performing
its lending function to consider liquidation, cost, profitability, convenience and
confidence since all these serve as coeds with which customer are tied to their bankers.
2.1.6
Developments in Nigerian Banking Sector
The development of banking activities in Nigeria can be classified as free banking era, regulated
banking era, deregulated banking era, consolidated banking era and post consolidated banking
era (Somoye, 2008). The free banking era also known as pre-independence banking period
21
marked the genesis of the development of banking activities in Nigeria and the era was before
1952. Two main features characterized the era. The first feature was the absence of any banking
legislation as anyone could establish a banking company as long as he registered under the
Companies Ordinance 1948. The second feature of the era was that five banks were established
consisting of three biggest foreign banks and two biggest indigenous banks (Nwankwo, 1980).
However, Aigbiremole and Aigbiremolen (2004) reported that between 1947 and 1952, 22 banks
were registered in Nigeria. Banking operation actually started in Nigeria with establishment of
African Banking Corporation (ABC) in 1892 and two years later, the Bank of British West
Africa (BBWA) (now First Bank of Nigeria Plc) was established to take over ABC. BBWA
remained the only bank operating in Nigeria until Barclays.
Bank (now Union Bank Plc) joined it in 1912. The third foreign bank to operate in Nigeria was
British and French Bank Ltd (now UBA Plc) which was established in 1949. The first
indigenous bank in Nigeria was the National Bank of Nigeria, which was established in 1933.
The second successful indigenous bank was African Continental Bank Ltd, which started
operation in 1947 (Alabede, 2012).
Following the collapse of some banks in the free banking era, it became obvious that there was
need for legislation for the control of the Nigerian banking sector. As a result, the first banking
legislation in Nigeria was passed in 1952.This marked the beginning of regulated era in the
Nigerian banking sector. Under the 1952 Banking Ordinance, before a bank was allowed to
operate in Nigeria, it must have a banking licence and must have a minimum paid up capital of
£25,000 for indigenous bank and £200,000 for foreign bank. In 1958, Central Bank of Nigeria
(CBN) was established through CBN Ordinance of 1958 to supervise Nigerian banking sector
22
and under 1958 Ordinance, the authorised capital of foreign banks was raised to £400,000
(Alabede, 2012).
The Banking Ordinance of 1952 together with its several amendments was replaced with the
Banking Decree of 1969. With the introduction of Structural Adjustment Programme (SAP) in
1986, the Nigeria banking sector was deregulated. As a result of the deregulation, the number of
banks operating in Nigeria increased from 55 to 125 together with 275 branches of the people’s
bank and 1,000 community banks (CBN, 1998). During the deregulation era, Banking Decree of
1969 was repealed while Bank and Other Financial Institution Act of 1991 (BOFIA) was
promulgated. The new Act raised the minimum capital of banks to N50 million for commercial
banks and N40 million for merchant banks in 1991 and this was further increased to N2 billion in
2001 (Alabede, 2012) In 2004, CBN embarked on major reform in the Nigerian banking sector
with a 13-point agenda and this marked the commencement of the consolidation era. The
objective of the reform was to consolidate the Nigerian banksand increase their capital (Somoye,
2008). As part of the reform, the minimum capital for Nigerian banks was reviewed from N2
billion to N25 billion in July 2004 with effect from 31 December 2005. Before the consolidation
era, 89 commercial banks were operating in Nigeria but the number reduced to 25 after
consolidation. The grave conditions in the Nigerian banking sector under the crisis provoked the
post consolidation reform tagged “The Project Alpha Initiative” in 2009 (Sanusi, 2012).
As part of the reform, CBN carried out special examination into operation of Nigerian banks
with specific reference to the liquidity, capital adequacy and corporate governance in 2008. The
results indicate that 10 of the 24 banks were in grave condition (the 10 banks in grave condition
included.
23
Afribank, Equatorial Trust Bank, FinBank, Intercontinental Bank,Oceanic International Bank,
Platinum-Habib Bank, Spring Bank, Sterling Bank, Union Bank, Unity Bank and Wema Bank)
(Alabede, 2012) .
To save the sector, CBN emoved and replaced chief executive and directors of 8 banks (the chief
executive officers removed from office were that of Afribank, Equatorial Trust Bank, FinBank,
Intercontinental Bank, Oceanic International Bank, Platinum-Habib Bank, Spring Bank, Sterling
Bank and Union Bank) with more competent hands and bailed out 9 banks with N620billion
public money (Sanusi, 2010b). Similarly, in order to reduce the problem of liquidity in the
banking sector, CBN established the Assets Management Corporation of Nigeria (AMCON). In
2011, AMCON acquired 1.7 trillion naira nonperforming assets of some Nigerian banks in
Nigeria. Furthermore, the CBN reviewed and replaced the universal banking model which was
adopted in Nigeria in 2001 with a new model which make banks to focus on core banking
business (Sanusi, 2012). Under the new model, banking licences are categorized into three:
commercial banking (regional, national or international); merchant (investment) banking and
specialized banking which could be microfinance (unit, state or national) mortgage (state or
nation) or non-interest banking (CBN, 2011; Sanusi, 2010a). In 2011, after 3 of the 8 banks
bailed out with the public money failed to show commitment towards recapitalization, their
banking licences were revoked and NDIC formed three new banks to take over their assets and
liabilities (the 3 banks that failed to recapitalize before the CBN dateline were Afribank,
Platinum-Habib Bank and Spring Bank; while Main Street Bank Ltd, Keystone Bank Ltd and
Enterprise Bank Ltd were new banks established to take up their operations respectively) (CBN,
2011).
24
The remaining bailed banks were recapitalized through merger/acquisition and injection of
capital by core investors (Equatorial Trust Bank, FinBank, Intercontinental Bank and Oceanic
Bank.
International entered into merger/acquisition agreement with Access Bank, Eco Bank, FCMB
and Sterling Bank respectively). Subsequently, the number of deposit money banks (DMBs)
operating in Nigeria reduced to 20 with 5,810 branches at end of 2011 (Alabede, 2012). The
various reforms in the Nigerian banking sector had impact on the performance of the sectors. For
example; the 2004 reform indicates that capital adequacy rate increased from 13.16% in 2004 to
21.25% in 2005 while liquidity improved from 50.44 % to 60.69% and the ratio of
nonperforming debt to total credit dropped from 23 to 20% in the same period (NIDC, 2005).
Furthermore, because of the impact of the reform, all the 25 DMBs operating in Nigeria in 2005
were in sound condition. The 2009 reform also shows great impact on performance of the banks
and save the sector from collapse as a result of the adverse effect of the global financial crisis.
Evidence available shows that the banks are recovering from the shock of the crisis as the
number of DMBs in sound healthy condition increased from 13 in 2009 to 19 in 2011. This is
reflected in the performance indicators: capital adequacy rate moved from 10.24% in 2009 to
17.9% in 2011, liquidity increased from 44.17 % to 69.1% and the ratio of nonperforming debt
to total credit declined from 32.8 to 5% respectively (NDIC, 2010; CBN, 2011). However, this
impressive performance was partly driven by the activity of AMCON. The AMCON took over
N1.7 trillion nonperforming risk assets of the DMBs in 2011 (Sanusi, 2012).
25
In view of the foregoing, Nigeria is considered a veritable case for investigating the link between
bank lending and economic growth, for at least two reasons. First, since the reform measures are
meant to strengthen the banking system to adequately play its intermediary role between the
surplus and deficit unit, there is need to assess the efficacy of the measures in raising the lending
ability of banks. Second, since the ultimate aim of developments/reforms in the banking sector is
boosting of economic activities, there is need to determine the level of impact of bank lending on
economic growth.
2.1.7
Structure of the Banking Industry
The idea that comes to the head of average individuals is most times fixed to a particular
definition of just saving money and giving out loans or bank credit, but the idea of banking is far
bigger than that. There are many other services banks render which are very much necessary for
the normal functioning of the complex economic system. Normal domestic bills can be paid via
banks and other payments. The evolution of the banking system has seen the shift of the
functions of banking from the mere deposition of money to every day dealing with anything that
needs money. The banking system in Nigeria has been described by an analyst as the number one
source or growth and stability of the nation (Babatunde and Shuaibu, 2011). Ubesie et al. (2017)
wrote that deposit money banks or commonly known as commercial banks are one of the main
drivers of economic development in Nigeria. Bank credit giving to this small and medium scale
enterprise, the real sector, the private sector, government and other sector are critical for growth.
