THE IMPACT OF BANK LENDING ON THE PERFORMANCE OF THE MANUFACTURING SECTOR IN NIGERIA

CHAPTER ONE

INTRODUCTION

 

1.1  BACKGROUND OF THE STUDY

It is a known fact that, output of the Nigerian economy comes from six main sectors namely: agriculture, manufacturing, mining, quarrying, real estate and construction, wholesale and retail trade (general commerce) and service sectors. These sectors relate with one another using the stock of capital and other factors of production within the economy to produce the desired goods and services. During the production process in these sectors, capital which is a factor of production play a very dynamic role? It assists in procurement of necessary inputs required for production and hence, increases production capacities. Therefore, availability and non-availability of capital determines, to a large extent, the growth process and performances in these sectors.

In many developed and developing nations including Nigeria, the manufacturing sector plays a very vital and significant role in the development of economy. The manufacturing sector as a sub sector of the industrial sector refers to a process in which raw material and other production factors such as labor land and capital are combined and utilized in the production of good and services.

In advanced economy such as the United States of America, China and most of other Asian countries, the manufacturing sector is a leading sector in many respects. This is understandable in view of the fact that it has been generally acclaimed, through the kaldor’s first law, that the manufacturing sector is the engine of growth of the economy. It is an avenue for increasing productivity related to import replacement and export expansion, creating foreign exchange earning capacity; and raising employment and per capita income which causes a unique consumption pattern.

The manufacturing sector also creates investment capital at a fast rate than any other sector of the economy while promoting a wider and more effective linkage among different sectors. (Anyawu, 2010) In terms of contribution to the Gross Domestic Product (GDP), the manufacturing sector is dominant and it has overtaken the services sector in a number of Organizations for Economic Co- operation and Development (OECD) countries.

In recognition of these potential roles of the manufacturing sector, successive governments in Nigeria have continued to articulate policy measures and programs to achieve industrial growth incentive and adequate finance (Orji, 2012). To emphasize the fundamental and critical role the manufacturing industry plays in capital formation, domestic savings and its effect in ensuring sustainable economic growth and development in Nigeria, the federal government at different times introduced a number of schemes such as World Bank SME II Loan Scheme (1987), Small Scale Industries Credit Scheme (1971), established Industrial Development Centre, National Economic Reconstruction Fund( NERFUND), Nigerian Bank for Commerce and Industries, Nigerian Industrial Development Bank all aimed at improving and sustaining the performance of the manufacturing sector.

In 2010, the federal government through the Central Bank of Nigeria made available the sum of 200 billion naira as Manufacturers’ Intervention Fund. “The objectives of the fund include fast-tracking the development of the manufacturing sector of the Nigerian economy by improving access to credit to manufacturers; improving the financial position of the Deposit Money Banks; increasing output; generating employment; diversifying the revenue base, as well as increasing foreign exchange earnings. It is also meant to provide inputs for the industrial sector on a sustainable basis.”(CBN, 2010). Similarly, the involvement of the private sector such as the Dangote group, Honey well among others in the manufacturing sector, has boosted its development.

As a result of abject poverty, low savings capacity and consequent low capital formation, producers in developing countries such as Nigeria are unable to finance their activities and therefore have to depend on external sources of funding. According to Uma (2001), Availability of external funding, especially access to long-term credits influences firms’ investments level in an economy, since credit is viewed as a productive input and policy makers believe that it is possible to promote specific economic activities by delivering pre-determined amount of loans to producers. Hence, banks credit has become an essential feature in output growth process in Nigeria. Availability of bank credits enables producers to harness innovations by bringing about new combinations of productive resources and employing hitherto unemployed resources

The banking system which is at the heart of the Nigerian economy has been prior to Nigeria’s independence in October 1960. Nwankwo (1975) observes that formal banking began in Nigeria 1892 with the establishment of the African banking corporation (ABC) in Lagos. Since the colonial era, till date, banking system in Nigeria has experienced massive transformation in character, structure and organization with the primary objective of promoting a more efficient and effective fund allocation and ensuring that its financial intermediation functions occurs as proficiently as possible, thereby enhancing fund mobilization and accessibility, which are required for output growth.

