EFFECT OF DEPOSIT MONEY BANKS ON THE ECONOMIC GROWTH OF NIGERIA

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EFFECT OF DEPOSIT MONEY BANKS ON THE ECONOMIC GROWTH OF NIGERIA

CHAPTER ONE

INTRODUCTION

BACKGROUND TO THE STUDY

Deposit money banks financing is the mobilization and allocation of financial resources to productive investments and, in return, promote sustainable performance and ensures that businesses are flourishing and alive. One of the key functions of banks is financial intermediation and issuing of loan facilities to governments, organizations and virtually every sector of the economy. These economic sectors range from the manufacturing, agriculture, services, construction, transport, mining, oil and gas among others. Economic growth is a sustainable increase in the value of goods and services in an economy within a given period of time. This could be measured by nominal gross domestic product, real gross domestic product, gross domestic product per capita or gross domestic product growth rate. The nominal gross domestic product is the total value of goods and services produced in an economy without adjusting for an inflation rate. A real gross domestic product is the total value of goods and services produced in an economy after adjusting for an inflation rate. Jhinghan (2003) defined gross domestic product per capita as the total value of goods and services produced in a country divided by the total population within a given period of time, while, gross domestic product growth rate is the rate of increase in the value of goods and services in an economy within a given period of time. Deposit money banks are financial institutions that played an intermediating role in financing industrial expansion in both developed and developing economies. Obviously, both the public and private sectors of any economy need banking sector credits for more productive activities as prerequisites for enhancing a nation’s overall performance. Lucas (1990) noted that the development of any economy is greatly enhanced through a vibrant banking industry which serves the function of mobilizing savings from small and large savers in the economy and channels same to the fund users for investment purposes. The agricultural sector needs funds to remain in operation and contribute to the nation’s overall performance. For it to survive and perform effectively there must be an investment which is synonymous with funding, hence the banking industry becomes a very relevant funnel. Soludo (2004) asserted that in Nigeria, deposit money banks are the largest financial intermediaries that transfer funds from surplus sector to the deficit sectors of the economy. The role of Deposit Money Banks financing is seen as a suitable source for the manufacturers to enable them to meet both new investment opportunities and operating expenses. Deposit money banks credit to manufacturing sector serves as financial intermediation between the deficit and surplus units which enhanced large-scale production and has a backward and forward effect on economic growth. In response to the decreasing level and the significant roles of the manufacturing sector in the economy, the Federal Government of Nigeria has put a policy measure in place, prioritising the manufacturing sector prior to year 2000 by directing deposit money banks, through the Central Bank of Nigeria, to devote a certain percentage of their loanable funds in order to enhance sustainable growth of the sector. Banking industry provides credit facilities to individuals and companies, for one kind of economic activity or the other. It could be for industrialisation purpose, manufacturing, agricultural production, mining and quarrying, execution of contract among others. The lending rate is one of the factors that affect the accessibility of loans by real sectors of the economy. The low lending rate will attract more investors to take loan facilities from the deposit money banks why high lending rate discourage most investors from accessing deposit money banks loans. The literature evidence indicated that finance is very important resources in carrying out every human activity at both private and public levels of which its impact needs to be examined on the economic growth in Nigeria. Deposit money banks credit allocations in Central Bank of Nigeria statistical bulletin 2018 indicated that the real sector in Nigeria is still finding it difficult to access financial resources especially from the deposit money banks that hold the larger part of total financial sector assets, also nominal interest rate is high which equally caused many investors to avoid bank-borrowing. Anyanwu (2000) argued that the low level of investments has hindered the growth of productivity in Nigeria. These low investments have accounted largely to banks’ unwillingness to make credits available to manufacturers, as a result of the mismatch between the short-term nature of deposit money banks’ financing and the medium to long-term nature of financing needed by manufacturing industries. The manufacturing, mining and quarrying sectors in Nigeria are faced with the problem of low accessibility of funds for productive investment, hence its poor performance in recent years (Edirisuriya, 2008). Deposit money banks have focused mainly on short-term lending instead of the long-term farming investments which is a peculiar characteristic of agricultural businesses in order to enhance agricultural growth. Rahji and Adeoti (2010) argued that agricultural credit is a major input in the development of the agricultural sector in Nigeria, yet there has been a decline in deposit money banks’ enthusiasm to lend to the sector because of the inherent problems associated with the sector. Even, where credits are granted, the interest charges are often too high, which may discourage many farmers. The empirical study has indicated that there is no conclusive agreement as to the effect of deposit money banks real sector financing on economic growth. Some researchers, e.g. Aniekan and Matthew (2014); Bada (2017); Imoughele and Ismaila (2013); James and Ikwuagwu (2016) found positive effects, other researchers e.g. Ugiagbe and Egbeonu (2016) found a negative effect of deposit money banks real sector financing on economic growth. The review further shows that their statistical tools used were good and adequate; however, their data were not current as all of their data were within 2015 and below. These gaps need to be filled by undertaken this study; effect of deposit money banks real sector financing on economic growth in Nigeria.

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