A bank can be defined as an institution that makes provision for financial services, which may
include issuing loans and accepting deposits. A bank is also a place where money and other
valuables are kept. The bank is also a portal whereby currency exchange can be achieved, money
transfers, safe keeping of jewelry, provision of loans for different scale of farming, provision of
26
bank credits for members of cooperative societies, SMEs, the private sector and other sectors. A
bank is also a place for payment, bookkeeping operations of depositing and withdrawing. It acts
as means of efficiently keeping records of income and expenditure. The different type of banking
system is a basic determinant of the structure of the financial system. There are many types of
banks that make up the structure of banking in Nigeria, and they include;
Central Bank
The central bank is a bank that is not dependent on any national authority, it conducts and creates
monetary policies, regulatory framework and conduct researches on financial matters and their
application in financial services. The apex bank’s main goal is to fight inflation, reduce the rate
of unemployment and stabilizes the nation’s currency (Amadeo, K. 2017). Controlling the
amount of cash flow in the financial system is the most critical tool used by the Central or apex
bank to initiate growth. Rafiu and Mary (2007) gave three policy tools the CBN use to achieve
their aim and objectives. The goals of the central bank can be divided into three categories,and
they are; - They set templates which are used as standard requirements for other banks and
financial institution. They are the sole bank involved in creating and writing policies which other
banks will follow as templates for operations.
-
They buy and sell securities from member banks using open market policies.
-
The apex bank is inchargeof creating standards, implement targets for all banks and
financial institutions and interest rates. The standards are used to rate the following; loans
and bank credit, mortgages, bonds, rising interest rate, slow growth, inflation.
Merchant bank
It is the bank that provides loans for companies that deal in international trades. A merchant bank
specializes in foreign trade and deals with the multi-national corporation. It also provides some
27
services that are usually meant for investment banks, but it is not involved in providing normal
banking services. They also provide finance for a large corporation who do business overseas.
For example, a conglomerate that wants to buy another company situated in another country
(Rafiu and Mary, 2009). A merchant bank is also a financial firm or money institutions which
invest huge financial resources into other businesses, and they offer or provides advisory
services to other businesses. In another word, they are involved in giving out business loans and
giving help to a large corporation. Amadeo (2017) opined that Merchant banks act as
intermediaries or middlemen which are equipped in the act of fund-raising, providing brokerage
services and give out financial advice to firms and private individuals. They are also involved in
providing special services in the place of acquisition and mergers. They also provide the
financial power involved in the acquisitionand they give out advice too.
Commercial banks
Commercial banks are institutions which provide services like giving out loans and accepting
deposits. It offers services such as money deposits, savings and loans can be given to customers
of commercial banks. The commercial bank provides several ranges of products to teaming
customers (Amadeo 2017). It gives out business loans, auto loans,and mortgages. They offer
interest on deposited money. It uses customer’s deposits to issue out loans to individuals who
pay interest when the loans are repaid. The bank’s net interest is the different between the
interest it pays to customers and the interest the banks receive for a loan given. Commercial
banks are profit oriented (Uwalomuwa et al., 2015).
28
Community Banks
Community banks are financial institutions that are owned and operated in a localized area. The
bank focuses on the needs of the localized individuals,and it gives small loans to business and
farmers localized in the community. Community banks operate like commercial banks, but they
are quite different from commercial banks in these three ways;
-
Community banks do not engage in sophisticated banking activities and export
transactions
-
Community banks are not members of Central banks or clearing houses.
-
Community banks operations are restricted to a particular geographical area, and they
are not licensed to operate in any other part of the country.
Nowadays they are called micro-finance banks.
Co-operative banks
Cooperative banks are banks established by members of a cooperative society. Such banks
collect deposits and offer other banking services to the society but givespecial preference to the
members of the cooperative society that established them. It operates more or less like a
cooperative shop. It also operates on cooperative principles (Abiafrian and Bello, 2015). Profits
made by the banks are shared among members of the cooperative society at the end of the year
according to their agreed profit and loss sharing ratio.
Consortium banks
A consortium is a bank created to sponsor or bankroll a project or to execute a specific deal. A
consortium takes advantage of assets of the banks involved in the consortium. All member banks
29
in the consortium have equal stake and ownership of the bank. After the consortium achieves its
goals, it is usually dissolved (Uwalomuwa et al).
2.1.8
Concept of Industrial Growth
According to Imhonopi and Urim (2013), industrial growth signifies the progress made in the
expansion of the economy and commercial activities in a country through massive industrial
production of goods and services. It includes the transformation of raw materials into consumer
goods, new capital goods which permit the production of more consumer goods and social
overhead capital, which together with human resources, provide new services to both individuals
and businesses. Arrey (2013) shares this observatory but adds that industrialisation is a process
that engages human and mechanical resources in the transformation of raw materials for
immediate consumption or for further production and leads to the heavy dependence on mass
production of goods and services manufactured within the territory of a country. Thus, industrial
development is focused on the use of technology and science in fostering a country’s capacity to
transform raw materials into finished goods or manufacture intermediate and capital goods for
consumption or for further production. Mobarak (2001) pitches industrial development within
two grooves: first is the establishment of new technologically competitive industries, and the
second is the expansion and renovation of existing industries to increase their productivity. He
defines industrial development as the mainstay for establishing a country’s production base and
maximising the export capabilities of the national economy. He argues that this is why industrial
development enjoys top priority in orchestrating a competitive economy in the face of
international variables and economic groupings of industrialised statesOnyeonoru (2005) has
identified the elements of industrialisation in an economy to include the availability of
technologies with capacity for large scale production; existence of a wide range of raw materials
30
used for production purposes; abundance of complex technical division of labour supporting
production; presence of a complex cooperation and coordination of specialised tasks aiding
production; and the availability of catholic but relevant industrial skills within a nation’s
workforce.
Imhonopi and Urim (2013) opine that industrial growthis an important mode of production in
modern society and is the process that provides livelihoods for millions of people all over the
world because it creates a massive pool of employment opportunities for citizens. They also
contend that the level of industrial development is what pigeonholes countries into developed,
underdeveloped or emerging economies. Without gainsaying the fact, Nigeria possesses the
ingredients that it requires to become a leading industrial economy in the global market and
supported by its massive population of close to 180 million people, its domestic market swarms
with a ready army of consumers for its industrial goods and services.
2.1.9
Challenges Facing Industrial Development in Nigeria
The impediments to industrial development in Nigeria include the following:
First, industrial development, over the years, has been challenged by lack of political will or
courage to bring about industrial transformation in Nigeria. The experiences of countries such as
China, Singapore, Malaysia, Indonesia and India, among others, show that these nations took
actions based on conviction and courage as inspired by their visionary political leadership. In
Nigeria, the absence of political will has hampered the full implementation of its industrial
policies which could have turned around its fortunes. In some instances, it has led to half-hearted
or poor implementation of these policies or led to lack of an integrated industrial policy
framework for the country. Without such visionary plans, the debouchment of Nigeria as a
31
dominant industrial economy in the global market has remained at best a work in progress and at
worst a fantasy. Second, while the political leadership has continued to controvert the slew of
accusations cast at it and its members for corruption, diurnal events in the political and economic
life in the country have further reinforced the belief that a generality of the people have that
corruption has become a hydra-headed monster that must not only be put on a leash, but must
also be decapitated if the country is to experience any progress in its industrial development
strides. Imhonopi and Urim (2013a) have argued elsewhere that although corruption is not a
Nigerian phenomenon, it haunts the nation as a spectre and has permeated the entire fabric of
state acting as a devious albatross to national development. Among the several traits of
corruption in the public realm in Nigeria such as outright bribery and inducement, patronage,
nepotism, influence peddling, use of one’s position for self-enrichment, bestowing of favours on
relations and friends, abuse of public property, leaking and/or abuse of government information,
embezzlement of state funds particularly earmarked for development purposes such as road
reconstruction, national electrification projects, diversion of funds meant for the iron and steel
sector and the provision of social overhead capital viz. education, health, security and others has
remained a vicious rape of the commonwealth. For many years, this malady, aided by dwindling
national resources, has incapacitated government, making it unable to fund development projects
that could have supported industrialisation in the country. Third, as a country of scholars, bright
minds and technocrats, Nigeria does not lack the constant introduction of industrial policies since
its inception as an independent nation-state. Rather, each government in power introduces its
own supposedly well thought-out industrial policy which is immediately replaced when that
government exits the corridors of power. These constant back-flips and somersaults that
industrial policies in the country are subjected to do not help the country to effectively try out
32
one policy before it is replaced by another. Thus, as these policies come tumbling down,
industrial development in the country suffers suicides.
