This study investigates the impact of bank lending on economic growth in Nigeria from 1981-2015, and specifically sought to evaluate the impact of bank lending to the private sector on economic growth in Nigeria. An error correction model was estimated using annual time series data of gross domestic product, credit to the private sector, money supply and interest rate collected from the Central Bank of Nigeria Statistical Bulletin and National Bureau of Statistics. The essence was to determine the short run impact of credit to the private sector on economic growth as well as to capture the adjustment towards long run equilibrium. The study established that in the period under review, credit to the privates sector has a negative impact on economic growth in Nigeria. Therefore the study recommends that measures should be put in place to widen the availability as well as accessibility of credit facilities to those who need it most and also ensure that there is sound policy frameworks that will help minimize interest rate to stimulate economic growth, that monetary authorities must ensure that a mechanism for monitoring of credit facilities must be put in place so as to ensure that loans given to individuals are used for the purpose for which it is collected and assist in making more loan-able funds available for investment in the real sectors of the economy.










1.1 Background of the Study

The relationship between commercial bank lending and growth is one that can have strong consequences for the growth of a country and the viability of large scale, medium scale and small scale businesses. Lending being the primary function of commercial banks can have strong implication for economic growth in a country.

Bank lending according to Stephen(2012) refers to commercial bank loans and other financial services offered to economic units intended for expansion and other corporate purposes. Bank lending is a core function of banks in any economy. Bank lending functions by commercial banks can take the form of issuing letters of credit, bank drafts, issuing loans and other financial services.

Banks accept deposits from the public for safe keeping and then trade with these monies through their lending activities. Banks lend money in various forms and for various activities.

Banks can lend to the private sector for the expansion of their businesses, acquisition of machinery or for starting up new businesses as well as for other purposes, they can also lend to Public sector which can be for the procurement of assets, provision of basic amenities or for the performance of other governmental roles.

Banks can also lend to various sectors such as the industrial, manufacturing, construction and service sectors. The huge financial outlay involved in either setting up, maintaining, or expanding already existing firms underscores the importance of bank lending or bank financial services.

The development of financial sector particularly in the provision of loans to economic agents in the economy should lead towards economic growth, thus, the role of bank credit is considered important to economic growth and development (Khan and Senhadji, 2000).

Kasekende (2008) wrote that countries with efficient credit systems grow faster while inefficient credit systems bear the risk of bank failure. The possible positive link between credit market and economic growth is fairly obvious because developed countries, without exception have more developed credit markets.

The literature on financial economics provides support for the argument that countries with efficient credit systems grow faster while inefficient credit systems bear the risk of bank failure (Kasekende, 2008). Moreover, credit institutions intermediate between the surplus and deficit sectors of the economy. Thus, a better functioning credit system alleviates the external financing constraints that impede credit expansion, and the expansion of firms and industries (Mishkin, 2007).

Lending institutions play a major role in economic growth and development through provision of credit to execute economic activities. Bank loans are one of the most significant tools employed to manage the economic system in accordance with the purposes of the monetary policy. In other words, the development in the volume of loans in an economy are very important in the sense that they contain useful information that may be used in both the analysis and the estimation of economic activities.

In some countries like Japan, bank lending which is one of the most important long-term financing sources constitute more than 70% of its long-term debt Freixas and Rochet, (2008).  The assessment of the banking system (particularly in the areas of loans) can be evaluated through the performance of monetary tools which can be broadly classified into two categories, the portfolio control approach and market intervention. In the view of Nwangwo(2000), credit constitutes the largest single earning asset in the portfolio of most banks. This explains why banks spend numerous resources to estimates, monitor and manage credit quality because improvement in the quality of bank lending is important than increasing the volume of bank lending.

The role of credit in economic development has been recognized as credits are obtained by various economic agents to enable them meet operating expenses. Usually financial services work through efficient resource mobilization and credit expansion to raise the level of investment and efficient capital accumulation. The possible positive link between credit market and economic growth is fairly obvious because developed countries, without exception have more developed credit markets.

