Impact Of Bank Credits On The Performance Of The Manufacturing Sectors In Nigeria

Project and Seminar Material for Economics

Impact Of Bank Credits On The Performance Of The Manufacturing Sectors In Nigeria


Abstract


Prominent among the obstacles facing the performance of manufacturing sector in Nigeria is the lack of effectively bank credits to the manufacturing sector of the economy. The banks especially the commercial ones have not been contributing effectively to the output of manufacturing sector of the economy. This study takes into cognizance the problems of manufacturing the range of one understanding of something, or awareness of something). sector in Nigeria.

Besides, it looks into the various economics effects of inefficiency of bank credits to the manufacturing sector in Nigeria over the period of 1989-2009, using the Nigerian data set. The study employed the ordinary least square regression method. Above all, this project examines the earlier interventionist efforts by the CBN toward achieving a stable and low interest rate on the credits from the commercial banks to the manufacturing sectors in the economy and finally resolved to give useful recommendation on ways to improve upon the performance of the bank credits to the manufacturing sector in the economy.


Chapter One


Introduction

1.1 Background of the Study

Manufacturing sector plays a catalytic role in a modern economy and has many dynamic benefits crucial for economic transformation. In typical advanced countries, the manufacturing sector is leading, sector in many respects. It is an avenue for increasing productivity related to import replacement and export expansion, creating foreign exchange earning capacity; and raising employment and per capital income which causes unique consumption patterns. Furthermore, it creates investment capital at a faster rate than any other sector of the economy while promoting wider and more effective linkages among different sector. In terms of contribution to the Gross Domestic product, the manufacturing sector is dominant but it has been overtaken by the services sector in a number of Organization for Economic Cooperation and Development (OECD) countries.

Before independent, agricultural product dominant Nigeria’s economy and accounted for the major share of its foreign exchange earnings. Initially, inadequate capital investment permitted only modest expansion of manufacturing activities. Early efforts in the manufacturing sector were oriented towards the adoption of an import substituting strategy in which light industry and assembly related manufacturing ventures were embarked upon by the formal trading companies. Up to about 1980, the prime move in manufacturing activities was the private sector, which established some agro-based light manufacturing units such as vegetable oil extraction plants, turneries tobacco processing textiles, beverages and petroleum products. The strategy of light and assemblage manufacturing shifted some what to heavy industries from the period of the Third National Development plan [1985-90] when Government intervened to establish care industrial plants to provide basis import for the downstream industries.

The import dependent industrialization strategy virtually came to a halt in the late 1980s and early 1990s when the liberal impart policy expanded the imports of finished goods to the detriment of domestic production.

In this regard, industrialization constitutes a veritable channel of attaining the lofty and desirable conception and goals of improved quality of life for the populace. Thus in a supportive mood, Lewis. (1967), assumes that “in any economy, one or more sectors serve as a prime mover moving the rest of the economy forward”. This role of engine of growth or leading sector has usually been played by industrial sector under the industrialization process.

Against this background, industrialization involves extensive technology based development of the productive [Manufacturing] system of an economy. Thus, the development of the industrial sector represents the deliberate and sustained application and combination of suitable technology, management techniques and other resources to move the economy from the traditional low level of production to a more automated and efficient system of mass production of goods and services. Arising from the foregoing affirmed centrality of industrialization as the pivot of economic growth and development, industrialization process seems to be main hope of most developing countries such as Nigeria with large population and large labour force. In spite of these aspiration which ought to have favoured effective industrialization process in an economically conducive manufacturing environment, most of these results as reflected in the performance of the manufacturing sector remain socio-economically undesirable. Against this backdrop, current economic planning and policy instruments are diverted at the development of the key productive sectors, particularly manufacturing and commerce for the promotion of an increasing pace of industrialization in Nigeria.

The major problem facing the Nigeria manufacturing sector is having adequate finance resource for investment. Because of the low level of income of this, saving is very low.

Since the attainment of independent in 1960, commercial banks in Nigeria have been playing an important role in development process of the nation. The banks in collaboration with other financial institution, have been mobilizing the scare domestic resources for rapid social, economic and industrial transformation of the country.

Other services provided by the commercial banks includes facilities for safe-keeping of important documents, provision of advice to customers on insurance and investment matters, and provision of cash for bulk payment of non customers salaries and wages Umole.(1985).

In recognitions of this potential roles of the sector, successive governments in Nigeria have continued to articulate policy measures and programmes to achieve industrial growth incentive and adequate finance. The central goal of government policy was to foster growth in the manufacturing sector. Over the years, and largely in response to some of the previous policy strategies, the main features of the Nigerian manufacturing sector had emerged.

The role of bank credits in the growth of manufacturing sector cannot be over-emphasized. For instance the Federal government’s Appropriation Bill for the year 2005 has as one of it’s broad policy objectives to achieve a high economic growth rate (i.e GDP of at least 5%) through a better mobilization and prudent use of economic resources. This objective is not achievable without significant levels of resources from the financial sectors being mobilized and deployed to finance business expansion and growth.. Bank’s have to be effective intermediaries for mobilizing and channeling deposits to the productive sectors of the economy especially, the manufacturing sector.


1.2 Statement of Problems

In spite of continuous policy strategy to attract credits to the manufacturing sector, most Nigeria manufacturing enterprises have remained unattractive for bank credits. For instance as indicated in Central Bank of Nigeria (CBN) reports, most throughout the regulatory era, commercial bank’s loan and advances to the manufacturing sector deviated persistently from prescribed minima. Furthermore, the enhanced financial intermediation in the economy following the financial reforms of the 1990s not with-standing, credits to manufacturing as a proportion of total banking credits has not improved significantly averaging 15. 7% (percent) between 1994 and 2000 and 25.85% between 2001 and 2005. Consequently, many manufacturing firms in the country have continued to rely heavily on internally generated funds, which have tended to limit their scope of operating.

