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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The whole concept of a bank revolves on public confidence on the banks ability and willingness to deliver on its obligations. This confidence which is reposed on the bank is not an object to be trifled with. Indeed it is very serious as the bank, the government and the people realize what is at sake, if this confidence is treated lightly. It is this singular factor that makes the bank stands out to help its clients when times are good by extending loan facilities to them on generous terms. However, when times are bad and there is wide spread uncertainty in the business horizon, the bank must be severe, conservative and very cautious in extending credits.

Some have described the banker as one who is willing to lend out a winter jacket when the weather is warm (dry season) and to retrieve it when the weather is cold (during harmattan) (Emekekwue, 1994:2-3).

The banking system of various countries vary considerably, however, they all tend towards central banking system. The systems that are tenable in Nigeria fall into the following parts: Central bank, commercial Bank, Development Bank, Merchant Bank, Mortgage Bank and other Banks. However, these distinctions are merely evident by their name. In terms of operation, apart from the Central Bank, all other banks perform essentially commercial Banking operations. They have long abandoned their traditional roles and gone into financial distributive trade but essentially their main business is to lend and borrow money.

Adekanye (2001:23) opines that, Banks generally provide avenue for savings for those who have surplus fund. The surplus deposit are then lent out to the needy persons, Co-operate bodies and business organizations in form of loans’ Banks serve as major intermediary between the demand sector that needs credit to financial project and the supply sector which provide such loanable fund for investment. Again, credit facilities are usually in form of loans and advances (which includes cash credit, call loans overdraft and discounting bill of exchange) and credit, Creation.

 Lending has become a vital function in banking operations because of its direct effect on economic growth and business development. This is being pursued in most countries particularly the developing ones, where banks and their lending activities have been usefully integrated into government policy formulation in the national economic development process. As far as banks are concerned, their role as lending is as important as that of deposit taking considering the interrelationship between one and the other (Nwosu (1999:91)

 In line with Nwankwo (1990: 45), banking like any other business, requires adequate capital to function effectively. By its nature, however, banking is a highly leveraged industry, the degree of leverage averaging between 88% and 95% in the United States, compared with between 25% and 7% for non financial firms.

The economy of Nigeria is a middle income; mixed economy emerging market with well developed financial legal, Communications, transport and entertainment sectors. It is ranked 31st in the world in terms of GDP (PPP) as of 2009, and its emergent, though currently under performing manufacturing sector is the second largest on the continent, producing a large proportion of goods and services for the West African Region.

Previously hindered by years of mismanagement, economic reforms of the past decade have put Nigeria back on track towards achieving its full economic potential. Nigeria GDP at purchasing power parity more than doubled from $170. Billion in 2005 to $374.3 billion in 2010, although estimates of the size of the informal sector (which is not included in official figures) put the actual numbers closer to $520 billion.

Correspondingly, the GDP per capital doubled from $1200 per person in 2005 to an estimated $2,500 per person in 2009 (again with the inclusion of the informal sector, it is estimated that GDP per capital hovers around $3500 per person). It is the largest economy in the West African Region, 3rd largest economy in Africa (behind South African and Egypt and on track becoming one of the top 30 economies in the world in the early part of 2011.

The largely subsistence agricultural sector has not kept up with rapid population growth, and Nigeria, once a large net exporter of food, now imports some of its food products. (Wikipedia of 11th April 2011).

The central bank of Nigeria Annual report and statement of accounts for the year ended 31st December 2009, on the real sector states as follows:

The real Gross Domestic product (GDP) at 1990 basic Prices grew by 6.7 percent, compared with 6.0 percent in 2008 and an average annual growth rate of 6.6 percent for the period 2005-2009. The growth was attributed mainly to the sound monetary and fiscal policies pursued in the course of the year, complemented by the favorable weather which enhanced agricultural output. The robust output growth was driven mainly by the non oil sector, as reflected in the non-oil GDP growth rate of 8.3 percent. Within the non oil sector, the agricultural sub sector grew by 6.2 percent, while whole sale and retail trade and the service sub sector grew by 6.2 percent (While whole sale and retail trade and the services sub-sector) recorded growth rates of 11.5 and 11.1 percent respectively.

