The Impact Of Money Deposit Banks On The Economic Development Of Nigeria

Project and Seminar Material for Economics

The Impact Of Money Deposit Banks On The Economic Development Of Nigeria

Abstract

This study sets out to investigate the impact of deposit money banks on economic development in Nigeria. Using quarterly data on GDP as well as various deposit money banks development indicators, covering the period March 2005 to December 2016, the study employed the Auto-Regression Distributive Lag (ARDL) methodology in determining existence of the short-run and long-run relationships. Furthermore, the study employed the Granger causality test in determining the causal relationship between banking sector development and economic development. From the ARDL results, the study concluded that there is existence of a positive short-run relationship between banking sector development and GDP growth, channelled through net interest income and funding liabilities of banks. The causality test indicated a bi-directional causality between economic development and the banking sector development, entailing that development of the banking sector would enhance GDP growth and vice versa. The study thus concluded that, commercial banks development has an impact on economic development in Nigeria and recommends for reforms in the banking industry to ensure increased lending in order to support the economy.

Chapter One

Introduction

1.1 Background to the Study

Money deposit banks are resident depository corporations and quasi-corporations which have any liabilities in the form of deposits payable on demand, transferable by cheque or otherwise usable for making payments. The banking sector in Nigeria in 2010 financial year was oligopolistic in structure as only ten banks 11.1% of the 90 operation accounted for 54.5% of total assets, 52.4% of total deposit liabilities and 46.1% of total deposit liabilities of deposit money bank as at 31/12/2006 amounted to #2,705 billion. Whilst aggregate credit to the domestic economy amounted to #1,302.2 billion. In 2006, sectoral allocation of deposit money banks credit continued to favour the less productive sector of the economy as only 40.9% of the total credit went to agriculture, solid minerals, exports and manufacturing down from 46.2% in 2001. In the year 2007, the general performance of banks was not significantly different from what happened in the previous year.

Economic growth has been a major objective of successive governments in Nigeria. In performing the financial intermediation role, it has been argued that by virtue of this function that banks generate economic growth by providing needed resources for real investment (Shaw, 1973; Mckinnon, 1973). Economic growth is one of the important factors that improve living standards in developing countries. It is an indispensable requirement for economic development among other factors. It is believed that the main factors affecting economic growth are labour, capital and exogenously determined technology. Subsequently the new growth theories try to incorporate technology and human capital as endogenous factors.

The role of finance in terms of money deposit bank was well acknowledged by researchers. The function of these banks as financial intermediation involves channeling funds from the surplus unit to the deficit unit of the economy, thus transforming deposits into loans or credits. The role of money deposit bank in economic development has been recognized as credits are obtained by the various economic agents to enable them meet investment operating expenses. For instance, business firms obtain credit to buy machinery and equipment, farmers obtain credit to purchase machines such as tractors, seeds, fertilizers, and erect various kinds of farm buildings. Government bodies obtain credits to meet various kinds of recurrent and capital expenditures. Individuals and families also take credit to buy and pay for goods and services (Adeniyi, 2006).

According to Ademu (2006), the provision of credit with sufficient consideration for the sector’s volume and price system is a way to generate self employment opportunities. This is because credit helps to create and maintain a reasonable business size as it is used to establish and/or expand the business to take advantage of economy of scale. It can also be used to improve informal activity and increase its efficiency. While highlighting the role of credit, Ademu (2006), further explained that credit can be used to prevent economic activity from total collapse in the event of natural disasters such as flood, draught, disease or fire. The banking sector helps to make these credits available by mobilizing surplus funds from savers who have no immediate needs for such funds and thus channels such funds in form of credit to investors who have brilliant ideas on how to create additional wealth in the economy but lack the necessary capital to execute the ideas.

1.2 Statement of the Problem

It is instructive to note that the banking sector has stood out in the financial sector as of prime importance because in many developing countries of the world the sector is virtually the only financial means of attracting private savings on a large scale. According to Adekanye (1986) in making credit available, money deposit banks are rendering a great social service because through their activities, production is increased, capital investment are expanded and a higher standard of living is realized. However, in Nigeria as in many other developing countries, the ratio of bank credit to the private sector to GDP has not increased significantly. This has made it necessary to examine the impact of money deposit banks on the economic development of Nigeria.

1.3 Objectives of the Study

The following are the objectives of this study:

  1. To examine the activities of the money deposit banks.
  2. To examine the impacts of money deposit banks on the economic development of Nigeria.
  3. To examine the relationship between money deposit banks and economic development of Nigeria.

1.4 Research Questions

  1. What are the activities of the money deposit banks?
  2. What are the impacts of money deposit banks on the economic development of Nigeria?
  3. What is the relationship between money deposit banks and economic development of Nigeria?

1.5 Hypothesis

  • HO: There is no significant relationship between money deposit banks and economic development of Nigeria.
  • HA: There is significant relationship between money deposit banks and economic development of Nigeria.

1.6 Significance of the Study

The following are the significance of this study:

The result of this study will educate the general public on the relationship between money deposit banks and economic development of Nigeria.

This research will be a contribution to the body of literature in the area of the effect of personality trait on student’s academic performance, thereby constituting the empirical literature for future research in the subject area.