Fourth, the preference of politicians for technocrats has remained the bane of Nigeria’s industrial
development. Where a lawyer occupies the seat of a Minister of Power or a lawyer or lowly
qualified teacher occupies the seat of a Minister of Education, what should be expected of their
performance? Mediocre results! Over the years, meritocracy in the selection of leaders into such
important offices was compromised, giving way to the induction of people who have no business
leading the ministries they were assigned to. In one of the recent elections in the Southwest, a
Governor-elect boasted that when he is sworn in, his government would be constituted of mainly
politicians, i.e. those who were in the trenches with him during the heat of the electioneering
period and not some technocrat. Such statements give Nigerian politicians away as individuals
whose desire is just to consolidate political power and enjoy political capital within their
constituencies ad nauseam.
Fifth, over the years, the budget for the education ministry has continued to parachute.
Government has failed to honour his agreements with the nation’s university lecturers,
polytechnic and secondary teachers. Public education has shamefacedly become underfunded.
The infrastructure needed for effective teaching and instruction in the classrooms, for instance, is
either out-dated, insufficient or absent. Laboratories do not have simple reagents for
experiments, engineering workshops are empty and when they are full, they are adorned with
archaic equipment and aging tools while the introduction of Information and Communication
Technologies (ICTs) into the public school system has remained rather snail-paced. This has
resulted in the procreation of a new generation of half-baked Nigerian graduates who are
33
unemployable as well as uncompetitive. Since human resources are drivers of industrial
development in any economy, the poor quality education and training citizens get create a
mismatch between human resources needs within industry vis-à-vis available workforce.
Sixth, internal security has also remained a huge challenge to industrial development in the
country. Obviously, security is inevitable for embedding any form of development in a society.
Without internal security, there cannot be free flow of goods and services between and among
different locations in the country and foreign investors will look elsewhere to engage their idle
capital. From kidnapping to militancy to terrorism, Nigeria has come face to face with
entrenched security upheavals which are not only threatening the cord of unity binding the
individual members of the nations but are also decreasing the amount of FDI that would/should
have come into Nigeria.
Seventh, another challenge beleaguering industrial development in Nigeria is the issue of the
absence of an enabling infrastructure. For many years, Nigerians have been subjected to the
embarrassment and pain of living in a country where basic infrastructure is a luxury. For
example, it was a luxury making a phone call some years ago, an elitist preserve, but the
government of the former President Olusegun Obasanjo worked very hard to liberalise the
telecom sector. Nowadays, Nigerians belonging to different rungs of the social pecking order,
including those unbelievably thought in the past not to be worthy of owning a phone now own a
mobile phone, phablet or tablet that helps them stay in touch with their friends, families and
colleagues. Bad roads, poor sanitation, poor water supply, spotty electricity from the national
grid leading to the heavy and heartbreaking dependence on fossil fuel to generate electricity for
34
homes and businesses and others have become the pictures that adorn the infrastructural fabric of
the country.
Eight, another challenge that has affected industrial development in the country is the lack of
long-term perspective necessary for the emplacement of industrial development in Nigeria.
Without this perspective, successive governments over the decade seemed to have been
visionless, directionless and unable to steer Nigeria’s towards the trajectory of industrial
development.
Ninth, sociocultural strangleholds have affected industrial development negatively in Nigeria. A
situation where the maxim “dignity in labour” no longer holds any form of fascination but
instead microwavable wealth creation paths are now desirable such as internet fraud business,
kidnapping, pimping, and other unlawful businesses, the culture of building and growing small
businesses patiently seems to lose its allure. Young Nigerians belonging to the millennial and
microwave generations are drooling on the sudden wealth and influence of politicians, arrivistes
and violent criminals such as political thugs, militants, illegal oil bunkerers, kidnappers,
carjackers, terrorists and others and now seek ways to devise their own escape hatch from the
grinding poverty to which many are entangled. Following the path of building businesses or
supplying goods and services as back-end supports in the industrial value chain seems farfetched to them.
Tenth, during the era of the military, having a national foreign reserve for the country was a
favour rather than a necessity by government. Lack of national savings put the economy of
Nigeria in precarious situations and with the continuous plundering of the national till, Nigeria
became a weak and banana economy for a very long time until the reprise of democracy. Of
35
course, within this context, the country was effete and thereby unable to fund any industrial
development initiative that its think-tank technocrats might have created.
High interest rates charged by Nigerian banks and financial institutions generally have not helped
to support the growth of the country’s industrialization. The real sector has been badly hit by this
practice. These lending rates are unsustainable to support meaningful industrial development as
the tenures on available credit facilities are typically not provided over long enough maturities
(NIRP, 2014). Therefore, in Nigeria, only expensive short-term credit facilities, which can
support a trading company, but not a manufacturing concern, are available.
Lastly, low patronage of made-in-Nigeria goods is one bane of industrial development. Before
Taiwan and China became Asian economic powerhouses that they are today, their products were
not as standardised like those from North America or Western Europe. But because of the
colonial hangover which makes Nigerians, and indeed Africans, think that white is always right
while black always lacks, is dark and backward, they bought these goods with gleeful
contentment. But Nigerians feel averse towards goods made in Aba, Onitsha, Kano, Lagos
Island, Ijebu and Yenagoa because they consider them substandard goods. This proclivity
towards foreign goods while showing aversion to home-grown products and services has
provided jobs for manufacturers of goods in Asia, Europe and America while starving our
domestic economy of the foreign exchange that could further prop up the country’s economy and
support its industrialisation.
2.1.10 Bank Credit and Industrial Expansion
In Nigeria, the number of banks stands at 24 due to the recent consolidation exercise and over the
years, the volume of credit has continued to increase. For example, the volume of credit to the
36
private sector increased from mere N6, 234.23million in 1980 to N29.21 billion in 2010. Credit
to private sector as a percentage of Gross Domestic Product (GDP) increased from 12.5% in
1980 to 18.59% 1993. The figure increased to 37.78 in 2010. This credit trend is expected to
augment industrial capacity and ultimately enhance economic growth.
As submitted by Libanio (2006), the industrial sector is supposed to be the driver of growth in
any economy and much is expected from the banks in terms of loans and advances in support of
this sector.Also Libanio’s presentation of the industrial sector as the engine room of any
economy is borne out of its role in generating employment within the economy. This was further
confirmed from a job creation survey by the National Bureau of Statistics (NBS) which indicated
that the private sector posted a significant share of the 1.2 million jobs created in the country in
2013 (Emefiele, 2014). While this achievement is laudable, it clearly suggests that the country
needs to do more to create more jobs for the existing job seekers as well as for new entrants into
the labour market.
However, economic growth has remained very low except for the last four years when marginal
increases were recorded. This puzzle has raised concern as to the impact of bank credit on
economic growth in Nigeria. Indeed, study by Bayoumi and Melander (2008) for US
macrofinancial linkages showed that a 2.5% reduction in overall credit caused a reduction in the
level of GDP by around 1.5 percent. In the same way, King and Levine (1993) study for 80
countries found that bank credit affected economic growth through improvement of investment
productivity (better allocation of capital) and through higher investment level. Several other
studies that support this claim include De Gregorio and Guidotti (1995), Levine (2002) and
Boyreau-Debray (2003).
37
However, the main feature of most existing studies is that they tend to focus on aggregate
economic growth without looking at the components. Unfortunately, aggregate growth may veil
fundamental issues in the growth process. This is particularly relevant in the case of Nigeria
where oil constitutes a major share of aggregate economic growth.
There is no gainsaying the fact that oil being an enclave sector has a very little value added.
Therefore, attempt at looking at the impact of bank credit to the industrial sector will provide a
robust picture of economic growth. There is the need to focus on the real sector namely
agriculture and manufacturing sub sectors. The real sector comprising agriculture and
manufacturing constitute the soul of the economy; hence whatever happens in the real sector will
have a significant effect on the entire economy. This explains the rationale for the study.
Specifically, the study examines the effects of bank credit on the growth of the industrial sector.
In particular, the main area of concern is the availability of credit to private investors and
empirical research has shown that financial depth is generally associated with an increase in
GDP (Levin, 1997).
In contrast, distorted financial markets with high macroeconomic
instability, direct government involvement and weak regulation can have extremely adverse
effects on industrial sector and on economic growth in Nigeria. As a result, the focus of much
recent on the financial sector has been on broadening and deepening financial markets in
developing countries and on improving financial sector, regulation, supervision and governance.
The increasing participation of commercial banks has been one of the striking structural changes
experienced by banking systems in developingcountries (Demigue-Kunt, Levine, and Min 1998,
Levine, 1999, Barjar et al 2000). The rest of the paper is organized as follows: section 2 reviews
the related literature. Section 3 discusses the methodology. Estimation and discussion of results
are provided in section4 and section 5 concludes the study.
38
2.2
Theoretical Review
The theoretical foundation adopted in this study is the Keynesian Monetary Transmission
Mechanism.
