EZEAKU, HILLARY CHIJINDU PG/M.Sc/11/60197 IMPACT OF BANKING CREDIT ON ECONOMIC GROWTH IN NIGERIA, FACULTY OF BUSINESS ADMINISTRATION

Transcription

1 EZEAKU, HILLARY CHIJINDU PG/M.Sc/11/60197 IMPACT OF BANKING CREDIT ON ECONOMIC GROWTH IN NIGERIA, DEPARTMENT OF BANKING AND FINANCE FACULTY OF BUSINESS ADMINISTRATION Ugboaku, Edith J. Digitally Signed by: Content manager s Name DN : CN = Webmaster s name O = University of Nigeria, Nsukka OU = Innovation Centre i

2 IMPACT OF BANKING CREDIT ON ECONOMIC GROWTH IN NIGERIA, BY EZEAKU, HILLARY CHIJINDU PG/M.Sc/11/60197 DEPARTMENT OF BANKING AND FINANCE FACULTY OF BUSINESS ADMINISTRATION UNIVERSITY OF NIGERIA NSUKKA ENUGU CAMPUS NOVEMBER, ii

3 IMPACT OF BANKING CREDIT ON ECONOMIC GROWTH IN NIGERIA, BY EZEAKU, HILLARY CHIJINDU REG.NO: PG/M.Sc/11/60197 BEING A DISSERTATION PRESENTED TO THE DEPARTMENT OF BANKING AND FINANCE FACULTY OF BUSINESS ADMINISTRATION UNIVERSITY OF NIGERIA NSUKKA ENUGU CAMPUS IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF MASTER OF SCIENCE (M.Sc.) DEGREE IN BANKING AND FINANCE SUPERVISOR Prof. J.U.J. ONWUMERE NOVEMBER, iii

4 APPROVAL PAGE This dissertation has been approved for the Department of Banking and Finance, Faculty of Business Administration, University of Nigeria, Enugu Campus by: Supervisor Prof. J.U.J Onwumere... Date.. Head of Department Assoc. Prof. E Chuke Nwude Date iv

5 DECLARATION I, Ezeaku, Hillary Chijindu, a postgraduate student in the department of Banking and Finance, with Registration Number PG/M.Sc/11/60197 do here by declare that the work embodied in this dissertation is original and has not been submitted in part or full for Diploma degree of this University or other institution of higher learning. Ezeaku, Hillary Chijindu PG/M.Sc/11/60197 (Student) v

6 DEDICATION I dedicate this work to God Almighty. vi

7 [ ACKNOWLEDGMENTS I am profoundly grateful to the various individuals who contributed immensely towards the success of this research project. I cannot fully express my gratitude to my supervisor, Prof. J.U.J Onwumere, for his fatherly guidance and affections, which was my source of steam and courage to the very end. His understanding, outpouring kindness and his unassuming disposition inspired me in no small ways. Only God can recompense him most equitably for his painstaking efforts and unwavering support throughout the course of this research work. Words are inadequate to express my appreciations to all the lecturers in the Department of Banking and Finance. You have all been unusually exceptional and your immense contributions are invaluable. I am thankful to all the staff of the Department and the Faculty who were very meticulous and diligent, working tirelessly for the success of my work and my programme. My sincere appreciations to my brother and friend, Ibe Imo, for his generous assistance, encouragement and sacrifices. His helpful piece of advice and inputs helped greatly. I am grateful to late Barr. M.F.O Eze for his believe and confidence in my academic journey, from the very beginning. His optimum guidance was immense. My heartfelt gratitude to Mr. and Mrs. Izuchukwu Ogbodo for their incalculable support and care from the inception of this endeavour till the end. For their peerless magnanimity, prayers and encouragement, I acknowledge Rev. Fr. Dr. Paul Nnanna. C., Fiona and David, and Chinasa Virgil-Okolo. You are very precious to me and extremely vast in your supports and inestimable gestures. With gratitude and consolation, I humbly acknowledge the overwhelming contribution of my family, especially my dear mother and, my sister, Rita, both of whom I deprived deserved support and attention during the course of this programme. I thank you for your unflagging faith, prayers and understanding. My very sincere gratitude also to all my friends and colleagues, with special thanks to Ejiofor, John Okoye, Kalu, Johnmartins, Cleophus, Israel, Chinedu, Chinwe, Emeka Okorie and to Lebechi, my cousin. My acknowledgments and gratitude are by no means exhaustive. For all the persons and families not particularly mentioned, my upwelling appreciations go to all of you. I am eternally thankful. vii

