THE IMPACT OF COMMERCIAL BANK’S LOANS ON ECONOMIC GROWTH IN NIGERIA
ABSTRACT
Lending in banks is crucial in order
to facilitate the growth of banks of invariably its environment in order to
enhance socio – economic transformation, banks must strive to provide funds to
the deficit economic units. The study
therefore sought to find out the impact of commercial banks was loans on the
growth of the Nigerian economy. Data
were sourced from CBN statistical bulletin, CBN Annual Report and Accounts and
world bank publications. Ordinary least square method of regression for the
period of 40 years (1970 – 2010) was employed.
A simple regression model was formulated to enable the data sourced to
be analyzed and tested. It was observed
from the test carried out that increase in commercial bank’s loans had a
positive impact on the growth of the Nigerian Economy. Also, the government should embark upon
certain policies which can help improve commercial banks lending capacity so as
to improve the country’s economic growth.
to facilitate the growth of banks of invariably its environment in order to
enhance socio – economic transformation, banks must strive to provide funds to
the deficit economic units. The study
therefore sought to find out the impact of commercial banks was loans on the
growth of the Nigerian economy. Data
were sourced from CBN statistical bulletin, CBN Annual Report and Accounts and
world bank publications. Ordinary least square method of regression for the
period of 40 years (1970 – 2010) was employed.
A simple regression model was formulated to enable the data sourced to
be analyzed and tested. It was observed
from the test carried out that increase in commercial bank’s loans had a
positive impact on the growth of the Nigerian Economy. Also, the government should embark upon
certain policies which can help improve commercial banks lending capacity so as
to improve the country’s economic growth.
TABLE OF CONTENTS
TITLE PAGE
CERTIFICATION
DEDICATION
ACKNOWLEDGEMENTS
ABSTRACT
TABLE OF CONTENTS
CHAPTER ONE:
INTRODUCTION
INTRODUCTION
1.1
Background
of the study
Background
of the study
1.2
Statement
of the Problem
Statement
of the Problem
1.3
Objectives
of the study
Objectives
of the study
1.4
Research
Question
Research
Question
1.5
Statement
of Hypothesis
Statement
of Hypothesis
1.6
Significance
of the study
Significance
of the study
1.7
Delimitation
of the study
Delimitation
of the study
1.8
Definition
of Terms
Definition
of Terms
CHAPTER TWO:
LITERATURE REVIEW
LITERATURE REVIEW
2.0
Introduction
Introduction
2.1
Bank
lending in Nigeria
Bank
lending in Nigeria
2.2
Characteristics
of Borrowers and the Emergence of
Characteristics
of Borrowers and the Emergence of
Bad loans
2.3
Measures
for Identification and Administration of
Measures
for Identification and Administration of
Bad loans
2.4
Roles
of Commercial Bank’s credit in Economic Growth
Roles
of Commercial Bank’s credit in Economic Growth
2.5
Theories
of portfolio management
Theories
of portfolio management
2.5.1 The shiftability theory
2.5.2 The Anticipated Income theory
2.5.3 The liabilities of management theory
2.5.4 The Real Bills theory
2.6
Review
of Empirical findings
Review
of Empirical findings
CHAPTER THREE:
METHODOLOGY
METHODOLOGY
3.1
Research
Design
Research
Design
3.2
Sources
of Data
Sources
of Data
3.3
Model
specification
Model
specification
3.4
Identification
of variables
Identification
of variables
3.5
a
priori Expectation
a
priori Expectation
3.6
Estimation
Techniques
Estimation
Techniques
CHAPTER FOUR:
RESULTS AND DISCUSSION
RESULTS AND DISCUSSION
4.1
Introduction
Introduction
4.2
Presentation
of Data
Presentation
of Data
4.3
Interpretation
of Result findings
Interpretation
of Result findings
CHAPTER FIVE: SUMMARY, CONCLUSION AND
RECOMMENDATION
RECOMMENDATION
5.1
Summary
Summary
5.2
Conclusion
Conclusion
5.3
Recommendation
Recommendation
REFERENCES
CHAPTER ONE
INTRODUCTION
1.1
Background of the study
Background of the study
Commercial banks are financial
institutions that take money from the haves and give to the have nots. The haves are the depositors (those who keep
their money with the banks) and the have nots are the borrowers. Commercial banks gather money from the
surplus sector of the economy and make it available for the sectors which are
in dire needs of it in form of loans. In
order to enhance socio economic transformation, commercial banks must strive to
provide funds to the deficit economic unit (Udoka and Offiong 2006).
