The Contribution Of Commercial Bank To The Economic Growth In Nigeria (1980 –2004)

Project and Seminar Material for Mathematics and Statistics

Project and Seminar Material for Mathematics and Statistics


Abstract


The Operation of Commercial Banks in Nigeria started lately in 19th century and since then their contribution to the economic growth cannot be over emphasized. There is strong acceptance of the proposition that financial institutions and particularly the commercial banks contribute significantly to economic growth.

For any country to pursue economic growth, therefore financial resources cannot be avoided. These financial resources are gotten mainly from commercial banks. This essence of commercial banks is not only to make profit for their business but also to make life meaningful to the society through their loans and advances.

This research work examined the contribution of Commercial Banks loans and advances. The aim is to know their quotas in the development of Nigeria economic growth.

The result from the research showed that loans and advances are positively related with gross domestic product.


Chapter One


1.0 Introduction

1.1 Background of the Study

There are quite a number of interpretations on the term growth. Be it as it may, the problem of economic growth was initially seen largely as an economic problem to be tackled largely by economists. The massive poverty that exist in underdeveloped world was interpreted as low per capita income.

Growth in the late 1960s and early 1970s brought into focus a situation of worsening poverty conditions for the poor in many underdeveloped countries despite a fairly good record of growth in national income.

The foregoing development gave rise to increasing questioning of the growth-bias. Arising from these questions, more variables were introduced into the definition of economic growth. Economic growth increasingly took on the conceptions of enhanced rate of growth of national income or increase in the rate of growth of per capita output coupled with a fairer and more equitable distribution of the resulting output. The latter condition of course implies improving conditions of employment as well as increased provision of social services. Indeed the stress on the conceptualisation of economic growth became focused primarily on the provision of basic needs for the masses of the people.

However, the wider interpretation of the concept economic growth emerged in 1978s when economic growth was defined or refers to as the increase in real output or real per capital output of an economy. This implies that the standard of living of the people in any economy is best measured in terms of real output per person.

The position of commercial banks to economic growth of Nigeria and other less developed countries (LDC) cannot be over emphasised. This is manifested by concerted efforts of government, policy makers and academic economists alike; hence in recent years in Nigeria, the commercial banks have shown greater interest for economic growth and development.

The government under its integrated economic growth and development programme has established small scale; agro based industries and has also developed certain measures aimed at encouraging industries, commerce, agriculture and other services.

The banking decree of 1969 empowers the central bank of Nigeria to grant approval for the open and closing of branches by commercial banks; and 1976 financial system review committee proposed that commercial banks should facilitate the transportation of economy of promoting the rapid expansion of baking facilities, services and cultivate banking habits. There has been glaring modernization of banking habits, mobilization of saving for investment in other areas of the economy.


1.2 Statement of the Problem.

Growth has many aspects, which are interrelated. It involves moving society in a preferred direction: an improvement in physical infrastructure high level of morality, political development, social development and economic growth.

In any modern society, economic growth and political development are the major goals, which cannot be achieved separately. In short they have been the major issues of any developing country in which Nigeria belong, initially, improvement in the national welfare was measured according to the rate of growth in gross domestic product but presently growth is seen as improvement in the general welfare of the society. It is usually manifested in desirable changes in the various aspect of the life of the society.

Other aspects of economic growth includes reduction in level of inflation, increase in per capital income, increase in employment, equitable distribution of income, favourable balance of trade and payment etc. As an important institution, commercial banks have been contributing to the economic growth of this country. This they do through the process of capitalization of financial resources, efficient allocation of these available resources and providing institutional mechanisms through which resources is mobilized and directed from the surplus spending units to the deficit spending units.

Economic growth in this research means increase in quantity of goods and service. These goods/services are used to measure the standard of living, which is as a result of increase in gross domestic product over the years. These goods and services are not produced by themselves rather by firms or companies that utilize resources (both human and natural resources) before any goods/services are produced. Examples of these firms or companies include uni-lever, Nestle food, Nigeria Breweries etc. These companies or firms, which produce these good and services that improve or increase our standard of living depend on the level of capital they receive from this sector (commercial banks), that is the contribution of commercial banks to economic growth of Nigeria.


1.3 Objective of the Study

In contemporary Nigeria society as in all developing societies, which are incorporate into the global capitalist economy, the most pressing need is economic growth and development. And to achieve these objectives there is need for financial institutions particularly commercial banks.

The purpose of this study is primarily to investigate the contribution of commercial banks to Nigeria economic growth using their loans and advances.