8 ABSTRACT Globally, it is expected that banks should play vital roles in financing economic activities as their contribution at ensuring sustainable economic growth and development. The intermediary role of banks can foster economic growth through raising of savings, improving efficiency of loan-able funds and promoting capital accumulation. In Nigeria, the banking industry as well as the entire economy assumed a new dimension in September 1986 when the then Military government introduced the Structural Adjustment Programme (SAP). Expectedly, this restructuring brought certain changes not only to the banking system but also the entire economy of Nigeria. However, whether continuation of policies allied to the programme has increased access to loan-able funds through the intermediation functions of banks is still contentious. It is against this background that this study examined the impact of bank credit on economic growth in Nigeria from 1987 to 2012, and specifically sought to evaluate the impact of bank credits advanced to the private sector on Nigerian economic growth, ascertain the effect of bank credits extended to the public sector on Nigerian economic growth and ascertain the impact of the aggregate bank credits to the private and the public sectors on the Nigerian economy. The study adopted the ex-post facto research design and times series data were collated from the Central Bank of Nigeria Statistical Bulletin and Annual Reports. The OLS regression statistic was used to test the hypotheses stated. The estimated regression results indicate that private sector credits, public sector credits and the aggregate bank credits to the private and the public sectors impact positively and significantly on economic growth over the period of the study. The study concludes that for the Nigerian economy to grow, policy frameworks that favour more credits to the private sector of the Nigerian economy with minimal interest rate to stimulate economic growth should be pursued by government. This will assist in making more loan-able funds available for investment into the real sectors of the economy. The study, therefore, recommends among others that policies on public sector borrowing and spending should be reviewed in order to discourage gross unproductive white elephant investments and more credits channeled into subsectors with more linkage effects such as agriculture, manufacturing, energy and infrastructural development. viii

9 TABLE OF CONTENTS Title page i Approval Page ii Declaration iii Dedication iv Acknowledgements v Abstract vi CHAPTER ONE: INTRODUCTION 1.1 Background of the Study Statement of the Problem Objectives of the Study Research Questions Hypotheses of the Study Scope of the Study Significance of the Study References CHAPTER TWO: REVIEW OF RELATED LITERATURE 2.1 Theoretical Review vii Theories of Financial Intermediation : Role of Banks in Financial Intermediation : Theories of Economic Growth : The Concept of bank Credit : The Public Sector Analysis : Determinants of Economic Growth Empirical Review ix

10 2.2.1 Banking Sector Credit and Economic Growth in Nigeria: - Evidence from Previous Researches Review Summary References CHAPTER THREE: RESEARCH METHODOLOGY 3.1 Research Design Nature and Sources of Data Model Specification Technique of Analysis References CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS 4.1 Presentation of Data Testing of Normality Testing of Stationarity Testing of Causality Test of Hypotheses Test of Hypothesis One Test of Hypothesis Two Test of Hypothesis Three Implication of Results References CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION 5.1 Summary of Findings Conclusion Recommendations x

11 5.3.1 Contribution to Knowledge Recommendations for Further Studies Bibliography Appendix xi

12 CHAPTER ONE INTRODUCTION 1.1 BACKGROUND OF THE STUDY Globally, banks in developing countries are expected to play vital and effective roles in financing their economic projects and activities as their contribution in ensuring sustainable economic growth. Theoretical discussions about the importance of credit development and the role that the banking industry plays in economic growth have occupied a key position in the literature of development finance. According to Osada and Saito (2010), financial or credit development can foster economic growth by raising savings, improving efficiency of loan-able funds and promoting capital accumulation. Banking industry credit in Nigeria assumed a new dimension and was transformed by the recapitalization and consolidation of banks which restructured them for better performance. Access to bank credit or financing can be said to improve commensurately in response to competition and the healthy sate of soundness the banks attained. Availability of credit allows firms to increase production, output and efficiency and in turn increases the profitability of banks through interest earned (Agada, 2010). The role of credit in economic growth has been recognized as credits are obtained by various economic agents to enable them meet operating expenses (Nwanyanwu, 2008). Furthermore, according to Ademu (2006), the provision of credit with sufficient consideration for the sector s volume and price system is a way of achieving economic growth through self employment opportunities. While highlighting the role of credit to the growth of any economy, he further explained that credit can be used to prevent an economic activity from total collapse in the event of unforeseen circumstances. The debate on the intermediary role of banks in the economic development has dominated many discussions in literature. However, there seem to be general consensus that the role of intermediary role of banks helps in boosting economic growth and development. Akintola (2004) identifies banks traditional roles to include financing of agriculture, manufacturing and syndicating of credit to productive sectors of the economy. When the banking industry discharges these important functions 1

