On
the empirical side, there has been quit extensive work in industrialized
economies on the relationship between bank credit, investment and industrial
sector development. Most empirical research in this area focuses on the banking
sector for reasons of data availability. Country specific studies reveal strong
evidence of dynamic interactions between industrial sector development and bank
credit in Hong Kong, Gerlach and Peng (2002).
Gerlach
and Pench, for example, found both short term and long-term causality running
from general prices and interest rates to credit but not the opposite. They
also highlighted the effect of regulatory changes on credit expansion. Sanchez,
Clarke, Cull and Peria (2002), using bank level data for Argentina, Chile, Colombia, and Peru over the
mid 1990s, examined the impact of foreign bank entry on the share and growth
rate of credit to small firms. Consistent with evidence from the US they found
that medium and large domestic banks in the four countries devote less of their
credit (as share of total credit) to small firms than small domestic banks.
Also, in most countries, the share of credit devoted to small firms by domestic
banks was dropping in the late 1990s evidenced by the negative and significant
trend in the share estimations.
Contrary
to popular belief, public banks do not appear to surpass private banks in the
extent to which they give credit to small firms. This would seem to indicate
that the argument that privatization of public banks would hurt small firms is
at best weak. Regarding the impact of foreign bank entry on credit to small
firms they found, consistent with conventional wisdom, that on average, foreign
banks in he four countries generally gave credit less to small firms (as share
of total credit) than private domestic banks (at least by end of period).
However, the difference appears to be primarily due to the behaviour of small
foreign banks. In all four cases, small foreign banks gave credit, considerably
less to small firms than small domestic banks. In contrast, the difference was
considerably smaller for large and medium sized banks. In fact, after
controlling for other factors that might affect credit, large foreign banks
actually appear to give more credit to small firms (as share of total credit)
than large domestic banks in two of the four cases study countries, Chile and Colombia.
Finally, in Argentina
and Chile,
the two cases were the ratio of banking sector assets to GDP consistently grew
over the sample period, credit to small firms by medium and large foreign banks
was positive and was growing more quickly than for similar domestic banks.
But
Strahan and Welson (1998) found no significant change in the ration of small
firms credit to assets following large merger and acquisitions. There is
however, very little literature that deals directly with the implications of
bank credit to investors and small-medium sized firms in developing countries. Argentina is
the only country for which we found such studies.
Belger
and Rozenwureel (2000), indicate that bank participation in Argentina is
associated with a reduction of bank credit to medium sized firms from around 20
to 16 percent of total credit between 1996 and 1998.
In
contrast, Escude et al, (2001), found that despite their lower tendency to give
credit to small and medium sized firms, banks have increased both their
propensity and their market share of giving credit to the sector between 1998
and 2000.
Using
a rich data set on Argentinean business sector in December, 1998, Berger,
Klapper, and Udell (2000), find that large banks and foreign owned banks are
less inclined to extend credit to smaller firms which are likely to be
informational opaque. Given the paucity of research on the impact of bank
credit on industrial sector or access to credit and the importance of this
issue from a policy stand point, further investigation is clearly warranted. In
contrast, credit by small foreign banks was shrinking and was growing far more
slowly than for similar domestic banks.
Quigley
(1999) showed that the history of business activities and products/services
prices play an important role in their determination and not merely
fundamentals. He also suggested that moral hazard and over credit drive prices
of goods and services as well as property price bubbles, for example in East
Asia in the 1990s.
Hofman
(2001) looked into a panel of 16 countries and found evidence that bank credit
and house prices have a significant two-way interaction in the short run but
that long run causality is from property prices to bank credit.
Goodhart
(1995) investigated the role of house prices in determining credit growth in
the United Kingdom
and the United State. He found that changes in house
prices significantly affected credit growth in the United Kingdom but not in the United State.
There are also a few studies based on asset prices that include a mix of
residential and commercial property prices (generally with a much higher weight
of residential property).
