Globally, it is expected that banks should play vital roles in financing economic
activities as their contribution at ensuring sustainable economic growth and
development. The intermediary role of banks can foster economic growth through
raising of savings, improving efficiency of loan-able funds and promoting capital
accumulation. In Nigeria, the banking industry as well as the entire economy assumed
a new dimension in September 1986 when the then Military government introduced
the Structural Adjustment Programme (SAP). Expectedly, this restructuring brought
certain changes not only to the banking system but also the entire economy of
Nigeria. However, whether continuation of policies allied to the programme has
increased access to loan-able funds through the intermediation functions of banks is
still contentious. It is against this background that this study examined the impact of
bank credit on economic growth in Nigeria from 1987 to 2012, and specifically
sought to evaluate the impact of bank credits advanced to the private sector on
Nigerian economic growth, ascertain the effect of bank credits extended to the public
sector on Nigerian economic growth and ascertain the impact of the aggregate bank
credits to the private and the public sectors on the Nigerian economy. The study
adopted the ex-post facto research design and times series data were collated from the
Central Bank of Nigeria Statistical Bulletin and Annual Reports. The OLS regression
statistic was used to test the hypotheses stated. The estimated regression results
indicate that private sector credits, public sector credits and the aggregate bank credits
to the private and the public sectors impact positively and significantly on economic
growth over the period of the study. The study concludes that for the Nigerian
economy to grow, policy frameworks that favour more credits to the private sector of
the Nigerian economy with minimal interest rate to stimulate economic growth should
be pursued by government. This will assist in making more loan-able funds available
for investment into the real sectors of the economy. The study, therefore, recommends
among others that policies on public sector borrowing and spending should be
reviewed in order to discourage gross unproductive “white elephant” investments and
more credits channeled into subsectors with more linkage effects such as agriculture,
manufacturing, energy and infrastructural development.
1.1 BACKGROUND OF THE STUDY
Globally, banks in developing countries are expected to play vital and
effective roles in financing their economic projects and activities as their contribution
in ensuring sustainable economic growth.
Theoretical discussions about the importance of credit development and the
role that the banking industry plays in economic growth have occupied a key position
in the literature of development finance.
According to Osada and Saito (2010), financial or credit development can
foster economic growth by raising savings, improving efficiency of loan-able funds
and promoting capital accumulation. Banking industry credit in Nigeria assumed a
new dimension and was transformed by the recapitalization and consolidation of
banks which restructured them for better performance. Access to bank credit or
financing can be said to improve commensurately in response to competition and the
healthy sate of soundness the banks attained. Availability of credit allows firms to
increase production, output and efficiency and in turn increases the profitability of
banks through interest earned (Agada, 2010).
The role of credit in economic growth has been recognized as credits are
obtained by various economic agents to enable them meet operating expenses
(Nwanyanwu, 2008). Furthermore, according to Ademu (2006), the provision of
credit with sufficient consideration for the sector’s volume and price system is a way
of achieving economic growth through self–employment opportunities. While
highlighting the role of credit to the growth of any economy, he further explained that
credit can be used to prevent an economic activity from total collapse in the event of
The debate on the intermediary role of banks in the economic development has
dominated many discussions in literature. However, there seem to be general
consensus that the role of intermediary role of banks helps in boosting economic
growth and development. Akintola (2004) identifies banks’ traditional roles to include
financing of agriculture, manufacturing and syndicating of credit to productive sectors
of the economy. When the banking industry discharges these important functions satisfactorily the outcome would be that the economic growth, as proxied by the
Gross Domestic Product (GDP), will improve commensurately.
Akpansung and Babalola (2008) have stated that the central Bank of Nigeria
has been seen to be playing a leading and catalytic role by using direct control not
only to control overall credit expansion but also to determine the proportion of bank
loans and advances to “high priority sector” and “other”. According to them, this
sectoral distribution of bank credits is often meant to stimulate the productive sectors
and consequently lead to increased economic growth in the country. Citing Driscoll
(2004), they opine that financial development can foster economic growth by raising
savings, improving allocative efficiency of loanable funds and promoting capital
accumulation. Arguing along this path, Jayaratne and Strahan (1996) maintain that
well-developed financial markets are necessary for overall economic advancement of
less developed and emerging economies.