13 satisfactorily the outcome would be that the economic growth, as proxied by the Gross Domestic Product (GDP), will improve commensurately. Akpansung and Babalola (2008) have stated that the central Bank of Nigeria has been seen to be playing a leading and catalytic role by using direct control not only to control overall credit expansion but also to determine the proportion of bank loans and advances to high priority sector and other. According to them, this sectoral distribution of bank credits is often meant to stimulate the productive sectors and consequently lead to increased economic growth in the country. Citing Driscoll (2004), they opine that financial development can foster economic growth by raising savings, improving allocative efficiency of loanable funds and promoting capital accumulation. Arguing along this path, Jayaratne and Strahan (1996) maintain that well-developed financial markets are necessary for overall economic advancement of less developed and emerging economies. 1.2 STATEMENT OF THE PROBLEM There still remains a gap in understanding the causal relationship between banking industry credit and economic growth in developing economies. And particularly, little studies have been done to find out the impact the various types of deposit money bank credits have on the growth of national economies. The influence of such types of credit (like those advanced to the public sector and the private sector) on economic growth has received little interest from researchers. Tuuli (2002) posits that although there have been numerous empirical studies on the determinants of growth in transition economies the relationship between bank credits and economic growth, however, has largely been ignored. Thus, studying the impact of the deposit money bank credits on the growth of the Nigeria economy has become very necessary. And until this vacuum is filled, the unavoidable questions on the study will remain unanswered. Generally, economic growth has long been considered an important goal of economic policy with substantial body of research dedicated to explaining how this goal can be achieved. But unfortunately, such concerted efforts in both researchers and policies have yielded no meaningful result. The questions, therefore, remain why is it so? And what practical measures should be taken to plug the situation? Central Bank of Nigeria (2009) notes that flow of credit to the priority sectors fell short of prescribed targets and failed to impact positively on investment, output 2

14 and domestic price level. Certainly, these comments have triggered questions on the effectiveness and productivity of bank credits on the Nigerian economy. In similar perspective, Taiwo and Abayomi (2011) note that the justification of public sector credits is for the provision of infrastructural facilities, which will consequently drive economic growth. However, they further posit that the effects of such government spending on economic growth are still an unresolved issue theoretically as well as empirically. 1.3 OBJECTIVES OF THE STUDY The general objective of this study is to ascertain the impact of deposit money bank credits on Nigeria s economic growth. In line with this, the specific objectives of the study include the following: 1. To evaluate the impact of bank credits advanced to the private sector on the Nigerian economic growth. 2. To ascertain the effect of bank credits extended to the public sector on Nigerian economic growth. 3. To ascertain the impact of the aggregate bank credits to the private and public sectors on the Nigerian economy. 1.4 RESEARCH QUESTIONS This study is based on the following research questions: (1) How far has bank credit to the private Sector influenced Nigeria s economic growth? (2) To what extent has bank credit to the public sector affected economic growth in Nigeria? (3) To what extent have aggregate bank credits to the private and public sectors influenced Nigeria s economic growth? 3

15 1.5 HYPOTHESES OF THE STUDY The hypotheses of this study are as follows: Hypotheses One H O : Bank credits to the private sector do not have a significant positive effect on Nigeria s economic growth. Hypotheses Two H O : Bank credits to the public sector negatively and significantly affect Nigeria s economic growth. Hypotheses Three H O : Aggregate bank credits to the private and public sectors do not have a significant positive effect on Nigeria s economic growth. 1.6 SCOPE OF THE STUDY The study will focus on the impact of banking industry credit on economic growth in Nigeria over the period Bank credits as shall be used in this study are credits advanced by the deposit money banks in Nigeria. Types of bank credits to be captured will include private and public sector credits, while economic growth shall be proxied by the real Gross Domestic product (RGDP). In justification for the choice of the base year, it is worthy to note that in Nigeria, the Nigerian economy assumed a new dimension in September 1986 when the military government introduce the Structural Adjustment Programme (SAP). The emphasis of the programme was deregulation of the economy, which was aimed at curtailing government participation in the economy. As a result, this restructuring brought radical changes not only to the banking system but also the entire economy of Nigeria. Therefore, it becomes necessary for our purpose to use 1987 as our base year bearing in mind the overwhelming expectations with respect to the anticipated result the programme would bring. 4

16 SIGNIFICANCE OF THE STUDY The study will be of immense benefit to the following: Bankers: The study will enhance their understanding of the relationships existing between bank credits and economic growth. This will go a long way in enabling them carry out efficient financial intermediation function bearing in mind how it will impact on economic growth. Regulators of the Financial Industry: When economic growth is of the essence, they will find this research relevant in their policy strategies, and regulatory prerogatives aimed at fostering sustainable economic growth and building efficient financial sector development. Investors: Both foreign and indigenous investors in the Nigerian economy will stand to take advantage of the gift of this study to already existing body of knowledge. The study will sharpen their understanding of causal relationships between financial development and economic growth. When they understand the relevance of bank credits to increase in productivity, it will enable them make rational decisions in obtaining funds at a price and amount that will serve their needs. The Government: different levels of government will find this study useful especially policy implementation, enactment of laws and making pronouncement that will promote economic growth. Researchers: other researchers will find this study very useful since it will add to the existing knowledge. Such researchers and students who wish to carry out a related study will have to use it as a research material. 5

