EVALUATION OF THE INTERMEDIATION ROLE OF THE DEPOSIT MONEY BANKS ON THE REAL SECTORS OF THE NIGERIAN ECONOMY (1999 – 2008)

ABSTRACT

This paper assesses the impact of intermediation roles of banks on the performance of the real sectors of the Nigerian economy. The main objective is to find out if the banking industry loans and advances have any significant effect on the real sectors GDP growth rate. The research design adopted in this dissertation was ex-post facto, that is, the use of secondary data. The researcher simply analyzed reported documentations of the study variables extracted from Central Bank of Nigeria (CBN) and Nigerian Deposit Insurance Company (NDIC). The population of the study was 25 deposit money banks operating in Nigeria after the recent consolidation that took place in the banking industry. The sample of the study was made up of the same 25 deposit money banks as the number is small hence manageable. By judgmental sampling real sectors of the Nigerian economy is represented by agriculture, manufacturing and  mining. The  data  for this  work were collected by the use of documentary data collection method from the published annual reports of Central Bank of Nigeria and Nigerian Deposit Insurance Company. The data collected were subjected to statistical analysis using the SPSS version. Parametric statistics  in  forms of  mean and standard deviation, ANOVA, the  student t-test, co- efficient  of  correlation and  simple  linear  regression were  used  to  analyze  research questions and hypotheses. The study found that there is no significant effect of banking industry’s  credits  on  the  GDP  growth  of  agriculture  and  mining  sectors  but  it significantly impacts positively on the manufacturing component of GDP.

The study recommends among other things that CBN should continue to collaborate with all stakeholders in repositioning the banking industry to maximally contribute its quota to

the country’s real GDP growth rate.   Again, there is need for close monitoring of the credit facilities extended to these sectors especially the agricultural sector as some of these facilities are diverted to other personal uses rather than for the purpose they are meant for.

CHAPTER ONE INTRODUCTION

1.1 Background of the Study

The banking sector has traditionally been an extremely important channel of financial intermediation in both developed and emerging economies. It is common knowledge that the strength of any economy is strongly tied to the strength of her banking sector. On the other hand, the state of the economy is strongly impacted on by the operations and performance of her banking industry.

Meshach (2003) notes that in the last two decades the link between financial intermediation (FI) and economic growth has generated a great deal of interest among academics, policy makers and economists around the globe both in developed and emerging economies. The development of any economy is often viewed from among others, the perspective of the growth and vibrancy of its financial sector. This is as a result of how important investible funds are to economic growth and development. Therefore, the place of banking industry in economic development cannot, then, be over- emphasized.

According to Caviglia, et al (2002:200) banks more effectively play intermediating role in financing industrial expansion than any other forms of financial institutions in developing economies. In the light of these developments, the question of whether intermediation roles played by banks still matter for economic growth and development once domestic agents have access to foreign markets has become very important from the perspective of policy makers and private investors.

It will not be an over-statement to say that both the public and private sectors of any economy need banking sector credits for more productive activities necessary to enhance the  nation’s overall perform. As noted by Lucas (1990:48) the development of any

economy is greatly enhanced through a vibrant banking industry. The banking industry serves the function of mobilizing savings from small and large savers in the economy and channels same to the fund users for investment purposes. Banking industry provides credit  facilities  to  individuals,  companies,  as  well  as  government  for  one  kind  of economic activity or the other. It could be for industrialization purpose, agricultural production, execution of contract etc.

Onwumere and Suleman (2010:250) have posited that all national economies comprise the public and private sectors, though, the degree and size of each sector differ among countries. They noted that the development of a country’s economy involves in part the development of the different sectors subsumed in these two main sectors. These different sectors may include some or the following; agriculture, industry, mining, commerce, transportation, communication etc. These sectors need funds to remain in operation and contribute to the nation’s overall performance. For them to survive and perform effectively there  must be  investment which is  synonymous with funding, hence the banking industry becomes a very relevant funnel.

Banks are the largest financial intermediaries in the Nigerian economy, moving funds from surplus sector to the deficit sectors. Agreeing with this Desai (1995:90) explains that banking industry is an indispensable element in any economy’s intermediation drive. It provides the bulk of the money supply as well as the primary means of facilitating the flow of credits especially to the real sectors. Consequently, McCauley (1992:33) submits that the economic well being of a nation is a function of advancement and development of her banking industry. Banking being described by Schumpeter (1934:8) as a conductor focal point for economic growth has important role to play in the funds intermediation between surplus and the deficit sector, hence the over-all growth of the economy.

