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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

It is well acknowledged in economics literature that deposit taking banking institutions play a major role in promoting economic development through channeling of funds from those with excess to those in need for investment purposes. However, for banks to be effective in fostering economic growth, it is important that they lend to the right sectors of the economy that are essential and can act as catalysts to stimulate growth. Furthermore, it is fundamental that banks effectively manage various risks that they are exposed to, in order to remain solvent in the long run and be in a position to provide long term capital which is more essential for economic growth and development. In this regard, for an economy to grow, it should have a well-developed and stable banking system that is resilient to external shocks to effectively play the role of financial intermediation. In Nigeria, the common suppliers of funds for supporting domestic economic activities are commercial banks, development banks and micro-finance institutions.

However, other financial institutions such as pension funds, unit trusts, insurance companies also play a role in providing funds for domestic investment purposes, in that they also create a platform for raising domestic savings. The role of non-banking financial institutions in providing funds for domestic investment is, however, limited given the fact that they are only required by law to invest at least 35 percent of their total assets in the domestic economy (International Monetary Fund, 2016). As such, most of these institutions have their investments off-shore, mainly invested with South African institutions. This has even placed a larger expectation on commercial banks in Nigeria to provide domestic credit that can stimulate the growth of the economy. While commercial banks in Nigeria are expected to drive economic growth through providing credit to the important sectors of the economy, it is not clear whether or not banks are making a significant impact on the economy.

As such, the Central Bank of Nigeria (CBN), which is the central bank entrusted with the function of supervising commercial banks in the country, has over the years raised concerns over the increasing household credit, that is mainly dominated by instalment credit, overdrafts and other loans and advances, which are mostly used to finance unproductive luxury imported vehicles (CBN, 2014). 

The Central Bank of Nigeria guidelines on sectoral distribution of loans and advances are aimed at developing the productive sectors of the country’s economy as well as curbing price inflation. The Commercial Banks who are expected to follow the Central Banks guidelines have their corporate objectives of making profits, the Commercial Banks have auxiliary objectives of meeting the demands of their shareholders, customers and government. Therefore, the research problem rests on whether the Commercial Banks will be able to show full compliance with the Central Banks guidelines in the light of the risk involved and the lending rate prescribed for lending to the preferred and less preferred sectors of the economy.

1.3   THE OBJECTIVES OF THE STUDY

The objectives of this research project can be stressed as follows:

a. To find out whether the Commercial Banks give out loans and advances to the preferred sectors of the Nigerian economy.

b. To find out whether the Commercial Banks give out loans and advances to the less preferred sector of the Nigerian economy.

c. To find out what makes up the preferred and less preferred sectors of the Nigerian economy.

1.4      SIGNIFICANCE OF THE STUDY

This research project will be of immense benefit to the academic world in the sense that it will stimulate future research. It will equally be of immense benefit to the federal government of Nigeria in the sense that the activities of Commercial Banks affect the economy as a whole. The study will also be of advantages to the business world and customers who wish to know why they are not given long term loan as requested by them.

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