1.4 Hypothesis of the Study

In, the course of this research, the following hypothesis are going to be put forward and scientifically tested.

  • HO: b1 = O There is not significant relationship between commercial banks’ loans and advances and Gross Domestic product in Nigeria
  • H1: b1 = O There is a significant relationship between commercial banks’ loans and advances and Gross Domestic product in Nigeria.

1.5 Significance of the Study

Contributions of commercial banks towards economic growth especially in developing nations are very essential. This study helps in better understanding of the positive impact of commercial banks especially inn Nigeria. It treats how commercial banks in Nigeria have made its contribution to the attainment of economic growth.

This analysis will help the policy makers to find a better way of regulating the activities of commercial banks in particular and financial institutions as a whole. This study hopes to stimulate, further investigation on how the contribution of commercial banks to economic growth could be increased.


1.6 Scope and Limitations of the Study

The study is directed to cover commercial banks’ loans and advances from then period 1980 – 2004. The study reflects to a large extent what is obtainable in our commercial banks and data collected and used are mainly secondary data.

Due to incomplete data for the year 2005, the research work covered the period of 1980 – 2004, but effort where made to ensure that the study was carried out to meet the current demand and comprehensiveness as adequately as possible.


1.7 Definitions of Terms

Economic Growth:

It means the percentage annual change in the national income of a country or a group of countries. It can be defined as increase in real gross national product over a time or if country’s gross national product has become larger than before economic growth is desirable since a growing economy means that there will be more goods and services for the people to consume. The rate of the gross national product must be higher than the rate of growth of the population before we can say that growth has had a positive impact on the welfare of the citizens (kuznet 1973). Economic growth is an anchor in which other aspects of economic development depend on.

Economic Development:

To asses the changes in national welfare we use the concept of development rather than growth. Economic development is a process of improvement in the general welfare of the society. It is usually manifested in desirable changes in the various aspects of the life of the society.

Economic development includes the following:-

  1. A reduction in the level of unemployment.
  2. A reduction in the extent of personal and regional inequalities.
  3. A reduction in the level of absolute poverty.
  4. A rise in the real output of goods and services.
  5. Improvements in the level of social and political consciousness of people.

Chapter Five


Discussion of Findings, Conclusion and Recommendation

5.1 Discussion of Findings

The negative but insignificant relationship between commercial banks’ Loans and gross domestic product and index of industrial production as shown in Table 4.5a and 4.5b is against the a priori expectation. This would be that banks’ centres the loans and advances to oil and gas sector at the detriment of manufacturing sector and other sector which reduces their productive capacity, thereby threatening increases in GDP. This result supports the findings of Ojeaga, Odejimi, Okhiku and Ojeaga (2014) and Tahir, Shehzadi, Ali and Ullah (2015) on the negative relationship between credit to private sector and real gross domestic product in Nigeria and Pakistan respectively. On the contrary, it refutes the empirical findings of Nwakanma, Nnamdi and Omojefe (2014), Marshal, Igbanido and Onyekachi (2015) and Timsina (2014) who have established a positive nexus between credit to private sector and RGDP. The granger causality result in the Table 4.7a also agrees with Akpansung and Babalolaa (2010) and Korkmaz (2015) that there is a unidirectional relationship flowing from RGDP to private sector credit. The negative relationship observed for index of industrial production and credit to private sector in line with Makinde (2014) who stated that industries are not getting the much needed loans to spur economic growth in Nigeria. The negative effect of inflation on economic development also support the study of Olowofeso, Adeleke and Udaji (2015).


5.2 Conclusion and Recommendations

The impact of commercial banks’ lending on economic development of Nigeria from 1980–2004 was ascertained in study. From the analysis performed, commercial banks’ lending has significant impact on gross domestic product of Nigeria notwithstanding the negative but insignificant relationship between commercial banks’ lending and gross domestic product. Commercial banks’ lending has no significant impact on Nigeria’s index of industrial production, however, the relationship between them was found to be negative but insignificant. The financial intermediation function of the banking institutions is critical to achieving a desired and sustained level of economic development and growth. Nigeria is a developing country and needs a lot of finance to provide basic infrastructural facilities for the improvement in the quality of life of her citizen. From the result of this study which evidenced the significant impact of commercial banks’ lending on economic growth, it is concluded that finance is great catalyst for development and growth of Nigeria’s economy.

In lieu of the findings of this study, the following recommendations are pointed out for consideration my decision makers:

  1. 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.
  2. The Central Bank of Nigeria should through monetary policy 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.

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