THE IMPACT OF COMMERCIAL BANK’S LOANS ON ECONOMIC GROWTH IN NIGERIA - UNIPROJECTS

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THE IMPACT OF COMMERCIAL BANK’S LOANS ON ECONOMIC GROWTH IN NIGERIA



THE IMPACT OF COMMERCIAL BANK’S LOANS ON ECONOMIC GROWTH IN NIGERIA 
ABSTRACT
Lending in banks is crucial in order to facilitate the growth of banks of invariably its environment in order to enhance socio – economic transformation, banks must strive to provide funds to the deficit economic units.  The study therefore sought to find out the impact of commercial banks was loans on the growth of the Nigerian economy.  Data were sourced from CBN statistical bulletin, CBN Annual Report and Accounts and world bank publications. Ordinary least square method of regression for the period of 40 years (1970 – 2010) was employed.  A simple regression model was formulated to enable the data sourced to be analyzed and tested.  It was observed from the test carried out that increase in commercial bank’s loans had a positive impact on the growth of the Nigerian Economy.  Also, the government should embark upon certain policies which can help improve commercial banks lending capacity so as to improve the country’s economic growth.

TABLE OF CONTENTS
TITLE PAGE                                                                
CERTIFICATION                                                      
DEDICATION                                                              
ACKNOWLEDGEMENTS                                          
ABSTRACT                                                                 
TABLE OF CONTENTS                                                       
CHAPTER ONE: INTRODUCTION
1.1            Background of the study                                                    
1.2            Statement of the Problem                                                       
1.3            Objectives of the study                                                 
1.4            Research Question                                                                 
1.5            Statement of Hypothesis                                                        
1.6            Significance of the study                                                        
1.7            Delimitation of the study                                                        
1.8            Definition of Terms                                                     
CHAPTER TWO: LITERATURE REVIEW
2.0            Introduction                                                                  
2.1            Bank lending in Nigeria                                                          
2.2            Characteristics of Borrowers and the Emergence of
Bad loans                                                                      
2.3            Measures for Identification and Administration of
Bad loans                                                                      
2.4            Roles of Commercial Bank’s credit in Economic Growth      
2.5            Theories of portfolio management                               
2.5.1    The shiftability theory                                                  
2.5.2    The Anticipated Income theory                                              
2.5.3    The liabilities of management theory                                      
2.5.4    The Real Bills theory                                                    
2.6            Review of Empirical findings                                        
CHAPTER THREE: METHODOLOGY
3.1            Research Design                                                           
3.2            Sources of Data                                                           
3.3            Model specification                                                       
3.4            Identification of variables                                            
3.5            a priori Expectation                                                      
3.6            Estimation Techniques                                               
CHAPTER FOUR: RESULTS AND DISCUSSION
4.1            Introduction                                                                           
4.2            Presentation of Data                                                    
4.3            Interpretation of Result findings                                   
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION
5.1            Summary                                                                     
5.2            Conclusion                                                                    
5.3            Recommendation                                                          
REFERENCES                                                           

CHAPTER ONE
INTRODUCTION
1.1            Background of the study
Commercial banks are financial institutions that take money from the haves and give to the have nots.  The haves are the depositors (those who keep their money with the banks) and the have nots are the borrowers.  Commercial banks gather money from the surplus sector of the economy and make it available for the sectors which are in dire needs of it in form of loans.  In order to enhance socio economic transformation, commercial banks must strive to provide funds to the deficit economic unit (Udoka and Offiong 2006).
One crucial reason why commercial banks are established by their promoters is to facilitates lending to their customers (cottarelli; et al, 2003).
Bank lending was the pre – occupation of the earliest goldsmith banker (Ekezie 1997).
The high profit realized from this business promoted them into banking business, commercial banks are expected to support their immediate environment with adequate supply of credit for all legitimate business.  They are also expected to take care of consumers financial needs and to price credit reasonably in line with competively determined interests rate (Goverinchas et al 2001).  Indeed, lending is the principal economic function of commercial banks (Mbat 2006) 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.
(Rose 1999) moreover, risk in banking tends to be concentrated in loan portfolio (Eichingreen et al, 2000).
When a bank gets into serious financial trouble, its problem usually emanate from loan that have becomes irrevocable due to mismanagement; illegal manipulation of loans, misguided lending policies or an unexpected economic downturn.
Bank loans are funds granted to individuals and organizations to meet their temporary or long term deficit operations. (Mbat, 2006).  Loans contribute significantly to the revenues and profits of banks.  They also stimulate business development and thus induce economic growth and development (Kings et al 1993).  Moreover, bank loans often seem to convey positive information to the market place about a borrowers credit quality enabling a borrower to obtain more and perhaps some what chapter funds from other credit sources. (Rose 1999). How well a bank performs its lending function has a great deal to do with the economic health and growth of its environment, because loans support the growth of new business and job creation within the bank’s territory and promote economic viability (Levine et al, 2000).
A deficit economic unit relies on a bank to meet its financial needs while the bank to relies on the borrowers to generate profit and revenue.  It follows therefore, that if the borrower is not capable of making effective use of loanable funds, it will hinder the ability of the commercial banks to generate income.  If commercial banks cannot grant loans to the deficit economic units within its immediate operational environment, the business sector will not grow, deposits will not be made, bank itself will be a loser and thus could die (Galac 2001, Honohan).
In the same vein, in the absence of effective commercial banks ability to issue loans to the public, the economic growth of the country (Nigeria) is at stake.  What do we even mean by economic growth?
Economic growth can be defined as any increase in the volume of goods and services over a given period of time which bring about an improvement in the national income of the country.  Economic growth can be put in proper perspective when we appreciate that all factors of production are engaged in the production of goods and services which at the aggregate levels can be called that Gross Domestic Product (GDP). If this is expressed in monetary terms we speak about Gross National Income.  For instance, if the GDP of Nigeria was N500 billion in 2006 and this increased to N1,400 billion in 2008, economic growth will be said to have taken place irrespective of how it was achieved and the impact of the citizenry and hence to determine the impact of commercial banks’ loans on t he economic growth of the country.


