Impact Of Deposit Money Credit Bank On The Nigerian Manufacturing Sector

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Impact Of Deposit Money Credit Bank On The Nigerian Manufacturing Sector


Abstract


This research work studied the impact of deposit money banks credit on the performance of the manufacturing sector in Nigeria. In carrying out this study this study used annual time series data for the period 2000-2016 obtained from Central Bank of Nigeria (CBN) Statistical Bulletin (various issues). The Ordinary Least Square (OLS) technique was employed to obtain the numerical estimates of the coefficients of the equations. The variables are; sectorial distribution of deposit money credit banks to the manufacturing sector (DMBCDMS), Lending interest rate (LR), savings rate (SR) and money supply (M2). This study identifies sectorial distribution of deposit money banks credits to the manufacturing sector (DMBCDMS), Lending interest rate (LR), and savings rate (SR) as the major constraints to manufacturing sector of Nigeria economy. The three variables had coefficients of -0.036255, -0.172759, -3.965471and t-statistics values of -2.513035, 0.219083, -2.369485 respectively. Both sectorial distribution of deposit money banks credits to the manufacturing sector and saving rate where negative but significant to the output growth rate of the manufacturing sector, while lending rate was negative and insignificant to the output growth rate of the manufacturing sector in Nigeria. Money supply was positive and insignificant to the output growth rate of the manufacturing sector. This implies that for the growth of the manufacturing sector in Nigeria bank lending interest rate should be low to allow investors to source capital for investment this study therefore, recommends that monetary authority in Nigeria should therefore reduce the lending interest rate at which deposit money banks lend to the manufacturing sector. While money supply in the economy should be increased to facilitate production processes, by assisting producer or manufacturers meet relative cost of 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 Research Design
  • 3.2 Nature and Sources of Data
  • 3.3 Model Specification
  • 3.4 Description of Model Variables
  • 3.5 Technique of Analysis

Chapter Four:

Data Presentation and Analysis

  • 4.1 Data Presentation
  • 4.2 Test of Hypotheses

Chapter Five:

Summary, Conclusion and Recommendation

  • 5.1 Summary
  • 5.2 Conclusion
  • 5.3 Recommendation
  • References

Chapter One


Introducrtion

1.1 Background of the Study

Output of the Nigerian economy comes from six main sectors namely: agriculture, manufacturing, mining, quarrying, real estate and construction, wholesale and retail trade (general commerce) and service sectors. These sectors relate with one another using the stock of capital and other factors of production within the economy to produce the desired goods and services. During the production process in these sectors, capital which is a factor of production play a very dynamic role? It assists in procurement of necessary inputs required for production and hence, increases production capacities. Therefore, availability and non-availability of capital determines, to a large extent, the growth process and performances in these sectors.

In many developed and developing nations including Nigeria, the manufacturing sector plays a very vital and significant role in the development of economy. The manufacturing sector as a sub sector of the industrial sector refers to a process in which raw material and other production factors such as labor land and capital are combined and utilized in the production of good and services. In advanced economy such as the United States of America, China and most of other Asian countries, the manufacturing sector is a leading sector in many respects. This is understandable in view of the fact that it has been generally acclaimed, through the kaldor’s first law, that the manufacturing sector is the engine of growth of the economy. It is an avenue for increasing productivity related to import replacement and export expansion, creating foreign exchange earning capacity; and raising employment and per capita income which causes a unique consumption pattern. The manufacturing sector also creates investment capital at a fast rate than any other sector of the economy while promoting a wider and more effective linkage among different sectors. (Anyawu, 2010) In terms of contribution to the Gross Domestic Product (GDP), the manufacturing sector is dominant and it has overtaken the services sector in a number of Organizations for Economic Cooperation and Development (OECD) countries.

In recognition of these potential roles of the manufacturing sector, successive governments in Nigeria have continued to articulate policy measures and programs to achieve industrial growth incentive and adequate finance (Orji, 2012). To emphasize the fundamental and critical role the manufacturing industry plays in capital formation, domestic savings and its effect in ensuring sustainable economic growth and development in Nigeria, the federal government at different times introduced a number of schemes such as World Bank SME II Loan Scheme (1987), Small Scale Industries Credit Scheme (1971), established Industrial Development Centre, National Economic Reconstruction Fund( NERFUND), Nigerian Bank for Commerce and Industries, Nigerian Industrial Development Bank all aimed at improving and sustaining the performance of the manufacturing sector. In 2010, the federal government through the Central Bank of Nigeria made available the sum of 200 billion naira as Manufacturers’ Intervention Fund. “The objectives of the fund include fast-tracking the development of the manufacturing sector of the Nigerian economy by improving access to credit to manufacturers; improving the financial position of the Deposit Money Banks; increasing output; generating employment; diversifying the revenue base, as well as increasing foreign exchange earnings. It is also meant to provide inputs for the industrial sector on a sustainable basis.”(CBN, 2010). Similarly, the involvement of the private sector such as the Dangote group, Honey well among others in the manufacturing sector, has boosted its development.

