NIGERIA JOURNAL OF ECONOMICS, VOL.4, NO.1
DEPARTMENT OF
ECONOMICS UNIVERSITY OF ABUJA
ABSTRACT
This
paper set out to assess the impact of banks’ credit on economic growth in
Nigeria using deposit money banks as a case study. It specifically sought to
find out total domestic credit of deposit money banks injected into the
Nigerian economy and their impact on the country’s economic growth as proxied
by Gross Domestic Product. Data were collected from secondary sources. The
ordinary least square econometric technique was used to analyze the data. The
apriori expectation is that bank credit to domestic economy should have a
significant positive impact on the growth of GDP.
Our findings revealed that
the marginal productivity coefficient of bank credit to the domestic economy is
positive but insignificant. The implication is that banks credit did not affect
the productive sectors sufficiently for the latter to impact significantly on
the Nigerian economy. In view of this, the paper recommended that banks should
be willing to give both short and long-term loans for productive purposes, as
this will eventually lead to economic growth. And also that the regulatory
(CBN) should adopt a direct credit control that will be beneficial to the
productive sector of the economy eg agriculture and manufacturing sectors.
1.1 INTRODUCTION
Finance is required for different
purposes by different people, organizations, and other economic agents. To
provide the needed finance, there are varieties of institutions rendering
financial services. Such institutions are called financial institutions. Banks
are among such institutions that render financial services. They are mainly
involved in financial intermediation, which involves channeling funds from the
surplus unit to the deficit unit of the economy, thus transforming bank
deposits into loans or credits. The role of credit in economic development has
been recognized as credits are obtained by various economic agents to enable
them meet operating expenses. For instance, business firms obtain credit to buy
machinery and equipment. Farmers obtain credit to purchase seeds, fertilizers,
erect various kinds of farm buildings. Governmental bodies obtain credits to
meet various kinds of recurrent and capital expenditures.
Furthermore,
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 economics of scale. It can also be
used to improve informal activity and increase its efficiency. This is
achievable through resource substitution, which is facilitated by the
availability of credit. While highlighting the role of credit, Ademu (2006),
further, explained that credit can be used to prevent an economic activity from
total collapse in the event of natural disaster, such as flood, drought,
disease, or fire. Credit can be garnered to revive such an economic activity
that suffered the set back.
The banking sector helps to make
these credits available by mobilizing surplus funds from savers who have no
immediate needs of such funds and thus channel 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. 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, (McKinnon, 1980 as cited by Adeniyi, 2006). The debate on the
intermediary role of banks in the economic development has dominated many
discussions in literature. However, there seem to be a general consensus that
the role of intermediary role of banks helps in boosting economic development.
Akintola (2004) identified banks’ traditional roles to include financing of
agriculture, manufacturing and syndicating of credit to productive sectors of
the economy. Credit of banks to the Nigerian economy has been increasing over
the years. According to Central Bank of Nigeria Annual Report (2007), credit to
the core private sector by the Deposit Money Banks grew by 98.7%. Outstanding
credit to agriculture, solid minerals, exports and manufacturing in 2007 stood
at 3.1, 10.2, 1.4 and 10.1 per cent, respectively. Credit flows to the core
private sector in 2007 amounted to N2,289.2billion.
Adekanye (1986) observed
that in making credit available, banks are rendering a great social service,
because through their actions, production is increased, capital investment are
expanded and a higher standard of living is realized. Against this background
and given the intermediary role of banks in economic development, this paper
examines the extent to which bank credit has impacted on the economic growth of
Nigeria. To achieve this objective, the paper has been structured into five
sections. Following the introduction, which is the first section, is section
two, which contains the conceptual framework. Section three examines
theoretical framework. Section four provides analysis on the impact of bank
credit on the growth in the Nigerian economy. Conclusion is drawn and
recommendations proffered in section five.