Industrial output grew slightly by 0.8 percent, in contrast to the fall recorded during the previews three years. The implementation of the federal Government amnesty programme paved the way for improved oil production which boosted the growth in industrial output.

From a middle income nation in the 1970’s and early 1980’s, Nigeria is today among the 30 poorest nations in the world. Putting the country back on the part of recovery and growth will require urgently rebuilding deteriorated infrastructure and making more goods and services available to the citizenry at affordable prices. This would imply a quantum lap in output of goods and services.

The part to economic recovery and growth may require increasing production inputsland, labour, capital and technology and or increasing their productivity. Increasing productivity should be the focus because, many other countries that have found themselves in the same predicaments have resolved them through productivity enhancement schemes, for instance Japan from the end of the world war II and the united states of America from the 1970s have made high productivity the centre point of their economic planning and the results have been resounding. Also, middle income countries like Hong Kong, South Korea, Singapore, the Philippines, India, Mexico and Brazil have embraced boosting productivity schemes as an integral part of their national planning and today they have made significant in- roads into the world industrial markets.

Giving the importance of high productivity in boosting economic growth and the standards of living of the people, its measurement cannot but be of importance to both policy makers and research. Productivity measurement can be used to measure or evaluate the relative efficiency of firms, sub- sectors and sectors. (Anyanwu, 2008: 124 – 125).

Economic development is about enhancing the productive capacity of an economy by using available resources to reduce risk, remove impediments which otherwise could lower costs and higher investments. The banking system plays the important role of promoting economic growth and development through the process of financial intermediation. Many economists have acknowledge that the financial system, with banks as its major component provide linkages for the different sectors of the economy and encourage high level of specialization, expertise, economies of scale and a conducive environment for the implementation of various economic policies of government intended to achieve non- inflammatory growth, exchange rate stability, balance of payments equilibrium and high level of employment.

Therefore, this research work will in detail analyze the basic principles of bank lending and its impact on the development of the Nigeria economy with particular attentions paid to the real sector of the same economy.

1.2 STATEMENT OF THE PROBLEM

The reluctance of the banks to provide credit for the real sector activities in the early years of the country Life led to a significant decline in the Agricultural and industrial productions. The outcome of the Central Bank of Nigeria Study in 1978 led to the establishment of the Agricultural Credit Guarantee Scheme Fund (ACGSF).

Also, it is not quite certain that the establishment of the Agricultural and Manufacturing Loan Scheme has significantly impacted on the Nations’ Gross domestic product (GDP).

Equally there are conflicting views as to weather business organizations should be financial by bank lending or not. Those opposed to the use of this alternative in Nigeria, argue that bank lending is expensive and involve much administrative work.

It is on these aforementioned problems that this research study is built. The researcher will delve deeply into these matters to enable her establish a link between bank lending and real sector performance in Nigeria.

1.3 RESEARCH QUESTIONS

The research questions for the study are as follows:

1. How far do loans from the Banking Industry contribute to the Growth of the

Agricultural section?

1. To what extent has Banking Industry’s loans to the Manufacturing sector contributed to the Growth of the Sector.

1.4 OBJECTIVES OF THE STUDY

The study will determine the impact of the loans of the Banking industry on the development of the Agricultural and Manufacturing sectors of the Nigerian economy. The following objectives will guide this research.

1. To determine the impact of Bank loans and Advances to the growth of the

Nigerian Agricultural Sector.

1. To ascertain the impact of Bank loans and Advances to the growth of the Nigerian

Manufacturing Sector.

1.5 RESEARCH HYPOTHESIS

In carrying out the research, the following hypotheses have been formulated.

HYPOTHESIS I

Ho: Bank loans do not have a positive and significant impact on the growth of the

Nigerian Agricultural sector.

HYPOTHESIS 2

Ho: Bank loans do not have a positive and significant impact on the growth of the

Nigerian manufacturing sector.

