INTRODUCTION - BACKGROUND TO THE STUDY
Commercial banks’ participation in
the financial sector of developing countries raises many questions, which
remain unanswered. Key among them is the issue of whether banks shy away from
giving credit to small business or small investors.
Commercial bank credit and
industrial sector growth link is not a recent discovery. It debate has a long
pedigree and is marked with conflicting conclusions. The difference in
conclusions is due not only to difference in theoretical perspectives, but also
to the way in which the link between them is taken into account by researchers.
Although most research works favour positive effect of bank credits on
industrial sector growth, the reverse seems to be the case in some developing
countries especially Nigeria where most observers believe that banking
consolidation has not reflected any positive effect on
Nigerian industrial
sector.
However, in Nigeria, the role of
commercial bank credit in the development of the Nigerian industrial sector has
not been fully addressed and the impact has not been fully felt. For instance,
manufacturing sub-sector in Nigeria has been experience a stunted growth and
its contribution to gross domestic product has remained low. For instance, the
manufacturing sub-sector as a whole remains small, accounting for only 6.6 per
cent of GDP in 2000 and 12 percent of employment (World Bank, 2002). The CBN
statistical Bulletin (1990 as a base year) also indicated that while
agriculture and services experienced modest growth from 10.35 to 136.6 and
297.0 between 1991 and 1999 respectively. Manufacturing sub-sector recorded a
decline from 109.4 to 92.3 in the same period. It is also sad to mention that
capacity utilization in the manufacturing sub-sector declined from about 70.1%
in 1980 to just 44.3 percent in 2002 (CBN, 2001).
Commercial banks in Nigeria are
highly liquid but they believe that giving credit to the manufacturing
sub-sector is very risky and increasing credit to the manufacturing sector is
not justified terms of risk and cost (Olorunsola, 2001). The business
environment, in general is very risky and uncertain, so firms may not be able
to service debt. The judicial system is reportedly inefficient and banks cannot
easily enforce contracts.
Consequently, banks charge high
interest rates, demand high levels of collateral and make few loans of more
than a year term. In addition to the above, high interest rate in the Nigerian
financial system is a reflection of the extremely poor infrastructural facilities
and inefficient institutional framework necessary to bring about substantial
reduction in the risk associated with financing an extremely traumatized
economy (World Bank, 2002).
Over the years, one of the most
recurring problems that Nigerian governments have had to contend with remains
the issue of adulterated and substandard goods imported mainly from South-East
Asia.
The problem had continued unabated
because Nigeria as a nation failed to make its real sector function efficiently
and to compete with imported products. Several captains of industry have drawn
the attention of the government to the perennial funding and infrastructural
constraints of the sector as one that calls for urgent attention from all
stakeholders. It was in the light of this that CGN has set out to pursue the
policy of establishing an African Finance Corporation. According to the
Governor of the Bank (2007), the focus of AFC would include funding of private
sector-led projects and development of infrastructure across Africa. The
rationale was informed by the need to harness the potentials created by the
massive funding gaps for the key economic sectors in Africa and the development
of an infrastructure base, which would mobilize and distribute the required
capital to drive development on the continent. Commenting on the dearth of
funds for the manufacturing sector, chairman of Flour Mills of Nigeria plc,
Coumantros (2002) said manufacturing industries are supposed to derive
substantial gains from the banks in terms of interest rate on their loans,
which mains high. His words: “The liquidity situation in the Nigeria economy
has vastly improved, thanks to the reform and consolidation of the banking
industry. Banks now have more funds at their disposal to lend to the real sector
(Okoroanyanwu et al, 2007). However, the industry is yet to derive any
substantial benefits in terms of interest rate, which remains high”
(Okoroanyanwu et al (2007).
A casual study of the credit profile
of Nigerian banks in the last couple of years reveal that a high percentage of
the credit advanced to manufactures end up as bad loans from the first day of
the contract (Okoroanyanwu et al (2007), while the Nigerian business community,
including entrepreneurs in the manufacturing sector, have looked up to the
banking sector to provide the financing needed to meet the challenges of
manufacturers, banks in their typical ways tended towards being cautions,
coming to the conclusion that it is not just a matter of credit, when several
factors have made operation in the real sector more of a suicide mission for
entrepreneur. The aim of this study is to obtain a comprehensive view of the
behaviour of financial sector credit and correlate it with the growth of the
industrial sector in Nigeria.