1.2 STATEMENT OF THE PROBLEM
There still remains a gap in understanding the causal relationship between
banking industry credit and economic growth in developing economies. And
particularly, little studies have been done to find out the impact the various types of
deposit money bank credits have on the growth of national economies. The influence
of such types of credit (like those advanced to the public sector and the private sector)
on economic growth has received little interest from researchers. Tuuli (2002) posits
that although there have been numerous empirical studies on the determinants of
growth in transition economies the relationship between bank credits and economic
growth, however, has largely been ignored. Thus, studying the impact of the deposit
money bank credits on the growth of the Nigeria economy has become very
necessary. And until this vacuum is filled, the unavoidable questions on the study will
Generally, economic growth has long been considered an important goal of
economic policy with substantial body of research dedicated to explaining how this
goal can be achieved. But unfortunately, such concerted efforts in both researchers
and policies have yielded no meaningful result. The questions, therefore, remain why
is it so? And what practical measures should be taken to plug the situation?
Central Bank of Nigeria (2009) notes that flow of credit to the priority sectors
fell short of prescribed targets and failed to impact positively on investment, output and domestic price level. Certainly, these comments have triggered questions on the
effectiveness and productivity of bank credits on the Nigerian economy. In similar
perspective, Taiwo and Abayomi (2011) note that the justification of public sector
credits is for the provision of infrastructural facilities, which will consequently drive
economic growth. However, they further posit that the effects of such government
spending on economic growth are still an unresolved issue theoretically as well as
1.3 OBJECTIVES OF THE STUDY
The general objective of this study is to ascertain the impact of deposit money
bank credits on Nigeria’s economic growth. In line with this, the specific objectives of
the study include the following:
1. To evaluate the impact of bank credits advanced to the private sector on the
Nigerian economic growth.
2. To ascertain the effect of bank credits extended to the public sector on
Nigerian economic growth.
3. To ascertain the impact of the aggregate bank credits to the private and public
sectors on the Nigerian economy.
1.4 RESEARCH QUESTIONS
This study is based on the following research questions:
(1) How far has bank credit to the private Sector influenced Nigeria’s economic
(2) To what extent has bank credit to the public sector affected economic growth
(3) To what extent have aggregate bank credits to the private and public sectors
influenced Nigeria’s economic growth?
1.5 HYPOTHESES OF THE STUDY
The hypotheses of this study are as follows:
HO: Bank credits to the private sector do not have a significant positive effect on
Nigeria’s economic growth.
HO: Bank credits to the public sector negatively and significantly affect Nigeria’s
HO: Aggregate bank credits to the private and public sectors do not have a
significant positive effect on Nigeria’s economic growth.
1.6 SCOPE OF THE STUDY
The study will focus on the impact of banking industry credit on economic
growth in Nigeria over the period 1987-2012. Bank credits as shall be used in this
study are credits advanced by the deposit money banks in Nigeria.
Types of bank credits to be captured will include private and public sector
credits, while economic growth shall be proxied by the real Gross Domestic product
In justification for the choice of the base year, it is worthy to note that in
Nigeria, the Nigerian economy assumed a new dimension in September 1986 when
the military government introduce the Structural Adjustment Programme (SAP). The
emphasis of the programme was deregulation of the economy, which was aimed at
curtailing government participation in the economy. As a result, this restructuring
brought radical changes not only to the banking system but also the entire economy of
Nigeria. Therefore, it becomes necessary for our purpose to use 1987 as our base year
bearing in mind the overwhelming expectations with respect to the anticipated result
the programme would bring.
SIGNIFICANCE OF THE STUDY
The study will be of immense benefit to the following:
• Bankers: The study will enhance their understanding of the relationships
existing between bank credits and economic growth. This will go a long way
in enabling them carry out efficient financial intermediation function bearing
in mind how it will impact on economic growth.
• Regulators of the Financial Industry: When economic growth is of the essence,
they will find this research relevant in their policy strategies, and regulatory
prerogatives aimed at fostering sustainable economic growth and building
efficient financial sector development.
• Investors: Both foreign and indigenous investors in the Nigerian economy will
stand to take advantage of the gift of this study to already existing body of
knowledge. The study will sharpen their understanding of causal relationships
between financial development and economic growth. When they understand
the relevance of bank credits to increase in productivity, it will enable them
make rational decisions in obtaining funds at a price and amount that will
serve their needs.
• The Government: different levels of government will find this study useful
especially policy implementation, enactment of laws and making
pronouncement that will promote economic growth.
• Researchers: other researchers will find this study very useful since it will add
to the existing knowledge. Such researchers and students who wish to carry
out a related study will have to use it as a research material.