Banking Sector Credit Development and Investment Productivity in Nigeria

Ogbuagu; Uchechi Rex; Chijioke; Mercy Ihuoma; Udah; EnangBassey

doi:doi:10.11648/j.ijebo.20130106.12

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Banking Sector Credit Development and Investment Productivity in Nigeria

Ogbuagu, Uchechi Rex, Chijioke, Mercy Ihuoma, Udah, EnangBassey

Published in International Journal of Economic Behavior and Organization (Volume 1, Issue 6)

Received: 2 December 2013 Published: 20 January 2014

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Abstract

In Nigeria, commercial bank credit represent almost 90 percent of the financial system assets and about two-thirds of the total credit is allocated to the private sector. Financing of investments through the credit market system portends that investments are associated with a level of productivity. Thus a developed credit market that efficiently utilizes its resources will contribute optimally to economic development. One will expect that increased earnings will lead to increased availability of credits and therefore a better developed credit market but our experience is to the contrary. In contrast, it is difficult to explain the low rate of development registered in most African countries including Nigeria in comparison to the quantum of export earnings they receive. In particular, Nigeria earned enormous revenue from crude petroleum export during oil boom years yet development in Nigeria crawls. This study therefore examined the relationship between credit market development as measured by bank sector credit ratio to GDP and investment productivity, measured as ratio of GDP to Gross Domestic Investment, GDI in Nigeria using data from 1970-2010 and standard econometric method of error correction mechanism. We observed that the improvement in the banking sector reforms ranging from structural adjustment programme (SAP) to the present consolidation era has not been translated to credit market development. This is attributed to inefficient utilization of credit market funds which results in low level of per capita income, low level of investment and ultimately poorly developed banking credit market in Nigeria. Based on the findings of the study, the following policy implications can be drawn: increase in deposit rate will encourage savings, promote credit market development and increase investment. Similarly; a reduction in lending rate will encourage borrowing for capital project financing that will lead to increased investment productivity, increased output, better use of the bank credit market and hence a better developed credit market. Through this, development in the credit market can contribute significantly to economic development via investment productivity. There is the need to increase per capita income through encouraged participation in credit market investment. Thus returns on investment in the credit market should be improved. At present people prefer to spend their money on consumption goods because of the discouraging low deposit rate in the banks. Improved deposit rate will definitely improve investment productivity and economic development through the multiplier process. Foreign direct investment was found to encourage investment productivity; policy should be geared towards attracting more FDI in Nigeria.

Published in	International Journal of Economic Behavior and Organization (Volume 1, Issue 6)
DOI	10.11648/j.ijebo.20130106.12
Page(s)	61-68
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2014. Published by Science Publishing Group

Keywords

Banking Sector, Credit Market Development, Investment Productivity, Foreign Direct Investment, Financing

References

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[2]	Athanasios, V. &Antonios, A. (2010). The effect of stock and credit market development on economic growth: An empirical analysis for Italy. International Research Journal of Finance and Economic, 1540-2887.Retrieved from http://www.eurojournal.com/finance.html
[3]	Atje, R. &Jovanovic, B. (1993). Stock markets and development. European Economic Review, 37,634- 640.
[4]	Bencivenga, V. & Smith, B. (1996). Financial intermediation and endogenous growth. The Review of Economic Studies, 58, 195-209.
[5]	Caporale, G., Howells, P. &Soliman, A. (2005). Endogenous growth models and stock market development: Evidence from four countries. Review of Development Economics, 9, 166-176
[6]	David, T. K. (2003). Nigerian financial sector assessment. Report for USAIN/ Nigeria; Economic Growth Strategy, GS-23f-97584-001.
[7]	Demetriades, O. P. & Hussein, A. K. (1996). Does financial development cause economic growth? Time series evidence from 16 countries. Journal of Development Economics, 51, 387-411.
[8]	Greenwood, J. &Jovanovic, B. (1990). Financial development, growth, and the distribution of income. Journal of Political Economy, 5(1), 1076-1107.
[9]	Gross, M. D. (2001). Financial intermediation: a contributing factor to economic growth and employment. ILO Publication,92-2-112895-4. Retrieved from www.ilo.org/employment/Whatwedo/Publications/.../index.htm
[10]	Kasekende, L. (2008). Developing a second banking system. Paper presented at the International Monetary Fund Seminar, Tunisia.
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[15]	Mishkin, F. S. (2007). The Economics of Money and Financial Markets (10thed.). India: Prentice Hall
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[17]	Nzue, F. (2006). Stock market development and economic growth: Evidence from Cote D’Ivore. Journal of Africa Development Review, 18(1), 123-145.
[18]	Oluitan, R. (2009). Bank credit and economic growth: the Nigerian experience. Retrieved from http://www.csae.ox.ac.uk/conference/2009-EDRA/papers/094
[19]	Osei, V. (2005). Does the stock market matter in Ghana? A granger-causality analysis. Bank of Ghana working Paper,5(13), 5-10.
[20]	Saci, K., Giorgioni, G. and Holden, K. (2009). Does financial development affect growth? International Journal of Accounting, 44(1), 79-102.
[21]	Schumpeter, J. A. (1911). The theory of economic development. Cambridge, CA: Harvard University Press.
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Ogbuagu, Uchechi Rex, Chijioke, Mercy Ihuoma, Udah, et al. (2014). Banking Sector Credit Development and Investment Productivity in Nigeria. International Journal of Economic Behavior and Organization, 1(6), 61-68. https://doi.org/10.11648/j.ijebo.20130106.12

