The Implication Of Bank Lending In Commercial Banks Towards Growth And Development Of The Economy (A Case Study Of First Bank Of Nigeria, Agbor)

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The Implication Of Bank Lending In Commercial Banks Towards Growth And Development Of The Economy (A Case Study Of First Bank Of Nigeria, Agbor)


Abstract


This work is based on the implication of bank lending in commercial banks towards growth and development of the economy (a Case Study Of First Bank Of Nigeria, Agbor). This study’s primary goal is to determine how bank lending has affected Nigeria’s economy from 1995 to 2021. Real gross domestic product (RGDP), a proxy for economic growth, was included in the model along with interest rates and bank lending rates as independent variables. The model was then tested using ordinary least-square (OLS) procedures. The empirical finding demonstrates that the relationship between bank lending and interest rates is unfavorable and has little bearing on Nigeria’s economic expansion. According to the results of the Granger causality test, Nigeria’s real gross domestic product and inflation rate are not causally related. In addition, there is no causal connection between INTR and RGDP, and there is no connection between the Bank Lending Rate (BLR) and the interest rate (INTR) Based on the findings, the researcher suggests that the Central Bank of Nigeria and other monetary authorities reduce the interest rates charged on loans obtained from commercial banks by lowering their bank rates and other deposit requirements in order to make money available to potential investors who will boost the nation’s output through their production.


Table of Content


  • Title Page
  • Certification
  • Dedication
  • Acknowledgement
  • Table of Content
  • List of Tables
  • Abstract

Chapter One:

Introduction

  • 1.1 Background of the Study
  • 1.2 Statement of the Problem
  • 1.3 Objective of the Study
  • 1.4 Research Questions
  • 1.5 Research Hypothesis
  • 1.6 Significance of the Study
  • 1.7 Scope of the Study
  • 1.8 Limitation of the Study
  • 1.9 Definition of Terms
  • 1.10 Organisations of the Study

Chapter Two:

Review of Literature

  • 2.1 Conceptual Framework
  • 2.2 Theoretical Framework
  • 2.3 Empirical Review

Chapter Three:

Research Methodology

  • 3.1 Theoretical Framework
  • 3.2 Model Specification
  • 3.3 Method of Evaluation
  • 3.4 Data Required and Source
  • 3.5 Statistical Package Used

Chapter Four:

Data Presentation and Analysis of Result

  • 4.1 The Empirical Results
  • 4.2 Regression Result
  • 4.3 Evaluation of Regression Result
  • 4.4 Evaluation of Research Result
  • 4.5 Implication Results.

Chapter Five:

Summary, Conclusion and Recommendation

  • 5.1 Summary
  • 5.2 Conclusion
  • 5.3 Recommendation
  • References

Chapter One


Introduction

1.1 Background to the Study

Units with surpluses and deficits make up the typical capitalist or mixed economy. Banks accept deposits from the economy’s surplus unit and lend those funds to the deficit unit as loans and advances as part of their fundamental duty of intermediation (Kalu, 2009). You cannot assume that the financial system plays a passive role in raising money and directing it toward the productive sections of the economy. Every modern economy is understood to need a sound financial system in order to experience rapid growth and development (Sanusi, 2012). Banks, insurance companies, stock exchanges, and other financial institutions make up the financial system. The banking industry plays a significant role in the Nigerian financial system. The banking industry dominates the Nigerian financial system, making up roughly 65% of the market capitalization of the Nigeria Stock Exchange and about 90% of the system’s total assets (Soludo, 2009a).

However, contrary to expectations, the banking industry has not made a significant contribution to the expansion and development of the Nigerian economy. Numerous issues that the industry faced, including insufficient capital, significant non-performing assets that frequently caused distress in the industry, and the prior failure of some banks, have been blamed for the sector’s poor performance (Sanusi, 2012). The business sector won’t expand, there won’t be enough deposits, which will make it harder for banks to make money if they can’t lend to the deficient economic units in their immediate operating area (Galac, 2001: Honohan, 1997). According to Udoka and Effiong (2006), the majority of banks’ loanable funds make up half or perhaps more of their total assets and between half and two thirds of their earnings, making lending their primary and most essential task. Several factors contribute to the function’s importance.

First, while evaluating a bank’s stability, the general public or consumers look to its lending. Banks that are able and willing to lend money are seen as being more stable than those that frequently turn down loan requests from clients. Second, the monetary authority views lending as a legal duty and may set a minimum percentage of bank lending to certain industries, such as agriculture and small-scale businesses. Third, lending is used as a tool in the government’s monetary policy implementation, which has an impact on the money supply and demand in the economy. Fourth, the pattern of production, the degree of entrepreneurship, and ultimately total output and productivity are impacted by financing. The final and most significant factor that makes banks’ lending activities necessary and significant for every economy is that it is widely acknowledged that bank lending and economic growth have a beneficial link (Oluitan, 2009).

