THE ROLE OF COMMERCIAL BANK TO ECONOMIC DEVELOPMENT IN NIGERIA

The Role Of Commercial Bank To Economic Development In Nigeria

ABSTRACT

The project set out to examine the role of commercial banks to economic development of Nigeria from 1980 – 2008. The variables used for this study are commercial bank loans and advances, interest rate on the loans, gross fixed capital formation. The main objective of the study is to examine the role of commercial bank to economic development in Nigeria. The methodology involves the use of ordinary least squares (OLS) using E-VIEWS econometric package. These include R2 to test the explanatory power of the estimate, T-test to determine the significance of the individual parameter estimates; F-test to determine the significance of the entire regression plane and second order test to check of the properties of OLS are violated. The result of the regression analysis shows that commercial banks loans and advances, and gross fixed capital formation have a positive relationship with the economic development in Nigeria, while interest rate on the loan show a negative relationship with the dependent variable. Based on the findings, the researcher made the following recommendations among others: (i) The Central Bank should give adequate directives to the commercial banks to give out loans and advances to the economic sectors with little interest rate. (ii) Gross fixed capital formation should be properly managed and periodically reviewed.

CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND OF THE STUDY

Commercial banks are financial institutions that deal with money and credit and also receive deposits from the public and organizations; some of which are repayable on demand by cheque. Commercial banks are public limited companies owned by shareholders. They operate in commercial basis, that is, they are out to maximize profits by trading in money. They differ from other banking financial institutions because they honour cheques drawn by their customers on their demand deposit.

The role of commercial banks in transforming the economic framework of Nigeria cannot be over-emphasized.  In effect, they give out loans and advances, thereby providing short terms and medium term capital for investors.  The loans and advances may be in the form of direct loans, overdrafts or by the discounting of bills.  With the amount borrowed, investors could finance various projects in the areas of industry, agriculture and commerce. This therefore, helps to speed-up economic development. Finally, commercial banks constitute the heart of any banking system. They are involved in general banking services to their customers and also play various roles in ensuring economic development in Nigeria economy.

Consequently, in-depth investigations were conducted in the following:

(1)        Volume of loans given by commercial banks to economic sectors in Nigeria.

(2)        In-depth analysis of the problems of economic development in Nigeria economy.

(3)        Suggestions on how to alleviate some of the problems in order to achieve the derived objectives.

1.2      STATEMENT OF THE PROBLEM

Commercial banks in Nigeria undergo some problems which serve as a hinderance to their roles in ensuring economic development to the economy of Nigeria.  Some of such problems are listed below:

(1)        The tedious procedures usually associated with opening of bank accounts and granting of bank facilities.

(2)        The problem of low capital base on Nigeria commercial banks.

(3)        The problem of easy access to bank services.

If the above stated problems are properly tackled, commercial banks would be able to play major roles in ensuring economic development in Nigeria.

        Besides, several studies have been undertaken to investigate the roles of commercial banks to economic development in Nigeria, but only few have studied commercial bank loans, interest rate, and gross fixed capital formation as macro-economic variables in determining economic development in Nigeria.

1.3 OBJECTIVES OF THE STUDY

The main objective of this study is to examine the role of commercial banks to economic development in Nigeria. Specifically, however, the research generally aims at:

(1)    Econometrically determine the contribution of commercial bank loans to preferred sectors.

(2)    Identifying of the constraints toward the granting of loans and advances.

(3)    Examine the impact of commercial bank loans to economic development in Nigeria.

1.4   RESEARCH QUESTIONS

The research is guided by the following questions:

(1)        What are the impacts of commercial bank loans to economic development in Nigeria?

(2)        What are the constraints towards granting of loans and advances?

(3)        What is the contribution of commercial bank loans to preferred sectors of the economy?

1.5   RESEARCH HYPOTHESIS

Null Hypothesis:  The activities of commercial banks have no significant impact to the growth and development of the economy.

Alternative Hypothesis: The activities of commercial banks do have a significant impact to the growth and development of the economy.

1.6 SIGNIFICANCE OF THE STUDY

The study is hoped to add to whatever that is already known in terms of the problems of funding of economic sectors in the area of the study. Thus, it will be of immense help to the commercial banks in Nigeria.

        On a personal note, this study would be an invaluable asset to this researcher as a progressive student of economics. Finally, Future researchers both students and non-students would also find this study indispensable.

1.7      SCOPE AND LIMITATIONS OF THE STUDY

This research covers the periods between 1980 – 2008. Moreover, the study is limited to the Nigerian economy. It is equally limited by time and limited sources of data. There are time also constraints in the process of carrying out the research due to inaccuracy of data. It is sometimes impossible to underestimate or overestimate.