1.7 Scope / Limitations of the Study

This study will cover the impacts of money deposit banks on the economic development of 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

Chapter Five

Recommendation and Conclusion

5.1 Research Conclusion

This study set out to establish the impact that deposit money Bank’s has on economic development in Nigeria. The study employed the quantitative methodology of ARDL in order to establish the long-run and the short-run relationship between GDP growth and banking sector development as well as the Granger causality test in determining the direction of causality. To this effect, the study used quarterly GDP growth rate and quarterly data on banks various development indicators such as total credit extended by banks to the private sector, aggregate funding liabilities, covering the period of 2005:1 to 2016:4. Prior to the regression analysis being conducted, the data was tested for unit root using the ADF and PP unit root test to ensure that it was stationary and could yield reliable results.

In the context of Nigeria, this study is the second of its kind and follows a study conducted by Sunde (2013) who investigated the nature of the nexus between financial sector development and economic development in Nigeria. While covering different periods and employing different variables and to a certain extend different methodologies, the findings of the studies are in line with the findings of Sunde (2013). In this regard, the study concluded that there is existence of a positive short-run relationship between banking sector development and economic development. The positive short run relationship is exerted through funding liabilities and net interest income and entails that only the size and depth of the banking sector as well as the efficiency of the sector have an impact on economic development. On the contrary, the stability of the banking sector was found not to have any influence on the growth of the economy.

Furthermore, the study concluded from the granger causality test that the relationship between economic development and banking sector development in Nigeria is bi-directional, entailing that economic development will advance the banking sector development while at the same time development of the banking sector will promote the growth of the economy, albeit through different variables. As such, a unidirectional causality was established between GDP and funding liabilities of banks as well as between GDP and liquid assets held by banks, with causality running from GDP to banking sector development, while credit extended by banks to the private sector and net interest income of banks caused the growth of the economy.

In light of the above, the study concludes that both the null hypothesis 1 of no relationship between commercial banks development and economic development and the null hypothesis 2 of no causal relationship between commercial banks development and economic development can be rejected. As such, the conclusion of the study is in support of the findings of prior empirical studies conducted on the subject matter by, among others, Sunde (2013), Aurengzeb (2012), Apergis, Fillipidis and Economidou (2007) and supports the endogenous growth model and financial repression hypothesis theories that acknowledge the role of financial institutions in driving economic development.

5.2 Policy Implications

In light of the study conclusions, the government of Nigeria, the CBN as the regulator of the commercial banks in Nigeria has a number of factors to consider in order to further drive economic development in the country. Firstly, in light of the study establishing a link between banking sector development and economic development, driven by the bank’s interest income and funding liabilities, Nigerian banks should consider increasing the absolute amounts of loans and advances to the real sector in order to foster economic development. This can be achieved either through the central bank authorizing additional participants in the banking sector or through existing banks embarking on a campaign to secure more funding liabilities, such as deposits and borrowings, to enable them to extend more credit to the economy.

Secondly, considering an insignificant relationship between liquid assets held by commercial banks and economic development, banks should not be required to hold too much assets in liquid assets as these assets are normally short term and not ideal for financing long term developmental projects. While the minimum liquid assets requirement set by the central bank at 10 percent liquid assets to total liabilities to the public, as per CBN (2014), is not too stringent, commercial banks tend to keep a buffer above this requirement to ensure that they have enough liquidity to meet their funding obligations as they fall due. In this regard, the central bank should be careful against setting the liquid assets requirements too stringent going forward, especially in light of the more stringent liquidity requirements coming from Basel 3.

As such, requiring banks to hold higher liquid assets would mean that they would need to reduce their total loans and advances to the economy which are more ideal for financing economic development as these are granted on a longer term as opposed to investments in liquid assets.

Thirdly, commercial banks should be incentivised to provide funding to sectors that can contribute to the growth of the economy as opposed to providing finance for unproductive activities. In this regard, commercial banks should increase funding to the SME sector since banks tend to be more risk averse and have put in place stringent requirements that most SMEs do not meet, such as collateral, high annual turnover, audited financial statements etc. Furthermore, given that the FinScope Consumer Survey Nigeria, (2012) reported that 38 percent of the Nigerian bankable population is reported to be excluded from the banking system as in 2012, with no access to banking products and services, commercial banks should aim to provide banking products services to those in remote areas. This could be achieved through expanding their branches or setting up mobile banks in remote areas, while their models should also be suitable to enable people excluded from the financial system to access banking products and services in order to contribute to the growth of the rural economies and eventually of the general economy.

5.3 Recommendations for Future Research

Given limited research conducted on the subject matter in Nigeria, this study creates opportunities for further research extension on the subject. In this regard, future researchers can consider extending this research in various ways as outlined below:

  1. Considering that CBN might adopt Basel 3 regulatory requirements in the near future, future researches can be based on the impact that complying with Basel 3 capital and liquidity requirements will have on the banking sector’s ability to support economic development.
  2. This research could further be extended to investigate the role that commercial banks in Nigeria have played with regard to financial inclusion since the country’s independence in 1990, in order to recommend reforms that the government should implement to ensure access to financial services and products to the unbanked and promote an inclusive economic development.
  3. Future researchers may also focus on investigating the efficiency of the Nigerian banking sector given the fact that there are only few banks in the industry, with the big four usually accused of uncompetitive practices to keep the smaller ones out of the market.
  4. The commercial banks’ corporate social responsibilities and the impact it has on the communities can also be investigated, given that banks are said to be the most profitable institutions in Nigeria yet with minimal social impact on communities.

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