The Production Sector Of The Nigerian Economy

Published Date: 02 Nov 2017

Abstract

Nobel prize laureates and other influential development economists disagree sharply about the role of the financial sector in economic growth. While some dismiss finance (credit) as a major determinant of economic growth calling its role "over-stressed", others argue that, "the idea that financial markets contribute to economic growth is a proposition too obvious for serious discussion." Our study is an empirical contribution to such existing literature as applied to a prototype developing country like Nigeria. Utilizing time series annualized data on Nigeria’s commercial banks’ credit to the production sector as well as contributions of the production sector to Nigeria GDP over a 23 year period, the paper evaluated the impact of banks credit on economic performance in Nigeria. The study applied the computer-based bi-variate linear regression approach using the current statistical package for social science (SPSS) version 17. Results show positive and significant effect on GDP of commercial banks’ credit to production sector proxied by agriculture, manufacturing, and mining/quarrying respectively. Based on these findings, we conclude that commercial banks’ credit influences growth and economic performance. Our result also imply that in Nigeria, finance leds growth. We therefore recommend among other things that government of Nigeria should intensify more efforts on direct credit not just to the production sector but to other relevant sectors of the Nigeria economy to foster long-run overall economic growth and boost the nation’s standard of living.

Keywords: Commercial Banks, Bank Credit, Production Sector, Economic Growth, GDP

1. Introduction

Productivity is sine qua non to industrialization which invariably is perceived as the gateway to modernization. To develop a robust production sector capable of playing an engine of growth role in any economy, sound policy initiative is imperative to eliminate the ‘performance inhibitors’ that scuttle the survival and growth of basic production variables visa-vis; agriculture, mining/quarrying, and manufacture. Poor accessibility to credit has been argued by the proponents of finance-led-growth hypothesis to constitute one of such major inhibitors to effective economic performance and rapid industrialization of most economies in the world and mostly, the developing ones like Nigeria. The significance of financial resources have hotly been expressed earlier in the works of McKinnon (1973) and Shaw (1973) who postulate that financial deepening increases the rate of domestic savings; lowers the cost of borrowing, stimulates investments, and induces long-run growth. Unarguably, these relevance have over the years informed governments’ rationale towards influencing bulk of financial markets’ credits through the monetary authorities into the production sector.

While finance-led-growth debate has remained unsettled, literature is also replete with extensive arguments comparing the roles of the capital and money markets in boosting economic development (Levine and Zervos, 1996/98; Demirgue and Levin, 1996; Nzotta, 2002; Ndi-Okereke, 2008; Kolapo and Adaramola, 2012; Ogboi and Oladipo, 2012). Although most of these studies document that capital markets are playing increasingly crucial roles in credit generation for business stimulation and for economic growth especially in the developed economies, they are still numerous existing evidence in the literature which argue that only few capital markets have probably achieved significant breakthrough growth in practice in the developing nations. The reasons are often due primarily to the poor business environment of most developing countries and the attached stringent operating conditionalities therein in the capital markets which make it difficult for smallholders to access credit in such markets. It is noteworthy that about 70 per cent of the population in most developing countries such as Nigeria are engaged in the informal agricultural sector, mining, local manufacturing, and other forms of crude extractive occupations (Eleje and Emerole, 2010; and Tajudeen, 2012). For sustainable growth and development in these developing countries to be attained therefore, the financial empowerment of their production sector being the repository of the predominantly poor must be enhanced. Studies including Okafor (2000), Olaitan (2006) Adenuga and Akpan, (2007), and Owolabi et.al. (2010) have shown that if effective growth strategies via credit and intellectual capital empowerment are adopted and the latent entrepreneurial capabilities of these large segments of people are sufficiently stimulated and sustained, positive multiplier’s effects will be felt throughout the economies. This explains the crucial role of the money market as a veritable engine of economic growth and development. So much has been stressed on this point that it has assumed prominence in the literature of growth and development in the world today.