1.6 SCOPE OF THE STUDY

The study concentrates on the banking industry in Nigeria from the inception of the country i.e. 1960 till date. The data that would be presented and analyzed would cover

1988-2008.

The following Banks’ activities generated the data that would be used in the analysis

• The Central Bank of Nigeria (CBN)

• The Commercial Banks and

• The Merchant Banks.

The activities of the commercial banks, have much to do with the works, since the various activities of the Central Bank of Nigeria translates to the loans given by the

Commercial Banks.

Presently, there are about twenty-five commercial Banks after the recapitalization in

2005.

The banks are as follows:

Access Bank

Afribank

Diamond Bank

Eco Bank

Equatorial Trust Bank

First City Monument Bank

Fidelity Bank

First Bank PLC

First Inland Bank

Guarantee Trust Bank

IBTC Chartered Bank

Intercontinental Bank

Nigeria Intercontinental Bank

Oceanic Bank

Bank PHB

Sky Bank

Spring Bank

Stanbic IBTC

Standard Chartered Bank

United Bank of Africa

Sterling Bank

Union Bank

Unity Bank

Wema Bank &

Zenith Bank plc

Also, the real sector components that are considered in this work are the Agricultural and manufacturing sub-sectors.

1.7 SIGNIFICANCE OF THE STUDY

Every one needs information so as to be empowered. These include, the financial system participants, owners of Banks and other institutions and the general public At the completion of this research, which is carried out as partial fulfillment of the award of Masters of Business Administration (MBA) degree in Banking and finance, the study will be significant in the followers ways and to the following persons as enumerated below.

It will enable the student/ researcher, investors, bank staff and management to have thorough knowledge of the subject matter.

To empower private and public investors, including farmers and manufacturers, banks and other financial institutions.

To help students and other researchers get information on their study for the award of various degrees

To Increase the volume of literature in the library for library users.

To help the banks solve some of their loan related problems, if they will have the time to read the recommendations made in this study

To help the Financial System participants and operators- The central Bank Commercial Banks, Securities and Exchange Commission (SEC), the stock exchange etc, assess their performance and the efficiency of their operations and then develop policies that will benefit the generality of the people.

To increase the reliance of investors and borrowers on bank loans and their impact on their operations as would be recommended in this research

To stare up research students into carrying out further research studies on areas not covered by the study.

1.8 OPERATIONAL DEFINITION OF TERMS

BANKING INDUSTRY: This comprises the Central Bank of Nigeria, commercial

banks and other banks that give loans to the Agricultural and Manufacturing sub-sectors of the real sector of the Nigeria Economy.

REAL SECTOR: This comprises the Agricultural sub sector and the manufacturing sub-sector that use the loans from the Banks, to hire Men, Material and Machines for the production of goods and the provision of services that lifts peoples standard of living as shown or reflected in their Gross Domestic Product.

NIGERIA ECONOMY: These comprise production (agricultural, forestry and fishery, manufacturing, Mining and quarrying, Real Estate and construction), General commerce

(Bills discounted; domestic trade, Exports, Imports), services (public utilities, transport and communications; credit to financial Institutions) and others (Government; personal and professional; Miscellaneous), Sectors, who take loans and advances from commercial Banks and the CBN.

GROWTH: This is the ability of the Agricultural and manufacturing sectors to produce more goods and services (GDP) with the bank loans, than they would have produced without the loans and Advances

COLLATERAL/SECURITY: Any property, money or life that farmers and producers

are willing to loose to the banks in case they do not pay back the loans given to them.

LOANS: Loans refer to the money in Naira that the Central Bank, commercial and Merchant Banks, give to the Agricultural and Manufacturing sectors to enable them produce more goods and services.

INTEREST: The additional money the farmers and producers would pay alongside their loans to the commercial Banks.

CONSIDERATIONS: The qualities that farmers and producers should possess and the condition they have to satisfy for the banks to give them the money they wish to take from the banking industry:

AGRICULTURE: The combination of crop production, livestock, forestry and fishing that utilize the banking industry loans.

MANUFACTURING: The combination of oil refining, cement production and other manufacturing that use bank loans to produce goods and services for Nigerians.