Bank’s Credit And Advances And The Performance Of The Nigerian Economy

Project and Seminar Material for Economics

Bank’s Credit And Advances And The Performance Of The Nigerian Economy


The researcher studied Banks’ Credit and Advances and the Performance of the Nigerian Economy. The objective of this study was to examine the relationship between Banks’ credit and advances, money supply lending rates volume of deposit and GDP which economic performance of Nigeria was proxy with. Data on all variables were collected from Central Bank of Nigeria (CBN) statistical bulletin and Nigeria Bureau statistic (NBS) (secondary data). Data collected were analyzed using ordinary least square (OLS) method of regression. From the empirical result, using p. value (probability value), the researcher realized that the commercial Banks loans and advances, lending rate and volume of Deposit are insignificantly related to GDP. Thus, the null hypothesis was accepted. The researcher also realized that money supply is significantly related to GDP. Thus, the null hypothesis was rejected. Conclusion was made that the higher the commercial bank loans and advances consolidated from customers’ deposit, the inverse the effect on the Nigeria GDP. The causative factor may be high lending rate at which credits were given. However, the researcher recommended that deregulation of interest rate should be pursued to a logical conclusion.

Chapter One

1.0 Introduction

1.1 Background of the Study

The It is crystal clear that any nation that wants a viable economy must have a viable financial sector and previous studies overtime confirmed that be significant and strong link show between the financial sector of a nation and performance overall country economy. Banks play important role in any economy because they are the cynosure of the financial sector. The importance of banks in any economy cannot be over emphasized, because sound financial system is recognized as a necessary and sufficient condition for rapid growth and development for every modern economy (Sanusi 2012). Banks are expected to support their region or local communities in which they operate with adequate supply of credits for all legitimate business and customers financial needs to ensure that credit is reasonably in line with competively determinable interest. Indeed, providing credit in form of loans and advances is one of the principle economic functions of banks. Sanusi, 2002, opined that the availability of investible funds is a key factor in the growth process of any economy. This is why banks today are recognized as the life blood of trade and general commerce. For instance, business firm obtain credit to buy machinery and equipment. Farmers collect loans to buy seeds, fertilizers, erect various kind of farm buildings etc. government bodies obtain loans to meet various kinds of recurrent and capital expenditure. Furthermore, individuals and families also take credit to buy and pay for goods and services (Adeiyi, 2006).

A typical capitalist or mixed economy is made up of surplus and deficits units. In performing intermediation function which is banks principle economic function; they mobilize and consolidate bank deposits and transformed the mobilized and consolidated deposits into the bank credits, usually loans and advances. It is simply the process of taking in money from depositors and then lending some out to borrowers for investment and other economic development purposes. The process allows financial institution acting as intermediaries channeling funds from surplus economic units (individuals and firms having surplus savings) to deficit economic units (firms and businesses in need of funds to carry out desired business activities). Relatively, it involves the conversion of bank largest liabilities (deposits liabilities) to bank largest interest earning assets (bank credits which include majority loans, overdraft and advances). It is expedient to know that bank credits are processed deposits of bank customers in the various accounts which they hold or operate with the bank.

Banks credits therefore constitute or rather enables banks to carry out their primary principle economic function which is known as intermediation.

Credits therefore has been defined by central bank of Nigeria (CBN) prudential guide lines issued 1990 as financial facilities granted by banks to their customers which includes all loans, advances, overdrafts and other loss contingencies connected with a bank risk. The researcher has decided to proxy bank credits with bank loans and advances.