For some banks, loanable funds account for about fifty percent or even more their total assets and about half to two-thirds of their revenue Udoka and Effiong (2006). This made bank lending the first and most important due to the following reasons;First the general public or customers use lending in assessing banks stability which means that banks that normally accept loan proposals are stable than those that do reject proposals for loan,  Lending are regarded as part of legal requirement by the monetary authority which may stimulate certain percentage of bank lending to some sectors like small scale industries, agriculture etc,  Lending is used as tools to implementation of the monetary policies of government which affect money demand and supply in the economy, the most important reason why the lending function of banks is important in every economy is that it is generally accepted that there is a positive relationship between bank credit and economic growth Oluitan(2009).

According to Gerschenkron(1962), banks more effectively finance industrial expansion than any other form of financing in developing economies. Bank loan may be secured and unsecured. It is regarded as secured loan when the lender can take possession of the assets should the borrower refuse to pay while unsecured loan is the one the lender does not have the right to take anything in return.

In ensuring effective supervision of lending, banks charge interest on loans base on the following factors: The banks cost of funds, interest charged by competitors, the ruling bank rate in the economy and other banking relations with the borrower.

The following are different types of loan banks normally loan out to its customers: Agricultural loan, working capital loan, term loan and real estate loan, installment and secured loan, small business loan, student loan, mortgage loan etc., the above loans by banks is characterized by interest which may be either fixedor variable.

Bank lending has the following advantages:They can be easily procured.They can be used as short- term as well as medium-term financing.Interest paid on bank loan is a tax deductable expenditure.

The following are disadvantages of bank lending; The greatest disadvantages of bank lending is the difficulties in obtaining loans because banks gives loans mainly to those businesses that can easily repay their loans and also make sure that they will be able to cover losses in the event of default.  The cost of bank loans because in most cases, interest rate for small business loans from banks can be quite high, and the amount of bank funding for which a business qualifies is often not sufficient to completely meet its needs.  In most cases, banks does not disburse the whole amount of loan applied for, it pays cash lower than the loan demanded.Borrowing too much as a bank loan can lead to decreased cash flow in the economy.

In Nigeria, there have been some instruments and policies put in place by the government with respect to bank lending which in order to achieve the set out objectives, all these banks must rely on these instruments and policies. They are: Reserve requirements, stabilization of securities, interest rate policy (lending rate), exchange rate and foreign exchange management, discount rate policy among others which Nigeria as a developing country operates under the supervision of Central Bank of Nigeria (CBN). Lending which has over the years become one of the most important functions in bank operations provides money for instrument which in turn yields turnover and increase liquidity in circulation, due to this direct effect it has on the economy and business development, it is being pursued in many developing countries where banks and their banking activities have been usefully integrated into government policy formation in the national economic development process.

However, the major concern of any lender while advancing credit is how they will get their money back (Fleisig, 1995), and this implies that the engagement between lenders and borrower is accompanied by certain level of risk which include market risk, operational risk, and performance and credit risks which largely depends on the environment the lending institution is conducting its operation. Lending to public and private sector needs to be effectively carried out by the commercial banks since it is the basis for the establishment of sound economic development. The lending operations of commercial banking in any economy constitute a critical sector in the growth and development of any economy Michael (2012).

In giving loan, banks gives loans base on these performance of such customers in the operations of their banks account, the size of their business undertaking, the nature of their business operations, their market shares in the industry, the personal integrity of the customers, level of liquidity of the bank and the type of banking operations like investment banking . Also in giving out loan, the loan interview provides an opportunity for the banks’ loan officer to assess; the customers character and sincerity of purpose, planned ultilization of the funds, actual amount of funds sufficient for the project involved, nature of the applicant business operation, means of ensuring prompt repayment of the loan and applicants understanding of the implications of loan obligation.  This step (the loan interview) is desirable because it can be used to exact some additional information from the loan applicant which will go a long way to help in giving favorable consideration to the loan request.

