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Impact of Commercial bank credit on Industrial Sector Output in Nigeria

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Industrial sector plays a crucial role in the development of modern economy the world over. Industrial sector as a sub-sector of the industrial sector refers to the productions of goods and services through combined utilization of raw materials and other production factors such as labor force, land and capital or by means of production process. In advanced economies, the industrial sector is a leading sector in many respects. 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 unique consumption patterns. Furthermore, it creates investment capital at a faster rate than any other sector of the economy while promoting wider and more effective linkages among different sectors. In terms of contribution to the Gross Domestic Product (GDP), the manufacturing sector is dominant and it has been overtaken the services sector in a number of Organization for Economic Co-operation and development (OECD) countries (Anyanwu, 2010).

In recognition of these potential roles of the sector, successive governments in Nigeria have continued to articulate policy measures and programmes to achieve industrial growth incentive and adequate finance (Orji, 2012). To underscore the pivotal and critical role the manufacturing industry plays in capital formation, domestic savings and its effect in the realization of sustainable economic growth and general prosperity 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 Centres, 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 sector. In 2010, the federal government through the Central Bank of Nigeria made available the sum of =N=200 billion 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.

The post-independence Nigerian government adopted the entrepreneurship government which constrained it to assume the role of entrepreneur and the urge to offset the economic neglect of the colonial government and that resulted in engaging in ambitious industrialization programmes.   When the Nigerian industrial Development Bank Limited (NIDB) was established in 1964 for the purpose of speeding up the industrialization process, its mandate was to promote industrial projects which were large enough to make applicable contribution to the national economy.  However, the collapse of the oil boom in the early 1980’s exposed the inherent weaknesses of this importation of inputs resulted in large  idle  capacities, thereby creeping many gross domestic product (GDP) declined in the face of the strong national aspiration for the restructuring of the economy and reduction of the dependence on petroleum. Small and medium scale enterprises have since become the focus of national industrial policy.  In pursuit of self-reliance in a developing country particularly in Nigeria, the central government enacted a decree called “Enterprises promotion Decree” when there was need for small scale enterprises in the promotion of economic development.  This has since been at the fore front of   development strategies. However, many developing countries have failed to adopt these strategies owing to their belief that it is a relatively slow process of industrialization. Without the development of small scale enterprises in Nigeria, the nation’s quest for industrialization will certainly remain forever at a slow pace.  It is the humble opinion of the researcher that further development on our business enterprises must add to the basic issue of creating linkage within the economy to begin to yield real inputs to our economic activities. Priority attention must therefore be given to those business enterprises for which domestic inputs could easily be produced.  The objective should be to maximize the value added in their processing and manufacturing as final strong producer incentives to small scale enterprises are necessary not only to meet the food requirement but also to promote growing input supplier industrial growth.  In the same vein the industry is as old as Man on earth.  Even though the inception of industrial revolution which scattered industries to all nooks and corners of the World claimed to be the originator.

1.2              STATEMENT OF THE PROBLEM

The industrial 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 against this back ground that this paper intends to investigate the effects of deposit money bank credit on the manufacturing sector in Nigeria. Also, given the present government’s policy twist of diversifying the economy away from oil towards non oil in which manufacturing sector is central on one hand, and on the other hand increasing the rates of interest on loans as signaled by the recent hike in the MPR from 12 to 14, calls for the investigation of the effect of bank credit which is largely determined by the prevailing interest rate on the manufacturing sector output in Nigeria.

In an attempt to modernize many small scale enterprises, their standard of operation has moved into the capital intensive stage.  The need in many cases is beyond the financial capability of the entrepreneurs who set up the business.  The major alternative for the provision of such capital is the financial institutions and among the financial institutions operating in the country, commercial banks are the major sources of credit to the various sectors of the economy.

However, it is common knowledge that getting financial support from commercial banks has been grossly inadequate for budding indigenous entrepreneurs and even for those who have been in the manufacturing business for a long term. Therefore this research work investigates commercial banks and  industrial development in Nigeria: Issues and analysis within the sample period of 1980-2015.

1.3       Research Questions

(1)        Is there any significant impact of commercial bank credits on industrial sector development?

(2)        Is there any long run relationship between industrial development and commercial bank credits?

1.3       Research Objectives

The general objective of the study is to assess the relationship between commercial bank and industrial development in Nigeria. The specific objectives include the following:

(i)         To investigate the impact of commercial bank credit and industrial sector development in Nigeria.

(3)        To evaluate if there is long-run relationship between industrial development and commercial bank credit in Nigeria.

1.5       Research Hypothesis

In this study, the hypotheses below shall be tested;

H0i:      Commercial bank has no significant impact on Industrial sector development in Nigeria.

H0ii:     There is no long-run relationship between industrial sector development and commercial bank credit in Nigeria.

1.5. Significance of the Study

This study aims at investigating commercial banks and industrial sector development in Nigeria by evaluating issues relating to commercial bank credit and industrial sector development in Nigeria. The study will be of great importance to policy makers, government and its agencies, private individuals and firms at large.  The study will be also of great importance to student s of economics and other researchers who may have interest in industrial sector or industrialization and its impact on Nigeria economy. Finally, the findings of this study would add to the stock of econometric literature of Nigeria.

1.6       Scope and Limitation of the Study

The geographical scope of this work will be centered on the Nigerian economy with particular emphasis on the industrial sector and commercial bank between 1980-2015. The industrial sector as used in this context refers to the sector of the economy that involves deliberate and sustained application and combination of suitable technology, management techniques and other resources to move the economy from the traditional low level of production to a more automated and efficient system of mass production of goods and services (Ayodele and Falokun, 2003).

The researcher encountered a number of constraints in the course of this work to include; data sourcing or data inconsistence due to poor nature of information management in Nigeria. Other constraints are; time factor, financial constraints and host of other constraints that prevent the researcher to present a better work than this.

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