17 REFERENCES Adejuwon, K.D and Kehinde, J.S. (2011), Financial Institutions as catalyst to Economic Development: The Nigerian Experience, European Journal of Humanities and social Science, 8(1). Ademu, W.A. (2006), The informal sector and Employment Generation in Nigeria: The Role of Credit and Employment Generation in Nigeria, Selected Papers for the annual conference of the Nigerian Economic society, in Calabar, August 22 nd to 24 th. Agada, A.O. (2010), Credit as in Instrument of Economic Growth in Nigeria, Bullion, 34(2), Central Bank of Nigeria Publication, Abuja. Akansung, A., and Babalola, S. (2008), Banking Sector Credit and Economic Growth in Nigeria: An Empirical Investigation, CBN Journal of Applied Statistics, 2(2). Jayaratne, J & Strahan, P. (1996), the Financial-Growth Nexus: Evidence from Bank Branch Deregulation, Quarterly Journal of economics III: Nwanyanwu, O.J. (2008), An Analysis of Banks Credit on Nigerian Economic Growth, Jos Journal of Economics, 4(1): Shaw, E.S. (1973), Financial Deepening in Economic Development, New York: Oxford University Press. Tuuli, K. (2002), Do efficient Banking sectors Accelerate Economic Growth in Transition Countries, (December 19, 2022). BOFIT Discussion Paper: (14) (2004). 6

18 CHAPTER TWO REVIEW OF RELATED LITERATURE 2.1 THEORETICAL REVIEW THEORIES OF FINANCIAL INTERMEDIATION Melicher and Norton, (2011:50) defined financial intermediation as the process by which savings are accumulated in depository institutions and then lent or invested. According to King and Levin (1993), citing Schumpeter (1911), explains that the services provided by financial intermediaries mobilizing savings, evaluating projects, managing risk, monitoring managers, and facilitating transactions are essential technological innovations and economic development. Shittu (2012), citing Benson and Smith (1975) has emphasized that besides the performance of specialized tasks, several theoretical models posit that they mitigate the costs associated with information acquisition and the conduct of financial transactions. Afolabi (1998:260) argues that financial intermediation will not be necessary, for example, if the lender and the borrower can come into direct contact and would in fact not be necessary if there is no deficit or surplus sector. He, however, concluded that modern economic transactions will be difficult, if not impossible, with unintermediated financing as the business world nowadays is much more complex and financial requirements are too large. Credit is an important aspect of financial intermediation that provides funds to those economic entities that can put them to the most productive use. Theoretical studies have established the relationship that exists between financial intermediation and economic growth. Shaw (1973), in his study, strongly emphasized the role of financial intermediation in economic growth. In the same vein, Greenwood and Jovanovich (1990) observed that financial development can lead to rapid growth. In a related study, Bencivenga and Smith (1991) explained that development of banks and efficient financial intermediation contributes to economic growth by channeling savings to high productive activities and reduction of liquidity risks. They therefore concluded that financial intermediation leads to growth. Intermediation involves the matching of lenders with savings to borrowers who need money by an agent or third party, such as bank. If this matching is successful, the lender obtains a positive rate of return, the borrower receives a return for risk taking and entrepreneurship and the 7

19 banker receives a return for making the successful match. The skill of identifying potential successful new entrepreneurs who can take market share off competitors or develop whole new idea or market is one of the most vital (and intangible) skills any banking system can posses. Granted the relevance of financial intermediation to economic growth, we looked at the two current theories of financial intermediation. (i) Jaffee and Russell theoretical model of 1976; and (ii) Stiglitz and Weiss model of Theoretical Model of Jaffee and Russell (1976): These two scholars developed a theoretical model in which imperfect information (asymmetric information) and uncertainty can lead to rationing in loan markets, where some agents do not receive the loan they applied for. There paper analyses the behavior of credit market in which borrowers have more information than lenders about the likelihood of default. The key feature in the model is the relationship between default proportion and contract size. They explained that there is some minimum loan size at which no default is observed, beyond that, the proportion of individuals who do not default is declining with the contract size. In their analysis, since borrowers are identical ex ante, the market rate incorporates a premium to take account of the aggregate probability of default. Consequently, borrowers with low default probability pay a premium to support low quality borrowers and credit rationing in the form of the supply of small-sized loans than those demanded by the borrowers at a quoted rate may result. They concluded by saying that high quality borrowers will prefer some rationing if the smaller loan sizes lower the market average default probabilities, thus reducing the premium. Theoretical Model of Stiglitz and Weiss (1981): These developed a model of bank credit rationing, where some borrowers receive loans and others do not. They assume that the interest rate directly affects the quality of loans because of an adverse selection effect or moral hazard effect. They posited that the Banking industry, in making loans, is concerned about the interest rate they receive on a given bank credit, and the riskiness of the credit. They stated that for a given loan rate, lenders earn a lower expected return on loans to borrowers with riskier projects than to good quality borrowers. The interest rate, a bank charges can affect the riskiness of the loans by 8

