Banking Credit and Economic Growth in Nigeria

Banking Credit and Economic Growth in Nigeria
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TABLE OF CONTENTS
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CHAPTER ONE: INTRODUCTION
Introduction
1.1 Overview of Research
Banking sector plays an essential role within the growth as well as the development of the
economy. The reason behind this is that banks provide a medium where individuals can keep
their money secure, which is further lent by them to other people, businesses and manufacturers.
This helps in enhancing the quality of commercial affairs, infrastructure and development of a
society that also contribute toward the economic condition of the country. This research report
will analyse the banking credit and its relation to the economy. The main reason for conducting
this research is to determine the impact of banking credit on the economic condition of Nigeria.
This is because banks within a developing country play a significant role in financing their
economic projects as well as activities which support in providing sustainable economic growth.
The financial and credit development of a country plays a crucial role in the economic growth of
the country by improving the efficiency of loan, raising saving and promoting capital
accumulation (Komal and Abbas, 2015).
1.2 Aim of the study
The main aim behind conducting this study is to determine the impact that banking credit have
over the economic growth of Nigeria.
1.3 Background of research
This research investigates the “Banking credit and economic development in Nigeria”, which
focuses on studying banking activities as well as its condition, which directly affects the
economic growth of the country (Tongurai and Vithessonthi, 2018). This is because the banking
sector plays a crucial role in the financial status of the country by creating money and facilitating
internal as well as international trade. Banking credit is considered a significant factor on
commercial activities as the majority of trade is done over credit and to conduct this banks issue
guarantee on behalf of its client so that business can get sound on credit which further paid by
the bank (Castro, V., 2013).
The experience of Nigeria is getting the most significant advantage in its economic development
and social progress through the capital generated by the banking industry. The central bank of
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Nigeria stated that to make the economy function efficiently structural rigidity and access to
credit is essential for financial development (Babajide, Adegboye and Omankhanlen, 2015).
Banking sector contributes to economic growth by attracting and gathering deposits from savers.
In addition to this, it also plays a crucial role in providing loans for encouraging investment as
well as productions. Apart from that banking credit also help in creating economic expansion
within several sectors such as agricultural sectors, infrastructure, trade transactions and
contribute toward initial capital related with investment projects (Taiwo, Falohun and Agwu,
2016).
1.7 Structure of the Dissertation
Chapter 1: Introduction
The research work starts with an introduction about the topic of the investigation along with aims
as well as objective behind conducting this report.
Chapter 2: Literature review
This would be the second chapter of research that includes a critical evaluation of the previous
literature. Literature review is conducted in this research to develop a theoretical framework and
an understanding regarding the past study as well as current information.
Chapter 3: Research Methodology
In this section, different tools and techniques will be used that help in collecting and analysing
the information gathered to provide valid results.
Chapter 4: Data Analysis
This part of research relates to the accumulation of data which would be further analysed and
interpreted for shedding light over research objectives and questions once the data collection is
concluded. This is considered as one of the essential parts of research in which data gathered
would be analysed and interpreted for shedding light over research objectives and questions.
Chapter 5: Conclusion and Recommendations
This section includes the summary of the findings of whole research that help in determining the
validity and reliability of research.
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CHAPTER TWO: LITERATURE REVIEW
Banking Sector and Credit Creation
Oluitan (2012) observes that Bank credit expands to loans and advances. It refers to the
expansion of deposits and increment of credit. Banks maintain a part of their deposits as the
minimum reserve so that they can keep up with the requirements of investors/depositors and will
also be able to earn interest by lending the remaining amount. Nigeria's Bank Credit to the
Private Sector is approximately 22.29% of GDP in 2009, as observed by the experts of Global
Economy (2019). Every time a bank gives a loan to someone, it creates an equal deposit to
balance it. Thus, credit creation expands the functions of banks. According to Mohammed
Julfekar Haider (2010), Credit Creation process starts when a customer makes a deposit in a
bank, as the customer will not immediately withdraw the amount, banks put it as a reserve and
give the loans in exchange of interest, to keep the process going, banks need to have minimum
deposits policy. Credit Creation is crucial because it provides loans and advances to all the
sectors for their development and growth. World Bank Group (2017), the domestic credit to
private sector worldwide was 104.714%. Out of this, Nigeria held 23.334% of the total domestic
credit.
According to Michele Saba (2010), the representation of banks as subsidiaries is perceived by
the credit creation philosophies. A single bank cannot create credit. It is a dependent factor that
affects the economy. Credit Creation is viewed as one the major and the essential function in the
Banking Sector. The element through which a bank generates the most profit is by credit creation
as for this, they are willing to accept cash in the form of deposits and are willing to provide
loans. Okafor (2013) states that credit creation was increasingly used in the Nigerian Banking
System from 2005. Marshal and Onyekachi (2014) found that the banking sector of Nigeria
closely mirrored the changes occurring in the oil prices as well as the presence of volatility in the
market. This led to an increase in the number of deposits made in the banks, the effect of which
reflected as an increase in the credit. The main reason behind the growth of credit in this sector
can be attributed to the abundant availability of capital, mainly accelerated due to the rise in
depositories, led to credit creation which quadrupled between 2004 and 2009. As a result, the
banking assets also experienced a 76% rise between 2004 and 2009 in Nigeria. Onoh and
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Iheanacho (2017) observe that Nigeria's current Banking Sector is a result of the recent global
financial and economic crisis as well as its exposure to oil, gas and non-performing loans. Based
on these factors, the Banking Sector underwent four phases spanning between a time period of
1993 and 2009.
Maturity Transformation
Banks are also involved in the Maturity Transformation. According to Moorad Choudhry (2013),
Maturity Transformation is a vital function to continue economic growth. The process of
Maturity Transformation includes meeting the needs of lenders and borrowers by converting
short term deposits or savings and money market loans into long term borrowings such as
Mortgages. The industry is working for the high capital investments, and it is only possible
because of the role performed by the banks and financial intermediation for the establishment
and the function of Maturity Transformation (Ductor and Grechyna, 2015). They collect money
from the depositors and then lend it to the borrowers in exchange of interest. Hence, banks
collect the short-term deposits and transform them into the long-term loan and collect the
difference as profits.
The development of Banking Sector in Nigeria and its influence over economic growth
According to Eugene (2016), the role of banking in the economic development of a country
cannot be overemphasised. This is because money is considered as lifeblood, which helps in
achieving sustainability in the modern era. To achieve sustainability in the banking sector,
Central Bank of Nigeria focuses on raising the shareholder's fund, i.e. 2 billion to 25 billion for a
commercial bank with the help of the recapitalisation process. Eugene (2016) in his article
examining the impact of the banking sector on the economic growth in Nigeria states that this
leads to a merger and acquisition of several banks and as a result of which several weak banks
get closed. This also results in the emergence of 25 standards of commercial bank in the country,
which help in making Nigeria bank more stable, competent, reliable and competitive globally.
This helps Nigeria to improve its relationship with other countries globally and as a result of
which it would be able to motivate businesses to perform their trade transactions within the
country. This helps the country to increase trade transaction between businesses and as a result of
which bank credit activities have been enhanced where banks of Nigeria provide guarantee on
behalf of the client. As per the report published by Oxford Business Group (2017) on Nigeria, it
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