The Role Of Commercial Banks To The Industrial Development Sector In Nigeria

Project and Seminar Material for Economics

The Role Of Commercial Banks To The Industrial Development Sector In Nigeria


It could be affirmative said that the index for measuring any growing economy’s technological advancement is the extent to which its industries both the large and small scale has been growing over time.

It’s a fact that none of these industries can grow without the required financial assistance from financial institution.

Industrialist had in recent times subscribed to discriminate behavior of the Nigeria commercial banks towards granting of finance as one of the reasons that militate against the growth of industries in Nigeria.

Chapter One


1.1 Background of the Study

The practice of banking and financing in Nigeria is culturally rooted and dates back several centuries ago. In the 1940s, the traditional financial institutions provide access to credit for rural and urban low- income earners. They are mainly of the Informal Self Help Groups (SHGS) or Rotating Savings and Credit Associations (ROSCAs) types. The informal financial institutions generally have limited outreach due primarily to paucity of loanable funds. In order to enhance the flow of financial services to Nigerians, government has in the past, initiated a series of publicly financed micro credit programmes and policies targeted at productivity enhancement.

Notable among such programmes were the Rural Banking Programme, Sectoral Allocation of Credits, the Agricultural credit Guarantee Scheme (ACGS) etc. Other institutional arrangement were the establishment of the Nigerian Agricultural and co-operative Bank limited (NACB), the National Directorate of Employment (NDE), the People Bank of Nigeria (PBN), the Community Banks (CBs) and the family Economic Advancement Programme (FEAP) all aimed at improving the economic growth of the nation.

Year 2005 was remarkable in the history of Nigerian Banking Industry. The consolidation exercise Initiated by the Central Bank of Nigeria (CBN) on July 2004 came to head on December 31, 2003 with 14 banks unable to meet the #25 billion recapitalization requirement. The apex bank revoked the licenses of the 14 banks. Meanwhile, the 25 banks that successfully met the #25 billion minimum capital requirements represent 93.5% of the total deposits of the 89 banks that existed in country reconsolidation. In the process, about #406 billion was raised from the capital market while an inflow of 652 million was generated from outside the economy.

In order to lower industry cost of funds, the Cash Reserve Ratio (CRR) was reduced by 6% points from 11% to 5% with the difference expected to be invested by banks in special Central Bank of Nigeria (CBN) instrument with a tenure of 91days at 3% coupon rate. Furthermore, a 1- year treasury bill was introduced on July 1, 2005 with a view to restructuring the deposit profile of the federal Government. Similarly, in order to reduce inequality pressure, reverse inflationary trend and encourage long tenured investment, the 182 days non. Discountable bill was introduced.

Commercial Banks are involved in the process of increasing the wealth of the economy, particularly the capital goods needed for raising productivity. In developing countries like Nigeria, income is very low and that as such low level investment can be made, if possible without requiring a long period effort at saving. Financial intermediaries have a vital role to play here, in raising both the savings and investment to the level necessary to achieve a self sustained growth.

In manpower development, Banks contribute highly in training staff and development through both local and foreign facilitation. In order to strengthen our work force and take advantage of emerging market opportunities, Banks also recruit various professionals with broad industry knowledge and hands- on experience.

In financing the economy, the bank has aligned its financial intervention in the economy with a clear understanding of high impact character of government’s privatization and deregulation program. The search made for the most efficient and effective domestic lending portfolio has meant that commercial Banks have led the financing of private investment in industrial development in the economy.

The financial institutions are therefore capable of influencing the major savings factors namely; ability, willingness or saving propensities and opportunities. The need to achieve sustained industrial growth within any economy can be possible amidst strong financial institution and precisely within the existence such that are tailored to work in accordance with government policies and program in a bid to attaining the desired macro-economic objectives of a nation. Banks as components of financial sector consist of the apex i.e Central Bank, Commercial Banks, Development Banks, Merchant Banks and Specialized banks.

1.2 Statement of the Problem

Evidently, an important avenue for banks to boost the growth of the industrial sector of the economy is through efficient and effective saving investment process which ought to stimulate investment and productive activities. For the past three decades, the Nigerian economy has not shown any favorable sign of growth. for example, the real G N P growth rate figures was 2.8% in 1995 with negative figures in year like 1982 with 0.3% etc (as depicted in the C B N periodic bulletin 1986)

From this background we are therefore poised to answer the burning questions like.

  1. In what extent does commercial bank as a financial intermediate contribute towards funds mobilization for industrial growth and development of the country.
  2. Is there any relationship between commercial banks financial industrial development growth in Nigeria
  3. What are the problems commercial banks encounter in their performance towards mobilization of fund for industrial development growth.