2.2.1
The Monetary Transmission Mechanism
The mechanism through which monetary policy is transmitted to the real economy is a vital
subject matter in economic literature. The transmission mechanism of monetary policy refers to
the ability of monetary policy to affect aggregate spending and real output. Using the standard
Keynesian analysis, Iyoha (2003), asserted that the channel through which monetary policy
impacts on the national economy in the closed economy is the aggregate demand via the rate of
interest. To this end, quite a number of theoretical formulation have been contrived to capture the
transmission pattern and the bank lending channel (loans and advances) represents the credit
view of the mechanism. A general form of the monetary policy output function involving direct
relationships can be seen from the simple Keynesian monetary mechanism (Adegboye, 2015).
Money
Supply
Interest
rate
Investment
Output
The transmission mechanism shows that a contractionary monetary policy that raises the policy
that raises the policy rate would lead to reduced capacity of the financial market to create money
thereby reducing money supply and aggregate expenditure. The effect would be a decline in
output growth rate. The credit view of monetary policy transmission on the other hand, posits
that monetary policy works by affecting bank assets (loans) as well as banks’ (liabilities).
Accordingly, monetary policy not only shifts the supply of deposits but also shifts the supply of
bank loans. For instance, an expansionary monetary policy that increases bank reserves and bank
39
deposits increases the quantity of bank loans available. Where many borrowers are dependent on
bank loans to finance their activities, the increases in bank loans will cause a rise in investment
leading ultimately to an increase in aggregate output (Y) ( Iyoha 2003, Adegboye, 2015). Below
is a schematic presentation of the resulting monetary policy effects;
The schematic representation above indicates that an expansionary monetary policy (M) would
lead to an increase in bank loans, thereby raising the level of aggregate investment spending, I
and aggregate demand and output, Y. In this context, the response of banks to monetary policy is
their lending response and not their role as deposit creators.
2.3
Empirical Review on the Impact of Bank Credit on Industrial Growth
This section presents empirical evidence on the impact of bank credit policy on Industrial
growth. Some of the available empirical evidences on this relationship are presented in the
subsequent paragraphs.
Akujuobi and Chima, (2013) examined the effect of commercial bank credit to the production
sector on economic development in Nigeria, adopting a multiple regression model over the
period 1960 to 2008. Using a co-integration analysis, it reveals the existence of a long run
relationship between credit to the production sector and the level of economic development in
Nigeria. Ajayi, (2007) empirically test the impact of bank credit on industrial performance in
Nigeria from 1975 to 2003. He confirmed that bank credit and inflation have positive and
negative effect respectively on industrial performance.
40
Tawose (2012), who tries to measure the performance of the industrial sector, compared the
loans and advances of commercial banks to the industrial sector and total savings, interest rate
and inflation rates. Finding a long-term relationship between these variables, Tawose (2012)
found that the variables considered in the short term had a positive effect on the performance of
the industrial sector. On the contrary, it was emphasized that loans and advances of long term
banks extended to the industry sector had an insignificant negative impact on sector
performance.
One of the studies conducted between the growth of the agricultural sector and commercial bank
loans is Toby and Peterside (2014). Although there was a significant weak relationship between
commercial bank loans and the contribution of agriculture to GDP, there was a significant
positive relationship between bank loans and agricultural contribution to GDP. In the same
study, Toby and Peterside (2014) looked at relations with commercial bank loans on the
manufacturing sector, and found that the manufacturing contribution to GDP was in a significant
inverse relationship with bank loans.
Investigating intermediation role of banks on economic growth in Nigeria, Ogege and
Boloupremo (2014) employ ADF, johansen cointegration and ECM. The study concludes that
only credit allocated to production sector is having a significant positive effect on growth even
though the report in table 3 shows the variable is not significant but credits to other sector is.
Akujuobi and Chimaijemr (2012) examine the effect of commercial bank credit to the sub
sectors of the production on growth between 1960 and 2008. The study confirms long run
relationship and while credits to agriculture, forestry and fishery, manufacturing, mining and
quarrying and real estate and construction are negative and insignificant, credit through the
41
mining and quarrying sub-sector have significant positive contribution on growth. From the
inferential results, it is evident that a significantly weak and strong correlation exists between
commercial bank and merchant bank lending respectively and agricultural sector’s contribution
to GDP. Uzomba, Chukwu, Jumbo and Nwankwo (2014) investigate the impact and the
determinants of Deposit Money Banks’ loans and advances granted to agricultural sector in
Nigeria from 1980 to 2011. Multiple OLS regression, Stationarity Test, Co-integration test,
Parsimonious Error Correction Mechanism and Granger Causality Test are employed. The study
concludes that there is positive impact of deposit money banks’ loans and advances on the
agricultural sector. Ebi and Emmanuel (2014) investigate the impact of commercial bank credit
on Nigeria industrial subsectors between 1972 and 2012. Using Econometric Error Correction
Model (ECM) and conclude that, an increased bank credit to industrial sector is significant in
determining industrial sector growth in Nigeria. Yushau (2011) compare accessibility to
financing by small entrepreneurs before and after the bank reform using primary and secondary
sources. The study concludes that informal institutions are better able to meet the financial need
of entrepreneurs than formal whose conditions are stiff.
Ceccetti and Kharroubi (2012) examined how financial development affects growth at both the
country and the industry level. Based on a sample of developed and emerging economies, they
first showed that the level of financial development is good only up to the point where factor
inputs are yet underutilized, after which it becomes a drag on growth. Secondly, focusing on
advanced economies, they showed that a fast-growing financial sector can be detrimental to
aggregate productivity growth. Finally, looking at industry-level data, they showed that financial
sector growth disproportionately harms industries that are either financially independent or
R&Dintensive. This study revealed that there is a link between finance and economic growth
42
generally and the causal link can be beneficial and in some cases detrimental. This further
justifies the need for this link to be investigated in Nigeria with a view to identifying whether the
finance-growth nexus between bank funding and growth is beneficial or detrimental to the
Nigeria’s manufacturing sector.
Law and Singh (2014) provided new evidence on the relationship between finance and economic
growth using an innovative dynamic panel threshold technique. The sample consisted of 87
developed and developing countries. The empirical results indicated that there is a threshold
effect in the finance growth relationship. In particular, they found that the level of financial
development is beneficial to growth only up to a level, beyond that level further development of
finance tends to adversely affect growth. These findings reveal that more finance is not
necessarily good for economic growth and highlight that an "optimal" level of financial
development is more crucial in facilitating growth.
Also narrowing the debate down to emerging markets, Pradhan, Dasgupta and Bele (2013)
examined the nexus between financial development and economic growth by using panel data
vector autoregression. Using five BRICS countries (Brazil, Russia, India, China and South
Africa), the study finds bidirectional causality between financial development and economic
growth. As a result, the policy implication is that the economic policies should recognize the
finance growth nexus in order to maintain sustainable development in the economy. This further
gives impetus to this study as Nigeria, the biggest economy in Africa in search of foreign and
local investors needs the findings and recommendations of this investigation in crafting policies
for her economic development, especially in the key sector like the manufacturing sector.
43
Nwaeze, Michael and Nwabekee (2014) explore the extent to which financial intermediation
impact on the economic growth in Nigeria during 1992 to 2011. Relying on Ordinary Least
Squares (OLS) regression technique, they conclude that both total bank deposit and total bank
credit exert a positive and significant impact on the economic growth in Nigeria for the period.
Also, the values of GDP per capital (PCY), Financial Deepening (FSD), Interest Rate Spread
(IRS) and negative influence of Real Interest Rate (RIR) and Inflation Rate (INFR) have positive
influence on the size of private domestic savings while the lagged values of total private savings,
private sector credit, public sector credit, interest rate spread and exchange rates Obademi and
Elumaro (2014) reexamine the financial repression hypothesis in order to determine the impact
and direction of causality between banks and economic growth during intensive regulation,
deregulation and guided deregulation regime. Ordinary least square regression and Causality test
conclude that banks have significant positive impact on growth in Nigeria especially during
deregulation.
Nevertheless, banks appear to be passive to growth in terms of causality. Nwakanma, Nnamdi,
and Omojefe (2014) evaluate the long-run relationship and the directions of prevailing causality
between bank credits to the private sector and the nation’s economic growth. The study conclude
based on the Autoregressive Distributed Lag Bound (ARDL) and Granger Causality that bank
credits have significant long-run relationship with growth but without significant causality in any
direction. Ogege and Shiro (2013) in a study covering 1974 to 2010 use co-integration and error
correction model, discover a long-run relationship and conclude that commercial credits
contribute positively to growth but it is significant in the long run.