Goodhard
(1995) explained credit conditions with asset prices while Borie et al (1994)
explained asset prices with credit conditions (debt/GDP ratio), and both found
significant result. Hofman (2001) included a mixture of residential and
commercial poetry prices in a vector error correction model (VECM) structure
and again finds a strong dynamic interdependence between bank credit and
property prices with the later being the causal element. He also found that
fluctuations in bank credit and property prices are jointly determined by
changes in real short-term interest rates. He notes that a difficulty with most
macro level work including his own is to distinguish between credit demand and
credit supply effects of real estate prices, both of which may be operative.
Work
by Higgins and Osler (1997) and Helbling and Terrones (2003), found that house
price busts cause reductions in output, especially in bank-based financial
systems.
Furthermore,
Choi and Smith (2002) extended existing real option theories by incorporating
the stochastic interaction between unit price and cost, applied in commercial
bank credit. They further empirically examined an implication derived from the
model as to the relationship between credit practices in the banking industry
and future uncertainties. They focused
on credit institutions to analyse the effect of uncertainties on credit (investment)
decision for several reasons. For it is easy to identify the main source of
uncertainties for the assets and liabilities of the financial
institutions-default risk and interest rate changes. Second, the commercial
credit institution provides a unique environment in which the correlation
between investments cost (Liabilities) and output (loans) prices is quite high
and positive since both depend heavily on interest rates. In all, bank credit
may be subject to a high degree of irreversibility (e.g substantial loss in
defaults). The real option model explains the relationship between levels of
credit, loans-to-assets, and the uncertainties regarding interest income and
expense cross-sectional credit activities, which confirms the importance of
risk management. These results also showed that as banks increase one type of
risk, e.g. interest rate risk. The risk as measured by loans/assets.
Olubiyo,
S.O. and Hill G.P (2003), examined the changes in bank credit to the farm
sector before and since the inception of the subsidized credit insurance in Nigeria, the
study also identified the pattern of bank credit to different agricultural
sub-sectors. The findings from the study suggested that there is the need for
the government to review its policy of underwriting loans as an instrument to
encourage increased bank credit to small-scale farmers. Evidence from the
United States indicates that large and organizationally complex institutions
find it difficult to give credit to information opaque small and medium sized
enterprise (Berger and Udell (1995), Berger et al (1995); Keeton (1995),
Levonian and Soller (1995), Berger and Udell (1996), Peek and Rosengren (1996),
and Strahan and Weston (1996). These organizational diseconomies might explain
why a number of studies have found that commercial banks, which as shown by
Focarelli and Poozolo are typically large appear to allocate greater shares of
their credit to activities and sectors dominated by big investors or large
firms (Goldberg, 1992; Cho et al, 1987; and Clarke et al, 2000).
Esterly, (2005) found that repeated
structural adjustment credit from either the World Bank or the IMF failed to
produce improvement on multiple macroeconomic outcomes including industrial
growth.
The study of Babatz and Conesa, (1997) used
macro economic data to analyze the importance of financial factors on capital
formation, they examined whether the privatization of banks 1991 has a
significant effect on how different types of firms finance investment. They
used data for 71 stock listed companies over the period 1994. By selecting a
prior those firms, which were 24 more likely, to be financially constrained to
use internal sources of financing. They found that larger firms experienced
significant relaxation in their financial constraints.
Rene (2000), in his paper examined how
a country’ financial structure affects economic growth through its impact on
how corporation raise funds. The paper defined country’s financial structure to
consist of the institution, financial technology, and rules of the game tat
define activity as organized at a point in time. It emphasized that the aspects
of financial structure that encourage entrepreneurship are not the same as
those that insure the efficiency of established firms. Financial structures that
permit the development of specialized capital by financial intermediaries are
crucial for economic growth.
