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PROJECT TOPIC AND MATERIAL ON Impact Of Commercial Banks On Economic Growth In Nigeria
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- Name: Impact Of Commercial Banks On Economic Growth In Nigeria
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The Nigerian commercial bank industry has gone through various policy measures so as to achieve economic growth. 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. Hence, this study tries to investigate the impact of commercial bank deposits on economic growth in Nigeria employing certain control variables such as nominal interest rate and inflation. The study was done with the Ordinary Least Square (OLS) method and Granger Causality tests using annual data from 1981 to 2013.The study found that there is a positive relationship between commercial bank deposits and economic growth in Nigeria. The ADF unit root test showed that all the variables are stationary at first difference. More so, it was also found that there is a long run relationship between the variables of interest detected by the Johansen cointegration test and the Granger causality test. The research result supports the endogenous growth model which believes that a strong financial institution can facilitate economic growth. One of the major findings of the study is the activities of commercial banks can be used to control economic activities in Nigeria. Among the recommendation of this study, the financial institution should build a financial environment that is safe, reliable and rewarding so as to attract deposits from people
- BACKGROUND OF STUDY
Finance is required by different people, organizations and other economic agents for different purposes. To provide the needed finance, there are various institutions rendering financial services. These institutions are called financial institutions. Financial institutions are divided into money and capital market. In the money market we have commercial banks that render financial services in term of intermediation. This involves channeling funds from the surplus spending to the deficient spending units of the economy, therefore, transforming bank deposits into credits (Yabubu and Affoi, 2013). The role of financial institutions in economic development has been known to make credit available to various economic agents to enable them meet operating expenses. For instance, business firms obtain credit to buy machinery and equipment, farmers collect loans to buy seeds, fertilizers, erect various kinds of farm buildings, government bodies obtain credits to meetvarious kinds of recurrent and capital expenditures,furthermore, individuals and families also take credit tobuy and pay for goods and services (Adeniyi, 2006). Ademu, (2006) posited that the provision of credit with sufficient consideration for the sector’s volume and price system is a way to generate self-employment opportunities. This is because credit helps 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 isachievable through resource substitution, which is facilitated by the availability of credit. While highlighting the role of credit, Ademu (2006), further explained that credit can be used to prevent an economic activity from total collapse in the event of natural disaster, such as flood, drought, diseases, or fire. Credit can be garnered to revive such an economicactivity that suffered the set back. The banking sector helps to make these credits available by mobilizing surplus funds from savers who have no immediate needs of such funds and thus channel such funds in form of credit to investors whohave brilliant ideas on how to create additional wealth in the economy but lack the necessary capital to execute the ideas (Nwanyanwu, 2010).
It has been confirmed in previous studies that a significant and strong link exist between the financial sector of a nation and the performance ofthe overall country economy and that it is crystal clear that nations who have good financial system have a tendency to develop their economic growth more quickly (Aurangzeb, 2012) noted in Sanusi (2011). A well repositioned bank is therefore expected to perform its role more efficiently and contribute to the development and growth of the economy with people having access to funds from the banking system cumulating aggregate demand for goods and services. Increased aggregate demand will impact positively on output and employment generation thereby reducing poverty – the ultimate goal of economic management.
It can now be seen that commercial banks are important financial intermediaries serving the entire public in the society and in most cases hold more assets than any other financial institution, even more than the Central Banks (Sergeant, 2001). Besides the many functions, commercial banks aid growth and development in every sector of an economy by contributing to investments, employment creation and by extension, the process of economic growth. The research is focused on establishing/examining how the activities of commercial banks impact on Nigeria’s economic growth.
- STATEMENT OF RESEARCH PROBLEM
Commercial banks play an important role in economic development, and foster economic growth of any country through their intermediation role and financial services that they provide to communities and nations. The credit facilities that they offer facilitate the exploration and expansion of productive investments avenues by individuals and institutional investors (Kaaya and Pastory, 2013) hence, the relevance of commercial banks in an economy cannot be overemphasized. The financial deregulation in Nigeria that started in 1987 and the associated financial innovations have generated an unprecedented degree of competition in the banking industry and this initially pivoted powerful 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 had to deal with is the inconsistency in monetary and regulatory 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 monetary policy have combined to create a challenging and precarious financial environment for commercial banks in Nigeria.
In the history of Nigeria’s banking sector, it can be seen that most of the failure experienced in the industry is as a results 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 assets/ liabilities (Soludo; 2004: 5). Besides the poor capital base of these banks, there are other issues hindering the effective performance of these banks. Some of the issues include inefficiency in 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 Nigeria 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 ₦25 billion each (Ibrahim, 2012). Unfortunately, the fear of systemic risk lingers, the supply of credit to investors is still questionable, while economic growth relatively stable. These reforms were implemented with a view to promote economic growth.
The Nigerian commercial bank industry has gone through various policy measures so as to achieve economic growth. This policy measures are the responsibility of the Central Bank of Nigeria. Since 2002 the CBN has adopted a medium policy framework to free monetary policy (control of the activities of commercial banks) implementation from the problem of time inconsistency and minimize over-reaction due to temporary shocks. However, periodic amendments were made to the Policy Guidelines in the light of developments in the financial markets and performance of the economy during the period under review. Thus, in 2005 some new reforms were introduced as amendments and addendum to the 2004/2005 monetary policy circular No. 37. These include: Exchange Rate Band (of +/-3.0%), Interest Rate Policy, Wholesale Dutch Auction Forex Market (DAS) , National Savings Certificate , Cash Reserve Requirement (CRR) , Public Sector Deposits , Settlement/Clearing Banks. Commercial banks in Nigeria have gone through two major phases of monetary policy in pursuit of external and internal balance of payments before and after 1986. The first phase placed emphasis on direct monetary controls, while the second relies on market mechanisms.
Before 1986, number of commercial banks 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 ceilings, selective credit controls, administered interest and exchange rates, as well as the prescription of cash reserve requirements and special deposits. The use of market-based instruments was not feasible at that point because of the underdeveloped nature of the financial markets and the deliberate restraint on 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 deposit 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 QUESTIONS
1 Is there any significant impact of commercial bank deposits on economic growth in Nigeria?
2 Is there a causal relationship between commercial bank deposits and economic growth in Nigeria?
1.4 RESAERCH OBJECTIVES
The broad objective of this study is to determine the relationship between commercial banks and economic growth in Nigeria. The specific objectives are:
1 To investigate the impact of commercial bank deposits on economic growth in Nigeria.
2 To find out the direction of the causal relationship between commercial bank deposits and economic growth in Nigeria.
1.5 RESEARCH HYPOTHESES
In this study, the hypotheses below shall be tested:-
H1: There exist significant impact of commercial bank deposits on economic growth in Nigeria.
H2: There is a causal relationship between commercial bank deposits and economic growth in Nigeria.
- 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 banks so as to know when to save or borrow as the case may be. This knowledge will help Nigerian citizens in gaining an insight on the intricacies of the variables of interest in their economy and what to expect from policy makers and also to authorities in various countries to make policies that would efficiently achieve its macroeconomic goals geared towards growth and development.
More so, this study will be of use to other researchers as a point of reference for further research studies.
- ORGANIZATION OF THE STUDY
The work is in three sections, the first chapter is the introduction of the work. Chapter two is the review of related literature and definition of terms, chapter three gives an insight of the methodology the work will be adopting.
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