STYLIZED FACTS ABOUT BANK CREDIT AND INDUSTRIAL GDP IN NIGERIA
EMPIRICAL METHODOLOGY AND ANALYSIS OF RESULTS
Unit Root Results
Co-integration Tests Results
Error Correction Models
ANALYSIS OF RESULTS
Test for Structural Stability
SUMMARY AND CONCLUSIONS
The ongoing financial crisis has reinforced the importance of capital in the industrial development and economic growth of a country. In the last two years, industries have closed down owing to lack of capital occasioned by the global financial meltdown. From America, London, other European countries, Asia and Africa, governments have had to intervene in other to bail out some ailing industries and forestall total collapse of the economy. These show the importance of credit either from bank or any other means to industries.
Recognizing the importance of capital in economic growth, Mackinnon and Shaw (1973), outlined the procedures for strengthening the financial sector of an economy so as to enable it play the all important role of providing capital for industrial development. Among the basic explanations for this is that the financial sector serves to reallocate funds from the supply side, given their investment opportunities, to the demand side with a shortage of funds. Thus, an economy with well-developed financial institutions will be better able to allocate resources to industries that yield the highest returns.
The manufacturing sector is a catalyst to the modern economy and has a many dynamic benefits that are crucial for economic transformation, (Loto, 2005). The manufacturing sector is a leading sector. It helps to increase productivity in relation to import substitution, export expansion, creating foreign exchange earning capacity, raising employment and per capital income which according to Loto, (2005), widens the scope of consumption in dynamic patterns. Ogwuma, (1995) asserts that the manufacturing sector promotes the growth of investment at a faster rate than any other sector of the economy as well as wider and more efficient linkages among different sectors.
Given the above understanding, coupled with the collapse of the Breton Wood agreement, the era of pegged interest rate regime was abolished, given way for market determined interest rate regime. So many financial institutions around the world deregulated their financial sectors in other to reap the benefits accruable from this gesture. Nigeria queued up to this idea in 1986 with the introduction of the structural adjustment programme. Since this period, interest rate has been allowed to be determined by the invisible hand of demand and supply. In 1989, Trade and Financial Liberalization Policy were enacted purposely to foster competition and efficiency in the financial sector. Among its objectives is to stimulate competition among the domestic firms and between the domestic imports competing firms and foreign firms. One of the objectives was the deregulation of interest rates in other to foster efficiency and productivity.
The National Economic Reconstruction Fund (NERFUND) was also set up in the same year as a complementary institution to the industrial policy. NERFUND seeks to address the medium and long-term financial constraints experienced by small and medium scale entrepreneurs, provide the required financial resources to participating merchant and commercial banks to lend to small and medium scale firms and provide naira or foreign denominated loans to participating firms for a period of five to ten years with a grace period of one to three years.
The Nigerian government established the Bank of Industry (BOI) in 2000, as a development institution to accelerate industrial development through the provision of long-term loans, equity finances and technical assistance to industrial enterprises. The objectives of this bank include providing long term loans, assist in employment generation and promote industrial dispersal indigenous entrepreneurship. As a complement to the Bank of Industry, Small and Medium Industries Equity Investment Scheme (SMIEIS) was also set up in 2000. The objective was to assist in the coordination of the scheme with a guideline that 60 percent of the SMIEIS fund should go to core real sector, 30 percent to services, and 10 percent to micro enterprises through NGOs among other objectives. All these underscore the importance of credit in industrial development of Nigeria.
However, given the amount of credit released to the sector compared to other sectors. The expectation was that the industrial sector will be the driving force of the Nigerian economy as is obtainable in advanced economies, but the reverse has been the case. The question that this posses is; what is the true impact of bank credit on industrial development in Nigeria? Answers to this question form the main thrust of this study. The study is significant in the sense that it will add to empirical works in this area and also spur further researches so as to inform policy. It is an exposition of the importance of credit to the industrial sector.
The rest of the paper is organized as follows. Section two is devoted to stylized facts and literature review. This will be followed by Section three, for empirical methodology where we specify out the relationship between bank credit and industrial development and report our estimated empirical results, and Section four is devoted to the summary and conclusions of the study.
Most literatures unanimously confirm that credit or capital is important in the growth of any industry. In view of this, their emphases are therefore focussed on strengthening the financial sector in other to allocate enormous resources to the industries so as to drive the growth of an economy. Mackinnon and Shaw (1973), stressed that financial institutions of depressed economies should be liberalized in other to be able to allocate resources to projects that yield the highest returns. This allocative role of financial institutions in promoting the development of industries was the focus of Petersen and Rajan (1997) in their work among small firms in the United States. Their findings suggest that implicit borrowing from suppliers may provide an additional possibility. Their result shows that among small firms in the United States, those with less well-established banking relationships held significantly higher levels of accounts payable. This result implies that trade credit is used as a source of "financing of last resort" by very constrained firms. Rajan and Zingales (1998), in their analysis, found that industrial sectors with a greater need for external finance develop disproportionately faster in countries with more developed financial markets. Nilsen (2002) looks at this issue from another angle, showing that during monetary contractions, small firms, which are likely to be more credit constrained, react by borrowing more from their suppliers. Now, even the most constrained of American firms face far less scarcity of funding from formal institutions than companies in many other countries, where stock markets are in their infancy, and formal lenders are rare.
Rizov, M., (2004) analyzed the link between credit access and profitability. Using switching regressions on the balance sheet and profit and loss accounts data of Bulgarian manufacturing firms over the 1997-99 periods, he found that firms in industries with higher rates of accounts payable exhibit higher rates of growth in countries with relatively weak financial institutions. This shows that the presence of credit market imperfections does impinge on profitability of firms and hinders industry from an economy with dramatically changing credit constraints during transition. He also provided direct estimates of credit rationing and its impact on profitability and reform policy outcomes.
STYLIZED FACTS ABOUT BANK CREDIT AND INDUSTRIAL GDP IN NIGERIA
The industrial development of Nigeria is full of ups and downs. This is as a result of the fact that it has failed dismally to take full advantage of fertile soil, massive oil resources and a relatively well-educated population (Udah and Enang, 2010). Following democratic elections in 1999, the first in more than 15 years, there are now some expectations of economic recovery. The central bank of Nigeria is today looking at a way of reducing interest rate in other to reduce the cost of capital. This section attempts to place Nigeria in context by giving an overview of the industrial sector GDP vis-avis the total GDP of the Nigerian economy and also the total credit allocated to the industrial sector.
Table 1 below shows the total commercial banks credit to all sectors and to industrial sector, comprising the manufacturing and mining and quarrying sectors specifically. The table shows that an average of =N=5418954 was released as credit to all sectors within the period under review of which 31.81 per cent was allocated to the industrial sector. Between 1970-1974, credit to the industrial sector accounted for 26.15 per cent of the total credit under that period. Credit to the industrial sector peaked between 1990-1994 with 43.04 per cent as its contribution to the basket and since then has witnessed continuous decline. This information is clearer in table 1.
Table.1 Total Credit and Credit to the Industrial Sectors in Nigeria
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Source: Author’s compilation from the CBN Statistical Bulletin (2009)
Notes: TCRED= Total Credit to all sectors, CRINDS= Credit to industrial Sector