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PROJECT TOPIC AND MATERIAL ON Impact Of Commercial Bank Loans On Economic Growth In Nigeria (1981-2015)
The Project File Details
- Name: Impact Of Commercial Bank Loans On Economic Growth In Nigeria (1981-2015)
- Type: PDF and MS Word (DOC)
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The objective of this study is to examine the impact of commercial bank loans on economic Growth in Nigeria from 1981-2015. The study made use of secondary data sourced from the Central Bank of Nigeria statistical bulletin and National Bureau of statistics from 1981-2015. Dependent variable for this study is Gross Domestic Product (GDP) and explanatory variables are commercial bank loans to key sectors like Manufacturing, Agriculture and Mining and Quarrying sector. Using Ordinary least square method (OLS) multiple regression techniques, the study revealed that there exist a stable long-run relationship between commercial bank loans and economic growth in Nigeria. The study also revealed that credit to Agricultural and Manufacturing sector has a positive impact on the Gross Domestic Product (GDP) while credit to Mining and Quarrying has a negative impact on the Gross Domestic Product in Nigeria. The study, therefore recommended that Government should concentrate more in formulating long-term credit policies which has the capacity to stimulate economic growth in Nigeria. More credit should be channeled to the Agricultural and Manufacturing sectors of the economy as it was shown on our findings to significantly contribute to economic growth in Nigeria.
- Background of the Study
Finance is required by different people, organizations and other economic agents for different purposes. Commercial bank loan is an important aspect of finance that aid investors to generate economic growth. The ease of obtaining bank loan over raising funds from the capital market make bank loan popular among investors especially short-term investors. Bank loans involve channeling funds from the surplus spending to the deficient spending units of the economy, therefore, transforming bank deposits into loan.
The role of loan in economic growth has been recognized as a means by which various economic agents are enabled to meet up with operating expenses. For instance, co-operate organizations need fund to procure machineries and equipment needed for the production of goods and services, Farmers obtain loan to purchase seeds, insecticides, fertilizers and erecting of various kinds of farm buildings. Government bodies source for credit to enable them meet with various kinds of recurrent and capital expenditures. Individuals and families on the other hand, take credit which enable them pay for goods and services (Adeniyi 2006).
According to Ademu (2006), the provision of credit is one of the ways to generate employment opportunities which contribute to the growth of the economy. Credit through bank loan leads to the expansion of production capacity and employment of idle resources which expand the gross domestic product (GDP) and therefore increases economic growth.
The banking sector is a channel of mobilizing savings through deposits and allocates such to investment through loans. It is also a source of attracting foreign capital in form of bank deposit which bank customers can access through loans in strong and stable economies.
Banking services cut across all the sectors of the economy. Hence bank loan as a form of investment generation services in every sector of the economy.
1.2 Statement of the Problem
The financial deregulation in Nigeria that started in 1986 and the associated financial innovations have generated an unprecedented degree of competition in the banking industry and this initially created high incentive for the expansion of both size and number of banking and non-banking institutions (Omankhanlen, 2012). The consequent phenomenal increase in the number of banking and non-banking institutions providing financial services led to increased competition amongst various banking institutions, and between banks and non-bank financial intermediaries. Apart from the keen competition with the range of financial activities, commercial banks have also faced problems associated with a persistent slowdown in economic activities, severe political instability, virulent inflation, worsening economic financial conditions of their corporate borrowers and increasing incidence of fraud and embezzlement of funds (Omankhanlen, 2012).
Another major problem of commercial banks have to deal is the inconsistency in monetary and regulation policies. The surveillance and regulatory measures of the Central Bank of Nigeria (CBN) have unfortunately been unable to keep up with the rapidity of the changes in the financial system. All these factors –deregulation, competition, innovation, economic recession, political instability, escalating inflation and frequent reversal in the monetary policy have combined to create a challenging and precarious financial environment for commercial banks in Nigeria in creating bank loans.
