Home » IMPACT OF COMMERCIAL BANK IN NIGERIA ECONOMY.

IMPACT OF COMMERCIAL BANK IN NIGERIA ECONOMY.

CHAPTER ONE

INTRODUCTION

1.1   Background of the Study

Commercial banking in Nigeria is a subsector of the financial sector. According to Sanusi (2012), the financial system is more than just institutions that facilitate payments and extend credit. It encompasses all functions that direct real resources to their ultimate user. It is the central nervous system of a market economy and contains a number of separate, yet co-dependent components, all of which are essential to its effective and efficient functioning. These components include financial intermediaries such as banks and insurance companies which act as principal agents for assuming liabilities and acquiring claims. The second component is the markets in which financial assets are exchanged, while the third is the infrastructural component, which is necessary for the effective interaction of intermediaries and markets. The commercial banks have been described to play the role of financial intermediation between the surplus and the deficit economic units of the economy (Adebayo, 2003). Unlike specialized banks (merchant banks, development bank etc) commercial banks intermediates in all business areas of the economy including the industrial sector. According to Sanusi (2012), the banking system functions more efficiently and effectively when there is a robust and efficient payments systems infrastructure. Moreover, the concern to ensure a sound banking system by the Central Bank is underscored by the critical role of banks in national economic development. Banks for instance, mobilizes savings for investment purposes which further generates growth and employment. The real sector, which is the productive sector of the economy, relies heavily on the banking sector for credit.

Ekpenyong and Acha (2011) noted that banks as financial intermediaries are expected to provide avenue for people to save incomes not expended on consumption. It is from the savings they so accumulate that they are expected to extend credit facilities to entrepreneurs and other industrialists. Despite the vital role of the commercial banks in Nigeria, the Nigeria industrial sector has not been a success story when juxtaposed with the Nigeria industrial sector. According to Udoh and Ogbuagu (2012), the contribution of the manufacturing component has on average been below 5.0 percent in the last two decades. Even the relatively high contribution of the petroleum oil sector to the industrial sector is being driven largely by crude petroleum extraction and not by the associated ‘core industrial’ components like refining and petrochemicals. The contribution of wholesale and retail trade and services has more or less remained stable while that of building and construction rose sharply from 5.3 percent in the 1960s to 8.3 percent in the 1970s, but fell consistently, thereafter, to 1.8 percent during 20012009. This shortfall of the Nigeria industrial sector has continued to nose down till date (Adeyefa & Obamuyi, 2018; Olorunfemi, Obamuyi, Adekunjo and Ogunleye, 2013). Yet industrialization is perceived to be the major force that drives modern economy in both developed and developing countries. In most economies, industrial/manufacturing sector serves as the medium for the production of goods and services, the generation of employment and the enhancement of incomes. Hence, the sector is often described as the hub of every economy. Unfortunately, the situation is different in Nigeria, as the contribution of the secondary sector (manufacturing, building and construction) to total gross domestic product (GDP) has been comparatively frail when compared to the other sectors of the economy in Nigeria (Adeyefa & Obamuyi, 2018).

Government effort at addressing the conundrum and improving industrial production and capacity utilization of the Nigeria industrial sector has yielded no significant result so far. For example, during the First National Development Plan (1962-1968), Nigeria adopted the import substitution industrialization strategy aimed at reducing the volume of imports of finished goods and encouraging foreign exchange savings by producing locally; during Second National Development Plan period (1970-74), Nigeria consolidated her import substitution industrialization strategy. But it fell within oil boom era. Between 1982 the Nigerian government adopt measures of 1982, the restrictive stringent exchange control measure abortive. Then came the Structural Adjustment Programme (SAP) of 1986 (CBN, 2003; Olorunfemi, Obamuyi, Adekunjo and Ogunleye, 2013).  According to Olorunfemi et al (2013), one of the main reasons for the introduction of SAP was to reduce the high dependence of the economy on crude oil as the major foreign earner, by promoting non-oil exports, particularly manufactured goods. But the contribution of the manufacturing sub-sector to GDP has declined steadily, due to a number of factors. As a result, many other economic policies. Despite these efforts of the government, the performance of the manufacturing sectors is still not clear, thus warranting an empirical probing. 

1.2    Statement of the Problem

This study was informed by the declining performance of the Nigeria economy. Scholars have attributed the declining performance to massive importation of finished goods and inadequate financial support for the manufacturing sector, which ultimately has contributed to the reduction in capacity utilization of the manufacturing sector in the country (Adeyefa & Obamuyi, 2018; Obamuyi, Edun and Kayode, 2012). According to Obamuyi, Edun and Kayode (2012), despite the fact that the government embarked on several strategies aimed at improving industrial production and capacity utilization of the sector, performance has continued to fluctuate. In the literature, it has been justified that industrialization is a pathway to economic development and growth (Adeyefa & Obamuyi, 2018; Olorunfemi, Obamuyi, Adekunjo & Ogunleye, 2013; Udoh and Ogbuagu, 2012). However, a well-developed banking sector is not unconnected to the success story of any industrialized economy. Whereas linkage between financial development and economic growth has long been a subject of intense scrutiny, not much has been done to examine the link between financial development and industrial growth. While the volumes of previous studies are attempting to reach a theoretical consensus on financial development and economic growth, it will be of interest to examine in the same vein the pathway of industrialization in the wake of financial development. This study therefore seeks to determine the impact of commercial banking on Nigeria industrial sector, since the banking sector is expected to extend credit facilities for industrial development.

1.3    Objectives of the Study

The main objective of this study is to examine the impact of commercial banking on Nigeria economy. Specific objectives include:

i.  To determine the effect of commercial bank to industrial sector, inflation, infrastructure, exchange rate, interest rate, labour force and bank capital on Nigeria economy.

ii.  To assess the impact of commercial banks’ lending on Nigeria’s gross domestic product and index of industrial production.

iii.  To find out the relationship between commercial bank and Nigeria economy.

1.4       Research Questions

i.  What is the effect of commercial bank to industrial sector, inflation, infrastructure, exchange rate, interest rate, labour force and bank capital on Nigeria economy?

ii.  What is the impact of commercial banks’ lending on Nigeria’s gross domestic product and index of industrial production?

iii.  Is there a relationship between commercial bank and Nigeria economy?

1.5    Research Hypotheses

Hypothesis I

H0: There is no significant impact of commercial banks’ lending on Nigeria’s gross domestic product and index of industrial production.

Hi: There is a significant impact of commercial banks’ lending on Nigeria’s gross domestic product and index of industrial production.

Hypothesis II

H0: There is no relationship between commercial bank and Nigeria economy.

Hi: There is a relationship between commercial bank and Nigeria economy.

1.6   Significance of the Study

This study will be of immense benefit to other researchers who intend to know more on this study and can also be used by non-researchers to build more on their research work. This study contributes to knowledge and could serve as a guide for other study.

1.7   Scope of the Study

This study on the impact of commercial bank in Nigeria economy was carried out in a time frame of thirty (30) years, from 1986 to 2015 data were sourced from Central Bank of Nigeria (CBN) statistical bulletin of 2015.

1.8       Limitations of the study

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.