CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The economy requires credit for different purposes; one main purpose is to promote economic activities (Ndubuisi M. Nwaru and Okorontah, 2014). Credit fuels economic activities by allowing businesses to advance beyond their cash on hand, households to purchase homes without saving the entire cost in advance, and governments to smooth out their spending by mitigating the cyclical pattern of tax revenues and to invest in infrastructure projects. In the modern times, the banking system developed with the developing sector of trade and commerce. Today, there are different types of banks for different purposes. At every turn, the role of bank lending in economic growth has been mired in controversy.

A typical capitalist or mixed economy is made up of surplus and deficit units. In performing their primary function of intermediation, banks collect deposit from the surplus unit of the economy and lend it out to the deficit unit in form of loans and advances (Kalu, 2009). The role of the financial system in mobilizing and channeling of funds to the real sectors of the economy cannot be taken for granted. Sound financial system is recognized as a necessary and sufficient condition for rapid growth and development for every modern economy (Sanusi, 2012). The financial system consists of institutions like banks, insurance, stock market, and other financial institutions.

In Nigeria, the banking sector is an important part of the financial system. The banking sector dominates the Nigerian financial system as it accounts for about 90 % of the total assets in the system and about 65 % of market capitalization of the Nigeria Stock Exchange (Soludo, 2009a). However, the banking sector has not contributed significantly to the growth and development of Nigerian economy as expected. The poor performance of the sector has been attributed to numerous problems that faced the sector such as inadequate capital, high nonperforming assets which had led to frequent distress in the sector and collapse of some banks in the past (Sanusi, 2012).

If banks cannot grant loans to the deficit economic units within their immediate operational environment, the business sector will not grow, deposits will be limited and this will hinder the ability of banks to generate income (Galac, 2001: Honohan, 1997). For most banks, loanable funds account for about fifty percent or even more of their total assets and about half to two-thirds of their revenue (Udoka and Effiong, 2006). This made lending the first and most important function of banks. The function is considered important due to number of reasons. First, the general public or customers use lending in assessing banks stability. Banks that are willing and able to give out loans are considered more stable than those that mostly reject loans proposals of their customers.

Second, lending is regarded as part of legal requirement by the monetary authority, which may stipulate certain percentage of bank lending to some sectors like agriculture, small scale industries etc. Third, lending is use as tool in implementation of the monetary policies of government, which affects money supply and demand in the economy. Fourth, lending affects pattern of production, level of entrepreneurship and consequently, aggregate output and productivity. The last and the most important reason why the lending function of banks is crucial and important in every economy is that it is generally accepted that there is positive relationship between bank credit and economic growth (Oluitan, 2009) Economic growth entails positive change in the national income or the level of production of goods and services by a country over a certain period of time (Oluitan, 2009). Economic growth is measured in terms of the level of production within the economy, factor productivity, technological change, physical capital accumulation and real Gross Domestic Product, (GDP) (Odedokun 1998; Allen & Ndikumama 1998; King and Levine 1993).

Bank credit is recognized to be a causal factor for economic growth all over. Based on this fact, this research study intends to examine the relationship between bank lending and economic growth in Nigeria.

1.2 Statement of the Problem

The link between bank lending and economic growth has important policy implications for development strategies. Especially in the field of increasing the rate of economic growth in spite of the limited role of banking sector to control the money supply and its effects on the economy.

      The poor performance of the sector has attributed to numerous problems that faced the sector such as inadequate capital, high nonperforming assets which have led to frequent distress in the sector and collapse of banks in the past.

The question if commercial bank lending incites growth in Nigeria is one that has not been previously addressed in a sufficient manner. It is well known that commercial bank lending in Nigeria is at an all time low and has not returned to the pre 1990s lending levels, (CBN 2012 statistics) making most Nigerian banks to be failing in their role of primary responsibility which is to lend to private sector businesses.

While most of the blame lies at the doorstep of commercial banks the Nigerian government also has a joint responsibility since it has failed to create enabling environment for productive commercial activities that have the capability to reduce the transaction cost associated with production making the business environment to be risky. A lot of macroeconomic variables are identified to be responsible for driving growth in the Nigeria economy among which is  the cost of access to capital. It is against this backdrop that this study is carried out to investigate the impact of banks lending on the Nigeria economic growth from 2005 to 2017.

1.3 Objective of the Study

The aim of this study is to investigate the impact of commercial bank lending on economic growth in Nigeria. Other specific objectives are:

1.       To investigate the effect of bank lending on economic growth in Nigeria.

2.       Investigate whether it is possible to use bank lending as the means of long-term economic growth.

1.4 Research Questions

The study will be guided by the understated research questions.

1.       What are the effects of bank lending on economic growth in Nigeria?

2.       It is possible to use bank lending as the means of long-term economic growth?

1.5 Research Hypothesis

Based on the above, the understated hypothesis is proposed for this study as follows;

          There seems to be no significant relationship between bank lending and economic growth in Nigeria.

1.6 Significance of the Study

This study will add to the stock of literature material in the department of banking finance that will be used for further research in other related areas.

It will also be of immense benefits to commercial banks in Nigeria, as it will afford them the opportunity of deciding on the line of products to market to avoid the issue of bank distress.

To the public and commercial bank customers it will give them sample knowledge on how to go about their borrowing.

1.7     Scope and Limitation of the Study

The research has to investigate the impact of commercial bank lending on economic growth in Nigeria. The study covers only commercial banks in Nigeria.

However, certain factor hinders the researcher form carrying out and in-depth research on the study. These factors are:

Fund: fund available is not enough to execute this work

Time: time expected to complete this work or study is too short, therefore different for completion.

1.8  Organization of the Study

This study is divided into five chapters; the first chapter provides the background of the study, statement, objectives, significance, scope and definition of terms. While chapter two contains the relevant literatures for the study.

Chapter three is concerned with the methodology employed in the study. Chapter four discuss about data presentation about analysis and finally chapter five talks about the summary, conclusion and recommendation in the study.

1.9 Definition of Terms

BANK: An organization to provide various financial services, for example keeping or lending money.

COMMERCIAL BANK: An institution which accepts deposits, makes business loans, and offers related services. Commercial banks also allow for a variety of deposit accounts, such as checking, savings and time deposit. These institutions are run to make a profit and owned by a group of individuals, yet some may be members of the Federal Reserve System.

ECONOMIC GROWTH: A positive change in the level of production of goods and services by a country over a certain period of time. Nominal growth is defined as economic growth including inflation, while real growth is nominal growth minus inflation.

IMPACT: A noticeable effect on something.

LENDING: The act of giving someone money under an agreement to pay it later.