In the objectives of lending activity, the banks have come up with policy guidelines which basically provides the frame-work for dealing with loan and advances. Some of these polices are designed to have relevance to the interval constraints of each bank. For instance, sector performance, deposit base, risk existing exposure while others rely mainly from the guidelines issued periodically by the Central Banks for control reasons known as monetary and credit policy guidelines for each fiscal year. A lending policy if well-articulated could provide a guide for safe, sound and profitable banking activities while it can lead to bank liquidation if not well articulated.

Irrespective of the amount of liquidity available in a bank, it may find it practically impossible to satisfy all the requests it lies for loan since the request may outstrip available resources. Thus bank has to discriminate in its lending decision.

Lending policy procedures which act as checks toward making sure that the objectives of policy guidelines are achieved include:How loan are to be processed, what documents are required, Necessary securities, where various documents should be send, recommendation to be forwarded.

Due to improper lending, most banks make provision for bad debts but on the other hand what is known as recovery procedures in savoring doubtful debt which  include the step by step actions by its specialized units either legal or other wise to this effect. This intends to take a critical appraisal at these lending policies procedures for loan recovery will help in achieving a good and effective banking system.It is on this basis of the divergence of opinionsthat it has become necessary to examine the role of banks in the economic growth process inNigeriaespecially its lending to and private sector.

This study thus will contribute to existing literature by investigating the relationship between bank lending and economic growth in Nigeria.

1.2 Statement of the Problem

According to CBN (2012), bank lending in Nigeria is at all-time low and has not returned to the pre 1990s lending level, making Nigerian banks to be failing in their role of primary responsibility which is to lend to private sector businesses which will leads to economic growth. Demetriades and Hussien (1996) observe that bank credits allocated to the private sector of the economy tend to be more productive compared with those allocated to the public sector of the economy. Also as observed by Levine and Zervous (1998) as well as Crowley (2008), the fact banks credits to the private sector are approved under more stringent conditions provide basis for them to ultimately guarantee better and higher productive effects compared to public sector lending. Some studies such as Beck, Cull and Jerome (2005), Levine (2002), Odedokun(1998), and King and Levine(1993) are of the view that credit to the public sector is weak in generating growth within the economy because they can easily be wasted on things that cannot influence economic growth and politically motivated programmes which may not be at the interest of the populance.

Despite the above generalization on the relative efficacies of private and public sector bank credits in relations to economic growth, empirical literature is still spurse, especially on country-specific basis, with respect to the comparative efficacies of bank lending to the private sectorwhich will be obtain using current data. This derive invariably, constitutes the core problem of the study.

This research paper undertake to see if bank lending have actually contributes to economic growth in Nigeria and also to find out if lending to private sector has contribute much towards Nigeria economy.


1.3 Research Questions

This study sought to answer the following research questions:

  • How does bank lending affect economic growth in Nigeria?
  • To what extent has lending to the private sector contributed to the Nigeria economy?


1.4 Research objectives

The general objectives of this study are to examine the impact of bank lending to economic growth in Nigeria. In line with this, the specific objectives of the study include the following;

(1) To determine the effect of bank lending to private sector on Nigeria’s economic growth.



1.5 Research Hypothesis 

H0: Bank lending to private sector has no significant effect on Nigeria’s economic growth.

H1: Bank lending to private sector has significant effects on Nigeria’s economic growth.

Bank lending has no significant effect on Nigeria’s economic growth.

H1Bank lending has significant effect on Nigeria’s economic growth.


1.6 Significance of the Study

A research to investigate the impact of banking lending and economic growth in Nigeria will be relevant tot eh bankers, the government, the public and other researchers since it will widen their understanding on how banks lend out money as to improve the growth of the economy.