RELATIONSHIP BANKING AND PERFORMANCE OF MANUFACTURING SECTOR FIRMS: EVIDENCE FROM NIGERIA

ABSTRACT

This study focused on examining the effect of Relationship banking on the performance of manufacturing sectors in Nigeria within the period of 2010 to 2014. This study was carried out to investigate the implication of banking relationship on firm’s performance in the manufacturing sector in Nigeria, using the number of banks as proxy for Relationship banking and leverage as proxy for effects of increase in banking relationships.

Secondary data were collected from the publicly available audited financial statements of the companies selected. Ordinary least Squares Regression was implemented using panel data in testing the correlation between Relationship banking and performance of twelve manufacturing companies respectively while descriptive analysis was done with the use of graph in analyzing alterations in the variables over time.

The result from the ordinary least squares (OLS) regression analysis showed that Relationship banking does not have any significant relationship on the performance of the twelve Nigerian manufacturing companies used in this study.

The study concluded that the number of banking relationships themanufacturing companies have does not determine or have any form of effect on the performance of these firms.This is possible, in that whether there is a decrease or increase in these banking relationships to the manufacturing sector, it neither discourages, nor encourages these manufacturing sectors to expand their businesses and scope of operation, which has ultimately contributed to the massive decline in Nigerian manufacturing sectors.

Keywords:     Profit Margin, Number of banks, Leverage, Manufacturing companies, Banking  Relationship

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Banking is an Economic activity of intense interest to public policy. Banks are subject to extensive prudential and conduct of business regulation. The public sector can also exercise direct and indirect influence over banks’ business decisions through outright ownership. The objective is basically to achieve public goals such as the channeling of funds to vulnerable economic sectors to borrowers with limited access to credit. Public sector involvement can be expressed through financial support, in cases where banks run into trouble, this support can be explicit or implicit in the markets’ expectation that some banks will not be allowed to fail.

Commercial banks have increasingly played a major role in financing public and private entities. Lending which may be on short, medium or long-term basis is one of the services that deposit money banks do render to their customers. In other words, banks do grant loans and advances to individuals, business organizations as well as government in order to enable them embark on investment and development activities as a means of aiding their growth in particular or contributing toward the economic development of a country in general (Bologna, 2011). Deposit money banks are the most important savings, mobilization and financial resource allocation institutions. Consequently, these roles make them an important phenomenon in economic growth and development. Therefore, no matter the sources of the generation of income or the economic policies of the country, deposit money banks would be interested in giving out loans and advances to their numerous customers bearing in mind, the three principles guiding their operations which are, profitability, liquidity and solvency (Adolphus, 2011). However, deposit money banks decisions to lend out loans are influenced by a lot of factors such as the prevailing interest rate, the volume of deposits, the level of their domestic and foreign investment, banks liquidity ratio, prestige and public recognition. The CBN require that their total value of a loan credit facility or any other liability in respect of a borrower, at any time, should not exceed 20% of the shareholders’ funds unimpaired by losses in the case of commercial banks (Bologna, 2011).

Manufacturing sector plays catalytic role in a modern economy and has many dynamic benefits crucial for economic transformation. In a typical advanced country, the manufacturing sector is a leading sector in many respects. It is an avenue for increasing productivity related to import replacement and export expansion, creating foreign exchange earning capacity; and raising employment and per capita income which causes unique consumption patterns. Furthermore, it creates investment capital at a faster rate than any other sector of the economy while promoting wider and more effective linkages among different sectors. In terms of contribution to the Gross Domestic Product (GDP), the manufacturing sector is dominant and it has been overtaken to the services sector in a number of organizations for Economic Co-operation and Development (OECD) countries (Anyanwu, 2003).