The performance of Nigerian economy can be linked to concept of output and concept of output is absolutely important in the field of macro economics, essentially as it relates to the economy of nations output. Output is defined as the quantity of goods and services produced in a country in a given period of time usually a year. Officially, gross domestic product (GDP) is the most popular measure of the output of a country. GPD indicates the market value of all officially recognized final goods and services produced within a nation at a specific period of time. The relevant of GDP of any nation (economy) cannot be over emphasized because it is the major indicator of a country economic growth and the living standard of the citizens there in. indeed the best index to understand a country’s economy performance is by looking at its output in terms of GDP because by global standard, it is the output (GDP) that show how rich and viable a country is economically, thus a country may be said to be in recession if its output (GDP) growth is negative for three consecutive years and when critically accessed, three consecutive quarters. The researcher will therefore proxy economic performance of the Nigeria economy with gross domestic product (GDP) of Nigeria.

Commercial banks now known as deposit money banks (DMBs) are the most important savings mobilization and financial resource allocation institutions. Consequently, these roles make them an important phenomenon in economic growth. In performing these roles, it must be realized that banks have the potential, scope, and prospect for mobilizing financial resources and allocating them to productive investments. Therefore no matter the sources of the generation of income or the economy policies of the country, commercial banks would be interested in giving out credits (loans and advances) to their numerous customers, bearing in mind the three principles guiding their operation which are profitability, liquidity and solvency. However commercial banks decision to lend out loans are influenced by a lot of factor such as prevailing interest rate, the volume of deposits, money supply by the directives of central banks of Nigeria and mention a few. It should be taken into cognizance that these prevailing influencing factors also affect the gross domestic product (GDP) of the country because they directly affect the level of credits given out for investment in the economy and the level of credits determines the level of nations output (GDP) for that period of time.

See appendix 1. For my literature survey on this work.

1.2 Statement of Problem

The banking industry is seen as the oil that lubricates the wheel of economy to avoid friction and plodding, and without this lubricant (bank) the entire economic activities may grind to a halt and be in a state of comatose. There seems to be a consensus in the theoretical and empirical literatures that financial development can influence and foster output (GDP) development, that there is a visible correlation between bank credits and economic growth, being synonymous to GDP growth and that banks credits facilitates the efficiency of financial system of any nation.

These core economic facts appear to be eluding the Nigeria situation because the Nigeria banking industries in recent time have undergone series of financial turbulence and capital adequacy problems, the consequences of which appears to cast doubts on the role of bank credits on the economy.

It is also argued that the Nigerian economy output in terms of gross domestic product (GDP) has not utilized or commensurate banks inputs in terms of banks credits that has been granted on release in the economic activities.

Thus, this research will tend to analyze the extent and volume of banks credits inform of loans and advances released into the economy and also ascertain the extent at which these credits were utilized to enhance the GDP of Nigeria and ascertain whether the output (GDP) can be commensurate with the banks inputs (credits).

1.3 Objectives of the Study

The major objective of the study is to empirically investigate the effects of banks’ credit on the economic growth of Nigeria (performance of the economy).

The following are the objectives:

  1. To determine whether banks loans and advances affect the growth of Nigeria economy (GDP).
  2. To determine whether money supply enhances the economy growth of Nigeria economy (GDP).
  3. To determine whether lending (interest) rates has impact on the growth of Nigeria economy (GDP).
  4. To determine whether deposit volume has effect on the growth of Nigeria economy (GDP).

1.4 Research Hypotheses

To aid the completion of the study, the researcher formulate the following research hypotheses;

  1. H0: banks loans and advances do not affect the growth of Nigeria economy (GDP).
    H1: banks loans and advances affect the growth of Nigeria economy (GDP).
  2. H02: lending (interest) rates has no impact on the growth of Nigeria economy (GDP).
    H2: lending (interest) rates has impact on the growth of Nigeria economy (GDP).

1.5 Significance of the Study

It is believed that at the completion of the study, the findings will be of great importance to the managers of financial institutions and regulatory authority (central bank of Nigeria), as the study seek to investigate the impact of lending rate on the economic growth of Nigeria, the study will also be of great importance to entrepreneur and potential entrepreneur who intend to get loan from financial institution to finance their project, business or contract. The study will also be useful to researcher who intend to embark on a study in a similar topic, as the study will serve as a reference point for further research, finally the study will be of great importance to the academia as the findings will add to the pool of literature already available in the field.

