IMPACT OF DEPOSIT MONEY BANK CREDITS ON ECONOMIC GROWTH OF NIGERIA

ABSTRACT

This work is based on the impact of deposit money bank credits on Nigeria economic growth. The main objective of this study is; to ascertain the impact of deposit money bank credits on economic growth of Nigeria (1981-2016). A model was constructed to incorporate real gross domestic product (RGDP) as the dependent variable proxy of economic growth, commercial bank credit (CBC) and interest rate (INTR) as the independent variables and tested using the ordinary least-square (OLS) techniques. The empirical result shows that commercial bank credit and interest rate have negative relationship and insignificant impact on the economic growth in Nigeria. From the granger causality test result, inflation rate and interest rate have no causal relationship with real gross domestic product in Nigeria. Also no causal relationship exist between INTR and RGDP, finally no causal relationship exist between commercial bank credit (CBC) and interest rate (INTR) Based on the result, the researcher recommends that the Central Bank of Nigeria and other monetary authorities should reduce the interest rate being charge on loans borrowed from the commercial banks through the reduction of bank rate and other deposit requirements of the commercial banks in order to make funds available to the potential investors which will increase the national output though their production.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Deposit money bank are resident depository corporations and quasi-corporation which have any liabilities in the form of deposit payable on demand, transferable by cheque or otherwise usable for making payments.

A growing body of work in advanced economies has shown that deposit money bank credits are one of the greatest drivers of economic growth and development. Thus, most countries with well-functioning financial system and large volume of deposit money bank credit are characterized with substantial and sustained growth as well as economic development (Nabila Zakir,2014, Sunde 2013). This suggest that as an economy becomes large, there is increasing need for increased and targeted deposit money bank to critical sector of the economy including households.

   This banking institution is responsible for financial intermediation in Nigerian financial system, which enables the channeling of fund from the surplus unit of the economy to the deficit unit of the same economy, thereby transforming deposit to credit (loan).  According to Ademu (2006) in Nwanyanwu (2010), the provision of credit with sufficient consideration to growth potential in the sector as well as price system in the economy is one of the ways to generate employment opportunities and by so doing, contributing to the growth of the economy at large. This can be made possible because bank credit contribute immensely to the expansions of business enterprise, increase scale of production which results to growth in the overall economy.

     Ademu (2006) highlighting the role of bank credit explained that it can be used to prevent economic activity from total collapse in the event of natural disaster such as flood, drought, disease or fire. Importance of bank credit to the Nigerian economy has led to sustained increase of credit to productive sector of Nigeria economy. Central bank of Nigeria annual report (2010), noted that credit to the core private sector to the deposit money bank grows by 10.26% between 2009-2010. In making credit available, banks are rendering great social services because through their actions production is increased, capital investment are expanded and ahigher standard of living realized.

   The concept of economic growth is viewed as an increase in the net national product in a given period of time (Dewett 2005) he explained that economic growth is generally referred to as a quantitative change in economic variable, normally persisting over successive periods. 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 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. (Shaw, 1973; Mckinnon 1973) economic growth is one of the important factors that improve living standard in developing countries. It is an indispensable requirement for economic development among other factors it is believed that the main factors affecting economic growth are labor, capital and exogenously determined technology. The impact of deposit money bank credits are relevant to the economic growth of Nigeria.

1.2 Statement of the Problem

The duty of the deposit money bank credit is to mobilize resources, so as to be able to provide long term funds to the business sector. Little studies has been done to find out the impact of deposit money bank credits have to the growth of national economies Tuuli (2002) posits that although there have been numerous empirical studies on the determinant of growth in transition economies, the relationship between bank credits and economic growth, however has been largely ignored.

  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 effort in both researchers and policies have yielded no meaning result. Thus, studying the impact deposit money bank credits have on the economic growth of Nigeria has become very necessary until this vacuum is filled, the unavoidable questions on this study will remain unanswered.