IMPACT OF PRIVATE SECTOR CREDIT ON NIGERIAS ECONOMIC GROWTH (1981 -2015)

ABSTRACT

This study investigates the impact of private sector credit on Nigerian’s economic growth by applying the Ordinary Least Square technique using time series data from 1981 to 2015. Real Gross Domestic Product (RGDP) is the dependent variable and proxy for economic growth, while the independent variables are Private Sector Credit (PSC), Gross Fixed Capital Formation (GFCF), Nominal Exchange Rate (NER), Gross Total Government Expenditure (GEXP) and Prime Lending Rate (PLR). PSC captures deposit money banks’ credit to the privatesector as a proportion of nominal GDP. GEXP, NER and PLR are proxies forfiscal, exchange rate and monetary policies, respectively. The stationarity of the variables were tested using the Augmented Dickey-Fuller (ADF). The variables RGDP, NER, GFCF were integrated of order of one i.e { I(1)}, PSC and GEXP were integrated of order two i.e {I(2)}, while PLR had no unit root. Some of the major findings includes: There exist a positive significant relationship between private sector credit, prime lending, gross fixed capital formation and real gross domestic growth in Nigeria. While nominal exchange rate and government expenditure had a negative impact on economic growth in Nigeria. Also, the empirical findings revealed that there is no long-run relationship between private sector credit and real gross domestic output in Nigeria. In conclusion of the findings, it was recommended that more credits should be channeled to the private sectors of the economy as this was shown to have significantly influenced economic growth in Nigeria.

 

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The private sector is the segment of a national economy owned, controlled and managed by private individuals or enterprises. The private sector has a goal of making money and employs workers in other to achieve its objectives. A private-sector organization is created by forming a new enterprise or privatizing a public sector organization. A large private-sector corporation may be privately or publicly traded. Businesses in the private sector possibly could drive down prices for goods and services at some given points in the economy.

The debate on the role of finance in economic development has been an ongoing, especially in the developing countries. This dates back to the work of the likes of Schumpeter (1911) who advocated the concept of finance-led growth.

Finance is a field that deals with the study of investment. It includes the dynamics of assets and liabilities over time under conditions of different degrees of uncertainty and risk. We can also say that finance is a simple task of providing the necessary funds required by the business of entities like companies, firms, individuals and others on the terms that are most favourable to achieve their economic objectives, thus finance is the soul of our economic activities. Thus, financial market helps to efficiently direct the flow of savings and investment in the economy in ways that facilitates the accumulation of capital and the production of goods and services; therefore finance has a positive impact on economic growth. This finance can be into different types such as; public finance, private finance, personal finance and corporate finance. In explaining these types of finance public finance studies the income and expenditure of a state. Private finance helps organization raise cash; it may be suitable for a non-profit entity. Corporate finance is primarily concerned with maximizing shareholder value through long term and short term financial planning. Personal finance is the application of the principles of finance to the monetary decision of an individual or family unit.

The financial intermediation role is generally performed by the financial sector, which channels saving into productive investment. Deposit taking institutions (commercial banks) in particular are well recognized for performing crucial role of sourcing finance to support private sector consumption and investment in Nigeria. Credit to private sector refers to the financial resources provided to the private sector, such as loans, and advances, purchases of non-equity securities, trade credit and other accounts receivable. In this regard, credit can be viewed from two angles; namely: trade commercial credit and banking system credit. According to freear (1980), trade credit refers to a transaction which involves the supplier handling over good s or performing a service without receiving immediate payment paying the supplier at a later date. However, this study focuses on banking system credit to private sector, which involves the direct provisioning of loans and overdraft to the private sector by institutions such as deposit money banks, non-interest banks and merchant banks in Nigeria. Private sector plays a very important role in developing the economy.