1.6 Scope and Limitation of the Study

The scope of the study covers bank credit and advances and the performance of the Nigerian economy, but in the cause of the study, there were some factors which limited the scope of the study;

(a) Availability of Research Material:

The research material available to the researcher is insufficient thereby limiting the study.

(b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

(c) Finance:

The finance available for the research work does not allow for wider coverage as resources are very limited as the researcher has other academic bills to cover.

1.7 Operational Definition of Terms


A bank is a financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through capital markets

Bank Credit

Bank credit is an agreement between banks and borrowers where banks trust a borrower to repay funds plus interest for either a loan, credit card or line of credit at a later date

Loan and Advances

Meaning of Loans and Advances: The term ‘loan’ refers to the amount borrowed by one person from another. The amount is in the nature of loan and refers to the sum paid to the borrower.

Economic Growth

Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time.

1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  • Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study.
  • Chapter two highlight the theoretical framework on which the study its based, thus the review of related literature.
  • Chapter three deals on the research design and methodology adopted in the study.
  • Chapter four concentrate on the data collection and analysis and presentation of finding.
  • Chapter five gives summary, conclusion and also recommendations made of the study.

Chapter Five

Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to investigate the effect of bank credit and advances and the performance of the Nigerian economy.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of bank credit and advances and the growth of Nigerian economy

5.2 Summary

his study is an attempt to examine the impact of bank credit on economic growth in Nigeria. The study uses chi-square statistics to test the hypotheses. The analysis is based on SPSS statistical analysis model for data in which current GDP is used as dependent variable and bank credit to private sector and broad money are used as financial indicator and financial depth respectively. Based on the results of our study there is strong evidence that a significant and positive relationship exist between bank credit to the private sector and gross domestic product (GDP).the study also indicates no causal relationship with GDP as the dependent variable but there is a unidirectional causal relationship when credit to private sector is used as the dependent variable. The direction of causality is from gross domestic product to bank credit to private sector

5.3 Conclusion

Development of financial markets is an indicator that a country is strong in economic sense. The more diversity of instruments used in financial markets and the more common these instruments are used, it can be said that it ensures financial development of that country. Its activation of national and international savings is an important indicator in developmental criterion of financial markets. Financial deepening and financial deregulation are crucial for a country to achieve its economic growth in a globalizing world. Resorting to deregulation in other words considerably lessening interferences and supervisions provide positive contribution to financial development. Financial freedom brought along financial deepening as well. Financial deepening play a great role in transferring created funds to real sector. If majority of these created funds is transferred to real sector, economic growth will increase. If a small portion of created funds is transferred to real sector, in this case economic growth will occur in lower ratios due to lack of resources in real sector. If savings accumulated in economic structure return to economy as investments by using them to a great extent, they will provide important contribution to development of economy. If majority of these savings is not used, economic growth will slow down. Increasing savings will also support capital accumulation. Savings are used via banks, which are one of financial establishments. As demand for goods and services produced in economy will increase with an increase in bank credits, another economic problem to wit inflation can be encountered. If inflation happened in a country’s economy and there is also a volatility of interest, this time the crowding out effect might occur in that economy. Experiencing such situation will seriously and negatively affect credit market. If a country’s domestic debt requirement is provided by banks, credit supply of banks will contract and a decline will occur in total fund supply of that economy. Its reflection on economy will decrease conversion rate of deposit to credit, which is one of indicators that display developmental level of countries

5.4 Recommendations

Haven completed the study, the researcher recommends that better and stronger credit culture should be promoted and sustained; there should be strong and comprehensive legal framework that will continue to aid in monitoring the performance of credit to private sector and recovery debts owed to banks; bank should share among themselves information on bad debt; and preferred sectors like agriculture and manufacturing should be favoured in terms of granting loans.

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