20 either sorting prospective borrowers (the adverse selection effect), or by affecting the actions of borrowers (the moral hazard effect). Finally, they opined that the inherent dismal effect of adverse selection problem and moral hazard can be averted. Banks therefore have an incentive, in some circumstances, to ration credit rather than to risk demand for loanable fund. In summary, banks are special where they provide credit to borrowers on terms which those borrowers would not otherwise be able to obtain. Because of the existence of economies of scale in loan market, borrowers may have difficulties obtaining funding from non-bank sources and so are more reliant on bank lending. Adverse shocks to the information structure (information asymmetry), or to banks ability to lend, may all impact on firm s and individuals access to credit and hence to investment and output ROLE OF BANKS IN FINANCIAL INTERMEDIATION Besley and Bringham (2009) have clearly emphasized that the presence of intermediaries improve economic well-being. They further explained that financial intermediaries were created to fulfill specific needs of both savers and borrowers, and to reduce the inefficiencies that would otherwise exist if users of fund could get loans only by borrowing directly from savers. 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. Banks are among such institutions that render financial services. They are mainly involved in financial intermediation, or indirect financing which involves channeling funds from the surplus unit to the deficit unit of the economy, thus transforming bank deposits into loans and credits. There are businesses that have good ideas and business opportunities they would want to invest money in, but they do not have the money. They would be willing to borrow from the net savers who have idle funds. For this reason, these second groups are called net borrowers or the deficit unit of the economy. However, there are barriers that make it difficult for the borrowing to take place. And to remove this barrier, according to Anyanwaokoro, (1999:75) there is, therefore, a need for an intermediary (a go-between) who will play the role of bridging the gap between the net savers and net borrowers. This role is called financial intermediation. Financial 9

21 intermediation is the role of channeling money from net savers who have idle funds to investors or borrowers who are in need of those funds. Against this backdrop, Nwanyanwu (2008), posits that the banking sector helps to make these credits available by mobilizing surplus funds from saver 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 many developing countries since the sector is virtually the only financial means of attracting private servings on a large scale, which is further extended to borrowers as credit (Mckinnon, 1980 as cited by Adeniyi, 2006) THEORIES OF ECONOMIC GROWTH There are numerous growth models in literature. However, there is no consensus as to which strategy will achieve the best success. The achievement of sustained growth requires minimum levels of skills and literacy on the part of the population, a shift from personal or family organization to large scale unit (Nnanna, 2004). Some of the existing growth models are Two-gap Model, Maxian Theory, Schumpeterian Theory, Harrod-Domar Theory of growth, Neo-Classical Model of Growth, and Endogenous Growth Theory. The growth models relevant to this study are Neo-Classical Model of Growth, and Endogenous Growth Theory, since these growth models explain the situation very peculiar in developing economies such as Nigeria, Ghana, Angola, etc. A) NEOCLASSICAL MODEL OF GROWTH Ray (1998) explains that Neoclassical Growth Theory is an economic theory that outlines how a steady economic growth rate will be accomplished with the proper amounts of the three driving forces: labour, capital and technology. He further stated that the theory stated that by varying the amounts of labour and capital in the production function, an equilibrium can be accomplished. When a new technology becomes available, the labour and capital need to be adjusted to maintain growth equilibrium. Khan, (2003) buttresses that this theory emphasizes that technology change has a major influence on economic growth. The theory argues that economic growth will not continue unless there continue to be advances in technology. 10

22 The neoclassical model of growth was first devised by Nobel price Wining economist, Robert Solow, over 40 years ago. The Solo model believes that a sustained increase in capital investment increases the growth rate only temporarily. This is because the ratio of capital to labour goes up (there is more capital available for each worker to use) but the marginal product of additional units of capital is assumed to decline and the economy eventually moves back to a long-term growth path, with real GDP growing at the same rate as the workforce plus a factor to reflect improving productivity (Shaw, 1992). A steady-state growth path is reached when output, capital and labour are all growing at the same rate, so output per worker and capitals per worker are constant. Neo-Classical economist who subscribe to the Solow model believe that to raise an economy s long term trend rate of growth requires an increase in the labour supply and an improvement in the productivity of labour and capital. Difference in the rate of technological change between countries are said to explain much of the variations in growth rates that we see. The neo-classical model treats productivity improvement as an exogenous variable, meaning that productivity improvements are assumed to be independent of the amount of capital investment (Geoff Riley, 2006). According to Nnanna, Englama and Odoko (2004), based on Solow s analysis of the American data from , he observed that 87.5% of economic growth within the period was attributable to technological change and 12.5% to the increased use of capital. The result of the growth model was that financial institutions had only minor influence on the rate of investment in physical capital and the changes in investment are viewed as having minor effect on economic growth. B). ENDOGENOUS GROWTH THEORY Endogenous growth theory or new growth theory was developed in the 1980s by Romer (1986), Lucas (1988), and Rebelo (1991), among other economics as a response to criticism of the neo-classical growth model. Jhingan (2006) explains that the endogenous growth model emphasizes technical progress resulting from the state of investment, the size of the capital stock and the stock of human capital. Endogenous growth theory holds that policy measures can have an impact on the long-run growth rate of an economy (Wikipedia, the free encyclopedia). The growth model is one in which long-run growth rate is determined by variables within the 11