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ACS Style

Ogbuagu; Uchechi Rex; Chijioke; Mercy Ihuoma; Udah, et al. Banking Sector Credit Development and Investment Productivity in Nigeria. Int. J. Econ. Behav. Organ. 2014, 1(6), 61-68. doi: 10.11648/j.ijebo.20130106.12

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AMA Style

Ogbuagu, Uchechi Rex, Chijioke, Mercy Ihuoma, Udah, et al. Banking Sector Credit Development and Investment Productivity in Nigeria. Int J Econ Behav Organ. 2014;1(6):61-68. doi: 10.11648/j.ijebo.20130106.12

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@article{10.11648/j.ijebo.20130106.12,
  author = {Ogbuagu and Uchechi Rex and Chijioke and Mercy Ihuoma and Udah and EnangBassey},
  title = {Banking Sector Credit Development and Investment Productivity in Nigeria},
  journal = {International Journal of Economic Behavior and Organization},
  volume = {1},
  number = {6},
  pages = {61-68},
  doi = {10.11648/j.ijebo.20130106.12},
  url = {https://doi.org/10.11648/j.ijebo.20130106.12},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijebo.20130106.12},
  abstract = {In Nigeria, commercial bank credit represent almost 90 percent of the financial system assets and about two-thirds of the total credit is allocated to the private sector. Financing of investments through the credit market system portends that investments are associated with a level of productivity. Thus a developed credit market that efficiently utilizes its resources will contribute optimally to economic development. One will expect that increased earnings will lead to increased availability of credits and therefore a better developed credit market but our experience is to the contrary.  In contrast, it is difficult to explain the low rate of development registered in most African countries including Nigeria in comparison to the quantum of export earnings they receive. In particular, Nigeria earned enormous revenue from crude petroleum export during oil boom years yet development in Nigeria crawls. This study therefore examined the relationship between credit market development as measured by bank sector credit ratio to GDP and investment productivity, measured as ratio of GDP to Gross Domestic Investment, GDI in Nigeria using data from 1970-2010 and standard econometric method of error correction mechanism. We observed that the improvement in the banking sector reforms ranging from structural adjustment programme (SAP) to the present consolidation era has not been translated to credit market development. This is attributed to inefficient utilization of credit market funds which results in low level of per capita income, low level of investment and ultimately poorly developed banking credit market in Nigeria.    Based on the findings of the study, the following policy implications can be drawn: increase in deposit rate will encourage savings, promote credit market development and increase investment. Similarly; a reduction in lending rate will encourage borrowing for capital project financing that will lead to increased investment productivity, increased output, better use of the bank credit market and hence a better developed credit market. Through this, development in the credit market can contribute significantly to economic development via investment productivity. There is the need to increase per capita income through encouraged participation in credit market investment. Thus returns on investment in the credit market should be improved. At present people prefer to spend their money on consumption goods because of the discouraging low deposit rate in the banks. Improved deposit rate will definitely improve investment productivity and economic development through the multiplier process. Foreign direct investment was found to encourage investment productivity; policy should be geared towards attracting more FDI in Nigeria.},
 year = {2014}
}