A rising amount of research in advanced economies has revealed that bank lending is one of the main forces behind economic expansion and progress. As a result, the majority of nations with a strong financial sector and a lot of bank lending exhibit both significant and sustained growth and economic development (Nabila Zakir,2014, Sunde 2013). This suggests that when an economy grows, there is a greater need for targeted and expanded bank deposits to important sectors of the economy, such as homes.

This banking organization is in charge of financial intermediation in the Nigerian financial system, which allows funds to be channeled from the surplus unit of the economy to the deficit unit of the same sector, converting deposits into credits (loan). According to Ademu (2006) and Nwanyanwu (2010), one of the ways to create employment possibilities and by doing so, contributing to the growth of the economy overall, is to provide credit while giving adequate respect to the sector’s growth potential as well as the price system in the economy. This is conceivable because bank lending plays a significant role in business enterprise expansions and production scale increases, both of which lead to growth in the economy as a whole.

Economic growth involves an increase in a nation’s national revenue or its level of output of goods and services over a specific time period (Oluitan, 2009). Production levels within the economy, factor productivity, technological advancements, the accumulation of physical capital, and real Gross Domestic Product (GDP) are all used to quantify economic growth (Odedokun 1998; Allen & Ndikumama 1998; King and Levine 1993). Bencivenga & Smith (1991) assert that capital and labor are used to produce the goods that are consumed in the economy. Entrepreneurs typically use their own personal resources or bank loans to mobilize capital. As a result, bank loans are important for national economic development. According to research, bank loans may be directly responsible for economic expansion. For instance, according to Bayoumi & Melander (2008), a 2.5% decrease in total credit results in a 1.5% to 1.5% decline in GDP. Demetriades and Hussein (1996), who examined 13 nations, agreed that bank loans and economic growth are causally related, but they contended that this causation is time- and country-specific rather than universal.

In a 2006 article outlining the function of bank lending, Ademu said that it might be utilized to stop the complete collapse of the economy in the event of a natural calamity such a flood, drought, illness, or fire. The importance of bank lending to the Nigerian economy has caused a steady increase in credit to the country’s productive sector. In its 2010 annual report, the Central Bank of Nigeria observed that between 2009 and 2010, credit to the core private sector increased by 10.26% at deposit money banks. Banks provide excellent social services by making credit available since doing so boosts productivity, expands capital investment, and results in a higher level of living.

According to Dewett (2005), economic growth is commonly referred to as a quantitative change in economic variables that typically persists over successive periods. The concept of economic growth is considered as an increase in the net national product in a specific period of time. In addition, according to Ademu (2006), the provision of credit with adequate consideration for sector’s volume and price system is a way to achieve economic growth through self-employment opportunities while highlighting the role of credit to the growth of any economy. Credits are obtained by various economic agents to enable them to meet operating expenses (Nwanyanwu 2008). Economic expansion is one of the key elements that raises living standards in developing nations (Shaw, 1973; Mckinnon, 1973). Among other things, it is a necessary condition for economic development. It is thought that labor, capital, and exogenously determined technology are the key variables influencing economic growth. The effects of bank lending are important for Nigeria’s economic development.


1.2 Statement of the Problem

The reason for bank lending is to gather resources so that it can give the business sector long-term financing. Few studies have been conducted to determine the effect that bank lending has on the expansion of national economies. Although there have been many empirical studies on the factors influencing growth in transition countries, according to Tuuli (2002), the connection between bank lending and economic growth has received little attention.

Economic growth is generally regarded as an important objective of economic policy, and a large body of scholarship has been devoted to describing how this objective might be attained. Unfortunately, despite this tremendous effort on the part of researchers and policymakers, nothing meaningful has come of it. As a result, it has become imperative to examine how bank lending affects Nigeria’s economic growth and development because unless this gap is addressed, the inevitable concerns raised by this study would go unanswered.


1.3 Objective of the Study

The general objective of this study is to ascertain the implication of bank lending in commercial banks towards growth and development of the economy (a Case Study Of First Bank Of Nigeria, Agbor). In line with this, the specific objective of the study include the following

  1. To evaluate the impact of bank lending on Nigeria’s economic growth.
  2. To ascertain the effect of bank lending rates on Nigeria’s economic growth.
  3. To ascertain the impact of money supply on the Nigeria’s economic growth.

1.4 Research Question

This study is based on the following research question

  1. What is the impact of bank lending on Nigeria’s economic growth?
  2. To what extent has bank lending rates affected the economic growth in Nigeria?
  3. To what extent has money supply influenced Nigeria’s economic growth?