institutions that take money from the haves and give to the have nots. The haves are the depositors (those who keep
their money with the banks) and the have nots are the borrowers. Commercial banks gather money from the
surplus sector of the economy and make it available for the sectors which are
in dire needs of it in form of loans. In
order to enhance socio economic transformation, commercial banks must strive to
provide funds to the deficit economic unit (Udoka and Offiong 2006).
One crucial reason why commercial
banks are established by their promoters is to facilitates lending to their
customers (cottarelli; et al, 2003).
banks are established by their promoters is to facilitates lending to their
customers (cottarelli; et al, 2003).
Bank lending was the pre – occupation
of the earliest goldsmith banker (Ekezie 1997).
of the earliest goldsmith banker (Ekezie 1997).
The high profit realized from this
business promoted them into banking business, commercial banks are expected to
support their immediate environment with adequate supply of credit for all
legitimate business. They are also
expected to take care of consumers financial needs and to price credit
reasonably in line with competively determined interests rate (Goverinchas et
al 2001). Indeed, lending is the
principal economic function of commercial banks (Mbat 2006) for most banks,
loanable funds account for about fifty percent or even more of their total
assets and about half to two thirds of their revenue.
business promoted them into banking business, commercial banks are expected to
support their immediate environment with adequate supply of credit for all
legitimate business. They are also
expected to take care of consumers financial needs and to price credit
reasonably in line with competively determined interests rate (Goverinchas et
al 2001). Indeed, lending is the
principal economic function of commercial banks (Mbat 2006) for most banks,
loanable funds account for about fifty percent or even more of their total
assets and about half to two thirds of their revenue.
(Rose 1999) moreover, risk in banking
tends to be concentrated in loan portfolio (Eichingreen et al, 2000).
tends to be concentrated in loan portfolio (Eichingreen et al, 2000).
When a bank gets into serious
financial trouble, its problem usually emanate from loan that have becomes
irrevocable due to mismanagement; illegal manipulation of loans, misguided
lending policies or an unexpected economic downturn.
financial trouble, its problem usually emanate from loan that have becomes
irrevocable due to mismanagement; illegal manipulation of loans, misguided
lending policies or an unexpected economic downturn.
Bank loans are funds granted to
individuals and organizations to meet their temporary or long term deficit
operations. (Mbat, 2006). Loans
contribute significantly to the revenues and profits of banks. They also stimulate business development and
thus induce economic growth and development (Kings et al 1993). Moreover, bank loans often seem to convey
positive information to the market place about a borrowers credit quality
enabling a borrower to obtain more and perhaps some what chapter funds from
other credit sources. (Rose 1999). How well a bank performs its lending
function has a great deal to do with the economic health and growth of its
environment, because loans support the growth of new business and job creation
within the bank’s territory and promote economic viability (Levine et al,
2000).
individuals and organizations to meet their temporary or long term deficit
operations. (Mbat, 2006). Loans
contribute significantly to the revenues and profits of banks. They also stimulate business development and
thus induce economic growth and development (Kings et al 1993). Moreover, bank loans often seem to convey
positive information to the market place about a borrowers credit quality
enabling a borrower to obtain more and perhaps some what chapter funds from
other credit sources. (Rose 1999). How well a bank performs its lending
function has a great deal to do with the economic health and growth of its
environment, because loans support the growth of new business and job creation
within the bank’s territory and promote economic viability (Levine et al,
2000).