23 model, not an exogenous rate of technological progress as in the neo-classical growth model. (Knight et al, 1993). Explain that Endogenous growth economists believe that improvements in productivity can be linked directly to a faster pace of innovation and extra investment in human capital They stress the need for government and private sector institutions which successfully nurture innovation, and provide the right incentives for individuals and business to be inventive. According to Beck, (2000) there is also a central role for the accumulation of knowledge as a determinant of growth. The knowledge industries (typically they include telecommunication agronomy, electronics, software, biotechnology etc) will be very vital to the growth of economies of the developing countries. Evidently, they are becoming important in many developed countries. Supporters of endogenous growth theory believe that there are positive externalities to be exploited from the development of high valued-added knowledge economy which is able to develop and maintain a competitive advantage in fastgrowth industries within the global economy (Tarlok, 2009). Furthermore, in an endogenous growth model, Nnanna, Englama, and Odoko (2004) observed that financial development can affect growth in three ways: raising the efficiency of financial intermediation, increasing the social marginal productivity of capital and influencing the private savings rate (capital formation). This means that a financial institution can effect economic growth by efficiently carrying out its functions, among which is the provision of credit THE CONCEPT OF BANK CREDIT Credit is the extension of money from the lender to the borrower. Spencer, (1977) notes that credit implies a promise by are party to pay another for money borrowed or goods and services received. Credit cannot be divorced from the banking industry as banks serve as a conduit for funds to be received in form of deposits from the surplus units of the economy and passed on to the deficit units who need funds for productive purposes. Banks are therefore debtors to the depositors of funds and creditors to the borrowers of funds. According to Nwanyanwu (2008:46), bank credit is the borrowing capacity provided to an individual, government, firm or organization by the banking system in the form of loans. 12

24 CBN Briefs (2003) defines bank credit as the amount of loans and advances given by the banking sector to the various economic agents. CBN Monetary Policy Circular (2010) identifies such bank credit facilities to include loans, advances, commercial papers, banker s acceptance, bill discounted, with a banks credit risk. Bank credit is often accompanied with some collateral that helps to ensure the repayment of the loan in the event of default. Credit channels savings into productive investment thereby encouraging economic growth. Thus, availability of credit allows the role of intermediation to be carried out, which is important for the growth of the economy. The availability of credit is important to the real economy. Globally, positive change in credit availability has positive significant effect on the nation s real gross domestic product (GDP). According to Nzotta (2004), it is generally accepted that bank credits influence positively the level of economic activities in any country. It influences what is to be produced, who produces it and quantity to be produced. Bank credits affect and alter the level of money supply in an economy or country. It is the most important source of bank income and it promotes the activities of banks and non-bank financial institutions and thus influences the level of growth of the financial system. It also affects aggregate output and productivity, the pattern of production, the level of entrepreneurship, and the realization of aggregate economic performance, development and growth. It could thus be said with absolute assurance that banking industry credit is of crucial importance both to the banks, the monetary authorities, business community and the economy in general THE PUBLIC SECTOR ANALYSES The existence of public sector can be attributed to the prevalence of political and social ideologies, which depart from the premises of consumer choice and decentralized decision-making (Ajibola, 2008:11). Against this backdrop, a major activity of the government includes the determinant of the optimal financing of public goods under a democratic society. One of the sources of public sector finances includes external borrowing from banks and other financial institutions (Onuoha, 2005:54). According to Bhatia (2002), in an underdeveloped country, public expenditure has an active role to play in stimulating the economy through the provision of infrastructure facilities. In his own contribution, Taiwo and Abayemi (2011) wrote 13