1.3 Objectives of the Study

The objective of this research work are stated as follows

  1. To determine the role of commercial banks towards a positive industrial growth and development.
  2. To identify and analyze the constraints and short comings facing commercial banks in Nigeria towards fund mobilization for industrial growth and development
  3. To examine ways in which the commercial banks in Nigeria can be made to play better roles towards fund mobilization for industrial growth and development.
  4. To determine and test the effect of some relevant economic variables and factors in the real gross domestic product (GDP) of Nigeria.

1.4 Statement of Hypothesis

The following hypothesis are tested on this study

Ho; Commercial banks have not played a significant role in the industrial growth in Nigeria

H1: Commercial banks have played a significant role in the industrial growth in Nigeria.

1.5 Significance of the Study

The usefulness of this study is that it will highlight to the nation as a whole on how best to manipulate commercial bank loans for financing in order to improve the state of industrial product in the country.

It will also give the government an overview of constraint of industrial financing and how best to manage commercial bank loan in order to yield output.

It will show commercial banks how to increase industrial financing for growth in the economy.

1.6 Research Questions

  1. Do commercial banks give loan for industrial financing?
  2. If so, to want extent has the industrial sector growth since the assistance started.
  3. Is there any relationship between commercial banks financing and the Nigeria industrial growth?

1.7 Scope of Study

This study is designed to find out the role of commercial banks towards financing industrial activities in Nigeria. Emphasis is on United Bank For Africa (U B A)

The study will cover the period 1980-2007.

Chapter Five

Summary, Conclusion and Policy Recommendation

5.1 Summary

This research work is an econometric study of the role of commercial bank to the industrial development research employed the ordinary least square regression methods.

The explanatory data employed to analyses the role of commercial bank to industrial development growth include interest rate, exchange rate and loan.

The regression result shows tat the estimate coefficient of interest rate is inversely related to industrial development growth in Nigeria. The coefficient of interest rate is inversely related to industrial development growth in Nigeria. The coefficient of interest rate was not statistically significant at 5 % level of significance. Interest rate, which is the cost of borrowing, are not usually attractive to industries because it is widely known that high interest rate discourage investment.

The regression result also shows the estimate coefficient of loan and exchange rate which has a positive relationship with industrial growth in Nigeria. The volume of loan granted to industries determines its growth and impact in the economic.

The student T-test result showed that both Exchange rate and loan are statistically significant at 5% level of significance. The coefficient attached to real interest rate was not statistical test of significance, the multiple determinations R2 reveals that only 82% variation in industrial development growth is determined by variations in the independent variable which, include real interest rate, Exchange rate and loan while 18% remain unexplained.
The F-test shows that the model is statistically significant at 5% level of significance.

5.2 Policy Recommendation

The banking sector especially the commercial banks is the force behind the total industrialization in any economy. Based on this fact, and revelation from the empirical analysis conducted on this sector in Nigeria, we make the following policy pronouncement.

  1. Commercial banks need to be strengthened to enable the sector to play its role of financial intermediary.
  2. The interest rate market. Must be closely monitored and all its bottlenecks removed. However, the monetary authorities must intervene in this market from time to time in order to prevent any possible wild swings of the interest rate.
  3. Government should seek to maintain stable exchange rate policy.
  4. A significant reduction in interest rate will at a stroke, bring relief to the real sector which will stimulate new investment activity.
  5. The deregulation of interest rate should be pursued to a logical conclusion. This is because the problem of high interest rate has actually frustrated the efforts of prospective investors from acquiring loan for investment which has in turn affected and has negative implications for industrial growth of the nation
  6. There should be moderation of sectoral credit limits, so that banks can give loan based on the rationality and viability of industrial projects.
  7. Policy makers, more especially, the apex which has the overall- fully power on financial and banking issues, should initiate conductive monetary and fiscal policies to boost the well being of industries.
  8. One of the major problems of the banks ability to finance industries is under-capitalization, this issue can be tackled by attracting public patronage in form of deposits, high share offers with the assistance of the stock and security market in order to expand the bank’s resources and capital for stable and efficient existence and also ability to finance industries.

5.3 Conclusion

Based on the above revelation in this study, we conclude that loans has a significant impact on industrial development role in Nigeria. Furthermore, the analysis reveals that real interest rate had a negative impact though not significant.

To achieve the level of industrial growth that is desired. The governments have to strive to regulate the interest rate through total liberalization or deregulation of interest in Nigeria.

With decreased rate of interest, more loans would be issued out for industrial development.

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