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TY  - JOUR
T1  - Banking Sector Credit Development and Investment Productivity in Nigeria
AU  - Ogbuagu
AU  - Uchechi Rex
AU  - Chijioke
AU  - Mercy Ihuoma
AU  - Udah
AU  - EnangBassey
Y1  - 2014/01/20
PY  - 2014
N1  - https://doi.org/10.11648/j.ijebo.20130106.12
DO  - 10.11648/j.ijebo.20130106.12
T2  - International Journal of Economic Behavior and Organization
JF  - International Journal of Economic Behavior and Organization
JO  - International Journal of Economic Behavior and Organization
SP  - 61
EP  - 68
PB  - Science Publishing Group
SN  - 2328-7616
UR  - https://doi.org/10.11648/j.ijebo.20130106.12
AB  - In Nigeria, commercial bank credit represent almost 90 percent of the financial system assets and about two-thirds of the total credit is allocated to the private sector. Financing of investments through the credit market system portends that investments are associated with a level of productivity. Thus a developed credit market that efficiently utilizes its resources will contribute optimally to economic development. One will expect that increased earnings will lead to increased availability of credits and therefore a better developed credit market but our experience is to the contrary.  In contrast, it is difficult to explain the low rate of development registered in most African countries including Nigeria in comparison to the quantum of export earnings they receive. In particular, Nigeria earned enormous revenue from crude petroleum export during oil boom years yet development in Nigeria crawls. This study therefore examined the relationship between credit market development as measured by bank sector credit ratio to GDP and investment productivity, measured as ratio of GDP to Gross Domestic Investment, GDI in Nigeria using data from 1970-2010 and standard econometric method of error correction mechanism. We observed that the improvement in the banking sector reforms ranging from structural adjustment programme (SAP) to the present consolidation era has not been translated to credit market development. This is attributed to inefficient utilization of credit market funds which results in low level of per capita income, low level of investment and ultimately poorly developed banking credit market in Nigeria.    Based on the findings of the study, the following policy implications can be drawn: increase in deposit rate will encourage savings, promote credit market development and increase investment. Similarly; a reduction in lending rate will encourage borrowing for capital project financing that will lead to increased investment productivity, increased output, better use of the bank credit market and hence a better developed credit market. Through this, development in the credit market can contribute significantly to economic development via investment productivity. There is the need to increase per capita income through encouraged participation in credit market investment. Thus returns on investment in the credit market should be improved. At present people prefer to spend their money on consumption goods because of the discouraging low deposit rate in the banks. Improved deposit rate will definitely improve investment productivity and economic development through the multiplier process. Foreign direct investment was found to encourage investment productivity; policy should be geared towards attracting more FDI in Nigeria.
VL  - 1
IS  - 6
ER  -

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Author Information

Ogbuagu
Uchechi Rex
Chijioke
Mercy Ihuoma
Udah
EnangBassey

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APA Style

Ogbuagu, Uchechi Rex, Chijioke, Mercy Ihuoma, Udah, et al. (2014). Banking Sector Credit Development and Investment Productivity in Nigeria. International Journal of Economic Behavior and Organization, 1(6), 61-68. https://doi.org/10.11648/j.ijebo.20130106.12

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ACS Style

Ogbuagu; Uchechi Rex; Chijioke; Mercy Ihuoma; Udah, et al. Banking Sector Credit Development and Investment Productivity in Nigeria. Int. J. Econ. Behav. Organ. 2014, 1(6), 61-68. doi: 10.11648/j.ijebo.20130106.12

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AMA Style

Ogbuagu, Uchechi Rex, Chijioke, Mercy Ihuoma, Udah, et al. Banking Sector Credit Development and Investment Productivity in Nigeria. Int J Econ Behav Organ. 2014;1(6):61-68. doi: 10.11648/j.ijebo.20130106.12