25 that the mechanism in which government spending on public infrastructure is expected to affect the pace of economic growth depend on the precise form and size of total public expenditure allocated to economic and social development projects in the economy. This effect, therefore, is basically in the nature of re-allocation of resources from less to more desirable lines of investment. Musgrave and Musgrave, (1980:152) postulated that it is interesting to pause and consider what may be said more sympathetically about the underlying causes of increasing public sector borrowings and expenditure growth. They maintained that high need for capital goods, technical changes, population change, relative costs of public services and changing scope of transfers are the major causes of expenditure growth in the public sector. However, as these basic facilities are built up and capital market developed, the path is cleared for capital formation of the manufacturing type to go into place and for industrial development in the private sector to occur. Accordingly, one would expect the public share in capital formation to decline over time (Alan et al 1991) DETERMINANTS OF ECONOMIC GROWTH Baye and Jansen (2006) defined economic growth as the rate of change in real output. The economic growth rate is usually stated as percentage change on an annual basis. Aretis (et al 2007) explains economic growth to involve the expansion on real output per capita and per worker over time. This, they emphasized, must be a sustained or steady increases in real output per capital. Moreover, Bay and Jansen posited that gross domestic product (GDP), the most commonly used measure of nominal output, is the total naira value of all final goods and services produced in the economy is one year. Writing in this regards, Burda and Wyplosz (2003) noted that whereas nominal GDP is computed using the actual selling prices, real GDP is computed using prices observed in some predetermined base year. Nothing matters more to the long-term economic welfare of a nation than its rate of economic growth. Compounded over many years, seemingly small differences in annual growth rates can lead to vast differences in output level, and in standard of living. At Robert Barro s lionel Robins Memorial lectures, delivered at the London school of economics in February 1996 (the MIT press), he explained that research on economic growth has exploded in the past decades. He maintained that hundreds of empirical studies on economic growth across countries have highlighted the 14

26 correlation between growth and a variety of variables, which are the determinants of economic growth. According to Riley (2006), potential output in the long run depends on the following factors: 1. The growth of the nation s stock of capital: A rise in capital investment to him, adds directly to GDP in the sense that capital goods have to be designed, produced, marked and delivered. Higher investment also provides workers with more capital to work with. New capital also tends to embody technological improvements which available workers have sufficient skills and training to make full and efficient use of their new capital inputs, should lead to a higher level of productivity after a time lag. In there contribution to this very subject, Karl and Ray (2004) identified capital shortage as the cause of low productivity dose not explain much. They therefore, suggested that such short supply of capital in developing countries is due to what they called Vicious-cycle-of poverty hypothesis; which suggested that poverty is self perpetuating because poor nations are unable to save and invest enough to accumulate the capital stock that would help them, grow. In other words, a developing nation must consume most of its income just to maintain its already low standard of living. Consuming most of the national income implies limited savings, and this implies low level of investment. Without capital formation and investment, the capital stock does not grow, the income and output remain low, and the viscious cycle is complete. 2. Human Resources and Entrepreneurial Ability: Case and Fair (2004:440), write that capital is not the only factor of production require to grow output. They maintain that, first of all, in order to be productive the workforce must be healthy. However, health is not the only issue. They explained that the workforce must be educated and trained. According to them, the familiar forms of human capital investment, including formal education and on-the job training are essential. Basic literacy as well as specialized training can yield high return to both the individual worker and the economy. It is clear that just as financial capital seeks the highest and safest return, so does human capital. Thousands of students from developing countries remain abroad after their studies. This brain drain siphons off many of the most talented minds from 15

27 the developing countries, which does not augur well to the economic growth in these developing and transitional economies. 3. The trend rate growth of productivity of labour and capital: For most countries, it is the growth of productivity that drives the long-term growth. The root cause of improved efficiency come from making markets more competitive and achieving better productivity within individual plants and factories. Increased investment in the human capital of the workforce is widely seen as essential if Nigerian and other developing countries are to improve its long run productivity performance. 4. Technological improvements: Changes in technology are important because they reduce the real costs of supplying goods and services which leads to an outward shift in a country s production possibility frontier. 16

28 Figure 2.1 REAL GDP GROWTH RATE IN NIGERIA FROM Source: CBN; researcher s computation from Statistical bulletins ( ). Figure 2.1 above explains the growth rate of the real GDP in Nigeria from It can be observed that the trend of the growth rates have been quite unstable. Throughout the period under review, there were no records of continuous growths. The highest growth rate of 60% was achieved in1992 which was followed by a drop to 39% the following year. In 1997 the real GDP growth rate was only 3% but the decline continued with a -4% in The year 2010 marked an upward movement to 39% from just 2% the previous year. However, the remarkable recovery dropped to 10% in 2011 and nosedived even further to 8% in

29 Figure 2.2 SECTORAL GROWTH RATES OF GDP (per cent) Sources: CBN; researcher s computation from CBN annual reports and statement of account and statistical bulletin ( ). From figure 2.2 above, the manufacturing sub-sector recorded a negative growth rate only in 1998, with -6.9%, and just a 0.4% in It however maintained reasonable degree of stable growth between 2004, where the growth rate was 11.9%, and 2008 at 9.3% growth rate. The growth in the agricultural sector fluctuated, but had the most impressive rate of growth between 2004 and The highest rate of growth in this sector was 52.2% in The industrial sector suffered the least rates of growth overtime. However, the sector grew at 21.3% in 2003, and recorded a negative growth rate of -2.5% in 2006, - 2.2% in 2003 and -3.4% in Interestingly, it recovered from -6.2% growth rates in 1999 to grow at 10% in Finally, we can observe that the period was both remarkable for but the manufacturing sub-sector and the agric sector. But this was not same in the industrial sector. 18