44
Shittu (2012) examines the impact of financial intermediation on economic growth in Nigeria
between 1970 and 2010 using the unit root test and cointegration test and the error correction
model. The paper concludes that financial intermediation notably deposit mobilisation is
significant in determining economic growth in Nigeria. Nwaru and Okorontah (2014) investigate
banks credit versus output and conclude that credit to the private sector is positive but
insignificant and that real output causes financial development, but not vice versa. Mamman and
Hashim (2014) examine the impact of bank lending on economic growth in Nigeria for the
period 1987 to 2012. The study employs multiple regression models and concludes that bank
lending is significant in determining growth. In a similar study from 1992 to 2012 using the same
method, Yakubu and Affoi (2014) conclude that the commercial bank credit has significant
positive impact on the economic growth in Nigerian.
According to Buono and Formai (2014), bank credit was positively and significantly correlated
with export incomes. Higher initial levels of productivity, collateral and credit rating is
associated with a higher export growth were examined in order to estimate the structural OLS
within firm leveled controls such as size and productivity. The analysis strongly suggested that
there is a positive and causal link between access to bank credit and total revenues and
consequent firm growth.
Ebi and Emmanuel (2014) showed that bank credits impacted the manufacturing sub-sector
positively and significantly. Sub-sector borrowers’ (mining and quarry firms) the output was
positively correlated and determined by bank credits. Moreover, contrary to expectations, they
could not determine an important relationship between interest rate and industry and its subsector outputs. Chisasa (2014), who studies in South Africa, found that the bank’s loan reduced
45
agricultural output in the short term and emphasized that the uncertainties in the country’s
corporate loan should be eliminated. Chisasa (2014) reached different results at macro and micro
level. He stated that supply-side findings are predominant on agricultural sector basis, but that
there is a causal relationship between economic growth and finance at macro level and therefore
there is a demand-side relationship.
In another study examining the level of agricultural output, Nnamocha and Eke (2015)
discovered that although long-term bank credit and industrial output had a positive effect, only
industrial output influenced the level of agricultural output in the short term. According to the
research results, low agricultural investment will lead to low agricultural output, which is due to
low credit opportunity or high lending rate.
Adeola and Ikpesu (2016) showed that agricultural output, trade credit and money supply were
not cointegrated. After sharing that the money supply and the loans used for agriculture
increased the agricultural sector and the level of agricultural output in Nigeria, they showed that
the effects of the loans at this point were very weak by the method of decomposition of the
variance they applied. Sogules and Nkoro (2016) claimed that a long run relationship exists
between bank credits and manufacturing sector output.
In their study on the manufacturing sector in Nigeria, John and Therhemba (2016) found that
bank loans, advances and large money supply had an impact on the output of the manufacturing
sector. However, they stated that the output of the manufacturing sector is declining by being
affected by high inflation and high interest rates. Using quarterly data of syndicated loans given
by Italian banks, Dorr et al. (2017) stated that increases in the borrowing costs and default rates
of firms have led to severe decreases in the assets side of the banks’ balance sheets. Strong
46
international banks have hesitated to lend money to Italian firms with distressed balance sheets.
The decline in the productivity of the country led to a reduction in the country’s productivity,
resulting from the credit restrictions experienced as a result of this hesitation.
Companies that could not provide enough credit from banks faced a decline in productivity as
well as investment and employment. Dorr et. al. (2017), who revealed this situation with their
findings, found that the reason why Italian firms could not achieve the desired level of
productivity was troubled banks and credit supply shocks.
Ume et. al. (2017) in their study on the manufacturing sector identified each explanatory variable
(commercial bank loans, total savings, interest rate and inflation rate) and subsequent lags as
important functions at 5%, excluding foreign exchange rates and lags in the output of the sector.
They argue that the output of the manufacturing sector has a set rate in order to reach equilibrium
the behavior of the short-term shocks in the long-term, has reached the conclusion that this
period is about 3 years. Vovchak (2017) examined the relationships of the firms with the bank
during the crisis and the credit situation, stated that it was very difficult for the firms to work
with healthier banks by changing their banks during the crisis.
It has determined that banks applying core deposit financing provided firms with a lower credit
rating than other loans during the crisis. Ramcharran (2017) indicated increasing productivity
(output elasticity) of bank credit from 0.76 to 1.23 to small and medium size industries sector.
The sector’s efficiency improved from returns to scale of −0.89 to 0.607. The main reason for the
increase in efficiency was the increase in the productivity of the bank loan Dimelis et. al. (2017)
claims that the growth of firms over 2075 firms in the euro zone before the crisis (2008 before
the mortgage crisis) is directly related to bank loans and moves in the same direction. For the
47
postcrisis period, it has revealed that this relationship did not last long, and that bank loans
contributed only to the slow-growing companies. However, for firms with a high growth rate,
this relationship has disappeared and no contribution has been observed. Diallo (2018) analyzes
and shows that the bank’s productivity loosens credit restrictions and increases the growth rate of
financially hooked industries during the 2008 crisis.
As can be seen in the literature studies, it is found that the industrial manufacturing sector is
generally taken into consideration in comparison with other sectors. Besides, the only microbased research in which the manufacturing industry and bank loans are handled in Turkey is the
study of Demirci (2017). However in this study, the manufacturing industry was considered as a
whole. In the econometric analysis of Demirci (2017), which determined that the production in
the manufacturing industry sector acted together with bank loans, monthly manufacturing
industry production index data were used between 1999-2015. The monthly cash loan volume of
the manufacturing industry sector, which was given by domestic banks, was included in the
analysis and causality test application was made. In the long term, the causality from the
production to the bank loan was determined and it was emphasized that the financial sector
followed the real economy. The macro findings of the study showed that the demand leading
hypothesis supports the results.
48
CHAPTER THREE
RESEARCH METHODOLOGY
3.0
INTRODUCTION
The main objective of this study is to ascertain the impact of commercial bank credit policies on
industrial growth in Nigeria. This chapter deals with a description of the methods employed for
this study. It includes source of data and data collection for the study, variables description, as
well as model specification and data analysis techniques etc.
3.1
Research Design
This study is a descriptive research survey of ex post facto. Survey research method will be used
for this study. The research survey design will be based on the impact of bank credit policy on
industrial sector growth in Nigeria. However, an ex-post facto is such that the independent
variable(s) have already occurred and the researchers start with the observation of a dependent
variable.
3.2
Model Specification
The model for this study is a three-variable model and covers the industrial sector output as the
dependent variable while and credit to private sector (proxy for credit policy), and interest rate
are the independent variables are the independent variables. The model is specify as follows:
IND = f( CP, INTR)……………………………………………..
Where:
Where;
IND = Industrial sector output;
CPS = credit to private sector
49
(1)
INTR = Interest rate
µt = Error term
β0 = intercept
βi = Slopes/elasticities (i=1,2,3…)
Expressing equation (i) in its explicit log linear form, it becomes:
LogINDt = β0 + β1logCPSt + β2LogINTRt + µt …………………….
3.4
(2)
Source of Data and Data Collection Procedure
The data to be use in this study will be collected from secondary sources. The instrument to be
utilized for the collection of secondary data is documentation. Documentary data will be
collected via the National Bureau of Statistics (NBS), Central Bank of Nigeria (CBN) Statistical
bulletin and World Development Indicator (WDI).
3.5
Population of the Study
The population of this study will consisted of selected business owners in Lagos state, Nigeria.
Lagos, sometimes referred to as Lagos State to distinguish it from Lagos Metropolitan Area, is a
state located in the southwestern geopolitical zone of Nigeria. The smallest in area of Nigeria's
36 states, with a population of over 15 million, Lagos State is arguably the most economically
important state of the country, containing Lagos, the nation's largest urban area. It is a major
financial centre and would be the fifth-largest economy in Africa if it were a country. It has the
highest population density of Nigeria's states. The actual population total is disputed between the
official Nigerian Census of 2006 and a much higher figure claimed by the Lagos State
Government. Lagos State annual GDP is 1 trillion naira. Lagos State is bounded on the north and
50
east by Ogun State. In the west it shares boundaries with the Republic of Benin. Its southern
borders are with the Atlantic Ocean. 22% of its 3,577 km2 are lagoons and creeks.
3.6
Sampling and Sample Technique
The samples of this study will be drawn from employees of the selected companies. The use of
sample is useful rather than the whole population because of costs in terms of fund, time and
material that was used in surveying the whole population. Consequently, the total sample size
(150) will be chosen. Thus, this sample size is considered adequate and representative enough to
give informed answers to the problem stated for this research study.
However, convenience sampling method is used for this study, that is, all consecutive individuals
(who met the inclusion criteria) during the period of the study. The study will be base on this
technique, considering the operational difficulties associated in the process of probability data
capturing. However, the respondent will be selected from the study area based on willingness
such that people who are available and willing to participate in the survey was considered so as
to ensure higher level of precision of the research study.