In the process, attempts will be made to provide answers to a series of questions including.

  1. How has bank credits affected the growth of manufacturing sector in Nigeria?
  2. What role can bank credit play in revitalizing the manufacturing sector?
  3. What are the basic problems of the manufacturing sector in Nigeria?
  4. What are the causes of inadequacy of skilled technical manpower in manufacturing sector in Nigeria?
  5. The causes of inadequacy of local technical support services for manufacturing sector in Nigeria?

1.3 Rational for the Study

This study was motivated by the challenges pose by the lack of sufficient bank credit to meet the increasing needs in the manufacturing sector of the Nigeria economy.

There is no idea doubt that a bank credit is very crucial and essential in revitalizing the manufacturing sector. As important as bank credit is to the sector inspite the continuous policy strategies to attract credits to the sector, most Nigeria enterprises have remained unattractive for bank credits. Hence, this study therefore intends to throw more light on the operation of bank credits and their resultant effect on the manufacturing sector.


1.4 Objective of the Study

The objectives of the study include;

  1. Examining the problem facing the manufacturing sector in attracting bank credits.
  2. To review the different sources of finance available to the manufacturing sector in Nigeria.
  3. To review the policies scheme as well as the as the developmental financial institution that have been up to promote the growth of manufacturing sector in Nigeria.
  4. To review the role and performance of this sector in the economy in facilitating industrial development in Nigeria.
  5. Also to look into the problems that militates against this sector (manufacturing) Apart from finance in Nigeria and to make recommendation where necessary.

1.5 Hypothesis of the Study

The hypothesis to be testes in this research endeavour are put as follows:

Null Hypothesis

H0: Aggregates credits to the manufacturing sector has no significant impact on the output of manufacturing sector.

Alternative Hypothesis
  • H1: Aggregate credits to the manufacturing sector has significant impact on the output of manufacturing sector.
  • H0: Debt financing has no effect on the growth of manufacturing firms in Nigeria.
  • H1: Debt financing has effect on the growth of manufacturing firms in Nigeria.

1.6 Significance of the Study

The following are the significance of this study:

  1. The results from this study will be a useful guide for manufacturing companies in Nigeria on debt management using the information obtained from the relationship between debt financing and the growth of manufacturing companies in Nigeria.
  2. This research will also serve as a resource base to other scholars and researchers interested in carrying out further research in this field subsequently, if applied will go to an extent to provide new explanation to the topic.

1.7 Scope / Limitations of the Study

This study on the impact of debt financing on the growth of manufacturing firms in Nigeria will cover all the sources of funds e.g. loans to the manufacturing firms in Nigeria. It will also cover the effect of debt financing on the profitability of manufacturing firms in Nigeria.

Limitation of Study
Financial constraint

Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint

The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.


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 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 impact of bank credit on the performance of manufacturing sector in Nigeria

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 bank credit in manufacturing sector


5.2 Summary

In most developing economies like Nigeria, the financing policies of firms may become relevant because managers in a company invest in new plants and equipment to generate additional revenue. This revenue generated belongs to the owners of the company and can be distributed as either dividend paid to owners or retained in the firm as retained earnings. The retained earnings could be used for new investment or capitalized by using it to issue bonus shares. Where the retained earnings are not enough to support all profitable investments opportunities, the company may forgo the investment or raise additional capital, thus altering the capital structure of firms. Unlike developed economies where the capital structure of firms comprise of equity and debt, the capital structure of firms in most developing economies is mainly equity based and where debt component is involved, it is usually from deposit money banks or other such financial institutions. The research work showed that the overall profitability in the manufacturing industry will be enhanced if good financial structure is properly managed as measured by leverage, short term debt and equity. This therefore means that, manufacturing companies operating in Nigeria should place more emphasis on equity funding compared to debt finance.


5.3 Conclusion

This study revealed the impact of the total debt (TD), Age of the firm (AGE), debt-equity ratio (DE) and the long term debt to capital employed ratio (LDCE) on the returns on investment and returns on assets (ROI and ROA) of the firms selected. The firms selected were ten from five different sectors and employed panel data spanning from 2002 to 2012. The effect of external financing on firm performance in developing economies like Nigeria could be explained through several theories such as Miller and Modigliani irrelevance theory, the pecking order theory, the trade-off theory, the signally hypothesis, market mutation hypothesis and the agency theory, amongst other capital structure theories. From these theories, the use of external financing increases returns on equity up to a certain level of operating income not only in a developing economy like Nigeria but also firms in developed economies. Hence, as the firm grow; higher levels of external financing are needed to cover for available investment opportunities. In a perfect world, management would favour more external financing whenever return on capital exceeds the cost of internal financing. However, higher returns could also result in higher risk to the business


5.4 Recommendations

Haven completed the study, the researcher recommends that Management must match the financing mix to the assets financed as closely as possible in terms of both timing and cash flows as to achieve the overall objective of the firm because value enhanced firm implies happy stakeholders thereby enhancing earnings attributable to shareholders. To maximize the market values, the major focus of quoted firms in Nigeria when deciding their choice of capital structure is to establish a positive significant relationship between their capital structure choice majorly total debt and debt-equity mix and their performance as revealed in the findings of this study. A most optimal capital structure is the debt-equity mix that best maximize firms’ value, therefore, firms’ should strive to optimize their capital structure by an appropriate mix of debt-equity capital. The firms’ should therefore strike a balance between their choice of capital structure and the effect on its performance as it affect the shareholders risks, returns and the cost of capital.


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