THE IMPACT OF BANK LOAN ON THE NIGERIAN INDUSTRIAL SECTOR DEVELOPMENT: AN EMPIRICAL ANALYSIS (1980 – 2006)
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THE IMPACT OF BANK
LOAN ON THE NIGERIAN INDUSTRIAL SECTOR DEVELOPMENT:
AN EMPIRICAL ANALYSIS
(1980 – 2006)
ABSTRACT
In this study, an
attempt was made to investigate and analyze the impact of bank credit (loan) to
the Nigeria industrial sector development.
This study involves
an appraisal of the extent to which banks have succeeded in enhancing the
growth and development and also the general performance of the Nigerian
industrial sector since 1980 – 2005, through their various lending portfolios.
The incipient stage
of Chapter one opens with an introduction through to the limitation of the
study.
Chapter two gave a detail
discussion in literature review, beginning with a brief history of the
industrial sector, conceptual issues and consequent economic related issues
such as the Nigerian industrial policies. This chapter also looked at
commercial banks and industries in Nigeria, and also the problems faced by
industries in obtaining credit facilities.
Chapter three
involves the theoretical framework, model specification and source of data
collected for analysis.
Chapter four is a
detailed empirical interpretation of ordinary least square (OLS) – regression
estimation results of collected data from Central Bank of Nigeria (CBN)
Statistical Bulletin.
Finally, in Chapter
five which combines the research’s summary of findings, recommendations and
then in conclusion that the banking sector credit (loan) has a positive impact
on industrial sector development in Nigeria.
Note that this study gave an insight on
the relationship between the development of the Nigeria industrial sector and
banking sector credit (loan).
TABLE OF CONTENTS
CHAPTER ONE
CHAPTER ONE: INTRODUCTION
1.1 Background
to Study
1.2 Statement
of the Research Problem
1.3 Objectives
of the Study
1.4 Scope
of Study
1.5 Significance
of the Study
1.6 Statement
of Hypothesis
1.7 Research
Methodology
1.8 Definition
of Keywords
CHAPTER TWO: LITERATURE REVIEW
2.1 Development
of Industries in Nigeria (Brief History)
2.2 Structures/Types
of Industries
2.3 Relevance
of Industries
2.4 Problems
Encountered by Industries
2.5 Commercialization
and Privatization of Industrial Concerns
2.6 Commercial
Banks and the Industrial Sector
CHAPTER
THREE: THEORETICAL FRAMEWORK AND MODEL SPECIFICATION
3.1 Theoretical
Framework
3.2 Model
Specification
3.3 Data
Requirements and Sources
3.4 Method
of Data Analysis
CHAPTER
FOUR: PRESENTATION AND INTERPRETATION OF REGRESSION RESULTS
4.1 Presentation
of Results
4.2 Interpretation
of Results
4.3 Policy
Implications
CHAPTER
FIVE: SUMMARY, RECOMMENDATION AND CONCLUSION
5.1 Summary
of Findings
5.2 Recommendation
5.3 Conclusion
BIBLIOGRAPHY
CHAPTER ONE
INTRODUCTION
1.9 BACKGROUND
TO STUDY
Recently, most
industries in the country (Nigeria) have been existing in the form of small
industries (cottage industries) i.e. household limits carrying out industrial
activities in the traditional methods without paid employment. It is to this
end (that small and medium industries are the cornerstone of any nation’s
industrial and
economic well-being) that successive
government came with policies encouraging the development and growth of
industries. The small and medium scale industries were not accorded significant
importance in Nigeria until 1975 when the government realize that its
industrialization strategy of import substitution only resulted in the setting
up of large industries. It was not until the third national development plan of
1975 to 1980 that the programmes for the small and medium scale industries were
explicitly spelled out; “The creation of employment opportunities, mitigation
of rural-urban migration, mobilization of local resources, and a more even
distribution of industrial enterprises in different parts of the country”.
Despite all efforts
by the three tiers of government to enhance the development of
industrialization, historical survey indicates that there have been inadequate
credit facilities. This has been a major impediment in the development to small
and medium scale industries in Nigeria. For this reason, many of them are
either proprietary or partnership and so cannot obtain funds from the capital
market.
As a result of this,
they are either starved of funds or, at best obtain fund on extremely
unfavourable terms from other sources like money lenders, thrift societies etc.
The problem of finance hinders them from operating profitably in a competitive
and depressed economy.
In other to overcome
this problem, the federal and state government set up industrial credit schemes
and gave guidelines to commercial banks to increase their lending to these
categories of enterprises.
Blatantly, the pass
military and civilian administrations made effort toward the development of
small and medium scale industries, notably among them was the pass military
administration of General Babangida’s regime with introduction of the
Structural Adjustment Program (SAP). The introduction of SAP in 1986 gave birth
to the various government organs and general conditions, which encourage the development
of industries even in the rural areas. Some of this organs involves the Better
Life for Rural Women Programme, National Directorate of Employment (NDE), the
Export Promotion Council and also the Nigerian Economic Reconstruction Fund
(NERFUN). Whether these organs are really achieving the derived results or not
is above the scope of this study.
The establishment of
the Nigerian Banks for Commerce and Industry (NBCI 1974), Nigerian Industrial
Development Bank (NIDB) and various industrial development centers all over the
country by pass governments shows the desire of the nation toward
industrialization. The transformation of the economy of a depressed nation such
as ours from her present agrarian position to positions of production and
industrial productivity can only be brought about by indigenous industries.
Inegbenebor (1991)
states that the desire of most developing countries including Nigeria is to
have a self-reliant and self sustain growth. Nigeria is blessed with abundant
mineral resources and if these resources are vividly harnessed and managed, she
will compete with other industrialized nations of the world.