Fancisco, et al., (2008) analyzed the
changes in both the access to financial markets and the financing (balance
sheet) decisions in a sample of Chilean firms. The sample consists of 79 firms
that are quoted in the stock market. The paper estimated and tested
econometrically by OLS and GMM approached three issues. The first is whether
the firms’ reliance on internal funds for investment has decreased in the more
financially open period of the 1990s relative to the 1980s and, thus, whether
investment has been more responsive to changes in the q-value of the firm. They
examined whether financial liberalization and the development of the banking,
stock and bond markets at the maturity of debt in the balance sheet of firms.
They studied the extent to which firms specify and how aggregate financial
market developments have impact on firm growth. They concluded that financial
developments at the macro level indeed had an impact on the firm access to
capital markets their financial structure and their rate of growth.
Gelos and Werner, (1999) used
plant-level data from the Mexican manufacturing sector, they find that cash
flow is significantly correlated with investment before and after financial
liberalization contributed to easing financing liberalization contributed to
easing financing constraints for small firms and therefore to higher investment
levels by increasing the availability of credit to these types of firms. They
also found that collateral, in the firm of real estate, played an important
role in determining investment especially after 1989.
Lan, Jack, and Ananth (2000) examined
the dynamics of external corporate financing choices in an international
context. It analyzes jointly the reliance on domestic versus foreign financing
and debt versus equity financing using panel-data on 30 countries from
1980-1997. The results shed light on current debates regarding the choice of
debt and equity financing choices. In particular, privatization activity is
initially followed by foreign equity issuance, but eventually lead to a higher
level of domestic bond issues. Further, they found that macroeconomics
stability is highly correlated with the choice of financing.
Amalaha et al., (2007) examined the
macroeconomic determinants of bank intermediation and explored its contribution
to the growth of the Nigerian economy using secondary sourced time series data
spanning from 1970 to 2004. The time series study based on the distributed lag
method of co-integration (DL-ECM) and regression analysis found firm and
colossal evidences suggesting that selected financial determinants as well as
macroeconomic variables has indeed contributed to bank intermediation and economic
growth. The study drew the conclusion that better bank intermediation has a
distinct significant positive impact on economic growth. Demirguekunt and
Maksimovic, (2000) investigated whether firms’ access to external financing to
fund growth differs in market based and bank based financial systems. Using
firm level data for forty countries, they computed the proportion of firms in
each country, which rely on external finance and examine how that proportion
differs across financial systems. They found that the use of external financing
by firms is positively related to the development of both the predicted banking
system and the securities markets in each country. However, in the sample they
did not find evidence that variations in the development of the financial
system that are unrelated to the legal system affect access to external
finance. In particularly, they found no evidence that firms use external
financing differently if they are in countries classified as bank based or
market based, on the basis of the development of their banking sector relative
to their securities markets. They also found that securities market and bank
development have a different effect on the type of external finance firms
obtain, particularly at relative low levels of financial development. In those
countries where the legal contracting environment predicts a high level of
development for securities markets, more firms grow at rates requiring long
term external finance. They did not find the same effect for predicted bank development,
differences in contracting environments that affect the relative development of
the stock market and the banking system may have implications for which firms
and which projects obtain financing.
In contrast to the extensive work on bank credit
per se, and despite its importance in industrial sector and the extent of
theoretical work, no major academic research project has yet looked at links to
commercial bank credit and the industrial sector on a systematic, empirical,
country specific basis. Also, different cases studies and methodologies tend to
produce different results. Most of the studies used cross sectional data on
countries that may be diverse, raising the possibility that the empirical
findings could be distorted by heterogeneity biases affecting both bank credit
and industrial development. In Nigeria
particularly, no study has gone further to analyze the impact of bank credit on
industrial sector development, specifically for the periods under review. This
research will fill the gap that has been over looked by the literature on
country specific basis. Hence, the fact that there are no unlimited empirical
evidences on the subject in Nigeria
is an important motivation for this very work at the moment.