1.2            Statement of the Problem
Commercial banks in Nigeria are often criticized for the manner of their lending activities commercial banks in Nigeria concentrate on short term lending where as one would expect a policy that matches the requirements of the economy, that is the medium and long term lending.
Another problem faced by commercial banks is the lack of enough capital.  The total available cash reserve is influenced by the public withdrawal of cash from the banking system. (cash drain) and also the amount the banks keep to meet their daily operations.
Moreover, commercial banks are faced with the problem of bad debts.  Commercial banks lend out money with the aim of collecting it back at a specified date in the future.  Many at times most of these loans are not often recovered by them resulting from disappointment from their borrowers.  This has gone a long way to limit the lending ability and capacity of the Nigeria commercial banks.


1.3            Objectives of the study
This study is set out purposely:
i.                   To examine the impact of commercial banks credit on the economic growth of Nigeria.
ii.                 To assess the behaviour of commercial banks’ loans in order to identify whether bank lending is a catalyst for economic growth in Nigeria.
iii.              To identify whether increase in loanable funds by commercial banks lead to increase in production capacity of the productive sector of the economic growth in Nigeria.
iv.              To determine how commercial banks are able to meet up with the demand of loans of the public.
1.4            Research Question
i.                   Does improvement in commercial banks lending activities bring about improvement in the growth of Nigeria economy?
ii.                 Does increase in loanable funds by commercial banks lead to increase in production capacity of the productive sector of the Nigeria economy?
iii.              Do people really make use of loans obtained from the commercial banks to engage in business activities that can bring about improvement in the economic growth of Nigeria?
iv.              Are the commercial banks able to meet up with the demand of loans by the members of the public?
1.5            Statement of Hypothesis
Ho: There is no significant association between loans provided by commercial banks to the public and the economic growth of Nigeria.
Ho: There is no significant difference in the impact of commercial banks credit on the economic growth of Nigeria.
Ho: There is no significant impact of commercial banks’ loans on the growth of the economy.
1.6            Significance of the study
This work will enable us to come to the conclusion whether commercial banks loans has any effect on the economic growth of Nigeria.
It will also enable the commercial banks to re – appraise their role and lending ability to suit a rapid growth in the economy of Nigeria.
In conclusion, it will help the government in determining the ideal which can help to improve commercial banks lending capacity so as to bring about improvement in the Nigeria economic growth.
1.7            Delimitation of the study
The analysis to be embarked upon in this research work would be within some specified period of 40 years (1970 – 2010).
1.8            Definition of Terms
Loans: This refers to the money lent out by banks either to a business or a consumer where the amount borrowed is rapid according to an agreed schedule at an agreed interest rate and time, typically by regular instalments over a set period of years.  However, the principals may be payable in one instalment.
Economic growth: This is usually taken to mean the growth of the value of real income or output.  The world “real” signifies that only changes in quantities and not changes in prices are allowed to affect the measure.
Deficit Economy: This refers to a deficiency or falling short of funds in an economy, when there is shortage of revenue in an economy most especially on the part of the government of a state.
Loan policy: This refers to the laid down protocol that guides the commercial banks in giving out loans to the public.
Short term loan: This is a financial borrowing in which the borrower is expected to refund the money within the period of a year or less.
Long term loan: This is a financial borrowing in which the borrower is expected to refund the money within the period of two to five years.