With these above
assistance the question will now be, why is there shortage of credit (finance)?
The explanations one can offer at this point is that the institutions
responsible for finance (in this case, the banking sector) are still
underdeveloped. This stage of underdevelopment of the credit system is caused
by lack of trust attributed to default in meeting financial obligations as at
when due by the users of the funds.
Others problems
facing the industrial sector in Nigeria beside the financial dilemma includes:
1.
Imperfect
knowledge of existing market.
2.
Tariffs
policies.
3.
Inadequate
technical and economic counselling or unavailability of qualified personnel on
the side of the promoters.
4.
Lack
of common service facilities.
All the above
mentioned problems have brought about unemployment, lack of social amenities
etc and hence a retarded economic growth.
Against these
backdrop, this study will involve the following:
1.
Government
policies on interest and credit facilities guidelines.
2.
Operates
of NERFUND to fund out the adequacy of fund provided by it.
3.
Other
compelling reasons such as foreign competition, inflation, poor infrastructure
or lack of raw-materials inhibiting the realization of government schemes for
industries.
1.10
STATEMENT
OF THE RESEARCH PROBLEM
The Nigerian industries
are confronted with a myriad of problems but notable among them is financial
constraint caused by the sources of funds used in financing the project. An
industrial project has a long maturity or gestation period and to finance such
firms requires long-term sources of funds instead of short-term funds often
provided by commercial banks.
The banking sector,
by nature of its operations has loanable short-term deposits, which are very
liquid. Thus, for banks to tend on long-term basis creates a deposit loan
maturity gap as the owners of such deposits can call for their money at short
notices. To solve this problem, commercial banks adopt a careful strategy or
strategic approach in extending medium to long-term financing which always
attracts high interest rate. This in itself constitutes a hard condition for
promoters or investors.
With the increasing
cost of production and falling real income of consumers, the demand for goods
and services are on the decline. This leads to stockpiles of finished goods (inventory)
in their warehouses. As stated by Anao and Osaze (1990):
“In financing the
traditional small business in Africa often has to depend on a mortgage from a
commercial bank. Survival after a few years may lead to success with obtaining
seasonal overdrafts and lines of credit from commercial banks, but no fund for
permanent growth…”
Access to foreign
exchange is another impediment to industries. Most of these industries need to
import machinery and they find it extremely difficult to obtain foreign exchange
even if they have the naira cover closely related to the above. There is also
the inability to secure foreign loans due to high cost of servicing the
loans.
1.11
OBJECTIVES
OF THE STUDY
Over the years,
successive government both federal, state and local governments have made
policies geared towards making the country self-reliant.
Until recently, the
survival and growth of small and medium scale enterprises have always been
given the front row position, considering their immense contributions to the
well-being of the nation’s economy. The objectives of this study will therefore
include,
i.
To
examine the activities of the major financial institutions to ascertain their
level of commitment.
ii.
To
determine why there is a gap in their credit delivery system.
iii.
To
examine whether there is any relationship between bank credit and the Nigerian
industrial sector development.
iv.
To
ascertain the degree at which other economic variables affect industrial
development in Nigeria.
v.
To
examine the effect of banking sector credit (loan) on the performance of the
industrial sector.
1.12
SCOPE
OF STUDY
The study will
attempt to diagnose the reasons for the slow growth rate of the Nigerian
industrial sector. It will also take a critical look at the effects of banking
sector credit (loans) on the overall performance or development of the Nigeria
industrial sector from 1980 – 2005. It intends to know the possible ways
through which Nigeria can become an industrialized giant.
1.13
SIGNIFICANCE
OF THE STUDY
The significance of
the study is derived from the basic feature of lending as an all time important
function of most banks. The findings of this study is believed would be of
great value to the government – maybe in terms of policy-making, the banking
sector, the industrial sector operators, other researchers, to students alike
and the society at large.
STATEMENT OF HYPOTHESIS
The issue of banking
sector credit made available to industries has been a running battle between
the government and banks. In the light of the above, the study will attempt to
test certain hypothesis, which will include;
i.
Null
Hypothesis Ho: b – O; That banks lending
has no positive relationship on industrial development.
Alternative
Hypothesis H1: b = O; That banks lending
has a positive relationship on industrial development.
ii.
Null
Hypothesis Ho: b – O; That the industrial
sector has not benefited from development.
Alternative
Hypothesis H1: b = O; That the industrial
sector has benefited from development.
RESEARCH METHODOLOGY
The
research will be carried out using secondary data from journals, textbooks,
magazines, financial newspapers, publications, bank annual reports, CBN –
journals, and other such journals. On these data a regression analysis will be
carried out using the Ordinary Least Square (OLS) method.
This will enable us
test our hypothesis and give the necessary interpretation and finally conclude
based on our regression results.
1.14
DEFINITION
OF KEYWORDS
Cottages Industry:
A small business in which the work is done by people in their homes, weaving
and knitting are traditional cottage industries. It has to do with household
units carrying out industrial activities without paid employment.
Import Substitution:
This implies that we substitute most of our imports with what is available
locally.
Lending Rate:
The rate of interest paid on funds borrowed from a financial institution.
Lending:
The granting of a credit facility for a specified period of time and terms on
the understanding that the facility will be repaid.
Credit:
This is the sum total of money granted by banks known as loans and advances for
the use of business and individuals alike to be repaid on an agreed period and
usually with interest.
Government
Regulation: This is legal control, directories,
guidelines exercise by the government through it regulatory or supervisory
authorities (CBN and NDIC) on banking activities.
Industrialization:
The process of establishing or increasing productive activities such as mining
and quarrying, processing, manufacturing, construction and assembly, crafts
etc.
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