1.5 Hypotheses of the Study

The hypotheses of this study are as follows

Hypotheses one
  • Ho: Bank lending do not have any significant impact on Nigeria’s economic growth.
Hypotheses two
  • Ho: Bank lending rates do not have any significant impact in Nigeria’s economic growth.
Hypotheses three
  • Ho: Money supply does not have any significant impact on Nigeria’s economic growth.

1.6 Significance of the Study

The following will greatly benefit from the study:

Bankers:

The research will improve your knowledge of the connections between bank lending and economic expansion. This will go a long way toward enabling them to perform their financial intermediation duty effectively while taking into account how it affects economic growth.

Government:

This study will be helpful for all levels of government, but particularly for those involved in implementing policies, passing legislation, and making announcements that will foster economic growth.

Researcher:

This study will greatly benefit future researchers by expanding our body of knowledge. Such researchers and students will need to use it as research material if they want to conduct a connected study.


1.7 Scope of the Study

The study will focus on the implication of bank lending in commercial banks towards growth and development of the economy over the period of 1995 to 2021. This study covers the period of 26 (twenty-six) years. bank lending as shall be used in this study are credits advanced by banks in Nigeria. Economic growth shall be peroxide by the real gross domestic product (RGDP).


1.8 Limitation of the Study

In the course of carrying out this study, the researcher experienced some constraints, which included time constraints, financial constraints, language barriers, and the attitude of the respondents. However, the researcher were able to manage these just to ensure the success of this study.


1.9 Definition of Terms

Bank Lending:

When people or organizations such as banks lend you money, they give it to you and you agree to pay it back at a future date, often with an extra amount as interest

Bank Lending Rate:

Lending rate is the bank rate that usually meets the short- and medium-term financing needs of the private sector.

Economic Growth:

Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of increase in the real gross domestic product, or real GDP

GDP:

Gross domestic product is a monetary measure of the market value of all the final goods and services produced and sold in a specific time period by countries. Due to its complex and subjective nature this measure is often revised before being considered a reliable indicator.


1.10 Organizations of the Study

The chapter one consist of the introductory part of the study which includes the study background, the statement of the research problem, the study objective and scope of the study. The second chapter is a critical review of other literatures relevant to the study and its objectives including the theoretical framework for the study. While the third chapter is methods of data collection, sampling and data analysis used in conducting the study. The fourth chapter centres around the research findings including an analysis of how it relates to previous findings. The fifth chapter consists of the summary of findings, conclusion and recommendations base on the study objectives.


Chapter Five


Summary of Findings, Conclusion and Recommendation

5.1 Summary of Findings

Incorporating additional factors that have an impact on real gross domestic product, such as bank lending rate, interest rate, and wide money supply, this study develops a model to analyze the effect of bank lending on the growth of the Nigerian economy from 1995 to 2021. Annual time series data on the broad money supply, interest rate, bank lending, and real gross domestic product for the years 1995 to 2021 were gathered in order to conduct this research.

The overall finding of the study indicates that factors such as bank lending, interest rates, and the volume of money supply have a big impact on Nigeria’s economic expansion.

The results of this study also show that while broad money supply has a positive association with economic growth in Nigeria, interest rate and bank lending have a negative link with real gross domestic product;

According to the Granger causality result, bank lending (CBC) and real gross domestic product (RGDP) have a unidirectional causal link. Interest rates (INTR) and real gross domestic product also have a causal relationship (RGDP).

There is a one-way causal link between RGDP and M2. There is no connection between CBC and INT that is causative.

There is a one-way causal relationship between CBC and M2. Finally, there is no connection between INT and M2


5.2 Conclusion

The aforementioned leads us to the conclusion that bank lending, interest rates, and the overall money supply all have a considerable impact on real GDP. Additionally, we draw the conclusion that there is a single direction of causation between bank lendings (CBC) and real gross domestic product (RGDP), and that there is no causation between interest rates (INTR) and real gross domestic product (RGDP). There is a one-way causal link between RGDP and M2. There is no connection between BLR and INT that is causative. Finally, there is no causal relationship between INT and M2 and unidirectional causation exists between BLR and M2.


5.3 recommendations

The government and other relevant authorities are recommended to adopt the recommendations that have been made as a result of the research work’s findings in order to boost Nigeria’s manufacturing sector production.

  1. In order to make money available to potential investors who will boost national output through their production, the Central Bank of Nigeria and other monetary authorities should lower the interest rate charged on loans borrowed from commercial banks by lowering bank rates and other deposit requirements of the commercial banks.
  2. Having observed that the relationship between interest rates and actual economic growth is unfavorable, the authorities in charge of developing the country’s stabilization strategies should develop strategies that maintain interest rates at a manageable level, increasing the amount of spendable money in people’s pockets.
  3. When obtaining loans for investment, financial institutions, especially commercial banks, should make it simple to do so without a lot of bureaucratic rules and never-ending demands from bankers..

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