30 Figure 2.3 SECTORAL CONTRIBUTIONS TO THE GDP (%) Sources: CBN; researcher s computation from CBN annual reports and statement of account and statistical bulletin ( ). In figure 2.3 above, both the Industrial and Agricultural sector had impressive contributions to the GDP over the years. The Agric sector maintained consistent contributions from 41 per cent to 42 per cent between 2004 and 2010; the industrial sector recorded a steady 2 percentage point decline each year between 2004 and 2010; from 30 per cent in 2004 to lowest 20 per cent in EMPIRICAL REVIEW BANKING SECTOR CREDIT AND ECONOMIC GROWTH IN NIGERIA: EVIDENCE FROM PREVIOUS RESEARCHES Although there exist some body of literatures on the link between bank credit and economic growth, there is no consensus on the effect of explanatory variables on economic growth. See for example Gazdar and Cherif (2012), Christopoulos and Tsionas (2004), Chakraborty (2008), Nwanyanwu (2008), Mo osin and Kusairi (2012), Balogun (2007), Osada and Saito (2010), Agada (2010), King and Levine (1993), Dritsakis and Adamopoulos (2004), Gross (2001), Akpansung and Babalola (2008), Beck (2008), Cevik and Rahmati (2013), Abu-Bader and Abu-Qarn (2008), Hamdi, Sbia and Onurtas (2012), and Asante, Agyapong and Adam (2011). 19

31 Gazdar and Cherif (2012), in their paper, investigated the effects of institutional quality on the finance-growth nexus. An empirical model with linear interaction between financial development and institutional quality was estimated. Their main findings show that while most indicators of financial development have a significant negative effect on economic growth, the sign of the coefficients of interaction variables were significantly positive, which provided strong evidence that institutional quality mitigates the negative effect of financial development on economic growth. Cevik and Rahmati (2013) carried out a study which aimed at investigating the causal relationship between financial development and economic growth in Libya during the period The empirical results varied with estimation methodology and model specification, but indicated the lack of long-run relationship between financial intermediation and output growth. The OLS estimation shows that financial development has statistically significant negative effect on real GDP per capita growth. However, the VAR-based estimations presented statistically insignificant results, albeit still attaching a negative coefficient to financial intermediation. In another research, Akpansung and Babalola (2008), examined the relationship between banking sector credit and economic growth in Nigeria over the period The causal linking between the pairs of variables of interest were established using Granger causality test while a Two-Stage Least Square (TSLS) estimation technique was used or the recession models. The results of the Granger causality test showed evidence of undirectional causal relationship from GDP to private sector credit (PSC) and from industrial production index (IND) to GDP. Estimated regression models indicated that private sector credit impacts positively on economic growth over the period of coverage in the study. Dritsakis and Adamopoulos (2004) examined empirically the causal relationship among the degree of openness of the economy, financial development and economic growth by using a multivariate autoregressive VAR model in Greece for the examined period 1960: : IV. The results of the cointegration analysis suggested that there is one cointegrated vector among GDP, financial development and the degree of openness of the economy. Granger causality tests based on error correction models showed that there is a causal relationship between financial 20

32 development and economic growth, but also between the degree of openness of the economy and economic growth. Christopoulous and Tsionas (2004) investigated the long-run relationship between financial depth and economic growth, trying to utilize the data in the most efficient manner via panel unit root tests and panel cointegration analysis. The long run relationship was estimated using fully modified OLS. For 10 developing countries, the empirical results provided clear support for the hypothesis that there is a single equilibrium relation between financial depth, growth and ancillary variables, and that the only conintegrating relation implies undirectional causality from financial depth to growth. Sanusi, Mo osin and Kusairi (2012), in their paper, examined the relationship between financial development and economic growth in ASEAN countries by using the static panel approach. In view of the study, the paper analyzed the evidence on financial depth for ASEAN countries, while disaggregating measures of financial depth covering the financial inequality development. It was found that there is a relationship between financial development and economic growth for ASEAN countries. Chakraborty (2008) investigated the impact of developments in the financial sector on economic growth in India in the post-reform period. The paper extended the models of Pagano (1993) and Murinde (1996) to formalize the relationship between financial development and economic growth in the structure of an endogenous growth model. The results showed that investment-output ratio has a positive effect on real rate of growth of GDP, irrespective of the indicator of stock market development. In a related study, Osada and Saito (2010) studied the effects of financial integration on economic growth using an international panel data of 83 countries from The results provided some evidence that financial integration has an additional, indirect effect on economic growth through its impact on other determinants of growth. Abu-Bader and Abu-Qarn (2008) in a paper focused on examining the causal relationship between financial development and economic growth for six Middle East and North Africa countries (Algeria, Egypt, Israel, Morocco, Syria and Tunisia) with a quadvariate vector autoregressive framework. They employed four different measures of financial development and applied the augmented vector autoregression (VAR) methodology to test the Granger causality. The empirical results strongly 21