3.7
Instrument for Data Collection
The instrument that will be used for data collection is a well-structured and self-administered
questionnaire that will modified by the researcher supervisor before validation. The
questionnaire will be used to collect information from the respondents. The data collected will be
used to answer research questions and hypotheses. The questionnaire will be structured
according to 4-point response format of SA, A, D and SD with weights of 4, 3, 2 and 1
respectively.
51
3.8
Validity of the Instrument
In order to increase content validity of the instruments, items from the questionnaires will be
tested using the same questions to different participants. The researcher will also consults
supervisor who shall give a feedback useful in validating the instruments. Therefore, the
instrument will be tested through testing their content by piloting in three different schools that
were not part of the sampled area. The respondents will be asked to complete the questionnaires
and give comments on clarity of instructions and relevance of the individual question as they
appeared on the questionnaire.
3.9
Reliability of the Instrument
The reliability of the instrument will be checked using the Cronbach’s Alpha Statistic. The
reliability statistics indicates the amount of variation to expect in the measurement from one
occasion to another. It reveals internal consistency of the scale instrument and shows the extent
to which scores are consistent from one part of the instrument to another. According to Bowling
(2014) an alpha of 0.5 or higher is considered a sign of acceptable statement construct from
questionnaire.
3.10
Procedure for Data Collection
While taking cognizance of random sampling technique, questionnaire will administered to
respondents to serve as primary data collection for the purpose of this study. Respondents were
given some days to complete the questionnaire due to distance factor in which afterwards the
questionnaire were collected back so as to gather the data.
52
3.11
Method of Data Analysis
The data will be collected individually coded and entered into the computer using statistical
package for social sciences (SPSS). The research questions will be answered using means and
standard deviation. The hypotheses will be tested at 0.05 level of significance using Chi-square
statistics. The weightings are SA=4, A=3, D=2 and SD=1. Mean value = (4+3+2+1)/4 = 10/4 =
2.5. A cut off point of 2.5 will be adopted for decision taking. If the item mean value is equal to
or greater than 2.5 the item is accepted, but if it is less than 3.0, the item is rejected
53
CHAPTER FOUR
DATA ANALYSIS AND RESULTS PRESENTATION
This chapter gives an analysis of data collected from the field. It also presents, interprets and
discusses the findings as contained in the study. Questionnaire served as the basis for statistical
analysis in which data retrieved was analysed using appropriate statistical tools. The descriptive
analysis of the data involves the use of tables and percentages. While inferential statistics was
carried out using simple linear regression, so as to understand the effect of commercial bank
credit policies on industrial growth in Nigeria. A study of selected respondents was carried out.
4.1
Data Analysis and Presentation
As a matter of primary data collection, questionnaires were administered directly to respondents
with aid of online survey and physical survey in selected areas of Lagos state. After filtering the
questionnaire received from respondents, 153 questionnaires were deemed usable, but only 150
were used for the purpose of the sample size earlier stated in this study. The response rate is
considered adequate for the study.
4.2
Analysis of Socio-Demographic Variable
Six (6) socio-demographic variables are included in this study. They are age, gender, marital
status, education level, number of staff and business type. The results in below tables and
figures represent distribution of sample individuals according to demographic variables.
4.3
Categorical Data Analysis
This section presents the results of the survey conducted based on the research questions. To
answer these research questions, the researcher relied on the responses of various statements
under the constructs. Hence, the descriptive analysis such as frequency counts, percentage and
54
mean were the statistical tools used in achieving this. All the questions were ranked and scores
were given to each option (Strongly Disagree = 1, Disagree = 2, Agree = 3 & Strongly Agree =
4). With this score, the mean of the scores was obtained (2.50) and individuals who fell below
the mean score were recorded as being totally disagreed with the statement while individuals
who fell above the mean score were recorded as being totally agreed with the statement.
4.3.1
Credit Policies of Commercial Banks
The section seeks to assess the credit policies used by commercial banks in Nigeria. To achieve
this objective, the study relied on the responses of 5 statements which cover various credit policy
under the constructs that are presented in Table 4.1 below.
Table 4.1: Analysis of Credit Policies used by Commercial Banks and the Growth of
Industries in Nigeria
S/N
Responses
1
(%)
(%)
(%)
(%)
61
66
14
9
(40.6)
(44.0)
(9.3)
(6.0)
75
54
12
9
(50.0)
(36.0)
(8.0)
(6.0)
57
46
27
20
(38.0)
(30.6)
(18.0)
(13.3)
59
55
19
17
(39.3)
(36.7)
(12.6)
(11.3)
72
60
10
8
(48.0)
(40.0)
(6.7)
(5.3)
Do the credit terms used by commercial
banks include early payment discount?
5
SD
Is nature of business used as factor
granting loan?
4
D
Do commercials banks consider size of
business before granting loan?
3
A
Do banks request for your business
cashflow for loan request?
2
SA
Do the credit terms used by commercial
banks include late payment penalties?
Source: Field Survey (2021)
55
MEAN Decision
3.29
Agreed
3.57
Agreed
3.18
Agreed
3.82
Agreed
3.86
Agreed
Table 4.1 gives detail assessment of the credit policies used by commercial banks in Nigeria. In
Table 4.1, strongly disagree, disagree, neutral, strongly agree and agree are represented by SD,
D, SA, A respectively. Also, mean for the variables are represented. Table 4.1 indicated that by
combining responses under strongly agree and agree, 84.6% of the respondents accepted that
banks requested for your business cashflow for loan request as credit policy of commercial banks
in Nigeria while 15.3% disagreed. This statement also has mean of 3.29 which indicate overall
acceptance of the statement.
By combining responses for item 2 in Table 4.1 under strongly agree and agree, 86% of the
respondents accepted that commercials banks consider size of business before granting loan as
credit policy of commercial banks in Nigeria while 14% disagreed. This statement also has mean
of 3.57 which indicate overall acceptance of the statement. Further, by combining responses for
item 3 under strongly agree and agree, 68.6% of the respondents accepted that nature of business
use as factor granting loan as credit policy of commercial banks in Nigeria while 31.4%
disagreed. This statement also has mean of 3.18 which indicate overall acceptance of the
statement. Also, by combining responses for item 4 in Table 4.1 under strongly agree and agree,
76% of the respondents accepted that the credit terms used by commercial banks include early
payment discount. This statement also has mean of 3.82 which indicate overall acceptance of the
statement. Lastly, combining responses for item 5 under strongly agree and agree, 88% of the
respondents accepted that credit terms used by commercial banks include late payment penalties
as credit policy of commercial banks in Nigeria while 12% disagreed. This statement also has
mean of 3.86 which indicate overall acceptance of the statement.
56
In our case, it was obvious that to a large extent that commercial banks credit policy covers are of
different forms which include request for business cashflow, late payment penalties, early
payment discount, use of nature of business for granting loan due to the agreement and
disagreement of the respondents to the positive and negative statements respectively. For
instance, 88% of the respondents agreed with the statement “credit terms used by commercial
banks include late payment penalties”
4.3.2
Economic and Operational Factors Limiting Access to Commercial Banks Credit
The section seeks to assess the factors limiting access to commercial banks credit. To achieve
this objective, the study relied on the responses of 5 statements which cover various economic
and operational factors under the constructs that are presented in Table 4.2 below.
Table 4.2: Analysis of Economic and Operational Factors Limiting Access to Commercial
Banks Credit
S/N
1
Responses
Does lack of collateral hinder access to
commercial banks credit?
2
Does high interest rate limit access to
(%)
(%)
(%)
(%)
40
77
20
13
40
30
78
(26.7) (52.0)
Does short term loan repayment hindered
63
35
54
63
61
(42.0) (40.6)
Source: Field Survey (2021)
57
(8.6)
16
(10.7)
13
19
(8.6)
(12.6)
20
13
(42.0) (36.0) (13.3)
Requirement of advance savings limits
access to commercial banks credit?
SD
69
Nature of business hinder access to
access to commercial banks credit?
5
D
(46.0) (20.0) (23.3)
commercial banks credit?
4
A
(26.7) (51.3) (13.3)
commercial banks credit?