Indeed, there is ample evidence to show that countries that have enjoyed or are enjoying economic prosperity have been linked with an efficient mechanism for mobilising

financial resources and allocating same for productive investment in the real sector like agriculture, manufacturing, mining etc

Banks provide important positive externalities as mobilizers of savings, allocators of resources, and providers of liquidity and payment services, as well as a fulcrum for monetary policy implementation. To support this, Soludo (2004) explains that banks influence the savings –investment process in order to accelerate the rate of economic growth and poverty reduction. Towards this goal, the soundness of intermediation is as important as its volume, hence the need to have an efficient banking system that will impact positively to the development of the entire economy. Ogunleye (1999) recalls that government has from the formative years of the nation’s financial market up to the mid-

1980s even till now made enough effort to encourage banking sector to extend enough credits to the real sectors. In those years, banks were required to allocate the bulk of their loanable funds to agriculture, manufacturing, mining, residential building construction, solid minerals at concessionary rate of interest, in the belief that a low interest rate structure would promote investments and output growth in the economy.

Ekundayo (1994:32) in his own work describes banking as a life wire, blood vessel and heartbeat of any economy. This means that every other sectors of the economy especially the real sectors like agriculture, manufacturing, mining, communication, transportations, commerce, etc revolve around banking for their survival. Hence, financial support from banking sector has become a major component of strategy for the survival of other

sectors of the economy. As already stated such other sectors of the economy like agriculture, security, manufacturing, commerce and industry revolve around banking industry for their success and effective performance.        It is not odd to reemphasize that the role of banking industry in the economy of any nation cannot be over emphasized especially in financial intermediation and credit extension to other sectors of the

economy to enhance economic growth and development. Banking sector as the engine and prime mover of economy is suppose to be playing a leading role in empowering the

other sectors of the economy especially the real sector to contribute to economic growth and development through improved GDP.

1.2 Statement of the Problem

There has been a problem of how to conduct a successful research that can determine the impact of the intermediation role of banking industry on the performance of the real sectors in an emerging economy like Nigerian. Over the years, one of the major problems facing the banking industry in its intermediation role is how to ensure that loans/funds reach various sectors of the economy especially the real sectors and significantly impact on them in a positive way. This has not be easy because Nigerian economy is viewed as being monoculture due to the predominant effect of oil sector especially in the resources generation to the government as such the other real sectors – agriculture, manufacturing, mining, building/construction, services, communication, commerce and industry are guised to be lagging behind in respect of the generation of revenues to the government due probably to poor credits extension to them, hence this study after which it will no longer be a guise.

Banking industry is expected to play a catalytic role of extending enough loans and advances to the real sectors in order to ensure their growth and contributions to the Gross Domestic Product (GDP) of the economy. As a matter of guise such expected role is not impacted much on the real sectors GDP growth rate. It has been a guise because most of the literature to the best of my knowledge had not been tailored towards Nigerian

banking industry’s intermediation role and the growth of the real sectors. Suffice is it to recall that from the formative years of the nation’s financial market up to the mid-1980s, the government has adopted so many policies to influence the flow of credits to the real sectors of the economy but to the best of my knowledge, sufficient literature has not been in place as to assess the impact of such credits on the performance of the real sector’s GDP growth rate. The assessment is necessary because the traditional economic thinking

relates banking sector performance to the extent to which it has inherent impacts on the transformation and improvement of real sectors performance as well as the over-all economy. But unfortunately the roles of banks in expansionary credit extension to the real sectors of the economy have not been given adequate attention in the discussion of performance of GDP in Nigerian context. It is important to recognize that whether these

credit extension roles of banking industry have increasing impact on the performances of the real sectors as well as on the entire economy cannot be fully understood outside of well-researched empirical study, hence this study to empirically find out the true situation and profound solutions to the pitfalls. In other words, there is very scanty work on the intermediation roles of the banking industry on the developing nation’s economy like Nigeria; hence, the lacuna which this lack of sufficient empirical research created necessitated this work. Regrettably enough the handful of empirical studies in this area is US- or European based, hence, this study becomes necessary to fill the gap.

1.3 Objectives of the Study

The central objective of this study is to empirically examine the impact of banking industry credits on the performances of the real sectors of the Nigerian economy. The specific objectives are:

(i)      To determine the impact of banking industry credit on the performance of the agricultural sector of the Nigerian economy;

(ii)     To find out  the extent to which credits from banking industry has influence on the manufacturing sector of the Nigerian economy;

(iii)    To ascertain if banking industry credit has significant positive influence on the mining sector of the Nigerian economy.

1.4Research Questions

Based on the above objectives which this study aims to achieve the following research questions were extracted to guide us to achieve the research objectives:

(i)      What  is  the  impact  of  banking  industry  credit  on  the  performance  of agricultural sector of the Nigerian economy?

(ii)     To what extent has the banking industry credit influenced the performance of manufacturing sector of the Nigerian economy?

(iii)    Is  there  any  significant  influence  of  banking  industry  credit  on  the performance of mining sector of the Nigerian economy?