As a result of abject poverty, low savings capacity and consequent low capital formation, producers in developing countries such as Nigeria are unable to finance their activities and therefore have to depend on external sources of funding. According to Uma (2001), Availability of external funding, especially access to long-term credits influences firms’ investments level in an economy, since credit is viewed as a productive input and policy makers believe that it is possible to promote specific economic activities by delivering pre-determined amount of loans to producers. Hence, banks credit has become an essential feature in output growth process in Nigeria. Availability of bank credits enables producers to harness innovations by bringing about new combinations of productive resources and employing hitherto unemployed resources

The banking system which is at the heart of the Nigerian economy has been prior to Nigeria’s independence in October 1960. Nwankwo (1975) observes that formal banking began in Nigeria 1892 with the establishment of the African banking corporation (ABC) in Lagos. Since the colonial era, till date, banking system in Nigeria has experienced massive transformation in character, structure and organization with the primary objective of promoting a more efficient and effective fund allocation and ensuring that its financial intermediation functions occurs as proficiently as possible, thereby enhancing fund mobilization and accessibility, which are required for output growth.

Early economists such as scumpeter (1934), mckinnon (1973) and shaw (1973) identified bank roles in facilitating innovations through their role of intermediation. The role according to them is performed through the process of channeling funds in the form of credits or loans for investment to those economic agents who need them and can put them into the most productive use. Thus lending which is defined in this context, as the link through which resources are transferred for capital formation, facilitates investment which leads to output growth. Several scholars thereafter such as fry (1988), king and Levine (1993), Levine (2004), and de serres, kobaykawa, slok & vartia (2006), have supported the above postulation about the significance of bank lending to output growth in an economy.


1.2 Statement of the Problem

The Federal Government’s Appropriation Bill in recent years has as one of its 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. These objectives are not achievable without significant levels of resources from the financial sector being mobilized and deployed to finance business expansion and growth, hence, the role of the deposit money bank in ensuring the effective and efficient performance of this objective. Banks have to carry out its essential duty of intermediation to ensure smooth mobilizing and channeling of deposits to the productive sector of the economy especially the manufacturing sector. However, in spite of persistent need by the federal government for improvement, which led to the development of policy strategy in order to attract credits to the manufacturing sector, there remains unwillingness by the deposit money bank to offer credits to the manufacturing sector at low lending rate. For instance, as indicated in the central bank of Nigeria (CBN report, 2009), almost throughout the regulatory era, deposit money banks loans and advances to the manufacturing sector deviated persistently to a minimal. A study by the national planning commission, Federal Republic of Nigeria (2011) held that the flow and quality of bank funding to the private sector went down increasingly as the risk aversion of banks increased in the aftermath of the financial meltdown. Funding has made it difficult for firms to invest in modern machines, information and communication technology and human resources development which are essential factors in trimming down costs, raising productivity and improving competitive strength. Even when credit is available, high lending rate which is sometimes go over 30%, make such credits unattractive, given the fact that returns on investments in the sub-sector have been below ten percent (10%) on the average. Accordingly, manufacturing sector in Nigeria is faced with the problem of accessibility of funds for productive investment, hence its poor performance in recent years (Edirisuriya, 2008).

It is important to note that most of the studies on the role of bank lending in the manufacturing sector performance have been highlights on developed economies. There exist limited studies on its impact on developing and emerging economies (specifically, Nigeria), this has created a huge knowledge gap. Hence, the reason for this present study, to eliminate or reduce the information gap in existence.


1.3 Objective of the Study

The objective of this study includes the following;

  1. To examine the effect the sectorial distribution of deposit money banks credits to the manufacturing sector has on the output and growth of the manufacturing sector in Nigeria.
  2. To determine the impact of deposit money banks lending rate on the output and growth of the manufacturing sector in Nigeria.
  3. To determine the impact of saving rate on the output and growth of the manufacturing sector in Nigeria.
  4. To examine the effect money supply has on the output and growth of manufacturing sector in Nigeria.

1.4 Research Question

In other to aid the testing of hypotheses, some questions will be asked which will help the researcher in achieving a positive result in the formulation of hypotheses, these questions includes:

  1. In what way has the sectorial distribution of deposit money banks credits to the manufacturing sector had an impact on the output and growth of the manufacturing sector in Nigeria?
  2. To what extent does lending rate have an impact on the output and growth of the manufacturing sector in Nigeria?
  3. To what extent does saving rate have an impact on the output and growth of the manufacturing sector?
  4. To what extent has money supply had an impact on the output and growth of manufacturing sector in Nigeria?