3
SA
(8.6)
10
16
(6.7)
(10.6)
MEAN Rank
3.09
5th
3.35
3rd
3.34
4th
4
1st
3.36
2nd
Table 4.2 gives detail assessment of the factors limiting access to commercial banks credit. In
Table 4.2, strongly disagree, disagree, neutral, strongly agree and agree are represented by SD,
D, N, SA, A respectively. Also, mean for the variables are represented. Table 4.1 indicated that
for item 1 by combining responses under strongly agree and agree, 78% of the respondents
accepted that lack of collateral hinder access to commercial banks credit as factors limiting
access to commercial banks credit while 22% disagreed. This statement also has mean of 3.86
which indicate overall acceptance of the statement. Also, for item 2, by combining responses
under strongly agree and agree, 66% of the respondents accepted that high interest rate limit
access to commercial banks credit as factors limiting access to commercial banks credit while
34% disagreed. This statement also has mean of 3.09 which indicate overall acceptance of the
statement.
For item 3, by combining responses under strongly agree and agree, 78.7% of the respondents
accepted that Nature of business hinder access to commercial banks credit as factors limiting
access to commercial banks credit while 21.3% disagreed. This statement also has mean of 3.35
which indicate overall acceptance of the statement. For item 4, by combining responses under
strongly agree and agree, 76% of the respondents accepted that short term loan repayment
hindered access to commercial banks credit as factors limiting access to commercial banks credit
while 24% disagreed. This statement also has mean of 4.0 which indicate overall acceptance of
the statement. Lastly, for item 5, by combining responses under strongly agree and agree, 82.6%
of the respondents accepted that Requirement of advance savings limit access to commercial
banks credit as factors limiting access to commercial banks credit while 17.4% disagreed. This
statement also has mean of 3.36 which indicate overall acceptance of the statement.
58
However, in addition to our case it was observed that the least three factors that hinder access to
commercial banks credit include; lack of collateral hinder access to commercial banks credit,
Nature of business hinder access to commercial banks credit, and high interest rate limit access
to commercial banks credit with mean of 3.09, 3.34, and 3.35 respectively. On the other hand,
the most two influential factors include; short term loan repayment hindered access to
commercial banks credit, and Requirement of advance savings limit access to commercial banks
credit.
4.3.3 Credit Policies and its Impact on Industrial Growth Cascade Down to the
Consumers
The section seeks to assess the credit policies and its impact on industrial growth cascade down
to the consumers. To achieve this objective, the study relied on the responses of 5 statements
which cover various impact under the constructs that are presented in Table 4.3 below.
59
Table 4.3: Analysis of Credit policies and its impact on industrial growth cascade down to
the consumers
S/N
1
Responses
afford industrial products
Does
credit
policies
of
banks
industrial sector due to high price?
SD
(%)
(%)
(%)
(%)
69
48
11
22
(46.0)
(32.0)
(7.3)
(14.6)
64
44
26
16
(42.7)
(29.3)
(17.3)
(10.6)
48
53
34
15
(32.0)
(35.3)
(22.7)
(10.0)
79
47
10
14
(52.7)
(31.3)
(6.7)
(9.3)
Do credit policies on industrial sector drive
attention of consumer to foreign used
products as a results?
4
D
affect
consumer attitude towards products from
3
A
Do you agree that credit policies on
industrial sector affect consumer ability to
2
SA
Do you agree credit policies on industrial
sector reduce the purchasing power of
consumer in buying industrial products?
MEAN
DECISIO
N
3.52
AGREE
3.22
AGREE
3.28
AGREE
3.49
AGREE
Source: Field Survey (2021)
Table 4.3 gives detail assessment of the credit policies and its impact on industrial growth
cascade down to the consumers. In Table 4.3, strongly disagree, disagree, neutral, strongly agree
and agree are represented by SD, D, SA, A respectively. Also, mean for the variables are
represented. Further. Table 4.3 indicated that by combining responses under strongly agree and
agree, 78% of the respondents accepted that industrial sector affect consumer ability to afford
industrial products while 22% disagreed. This statement also has mean of 3.52 which indicate
overall acceptance of the statement.
By combining responses for item 2 in Table 4.3 under strongly agree and agree, 72% of the
respondents accepted that credit policies of banks affect consumer attitude towards products
from industrial sector due to high price while 28% disagreed. This statement also has mean of
60
3.22 which indicate overall acceptance of the statement. For item 3, by combining responses for
item 3 under strongly agree and agree, 67.3% of the respondents accepted that credit policies on
industrial sector drive attention of consumer to foreign used products as a results while 32.7%
disagreed. This statement also has mean of 3.28 which indicate overall acceptance of the
statement.
Lastly, combining responses for item 4 under strongly agree and agree, 84% of the respondents
accepted that credit policies on industrial sector reduce the purchasing power of consumer in
buying industrial products while 16% disagreed. This statement also has mean of 3.49 which
indicate overall acceptance of the statement.
4.4
Test of Hypotheses
Correlation Analysis
Hypotheses one to four were tested using the Pearson Correlation analysis. The result indicates
that all dependent variables have inverse relationship with the independent variable.
Hypotheses I
Ho:
Credit policies used by Commercial Banks has no significant relationship with the growth
of industries in Nigeria.
Hi:
Credit policies used by Commercial Banks has significant relationship with the growth of
industries in Nigeria.
Hypotheses II
Ho:
There is no significant relationship between economic and operational factors that limits
industries from gaining access to credit and commercial banks.
61
Hi:
There is significant relationship between economic and operational factors that limits
industries from gaining access to credit and commercial banks.
Hypotheses III
Ho:
Policy recommendations does not enhance the financing of industries in Nigeria.
Hi:
Policy recommendations does enhance the financing of industries in Nigeria.
Hypotheses IV
Ho:
There is no positive relationship between commercial bank credit policies and industrial
growth in Nigeria.
Hi:
There is a positive relationship between commercial bank credit policies and industrial
growth in Nigeria.
Table 4.4: Pearson test of relationship between Credit policies by Commercial Banks and
Growth of Industries in Nigeria
Credit policies by
Growth of Industries
Commercial Banks
in Nigeria
Credit policies by Commercial 1.000
0.358**
Banks
Growth of Industries in Nigeria
0.358**
1.000
**p< .01
For the first hypotheses, it was established that significant relationship between Credit policies
by Commercial Banks and Growth of Industries in Nigeria. However, the relationship that exists
between both variables is inverse, this indicate that for every increase in adoption of credit
62
policies by commercial banks, there is a corresponding enhancing in the growth of industries in
Nigeria.
The stated null hypotheses was rejected, this is supported with p=.000<.01. Hence a positive
relationship exists between Credit policies by Commercial Banks and Growth of Industries in
Nigeria.
The correlation co-efficient (r) of the relationship between Credit policies by Commercial Banks
and Growth of Industries in Nigeria is .358, this implies that there is significant relationship
between Credit policies by Commercial Banks and Growth of Industries in Nigeria.
This finding is corroborated by recent related studies done by Joseph and Nnanyelugo (2015) in
which it was further found out that the impact of credit policies by commercial banks on
business expansion can be felt from both the perspective of Economic growth as well as
Economic Development.
The general interest in access to finance as a result of credit policies by commercial banks has
increased significantly in recent years, as growing evidence suggests that lack of access to
effective credit policies prevents small firms from financing high return investment projects,
having an adverse effect on industrial growth. There are numerous literature on the causal
relationship between Credit policies by Commercial Banks and its impact on Growth of
Industries in Nigeria.
63
Table 4.5: Pearson test of relationship between economic and operational factors Limiting
Access to Credit by industries and Commercial Banks
Economic and Operational
Commercial Banks
Factors Limiting Access to
Effectiveness
Credit by industries
Economic and Operational Factors 1.100
Limiting
Access
to
Credit
0.258**
by
industries
Commercial Banks Effectiveness
0.258**
1.100
**p< .01
For the second hypotheses, it was established that significant relationship between factors
Limiting Access to Credit by industries and Commercial Banks effectiveness. However, the
relationship that exists between both variables is inverse, this indicate that for every change in
those factors limiting access to credit by industries, there is a corresponding increase in the
commercial banks effectiveness and vice-versa.
The stated null hypothesis was rejected, this is supported with p=.000<.01. Hence a positive
relationship exists between factors Limiting Access to Credit by industries and Commercial
Banks Effectiveness. The correlation co-efficient (r) of the relationship between Limiting Access
to Credit by industries and Commercial Banks Effectiveness is .258, this implies that there is
significant relationship between Economic and Operational Limiting Access to Credit by
industries and Commercial Banks Effectiveness.
64
This finding is corroborated by recent related studies carried out by Akabueze (2002) who asserts
that the significance of access to credit in the drive for industrial growth is fairly well established
and generally accepted.
For instance, the take-off and efficient performance of any industrial enterprises, be it small or
large, will require the provision of funds for its capitalization, working capital and rehabilitation
needs, as well as for the creation of new investments through commercial bank credit and loans.
