An Appraisal Of Commercial Banks Lending In The Economic Development Of Nigeria
The pace of development in Nigeria economy which is rich in oil is not commensurate with the revenue from crude oil exports coupled with the increasing banking credit to the economy. This raises a question on efficiency and effectiveness of banks’ in discharging it function of credit mobilization and distribution of resources to deficit economic units.
In this regard, this study empirically assesses the impact of commercial banks’ lending on economic development of Nigeria from 1986 to 2015 by specifically ascertaining the impact of commercial banks’ lending on real gross domestic product and index of industrial production.
The data sourced from the Central Bank of Nigeria statistical bulletin were diagnosed for serial correlation, heteroskedasticity and Ramsey Reset model fitness specification and stationarity. The Johansen co-integration envisaged a long run relationship between commercial banks’ lending and gross domestic product but such could be said for index of industrial production.
The granger impact assessment result shows that commercial banks’ lending has significant impact on real gross domestic product and real gross domestic product on the other hand, has significant impact on credit to private sector. Index of industrial production was not significantly influenced by commercial banks’ lending activities. The vector error correction model depicts that for achievement of long term growth and development of the Nigerian economy, commercial banks’ lending is very pivotal as the high interest rate charged by commercial banks’ remain a threat to the positive influence of banks’ credit to the economy.
The Central Bank of Nigeria should implement regulation to stop banks from centring loans and advances to a particular sector which is, oil and gas to improve credit flow to other strategic sectors, especially agriculture and industries to increase their contributions to gross domestic product of Nigeria. The monetary policy of the Central Bank of Nigeria should complement fiscal policies of the government to reduce the level of inflation in country, having regard to its negative effect on index of industrial production.
1.1 General Overview Of The Study
This project studies the appraisal of the Commercial Bank Lending to the Economic Growth and Development of Nigeria. We shall give a detailed and critical examination of commercial bank lending and try to assess its contribution to the economic growth and development of the country.
Economic growth may be described by reference to quantitative charges in magnitudes of selected economics indicators, whereas development of the economic is discussed in terms of structural transformation which accompanies such growth.
Growth is usually measured by the changes in the magnitude as a country’s Gross Domestic Product (GDP) while development is measured by the welfare of the citizens.
Ordinarily, bank lending can be defined as the transfer of resources of the bank to the various economic units of the economy through loans, overdraft, discounting of trade bill etc. The form a bank lending taken depends in any given case, on the purpose of the borrower and the circumstances of the transaction. In each case, a debt is created between the bank and the borrower. Whereby the bank becomes the creditors while the borrower becomes the debtors. Lending is an important aspect of banking and one of the cardinal principles of classical banking is to ensure effective lending which is to maximize profitability and ensure adequate liquidity.
Whether, bank lending is made to a private person corporate organizations or to an economic institution. The purpose is to enhance the development of the economy all things being equal. A developing economy however, needs special attention since the volume of bank lending to it determines to some extent the growth of that economy.
Lending is considered effective, if it successively reconciles the bank’s obligation of maximum profitability to its shareholders and maximum liquidity to its depositors. But this principle of ensuring maximum profitability and liquidity may not be satisfactory in a developing economy. As will be seen later, maximum profitability and liquidity are at variance to each other, except on a comprise ground.
Even at a compromise ground where lending is considered effective, it can still be faulted to be ineffective in term of maximum contribution to the development of the economy. Lending to commerce had the trappings of effective lending by the classical (bankers) view while lending to agriculture or contributions to the development of most community may be branded ineffective lending. The later is however more beneficial to the developing economic than the former. It is therefore, necessary that effective lending in developing economy should combine the classical view of effective and ineffective lending. .
1.2 Statement Of Problems
In our society today, some of our business men and women including some of our educated elite make side comments and criticize the commercial banks for their unwillingness to make loans and advances available to deserving customers and where they agree to make credits, attach very vigorous and difficult conditions for obtaining the finance. This according to critiques has contributed in causing immense slow down in economic growth of the country;
In view of the above, the researcher has considered it expedient to direct this research problems as follows:
- Loans and advances to a new and untried business which is inadequately capitalized
- Loans and advances made because of other benefits such as control of large deposit balances and not based on sound lending principles.