1.5Hypotheses of the Study

Streamlined with the objectives and the research questions of this study, the

following hypotheses have been formulated for this research:

Hypothesis One

Ho:   Banking industry credit has no significant impact on the performance of

agricultural sector of the Nigerian economy;

Hypothesis Two

Ho:    Banking industry credit has not significantly influenced the performance of

the manufacturing sector of the Nigerian economy;

Hypothesis Three

Ho:    There is no significant influence of banking industry credit on the

performance of the mining sector of the Nigerian economy

1.6 Significance of the Study

This paper assesses the relevance of intermediation roles of banking industry credits on

the growth and development of real sectors. The outcome of this study will be of great significance in many aspects to the following groups of persons:

The Existing Body of Knowledge: This study will play a significant role in addressing the gap in the existing literature as there is not enough study in the literature that has addressed this vital issue in the Nigerian context to the best of my knowledge.

The Regulatory Authorities: This study will serve as a guide by the regulatory authorities to encourage banking industry to extend more credits to the real sectors especially the agricultural sector as this will pave way for overall growth of the economy. The Policy Makers: This study will be of great significance to government policy making body especially as it affects making policy recommendations for banks to meet the financial needs of the real sectors as to move the economy forward. In other words, it would enable the policy makers establish the policies that will steak to the relevance of the intermediation roles played by banking industry to move the economy forward. That is, providing evidence on the role of financial intermediary development will help policymakers design reforms that indeed promote growth-enhancing financial sector development.

Other countries: It will serve as an eye-opener for other countries having seminar characteristics with us in search of better ways to enhance the performance of the real sectors through funds injection by the banking industry.

The Students and Future Researchers: This study will be of significant to students

and researchers who will desire to undertake study or similar study on the intermediation role of banking industry on the economy. It could be of immense help and serve as a stepping- stone for researchers and students alike for further studies on the role of intermediation on the performance of the real sectors of the emerging economy like ours. The Banking Industry: This study will enable the operators of the industry to know

how best to reach out and inject enough funds to the real sectors in order to move the economy forward.

The General Public: This study will be of significance to the general public as it will enable them know the roles banks play in transferring funds from surplus sector to the

deficit sector. This knowledge will enable them to know that such funds are available for them to access as well and how to go about such.

1.7     Scope of the Study

The study is on the evaluation of the impact of intermediation role of banking industry on the performance of the real sectors of the Nigerian from 1999 to 2008. It examines the impacts of banking sector credits on the sampled real sectors of the economy-agriculture, manufacturing and mining. We restricted our discussion to the mainstream banks (now referred to as deposit money banks), operating in Nigeria from 1999 to 2008 and focused on the level of credits extended to the real sectors of the economy namely agricultural, manufacturing and mining sectors.

For the purpose of this study, banks credits excluded those of non-deposit banks/financial institutions, specialized banks and development banks. However, for all intents and purposes, the deposit money banks constitute the hub of the banking industry, and in fact, the financial services industry. The size of the banking market can be proxy by the size and volume of loans and advances extended by the deposit money banks to the real sectors. Hence deposit money banks formed our main focus in this study.

The data used in this study were extracted from the Central Bank of Nigeria (CBN) and Nigerian Deposit Insurance Corporation (NDIC) annual report and statement of accounts for the years under review to represent the entire banking industry in Nigeria. For analytical reason, not all the real sectors were studied, only agriculture, manufacturing and mining sectors were looked into.

1.8 Limitations of the Study

In this research work, apart from time and financial constraint coupled with the dead of my first Supervisor late Dr A.M.O. Anyafo which posed threats against the completion of this research work; other threats include:

(i)      It proved difficult to obtain on time the detailed information or data from CBN

and NDIC in terms of annual reports and statement of accounts.

(ii)    There were no substantial local literatures on the effect of the intermediation role of banking industry on the performance of the real sectors of the economy.

(iii)    Costs of associated logistics and other serious pressures of life posed serious constrain against the completion of this research work. Nevertheless, the impact of all these constraints did  not  debar the researcher from accomplishing a relatively great deal by His Special Grace.

1.9 Operational Definition of Terms

Banking Ordinance: This is a law or regulation or authoritative degree issued by a regulatory body to guide banking activities.

Capital market: Is the financial market for equity instruments and for debt instrument with a maturity period of more than one year. Or is a market for the buying and selling of long term equity and debt instruments.

Economic growth: Is the quantitative increase in the real outputs of capital income of an economy which are necessary to improve the general condition of living of the people. Economic development: It implies not only mere outputs but growth accompany by changes in the structure of the entire economy.

Emerging market: Stock market or financial market, or business and market activities of developing countries of the world which target at generally moving into bigger and better stage.

Ex–post facto (exposit): Is a Latin word for “after the event” which describes the position that arises after a certain event has taken place or has occurred.

Gross Domestic Product (GDP): Is the Gross National Product (GNP) minus net property income from abroad used frequently to evaluate a nation’s economy.

Gross National Product: Is the total market value of all the goods and services produced by a nation’s economy in a given period, usually a year.

Intermediation:   Is the communicated movement of funds from surplus sector to the deficit sector of the economy by financial institutions like bank. Or is the transferring of funds from the funds raisers to the fund users.

Real sector: Is the activity sector that is into real production of goods and services needed in the economy to promote economic growth and the development of such economy as well as for the welfare of the citizenry.

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