Early economists such as scumpeter (1934), mckinnon (1973) and shaw (1973) identified bank roles in facilitating innovations through their role of intermediation. The role according to them is performed through the process of channeling funds in the form of credits or loans for investment to those economic agents who need them and can put them into the most productive use. Thus lending which is defined in this context, as the link through which resources are transferred for capital formation, facilitates investment which leads to output growth. Several scholars thereafter such as fry (1988), king and Levine (1993), Levine (2004), and de serres, kobaykawa, slok & vartia (2006), have supported the above postulation about the significance of bank lending to output growth in an economy.

 

The Impact of Bank Lending on the Performance of the Manufacturing Sector in Nigeria

1.2  STATEMENT OF THE PROBLEM

The Federal Government’s Appropriation Bill in recent years has as one of its broad policy objectives to achieve a high economic growth rate i.e. GDP of at least 5% through a better mobilization and prudent use of economic resources. These objectives are not achievable without significant levels of resources from the financial sector being mobilized and deployed to finance business expansion and growth, hence, the role of the deposit money bank in ensuring the effective and efficient performance of this objective.

Banks have to carry out its essential duty of intermediation to ensure smooth mobilizing and channeling of deposits to the productive sector of the economy especially the manufacturing sector. However, in spite of persistent need by the federal government for improvement, which led to the development of policy strategy in order to attract credits to the manufacturing sector, there remains unwillingness by the deposit money bank to offer credits to the manufacturing sector at low lending rate. For instance, as indicated in the central bank of Nigeria (CBN report, 2009), almost throughout the regulatory era, commercial banks loans and advances to the manufacturing sector deviated persistently to a minimal.

A study by the national planning commission, Federal Republic of Nigeria (2011) held that the flow and quality of bank funding to the private sector went down increasingly as the risk aversion of banks increased in the aftermath of the financial meltdown. Funding has made it difficult for firms to invest in modern machines, information and communication technology and human resources development which are essential factors in trimming down costs, raising productivity and improving competitive strength.

Even when credit is available, high lending rate which is sometimes go over 30%, make such credits unattractive, given the fact that returns on investments in the sub-sector have been below ten percent (10%) on the average. Accordingly, manufacturing sector in Nigeria is faced with the problem of accessibility of funds for productive investment, hence its poor performance in recent years (Edirisuriya, 2008).

It is important to note that most of the studies on the role of bank lending in the manufacturing sector performance have been highlights on developed economies. There exist limited studies on its impact on developing and emerging economies (specifically, Nigeria), this has created a huge knowledge gap. Hence, the reason for this present study, to eliminate or reduce the information gap in existence.

 

1.3  OBJECTIVE OF THE STUDY

The objective of this study includes the following;

1. To examine the effect the sectorial distribution of commercial banks’ loans and advances to the manufacturing sector has on the output and growth of the manufacturing sector in Nigeria.
2. To determine the impact of lending rate on the output and growth of the manufacturing sector in
3. To determine the impact of saving rate on the output and growth of the manufacturing sector in
4. To examine the effect money supply has on the output and growth of manufacturing sector in

The Impact of Bank Lending on the Performance of the Manufacturing Sector in Nigeria

1.4  RESEARCH QUESTIONS

In other to aid the testing of hypotheses, some questions will be asked which will help the researcher in achieving a positive result in the formulation of hypotheses, these questions includes:

1. In what way has the sectorial distribution of commercial banks’ loans and advances to the manufacturing sector had an impact on the output and growth of the manufacturing sector in Nigeria?
2. To what extent does lending rate have an impact on the output and growth of the manufacturing sector in Nigeria?
3. To what extent does saving rate have an impact on the output and growth of the manufacturing sector?
4. To what extent has money supply had an impact on the output and growth of manufacturing sector in Nigeria?

The Impact of Bank Lending on the Performance of the Manufacturing Sector in Nigeria

1.5 STATEMENT OF HYPOTHESES

 The following hypotheses are relevant to our study:

HO1 Sectorial distribution of commercial banks’ loans and advances to the  manufacturing  sector does not have a positive and significant impact on the output and growth of the manufacturing sector in Nigeria

HO2   Lending rate does not have a positive and significant impact on the output  and growth    of the manufacturing sector in Nigeria.

HO3    Saving rate does not have a positive and significant impact on the output and growth      of the manufacturing sector in Nigeria.

HO4  Money supply does not have a positive and significant impact on the output and   growth of the manufacturing sector in Nigeria.