- Over – emphasis on income, misplaced emphasis on income, deriving from loans and advances rather than sound principles leads to granting of loans and advances possessing undue risk. In the long run, loss incurred on the loans and advances will exceed the income earned on them
Some Nigeria, businessmen are unreliable., they are fond diverting funds approved for specific projects, to other uneconomic venture. Thus, creating a right rate of loan losses for banks.
A lot of Nigeria businessmen do not believe in proper record keeping. The majority of small business in this country have no accounting records at all.
1.3 Objectives Of The Study
- To find out to what extent commercial bank lending practice conform to lending principles
- To assess how commercial bank lending affect the economic growth and development;
- To find out the major constraints to commercial bank lending;
- To help business men and women and other commercial bank customers understand and appreciate why a bank is cautions in his lending operations;
- To investigate and appraise the extent of commercial bank lending distribution to indigenous business operating in various sectors of the economy;
- To find out what lending consideration exists for different classes of borrows
1.4 Scope Of The Study
This research study covers the commercial banks leading in the economic development of Nigeria. Principally, emphasis will be made on bank lending in Nigeria and the role it plays in economic development.
The research study covers the activities of the following commercial banks in Owerri: –
- First Bank of Nigeria Plc,
- Union Bank of Nigeria Plc,
- Citizens Bank Plc.
1.5 Statement Of Hypothesis
Using the information collected, the researcher will attempt to test the validity of the following hypothesis: –
- Hi: Financial statements are the major consideration in banking lending decision;
- Hi: Commercial bank lending plays positive role in economic development of Nigeria.
1.6 Significance Of The Research
This study will of great significance to the public as it will create understanding to the nature of commercial bank lending and its contribution to the economic development of Nigeria;
The study will also be of great benefit to banking and finance student and it will help to understand the concept of commercial bank lending to economic development
The researcher would have contributed to knowledge by undertaking this project.
Lending is one of the major sensitive areas of secrecy and privacy of commercial banks. For this reasons, information as to facts and figures of commercial bank lending to the various economic sectors could not be obtained from the commercial bank visited.
I did not find it easily getting the bank officers to listen to my interviews questions, talk less of answering them.
Those who were willing to give me audience out of sympathy told me that they were not going to go deep considering the implication of revealing the banks secrets.
Some respondents to the interview questions might not have given a true and firm information regarding their business.
There were the problems of the research getting at the entrepreneur’s scattered all over the length and breach of the economic sectors. Such that were made to reach the respondents.
1.8 Definition Of Terms
This is a financial institution where customers deposits money and other valuable asset for security reasons and other benefit.
Are banks that are establish to carryout banking services but are profit oriented like every other business venture.
This is the amount of money given to a customer on credit terms in which the customer in future date will pay both the principles and interest.
This is the transfer of money from surplus units (depositors) to deficits units (borrowers) on a condition.
This is the maximization of the value of a bank by achieving a trade of between liquidity and profitability
Are those decision variables that influence the amount of credit or loan
This is the ability of a bank to covert it asset to cash as to meet her obligations as they fall dev.
These are those lending facilities that does not operate within the agreed terms and condition between the banks and customers.
Cannons Of Lending
These are factors put into consideration before they lend money to their customers. Thus, to prevent high rate of default by borrowers.
This are asset or document issued by a customer before loan is given to him. It is what the bank will fall back to if all other considerations fail to work according to exception.
These are customers that are owning a bank sum certain amount of money as a loan being given to them.
This is a statement that contains summarized information of the firms financial positions or affairs which is organized systematically.
Summary, Conclusion And Recommendation
In this work, the researcher has tried to look at commercial banks lending side by side with its implications or effects on the economy.
