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

---

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

 

Finance is required by different people, organizations and other economic agents for different purposes. To provide the needed finance, there are varieties of institutions rendering financial services. These institutions are divided into money and capital market. In the money market, we have commercial banks that render financial services by way of inter-mediation.

This involves channeling funds from the surplus spending units the deficient spending units of the economy therefore, transforming bank deposits to loans. The role of credit in economic development has been recognized as loans obtained by various economic agents to enable them meet operating expenses. For instance business firm obtained loan by machinery and equipment. Farmers collect loans to buy seeds, fertilizers, erect various kinds of farm buildings; government bodies obtain loans to meet various kinds of recurrent and capital expenditures. Furthermore, individuals and families also take loans to buy and pay for goods and services (Adeniyi, 2006). Ademu (2006) is of the view of the provisions of loans with sufficient consideration for the sector’s volume and price system is a way to generate self-employment opportunities. This is because loans help to create and maintain a reasonable business size as it is used to establish and/or expand the business, to take advantage of economies of scale. It can also be used to improve informal activity and increase its efficiency.

This is achievable through resource substitution which is facilitated by the availability of loans, Ademu (2006).

Further, explained that loans can be used to prevent an economic activity from total collapse in the event of natural disaster, such as flood, drought, diseases or fire. Loans can be garnered to revive such an economic activity that suffered the set back.

The banking sector helps to make these loans available by mobilizing surplus funds from savers who have no immediate need of such funds and thus channel such funds in form of loan to investors who have brilliant ideas on how to create additional wealth in the economy but lack the necessary capital to execute the ideas. (Nwanyanwu 2010). It is instructive to note that the banking sector has stood out in the financial sector as of prime importance, because in many developing countries of the world, the sector is virtually the only financial means of attracting private savings on a large scale (Ademiji, 2006). Adekanye (1986) observes that making loan available, banks are rendering a great service, because through their action production is increase, capital investment are expended and a higher standard of living is realized. Furthermore economic growth is one major objective of macroeconomic policy. It is the crucial means of uplifting the standard as well as achieving economic development. Economists defined economic growth from various perspectives, some economists view that it is an increase in the national income or the level of production of goods and services by a country over a certain period of time. Generally economic growth is defined as an increase in Guess Domestic Product (GDP). Therefore, Gross Domestic Product (GDP) is considered a proxy of economic growth in the study.  Loan is the aggregate amount of funds provided by commercial banks to individuals, business consumption and investment purposes.

1.2 STATEMENT OF THE PROBLEM

 

Bank have been lending to the economy but thr impact of these on growth of the Nigerian economy is yet to be ascertained.

Since the new political dispensation economic growth rate have been fluctuating, so how far banks have contributed to the growth has remained an issue with some saying, it has made a significant effect on the economic growth while others are of the view that it has no significant effect on economic growth.There are in the literature debates on the intermediary role of banks in the economic growth. But, these seems to be a general consensus that the role of inter-mediation of banks help in boosting economic growth, Akintola (2004) identifies banks’ traditional roles to include financing of agricultural, manufacturing and syndicating of credit to productive sectors of the economy. The Nigerian banking industry has been subjected to varying degree of regulations since the enactment of the 1952 Banking Ordinance. This has seen the rise and fall of several banks in Nigeria. According to (Obademi and Elumaro 2014), bank regulations have negative impact on banks contribution to economic growth in Nigeria. Impact of economic growth process in Nigeria are felt most under deregulation regime considering the aforementioned and given the intermediary role of commercial banks in economic growth, this study intends to examine the impact of commercial bank credit on economic growth in Nigeria.

1.3 OBJECTIVES OF THE STUDY

The following are the major objectives of this research work.

1. Examine the impact of commercial banks credit on economic growth in Nigeria

3. Examine the contribution of commercial banks credit to Gross Domestic Product with aim of examining past and current trends based on historical data to examine the effectiveness of this sector.
4. Examine the extent to which intermediation credit to private sector of the economy has influence economic growth in Nigeria.

1.4 RESEARCH QUESTIONS

1. Does commercial banks really contribute significantly to economic growth in Nigeria?

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

3. To what extent does intermediation credit to private sectors influence economic growth in Nigeria?

1.5 RESEARCH HYPOTHSES

1. Ho: Commercial bank credit does not have a positive and significant impact on the growth of the Nigerian economy.

2. Ho: Commercial bank credit does not have a positive and significant effect on Gross Domestic Product.

3. Ho: Bank intermediation credit to private sector of the economy does not have a positive and significant influence on economic growth In  Nigeria.