1.5 Statement of Hypothesis

The following hypotheses are relevant to our study:

  • HO1 Sectorial distribution of deposit money banks credits to the manufacturing sector does not have a positive and significant impact on the output and growth of the manufacturing sector in Nigeria
  • HO2 Lending rate does not have a positive and significant impact on the output and growth of the manufacturing sector in Nigeria.
  • HO3 Saving rate does not have a positive and significant impact on the output and growth of the manufacturing sector in Nigeria.
  • HO4 Money supply does not have a positive and significant impact on the output and growth of the manufacturing sector in Nigeria.

1.6 Significance of the Study

  1. The study is useful to the academic community because it will provide them with an insight of how the development of manufacturing sector would contribute to the efficient and effective growth of an economy if proper measures would be taken to meet the financial needs of the sector.
  2. This study is also useful to policy makers by making them aware of the problems affecting the growth of the manufacturing sector and pointing out steps or measures that can be taken in order to produce a better functioning sector.
  3. This Research would also serve as a platform for other researchers on the same or related subjects.
  4. This research will also satisfy the interest of the general public by creating awareness on sectorial issues of the economy.

1.7 Scope of Study

This study will adopt time series data from 2000-2016. The data will be obtained from the publications of the central bank of Nigeria statistical bulletin and another academic journal. This is to enable the researcher conduct the study with ease, by using the relevant and realistic data obtained.


1.8 Limitation of Study

One cannot claim the preciseness of this research finding mainly because of the bias in data presentation by the government agencies in Nigeria. The general limitations of the study, is the fact that the work is limited to the scope of the study and there will be transfer of errors or mistakes in the reporting data that would affect the validity of this research result since some data would be sourced from existing work. While the specific limitations includes but not limited to the ones listed below:

Materials:

The sourcing of the relevant materials that will be used for the project will not be an easy task, because the researcher will have to visit office and libraries, in other to get first-hand information, and most of the times, these materials will not be easily accessible.

Time:

Since the research work has the highest unit load in the second semester course, the time that is allotted to it is usually not enough, the researcher will have to struggle with the limited time and still ensure that the best result is gotten for this research work, so time constraint is a major challenge.


1.9 Definition of Terms

In order to avoid the maze of semantics that surrounds words, the following terms have been precisely defined as they relate to the context of the research work.

Economy:

The state of a country or region in terms of the production and consumption of goods and services and supply of money.

Economic Growth:

This is the increase in the inflation adjusted market values of goods and services produced by economy overtime.

Bank Credits / Lending:

Bank lending or bank credits are the aggregate amount of credit available to a person or business from a banking institution. It is the total amount of funds financial institutions provides to an individual or business. A business or individual’s bank credit depends on their ability to repay and the total amount of credits available in the banking institution.

Lending / Interest Rate:

An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited or borrowed.

Sector:

A sector is an area or proportion that is distinct from others. Therefore, the sectors of an economy are large groups of the economy, grouped according to their place in the production chain, by their kind of work (product or services) or ownership. For example the agricultural sector, the manufacturing sector, etc. Our focus, for the purpose of this research work is the manufacturing sector.

Saving Rate:

A saving rate is an amount of money, expressed as a percentage or ratio that a person deducts from his disposable personal income to set aside as a nest egg or for retirement.

Money Supply:

Money supply is the total value of monetary assets available in an economy at a specific time. Money supply includes currency in circulation and demand deposits (depositors’ easily accessed assets on the books of the financial institution).


1.10 Organization of the Studies

The study is categorized into five chapters. The first chapter presents the background of the study, statement of the problem, objective of the study, research questions and hypothesis, the significance of the study, scope/limitations of the study, and definition of terms. The chapter two covers the review of literature with emphasis on conceptual framework, theoretical framework, and empirical review. Likewise, the chapter three which is the research methodology. The second to last chapter being the chapter four presents the data presentation and analysis, while the last chapter(chapter five) contains the summary, conclusion and recommendation.


Chapter Five


Summary of Findings, Conclusion and Recommendation

5.1 Summary of Findings

The principle objective of this study is to examine the impact of deposit money credit bank on the Nigerian manufacturing sector. An overview of Nigeria manufacturing industry and its activities was presented. The manufacturing industry which is a productive sector plays a very vital and significant role in the development of economy. The manufacturing sector as a sub sector of the industrial sector refers to a process in which raw material and other production factors such as labor land and capital are combined and utilized in the production of good and services. It was also identified that the manufacturing industries in Nigeria face difficulty in raising funds for father investments. Funding has made it difficult for these industries to invest in modern machines, information and communication technology and human resources development which are essential factors in trimming down costs, raising productivity and improving competitive strength. Loans which forms part of the ways by which business can obtain funds are usually made inaccessible by the Nigeria banks resulting from several factors such as interest rate or inability to meet up with some collateral or security requirements.