A deficit economic unit relies on a
bank to meet its financial needs while the bank to relies on the borrowers to
generate profit and revenue. It follows
therefore, that if the borrower is not capable of making effective use of
loanable funds, it will hinder the ability of the commercial banks to generate
income. If commercial banks cannot grant
loans to the deficit economic units within its immediate operational
environment, the business sector will not grow, deposits will not be made, bank
itself will be a loser and thus could die (Galac 2001, Honohan).
bank to meet its financial needs while the bank to relies on the borrowers to
generate profit and revenue. It follows
therefore, that if the borrower is not capable of making effective use of
loanable funds, it will hinder the ability of the commercial banks to generate
income. If commercial banks cannot grant
loans to the deficit economic units within its immediate operational
environment, the business sector will not grow, deposits will not be made, bank
itself will be a loser and thus could die (Galac 2001, Honohan).
In the same vein, in the absence of
effective commercial banks ability to issue loans to the public, the economic
growth of the country (Nigeria)
is at stake. What do we even mean by
economic growth?
effective commercial banks ability to issue loans to the public, the economic
growth of the country (Nigeria)
is at stake. What do we even mean by
economic growth?
Economic growth can be defined as any
increase in the volume of goods and services over a given period of time which
bring about an improvement in the national income of the country. Economic growth can be put in proper
perspective when we appreciate that all factors of production are engaged in
the production of goods and services which at the aggregate levels can be called
that Gross Domestic Product (GDP). If this is expressed in monetary terms we
speak about Gross National Income. For
instance, if the GDP of Nigeria wasN500
billion in 2006 and this increased toN1,400
billion in 2008, economic growth will be said to have taken place irrespective
of how it was achieved and the impact of the citizenry and hence to determine
the impact of commercial banks’ loans on t he economic growth of the country.
increase in the volume of goods and services over a given period of time which
bring about an improvement in the national income of the country. Economic growth can be put in proper
perspective when we appreciate that all factors of production are engaged in
the production of goods and services which at the aggregate levels can be called
that Gross Domestic Product (GDP). If this is expressed in monetary terms we
speak about Gross National Income. For
instance, if the GDP of Nigeria was
billion in 2006 and this increased to
billion in 2008, economic growth will be said to have taken place irrespective
of how it was achieved and the impact of the citizenry and hence to determine
the impact of commercial banks’ loans on t he economic growth of the country.
1.2
Statement of the Problem
Statement of the Problem
Commercial banks in Nigeria are often
criticized for the manner of their lending activities commercial banks in
Nigeria concentrate on short term lending where as one would expect a policy
that matches the requirements of the economy, that is the medium and long term
lending.
criticized for the manner of their lending activities commercial banks in
Nigeria concentrate on short term lending where as one would expect a policy
that matches the requirements of the economy, that is the medium and long term
lending.
Another problem faced by commercial
banks is the lack of enough capital. The
total available cash reserve is influenced by the public withdrawal of cash
from the banking system. (cash drain) and also the amount the banks keep to
meet their daily operations.
banks is the lack of enough capital. The
total available cash reserve is influenced by the public withdrawal of cash
from the banking system. (cash drain) and also the amount the banks keep to
meet their daily operations.
Moreover, commercial banks are faced
with the problem of bad debts.
Commercial banks lend out money with the aim of collecting it back at a
specified date in the future. Many at
times most of these loans are not often recovered by them resulting from
disappointment from their borrowers.
This has gone a long way to limit the lending ability and capacity of
the Nigeria
commercial banks.
with the problem of bad debts.
Commercial banks lend out money with the aim of collecting it back at a
specified date in the future. Many at
times most of these loans are not often recovered by them resulting from
disappointment from their borrowers.
This has gone a long way to limit the lending ability and capacity of
the Nigeria
commercial banks.
1.3
Objectives of the study
Objectives of the study
This study is set out purposely:
i.
To
examine the impact of commercial banks credit on the economic growth of Nigeria.
To
examine the impact of commercial banks credit on the economic growth of Nigeria.
ii.
To
assess the behaviour of commercial banks’ loans in order to identify whether
bank lending is a catalyst for economic growth in Nigeria.
To
assess the behaviour of commercial banks’ loans in order to identify whether
bank lending is a catalyst for economic growth in Nigeria.
iii.
To
identify whether increase in loanable funds by commercial banks lead to
increase in production capacity of the productive sector of the economic growth
in Nigeria.