In the history of Nigeria’s banking sector, it can be seen that most of the failure experienced in the industry is as a result of imprudent lending that finally led to bad loans and some other unethical factors in the banking sector (Isaac and Samuel, 2015), Prior to June, 2004, there were eighty-nine commercial banks, among other financial intermediaries, with capitalization of less than 10 million USD and 3,330 branches, while the top ten banks accounted for about 50 percent of the industry’s total asset/liabilities (Soludo; 2004: 5). Besides the poor capital base of the banks, there are other issues hindering the effective performance of these banks. Some of the issues include inefficiency in the management, operational incompetency, poor corporate governance and unhealthy competition. Thus, these culminated in gross performance, which was below expectation. These hindered the financial sector from delivering financial services optimally to the satisfaction of both investors and customers (Ibrahim, 2012).
The CBN then tried to ensure that the financial sector plays its role in the achievement of growth and development in Nigerian leading to several reforms being implemented. The reforms led to the increase in the minimum capital requirements for the commercial banks and micro-finance banks respectively and this has brought to bear the existence of twenty five commercial banks and in the post consolidation era, There are fewer banks with improved minimum capital requirement of N25 billion each (Ibrahim, 2012) Unfortunately, the fear of systemic risk lingers, the supply of loan to investors is still questionable, while economic growth is relatively stable.
Before 1986, the number of commercial bank rose from 29 in 1986 to 64 in 1995 and declined to 51 in 1998, while the number of merchant banks rose from only 12 in 1986 to 54 in 1991 and subsequently declined to 38 in 1998. In terms of branch network, the combined commercial and merchant bank branches rose from 1,323 in 1985 to 2,549 in 1996. There was also substantial growth in the number of non-bank financial institutions, especially insurance companies. The economic environment that guided monetary policy before 1986 was characterized by the dominance of the oil sector, the expanding role of the public sector in the economy and over-dependence on the external sector. In order to maintain price stability and a healthy balance of payments position, monetary management depended on the use of direct monetary instruments such as credit ceiling, selective credit controls, administered interest and exchange rates, as well as the prescription of cash reserve requirement was not feasible at that point because of the underdeveloped nature of the financial markets and the deliberate restraint on the interest rates. Despite the use of direct monetary instrument, monetary aggregates, government fiscal deficit, GDP growth rate, inflation rate and the balance of payments position moved in undesirable directions. Since 1986, the main instrument of the market-based framework is the open market operations.
Now, the supposed relationship between commercial bank and economic growth is that commercial banks through its activities such as savings and fund mobilization, credit creation, etc. increases the accumulation of capital formation which in turn is expected to enhance the economy of the country. So, whether or not this relationship holds in Nigeria is the essence of this study.
1.3 Research Question
- Does commercial bank loans have any effect on economic growth in Nigeria?
- What is the relationship between commercial bank loans and economic growth in Nigeria?
1.4 Objectives of the study
- To examine the impact of commercial bank loan on economic growth in Nigeria.
- To determine the long-run relationship between commercial bank loan and economic growth in Nigeria.
1.5 Research Hypothesis
The following hypothesis will guide the study.
Ho: There is no significant effect of commercial bank loan on economic growth in Nigeria.
Ho: There is no long-run relationship between commercial bank loan and economic growth in Nigeria.
1.6 Significance of the study
This study is relevant for several reasons. First it will be relevant to the government to make financial reforms that would be directly geared to the growth of the economy. It will be relevant to lenders and borrowers to understand the efficiency of commercial bank so as to know when to save or borrow as the case may be. The knowledge of this study will help Nigerian citizens in gaining insight on the intricacies of the variable of interest in their economy and what to expect from policy makers in making policies that will help in achieving its macroeconomic goals towards economic growth. More so, this study will be of use to other researchers as a point of reference for further research studies.
1.7 Scope of the Study
The research covers the period of 1981-2015. The research is also limited to Nigerian economy. It specifically examines the impact of commercial bank loan on economic growth in Nigeria.
1.8 Limitations of the Study
A study of this nature ought to have compelled the researcher to visit many towns in collecting of data. Thus, the researcher is very much aware of where to do so, but constraints ranging from inadequate finance, limited time and inaccuracy of data pose a big treat.
There is also a problem of reluctance of giving out information by the banks. This could be due to the high level of secrecy being observed in the banking industry.
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