Before evolving a lending policy, the management of any bank will have to put the following three factors. Growth, Profitability and Liquidity into consideration, subject to the following internal and external constraints which include: –
- Deposit base
- Liquidity requirement
- Shareholders fund
- Statutory lending limit
- The economic climate
- Government regulations and CBN guidelines
- Socio – political considerations
The lending policy so evolved will; embrace the principles of good lending comprising of examination into the following factors before granting a loan request: –
- Amount of the advance
- Duration of the Advances
- Sources of repayment
- Remuneration on the advance and
- Security for or advances
The application of the policy, is however subject to the following limitation: –
- Subjective human consideration
- Reliance on historical accounts for lending
- Accounts on often misleading
- Reliance on security values and
- Eagerness to create new loans, all of which makes the whole execrable risk.
It is also worthy to note that apart from lending activities commercial banks carryout some other functions likes: –
- Mobilization of savings
- Creating money
- Safe – keeping of valuables
- Brokerage services
- Business advisory services
- International trade services
- Transfer of fund
We also see what the bank have or own that is their assets and what they own to others that is their liabilities. The researcher using the following methodology interviews, desk study and observation as shown in chapter three collected the data, (Presented analyzed in chapter four) which reveals that commercial bank lending is a good ingredient for economic and bank lending is a good ingredient for economic development because the money lent out is used for investment and other economic activities which is evidenced in the rise in the Gross Domestic Product (GDP) of Nigeria.
Although, these are claim in some quarters of immense slow down in economic growth of Nigeria is not as a result of unwillingness of commercial banks to lend, but due to fundamental structural weakness displayed by the economic operator.
This research study had appraised the commercial banks lending in the Economic Development of Nigeria.
The problems that prompted these study are already stated in chapter One of this project work.
The researchers get her information administration of questionnaires, interviews and published materials bank.
Some of the respondent, were against commercial bank lending, that it did not contribute to the economic development of Nigeria, notwithstanding greater percentage of respondent that bank lending is a contributing factor in economic development especially a developing country like ours.
The data obtained was analyzed using simple percentage method was adopted to test the hypothesis and the following conclusion was drawn: –
- Commercial bank lending plays positive role in economic development of Nigeria;
- Bank lending has a significant impact on the economic development of Nigeria;
- Financial statements are major consideration in bank lending decision;
- Bank lending increase money circulation in the economy;
- Banks lending reconcile the liquidity and profitability objectives of commercial banks.
With the introduction of Universal banking and the on going N25 b, recapitalization return in the banking sector, commercial banks will be very much able to engage in large amount of lending hence is the key to economic development of Nigeria.
Having critically looked into commercial banks lending and its effect on the economy, the researcher has the following recommendations to make: –
There is much need for commercial banks to increase their lending portfolio to indigenous business men and women, because the amount lent out is quite inadequate to give a significance improvement in the economic development of the state bearing in mind that the country is still developing.
There is also need for reallocation of banks this is because the distribution of banks in the country is uneven and this hampers the growth of the economy and banking sector growth. More than 60 percent of existing banks are located in the urban areas with little recognition of the rural areas.
This lending polities should be improved, and also the should be training and retaining of staff and diversification of services since deposit base is the fountain of lending profitability and growth, banks should evolve strategies to increase their deposit base. Such strategies will include quick services to customers and good public relations on the part of workers
Banks should go into agriculture financing and refinancing locally, produced goods to support the government and CBN’s more towards increased good production, so that the living economic citizens can develop all the same pace with the nation economy .
It takes time to create the needed banker customer relationship, especially by bank managers who are caged – off from the banking hall, the disruption of create relationship therefore has a drastic effect on the bank vis – a vis loans and advances. For this reason, banks are enjoyed to reduce the rate at which manager are changed or transferred.
This part goes to customer who may think that the banks do not have their interest at heart and that is why the evolve unapproachable lending policies. It is not true that
They do not have customer interest at heart, rather they try to make sure that the loans when given are recoverable, since is depositors, money not theirs.
An Appraisal Of Commercial Banks Lending In The Economic Development Of Nigeria
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