The study tried to identify some the major objectives of bank lending to include but not limited to; Stimulate economic growth: both on the borrowers and lenders, It encourages savings and investments, Maintaining maximum profitability to shareholders and liquidity for depositors, Realization of government policy objectives of ensuring financial stability within the country: through monetary policy tools such as liquidity ratio, bank rate etc. Although these positive objectives there are still constraints to lending, this is clearly discussed in the conceptual framework of this study.

The constraints are those factors that limit the amount of fund to be given out as loans by the deposit money bank to the public. They include and are not limited to the volume of bank deposit, liquidity requirements of banks by the central bank, shareholders fund capital base, statutory lending limit.

Furthermore, an analysis was carried out for the purpose of the objectives as stated in chapter one. Using ordinary least square regression analysis technique, bank lending, through identifiable and measurable proxies such as lending rate (LR), deposit money bank’s loan and advances to the manufacturing sector (DMBCMS), saving rate (SR) and money supply (M2) was used to investigate its impact on the performance of the manufacturing sector with time series data from 2000 to 2016.


5.2 Conclusion

This study has investigated the impact of deposit money credit bank on the Nigerian manufacturing sector for the period which spanned between 2000 and 2016. Econometric model was specified and estimated via the Least Square regression techniques to ascertain the relationship between dependent manufacturing output growth rate and the explanatory variables (deposit money bank credit to the manufacturing sector, interest/ lending rate, savings rate, money supply). Descriptive statistics for the variables was carried out, as well as correlation test between the dependent variable and the independent variables. From the results obtained in the regression analysis showed that manufacturing output growth rate and selected macroeconomic variables included have a long run relationship with the performance of the manufacturing sector. The study also reveals that deposit money bank credits (DMBC) and savings rate has a significant impact on manufacturing output growth rate in Nigeria. Although money supply has a positive relationship with manufacturing output growth rate, its impact is still insignificant on the country’s manufacturing output growth rate. This may be connected with the government monetary policy objective of ensuring financial stability by controlling the amount of money in circulation. The study shows that interest rate has adverse effect on the growth of manufacturing industry output. This finding confirms to the apriori expectation. This was attributed to the stable macroeconomic policy in management of interest rate and the control of money supply in the Nigeria economy. Conclusively, deposit money bank credit to the manufacturing sector and saving rate are the main determinants of Nigeria manufacturing performance.


5.3 Recommendations

Based on the findings of this paper, the following policy recommendations are made.

  1. Deposit money banks should be further empowered, so as to be able to grant long-term loan that would enhance manufacturing sector’s output growth and performance. These loans would ensure that more funds are available for investment purposes and for improvements such as technological improvement.
  2. Technological improvement in the manufacturing sector: Technology can help to improve productivity in four major ways: more effective and efficient machinery that can reduce production time and costs; better methods and process controls; breakthrough into completely new ways of doing things and product designs that can increase competitive edge and reduce costs. Most machines that are now in use are outdated with high cost of maintenance. They should be replaced with modern machines that have better product design features and its processes are faster. Computerization of processes and procedures should be implemented to save time and costs. The machine tools industry at Oshogbo which was designed to produce industrial machinery should be completed and made functional so that the economy will depend less on imported machinery and equipment. Also, local capacity building in the production of appropriate technology should be encouraged through continuous on the job training, enhanced research and development efforts and the promotion of technological education in the school system.
  3. Government should ensure the provision of infrastructural facilities such as good road, steady power supply and health services.
  4. Interest rate must be allowed to function through market mechanism to ensure that interest rate is determined by the demand for loanable fund and the supply of these loanable funds.
  5. Saving should be encouraged by establishing more deposit money banks in the rural area which would facilitate financial inclusion and also ensure effective and efficient mobilization of rural saving for manufacturing sector’s development.
  6. Increasing Investments: An effective investment facilitates growth and productivity. Capital investments are important for acquiring modern machinery and equipment and appropriate technology; as well as improve the quality of the labor force and the environment. This will require a lot of funds which is difficult to source from the banking system. Much needs to be done to solve the problem of capital finance. Currently, the Bankers Committee is working on a proposal which will require banks to set aside 10 per cent of their yearly profits for equity investments in small scale industries. This will be complemented with increased bank funding if the government can set up a credit guarantee scheme which will share in the risk of lending to the manufacturing sub-sector. Promotion of the use of the capital market for long-term financing is also necessary.

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