Table 4.6: Pearson test of relationship between Policy Recommendations and Financing of
Industries
Policy Recommendations
Financing of Industries
Policy Recommendations
0.100
0.258**
Financing of Industries
0.258**
0.100
**p< .01
For the third hypotheses, it was established that significant relationship between Policy
recommendations and financing of industries. However, the relationship that exists between both
variables is inverse, this indicate that for every change in Policy recommendations, there is a
corresponding increase in financing of industries and vice-versa.
The stated null hypothesis was rejected, this is supported with p=.000<.01. Hence a positive
relationship exists between Policy recommendations and financing of industries. The correlation
co-efficient (r) of the relationship between Policy recommendations and financing of industries
is .258, this implies that there is significant relationship Policy recommendations and financing
of industries.
65
This finding is corroborated by recent related studies conducted by Ndwiga & Waithaka (2012)
who have further found that as much as source of finance and risk management affects
entrepreneurship development, inadequate policy recommendations on financing of industries
have even more greater effect on the Nigerian economy which means that there is a strong
correlation between Policy recommendations and financing of industries.
Table 4.7: Pearson test of relationship between Commercial Bank Credit and Industrial
Growth
Commercial Bank Credit
Industrial Growth
Commercial Bank Credit
0.100
0.258**
Industrial Growth
0.258**
0.100
**p< .01
For the fourth hypotheses, it was established that significant relationship between commercial
bank credit and industrial growth. However, the relationship that exists between both variables is
inverse, this indicate that for every increase in commercial bank credit, there is a corresponding
increase in industrial growth and vice-versa.
The stated null hypothesis was rejected, this is supported with p=.000<.01. Hence a positive
relationship exists between commercial bank credit and industrial growth. The correlation coefficient (r) of the relationship between commercial bank credit and industrial growth is .258,
this implies that there is significant relationship between commercial bank credit and industrial
growth.
66
This finding is corroborated by recent related studies that commercial bank credit plays a key in
creating an enabling environment for industrial growth (O'Hara-Devereaux & Johansen, 2015).
The commercial bank credit allows capital to be well utilized in core areas of the business while
integrating and effectively controlling the whole growth process (Mowshowitz, 2014) which
means that there is a strong correlation between commercial bank credit and industrial growth.
An industry that introduces commercial bank credit in its operation will experience higher
productivity compared to rival industries, who may not even be opened to the idea. This means
that commercial bank credit is directly linked to the presence of productive environment that
occurs as a result of financial and non-financial credit offered by commercial banks in Nigeria.
4.5
Discussion of Finding
This study examined the effects of commercial bank credit policies on the industrial growth in
Nigeria, this may end up providing insights on the importance of examining credit policies
implemented by commercial banks as this has become an issue of more debates and hated
discussion in the contemporary business world. The research findings as outlined in the study
have direct scientific and technological implication.
Having analyzed the various submissions of scholars in support to a large extent that commercial
banks credit policy covers are of different forms which include request for business cash flow,
late payment penalties, early payment discount, use of nature of business for granting loan due to
the agreement and disagreement of the respondents to the positive and negative statements
respectively. All industries in every economy in the world require access to finance which
involves the implementation of credit policies by commercial banks for their businesses to thrive
on a sustainable basis. The study has shown that poor credit risk management serves as a
67
drawback in the stride towards achieving improved industrial growth. Results from this study
have shown that for industries to stand as a driving force towards achieving economic growth
and development, access to credit facility plays a significant roles as result have clearly shown
that access to credit have an enormous significant impact on business expansion.
68
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
The aim of this chapter is to summarize the analysis and interpretation of the study, provide
recommendations for the problems identified in the study. The chapter also mentions the
implication of the findings to the policy makers that would benefit from the study as well as the
study’s contribution to knowledge.
5.1
Summary
The study carried out to examine the effect of commercial bank credit policies on industrial
growth in Nigeria. Primary and secondary data was used through the use of questionnaire and
Central Bank of Nigeria (CBN) statistical bulletin. Based on the population estimate, the study
arrives at a sample size of 150 units and was finally analysed. Convenience sampling technique
was also used in determining sample size proportions. The study made use of a various point
questionnaire for collecting data and simple linear regression analysis was chosen to determine
the relationship between identified hypotheses.
Data generated from the questionnaire was sorted, arranged, coded, analysed and substituted in
the functional equations to obtain simple regression models and establish statistical significance
of commercial banks credit policy and industrial sector performance variables and the final
acceptance or rejection of the hypothesis were made using Pearson Test.
From the analysis carried out the study reveals that it can be deduced on the overall that the
commercial banks credit policy covers are of different forms which include request for business
cashflow, late payment penalties, early payment discount, use of nature of business for granting
loan due to the agreement and disagreement of the respondents to the positive and negative
statements respectively. For instance, 88% of the respondents agreed with the statement “credit
69
terms used by commercial banks include late payment penalties” In addition to our case it was
observed that the least three factors that hinder access to commercial banks credit include; lack
of collateral hinder access to commercial banks credit, Nature of business hinder access to
commercial banks credit, and high interest rate limit access to commercial banks credit with
mean of 3.09, 3.34, and 3.35 respectively. On the other hand, the most two influential factors
include; short term loan repayment hindered access to commercial banks credit, and
Requirement of advance savings limit access to commercial banks credit.
Further, it was observed that correlation co-efficient (r) of the relationship between Credit
policies by Commercial Banks and Growth of Industries in Nigeria is .358, this implies that there
is significant relationship between Credit policies by Commercial Banks and Growth of
Industries in Nigeria. The implication of this is that credit has significant relationship with
growth and development of industries in Nigeria, such that commercial banks credit policy could
lead to efficiency and high performance of industrial sector in Nigeria. This implies a unit
increase in credit to private sector will lead about 0.088 increase in industrial sector output in
Nigeria.
5.2
Conclusion
The focus of this study centered on the effect of commercial bank credit policies on industrial
growth in Nigeria. Based on the findings of this study therefore, the following conclusions are
arrived at:
 Commercial banks credit policy covers are of different forms which include request for
business cashflow, late payment penalties, early payment discount, use of nature of
business for granting loan.
70
 The least three factors that hinder access to commercial banks credit include; lack of
collateral hinder access to commercial banks credit, Nature of business hinder access to
commercial banks credit, and high interest rate limit access to commercial banks credit.
On the other hand, the most two influential factors include; short term loan repayment
hindered access to commercial banks credit, and Requirement of advance savings limit
access to commercial banks credit.
 Credit has significant relationship with growth and development of industries in
Nigeria. The implication of this is that credit has significant relationship with growth
and development of industries in Nigeria, such that commercial banks credit policy
could lead to efficiency and high performance of industrial sector in Nigeria. Lastly,
negative and significant relationship between interest rate (INTR) and industrial growth
(IND) in Nigeria.
5.3
Recommendation
In this project, the researcher has investigated on the effect of commercial bank credit policies on
industrial growth in Nigeria. However, in this effect, recommendation should be sent on impact
that could be introduced towards solving the problem identified which should focus on.
The Central Bank of Nigeria should not allow banks to place unnecessary embargoes on bank
credit. This will help qualified applicants to obtain credit for entrepreneurship and economic
growth.
Stabilization policy should be put in place by the monetary authority to control inflation.
For any loan given to the industrial sector to be effective, there should be reasonable long-term
loans to industrial sector and also lending scheme which is targeted at infant industries and
small-scale industries. This should be monitored to ensure that such loans are channelled to their
71
proper purpose. There is the need also for more enlightenment campaign which will serve as an
avenue to know how loans are sought from banks.
The government should endeavour to ensure that there are available and sufficient credit
allocated to the manufacturing sector in Nigeria with reasonable or affordable lending rates. This
will enable the manufacturing sector in Nigeria to operate on their production possibility curve,
which is full capacity. In the long run it will lead to development of the Nigerian economy,
through employment generation, innovation, competition, economic dynamism and promotion of
indigenous technology.
For Nigeria to meet it sustainable developmental goals and objectives, it should be depending
more on products and services produced within her boundaries; hence the need to encourage the
manufacturing sector. In will afford her the privileges of enjoying favourable balance of
payments, as well as favourable terms of trade, which are the fundamentals for economic growth
and development in the 21st century.
1.
The Central Bank of Nigeria should ensure that commercial banks intermediates in the
industrial sector and the government should also step up expenditure on the needed
infrastructure to enhance the industrial sector performance.
2.
Stabilization policy should be put in place by the monetary authority to control inflation.
3.
For any loan given to the industrial sector to be effective, there should be reasonable longterm loans to industrial sector and also lending scheme which is targeted at infant
industries and small scale industries. This should be monitored to ensure that such loans
are channelled to their proper purpose. There is the need also for more enlightenment
campaign which will serve as an avenue to know how loans are sought from banks.
72
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