To
identify whether increase in loanable funds by commercial banks lead to
increase in production capacity of the productive sector of the economic growth
in Nigeria.
iv.
To
determine how commercial banks are able to meet up with the demand of loans of
the public.
To
determine how commercial banks are able to meet up with the demand of loans of
the public.
1.4
Research Question
Research Question
i.
Does
improvement in commercial banks lending activities bring about improvement in
the growth of Nigeria
economy?
Does
improvement in commercial banks lending activities bring about improvement in
the growth of Nigeria
economy?
ii.
Does
increase in loanable funds by commercial banks lead to increase in production
capacity of the productive sector of the Nigeria economy?
Does
increase in loanable funds by commercial banks lead to increase in production
capacity of the productive sector of the Nigeria economy?
iii.
Do
people really make use of loans obtained from the commercial banks to engage in
business activities that can bring about improvement in the economic growth of Nigeria?
Do
people really make use of loans obtained from the commercial banks to engage in
business activities that can bring about improvement in the economic growth of Nigeria?
iv.
Are
the commercial banks able to meet up with the demand of loans by the members of
the public?
Are
the commercial banks able to meet up with the demand of loans by the members of
the public?
1.5
Statement of Hypothesis
Statement of Hypothesis
Ho: There is no significant
association between loans provided by commercial banks to the public and the
economic growth of Nigeria.
association between loans provided by commercial banks to the public and the
economic growth of Nigeria.
Ho: There is no significant
difference in the impact of commercial banks credit on the economic growth of Nigeria.
difference in the impact of commercial banks credit on the economic growth of Nigeria.
Ho: There is no significant impact of
commercial banks’ loans on the growth of the economy.
commercial banks’ loans on the growth of the economy.
1.6
Significance of the study
Significance of the study
This work will enable us to come to
the conclusion whether commercial banks loans has any effect on the economic
growth of Nigeria.
the conclusion whether commercial banks loans has any effect on the economic
growth of Nigeria.
It will also enable the commercial
banks to re – appraise their role and lending ability to suit a rapid growth in
the economy of Nigeria.
banks to re – appraise their role and lending ability to suit a rapid growth in
the economy of Nigeria.
In conclusion, it will help the
government in determining the ideal which can help to improve commercial banks
lending capacity so as to bring about improvement in the Nigeria
economic growth.
government in determining the ideal which can help to improve commercial banks
lending capacity so as to bring about improvement in the Nigeria
economic growth.
1.7
Delimitation of the study
Delimitation of the study
The analysis to be embarked upon in
this research work would be within some specified period of 40 years (1970 –
2010).
this research work would be within some specified period of 40 years (1970 –
2010).
1.8
Definition of Terms
Definition of Terms
Loans: This refers to the money lent out
by banks either to a business or a consumer where the amount borrowed is rapid
according to an agreed schedule at an agreed interest rate and time, typically
by regular instalments over a set period of years. However, the principals may be payable in one
instalment.
by banks either to a business or a consumer where the amount borrowed is rapid
according to an agreed schedule at an agreed interest rate and time, typically
by regular instalments over a set period of years. However, the principals may be payable in one
instalment.
Economic growth: This is usually taken to mean the
growth of the value of real income or output.
The world “real” signifies that only changes in quantities and not
changes in prices are allowed to affect the measure.
growth of the value of real income or output.
The world “real” signifies that only changes in quantities and not
changes in prices are allowed to affect the measure.
Deficit Economy: This refers to a deficiency or
falling short of funds in an economy, when there is shortage of revenue in an
economy most especially on the part of the government of a state.
falling short of funds in an economy, when there is shortage of revenue in an
economy most especially on the part of the government of a state.
Loan policy: This refers to the laid down
protocol that guides the commercial banks in giving out loans to the public.
protocol that guides the commercial banks in giving out loans to the public.
Short term loan: This is a financial borrowing in
which the borrower is expected to refund the money within the period of a year
or less.
which the borrower is expected to refund the money within the period of a year
or less.
Long term loan: This is a financial borrowing in
which the borrower is expected to refund the money within the period of two to
five years.
which the borrower is expected to refund the money within the period of two to
five years.
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