The drivers of economic growth (such as access to credit facilitates, labour, level of technology, etc) are factors which either improves the quality of outputs, or the efficiency with which inputs are transformed into outputs. Several empirical studies have shown that the efficient provisioning of credit has a positive and significant effect on output and employment opportunities while a low level of financial development and its attendant inefficient private sector credit system distorts (pull) economic growth. A strong and inclusive financial system; and availability of investable funds play vital roles in financing economic project and activities that would promote economic growth and development. This is because access to credit enhances the productivity capacity of firms and enhances their potential to grow. In view of the importance in driving the private sector, monetary authorities strive to ensure that their financial system is sound and vibrant. Indeed, it is well established that a vibrant, dynamic, and well-functioning financial sector leads to a host of improved economic outcomes (Levine, 1997; Demirguc-Kunt and Levine, 2008). Thus this forms the bedrock of this research effort.

1.2 Statement of the Problem

In recent years, private sector and economic growth linkage has been a major issues in economic discussion all around the world and empirical literature has been inconclusive on this issue. However, balance of evidence seems to favour a positive relationship between private sector credit and economic growth. This belief has led the Nigerian government through the Central bank of Nigeria to continue to build robust and inclusive financial system to fast track economic growth and to serve as a growth means to other emerging economics in Africa. Therefore for there to be growth bank should lend credit to private investors to invest.

When interest rate is high, loans become more expensive and loan demand is reduced because investors cannot afford to borrow because of the increased rate and vice versa. A monetary tightening, reflected by an increase in interest rates, may also induce banks to cut back credit supply.

A reduction in credit supply may also arise from reduced creditworthiness of firms and households due to a decline in their financial positions following a monetary tightening (balance sheet channel of monetary transmission). A tightening of monetary policy, operated via open market sales by the central bank, may also drain reserves and thus loanable funds from the banking sector, which may also cause a reduction of loan supply (bank lending channel of monetary transmission).

According to CBN statistical bulletin 2015 credit to the private sector has increased steadily over the past years; from 8.57 billion in 1981 to 41.35 billion in 1991 and 764.96 billion in 2001 and by 2011 it stood at 10660.07 billion and 18674.15 billion 2015. An assessment of the National Accounts of Nigeria indicates that the private sector contributes over 60.0 per cent to the gross domestic product (GDP), but attracts only about 40.0 per cent of total credit.

Hence studies have shown that banks are reluctant to lend to private sector activities for reasons such as poor managerial ability, ability to repay, unfavourable growth prospects in the sub-sector, inherent risk and insufficient collateral (Anyanwu, 2010). In essence the study will seek to answer the questions be what is the impact of private sector credit on Nigerian’s Economic growth and also in answering the above research question would help us to see how and to what extent the credit to the private sector contributes to Nigerian economic growth is? And What is the relationship between financial intermediaries and private sector growth in Nigeria.

This study therefore seeks to analyze the basis for appropriate view in the bank’s lending credit to the private sector.

1.3 Objective of the Study

The broad objective of the study is to investigate the impact of private sector credit on the economic growth of Nigeria. The specific objectives include

1. To examine the long-run relationship between private sector credit and economic growth in Nigeria
2. To examine the effect of private sector credit on Nigeria’s economic growth

 

 

1.4 Research Questions

In essence the study will seek to answer the questions below:

1. What is the impact of private sector credit on Nigerian’s Economic Growth,

Answering the above research question would help us to see how and to what extent the credit to the private sector contributes to Nigerian economic growth is.

1. What is the relationship between financial intermediaries and private sector growth in Nigeria.

 

1.5 Research Hypothesis

1. H₀: Private sector credit has no significant effect on economic growth of Nigeria

H₁: Private sector credit has significant effect on economic growth of Nigeria

2. H₀: There is no long-run relationship between private sector credit and economic growth in Nigeria

H₁: There is a long-run relationship between private sector credit and economic growth in Nigeria

1.6 Significance of the study

This study is significant in the sense that

• The findings will be used in determining to what extent credit to private sector determines the level of economic growth through investment.
• It will also help the government to better understand and appreciate the role of the private sector as the engine of growth of any nation.

1.7 Scope and limitation of the study

The study will cover a period of 35years from 1981-2016.