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@article{10.11648/j.ijebo.20130106.12,
  author = {Ogbuagu and Uchechi Rex and Chijioke and Mercy Ihuoma and Udah and EnangBassey},
  title = {Banking Sector Credit Development and Investment Productivity in Nigeria},
  journal = {International Journal of Economic Behavior and Organization},
  volume = {1},
  number = {6},
  pages = {61-68},
  doi = {10.11648/j.ijebo.20130106.12},
  url = {https://doi.org/10.11648/j.ijebo.20130106.12},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijebo.20130106.12},
  abstract = {In Nigeria, commercial bank credit represent almost 90 percent of the financial system assets and about two-thirds of the total credit is allocated to the private sector. Financing of investments through the credit market system portends that investments are associated with a level of productivity. Thus a developed credit market that efficiently utilizes its resources will contribute optimally to economic development. One will expect that increased earnings will lead to increased availability of credits and therefore a better developed credit market but our experience is to the contrary.  In contrast, it is difficult to explain the low rate of development registered in most African countries including Nigeria in comparison to the quantum of export earnings they receive. In particular, Nigeria earned enormous revenue from crude petroleum export during oil boom years yet development in Nigeria crawls. This study therefore examined the relationship between credit market development as measured by bank sector credit ratio to GDP and investment productivity, measured as ratio of GDP to Gross Domestic Investment, GDI in Nigeria using data from 1970-2010 and standard econometric method of error correction mechanism. We observed that the improvement in the banking sector reforms ranging from structural adjustment programme (SAP) to the present consolidation era has not been translated to credit market development. This is attributed to inefficient utilization of credit market funds which results in low level of per capita income, low level of investment and ultimately poorly developed banking credit market in Nigeria.    Based on the findings of the study, the following policy implications can be drawn: increase in deposit rate will encourage savings, promote credit market development and increase investment. Similarly; a reduction in lending rate will encourage borrowing for capital project financing that will lead to increased investment productivity, increased output, better use of the bank credit market and hence a better developed credit market. Through this, development in the credit market can contribute significantly to economic development via investment productivity. There is the need to increase per capita income through encouraged participation in credit market investment. Thus returns on investment in the credit market should be improved. At present people prefer to spend their money on consumption goods because of the discouraging low deposit rate in the banks. Improved deposit rate will definitely improve investment productivity and economic development through the multiplier process. Foreign direct investment was found to encourage investment productivity; policy should be geared towards attracting more FDI in Nigeria.},
 year = {2014}
}

Copy | Download

TY  - JOUR
T1  - Banking Sector Credit Development and Investment Productivity in Nigeria
AU  - Ogbuagu
AU  - Uchechi Rex
AU  - Chijioke
AU  - Mercy Ihuoma
AU  - Udah
AU  - EnangBassey
Y1  - 2014/01/20
PY  - 2014
N1  - https://doi.org/10.11648/j.ijebo.20130106.12
DO  - 10.11648/j.ijebo.20130106.12
T2  - International Journal of Economic Behavior and Organization
JF  - International Journal of Economic Behavior and Organization
JO  - International Journal of Economic Behavior and Organization
SP  - 61
EP  - 68
PB  - Science Publishing Group
SN  - 2328-7616
UR  - https://doi.org/10.11648/j.ijebo.20130106.12
AB  - In Nigeria, commercial bank credit represent almost 90 percent of the financial system assets and about two-thirds of the total credit is allocated to the private sector. Financing of investments through the credit market system portends that investments are associated with a level of productivity. Thus a developed credit market that efficiently utilizes its resources will contribute optimally to economic development. One will expect that increased earnings will lead to increased availability of credits and therefore a better developed credit market but our experience is to the contrary.  In contrast, it is difficult to explain the low rate of development registered in most African countries including Nigeria in comparison to the quantum of export earnings they receive. In particular, Nigeria earned enormous revenue from crude petroleum export during oil boom years yet development in Nigeria crawls. This study therefore examined the relationship between credit market development as measured by bank sector credit ratio to GDP and investment productivity, measured as ratio of GDP to Gross Domestic Investment, GDI in Nigeria using data from 1970-2010 and standard econometric method of error correction mechanism. We observed that the improvement in the banking sector reforms ranging from structural adjustment programme (SAP) to the present consolidation era has not been translated to credit market development. This is attributed to inefficient utilization of credit market funds which results in low level of per capita income, low level of investment and ultimately poorly developed banking credit market in Nigeria.    Based on the findings of the study, the following policy implications can be drawn: increase in deposit rate will encourage savings, promote credit market development and increase investment. Similarly; a reduction in lending rate will encourage borrowing for capital project financing that will lead to increased investment productivity, increased output, better use of the bank credit market and hence a better developed credit market. Through this, development in the credit market can contribute significantly to economic development via investment productivity. There is the need to increase per capita income through encouraged participation in credit market investment. Thus returns on investment in the credit market should be improved. At present people prefer to spend their money on consumption goods because of the discouraging low deposit rate in the banks. Improved deposit rate will definitely improve investment productivity and economic development through the multiplier process. Foreign direct investment was found to encourage investment productivity; policy should be geared towards attracting more FDI in Nigeria.
VL  - 1
IS  - 6
ER  -

Copy | Download