Commercial banks play a leading role in the money market segment of any financial system. The banks’ credit is very pivotal in stimulating effective economic performance. According to Nzotta (1999), commercial banks’ credit influences positively the level of economic activities in any country. It influences what is to be produced, who produces it, and how much is to be produced. The Central Bank of Nigeria (CBN, 1992) specifically identified commercial banks as monetary institutions owned by either government or private businessmen for the purpose of profit making. In pursuit of this objective, the commercial banks perform a number of crucial functions. One of these functions is the acceptance of deposits from the public. These deposits are given as loans to different segments of the economy. Government as part of her monetary policy role also directs commercial banks’ credit to certain national interest areas to facilitate growth and better economic performance.

The use of directed credit controls by the Nigerian government has over the years undergone several transformations decorated with different numenclature including commercial bill financing scheme; rediscounting and refinancing facility; small and medium enterprises equity investment scheme (SMEEIS), among others. The form oftentimes has been the sectoral allocation of commercial banks’ loans and advances within the credit limit specified by the Central Bank. Under the arrangement, the production sector comprising agriculture, Manufacturing enterprises as well as Mining/quarrying are allocated the bulk of commercial banks credit. But the effectiveness of directed credit policy has been challenged. Presently, there is an ongoing controversial debate between the monetary authorities and the real sector operators that a lot of resources have been channeled to the sector but the impact is yet to be felt in the economy. Admittedly, much theoretical studies including Allen and Ndikumana (1998), Mishkin (2007) as well as Essien and Akpan (2007) have attempted to establish the validity of this argument but emipirical evidence in this respect is still insufficient. This study while contributing to existing literature on finance-led-growth also filled the aforementioned research gap. Specifically, the paper empirically evaluated the possible impact on the Nigeria economy of commercial banks’ credit to the production sector proxied by agriculture, manufacturing and mining/quarrying.

2. Review of Theoretical and Empirical Literature

The existence of a relationship between finance and growth seems incontestable as many researchers have worked on the issue and positively confirmed it. What is debatable is the direction of causality between finance and growth. According to Levine (2003), finance and growth theory illuminate many of the channels through which the emergence of financial resources, instruments, markets and institutions affect and are affected by economic development. Theoretical debates on the direction of causality between finance and growth have given rise to three distinct hypotheses viz; supply-leading hypothesis (Schumpeter, 1912; Patrick, 1966; Mckinnon, 1973; etc); demand-leading hypothesis (Robinson, 1952; Gurley & Shaw, 1967; Goldsmith, 1969; Lucas, 1988; etc); and the bi-directional hypothesis (Demetriades & Hussein, 1996; Demetriades & Andrianova, 2004; etc) respectively. When causal relationship runs from financial development to growth, it is termed supply-leading because it is believed that the activities of the financial institution increase the supply of financial services which creates economic growth. Similarly, when the growth within the economy results in increase in the demand for financial services and this subsequently motivates financial development, then it is termed demand-leading hypothesis. But when causal relationship runs in both directions, it is termed bi-directional. Theoretical arguments over the years have spurred a growing body of empirical analyses, including firm-level studies, industry-level studies, individual country-studies, time-series studies, panel studies, and broad cross-country comparisons all in attempt to demonstrate a link between the functioning of the financial system and long-run economic growth.

Cross-Country Time Series Empirical Studies

Substantial time-series literature examined the finance-growth relationship using a variety of time-series techniques. These studies frequently used ordinary least square (OLS) regression tests, Granger-type causality tests and vector autoregressive (VAR) procedures to examine the nature of the finance-growth relationship. Jung (1986) and Demetriades and Hussein (1996) used measures of financial development such as the ratio of money to GDP. They found that the direction of causality frequently runs both ways, especially for developing economies. According to them, the positive impact of finance on growth is particularly strong when using measures of the value-added provided by the financial system instead of simple measures of the size of the financial system, as documented by Neusser and Kugler (1998).

In a broad study of 41 countries over the 1960-1993, Xu (2000) used the VAR approach and improved upon the early works of Jung (1986) as well as Arestis and Demetriades (1997). The VAR approach permitted the identification of the long-term cumulative effects of finance on growth by allowing for dynamic interactions among the explanatory variables. Xu (2000) rejected the hypothesis that finance simply follows growth. Rather, the analyses indicate that financial development is important for long-run growth. Christopoulos and Tsionas (2003) used panel unit root tests and panel cointegration analysis to examine the relationship between financial development and economic growth in ten developing countries. They noted that many time-series studies yielded unreliable results due to the short time spans of typical data sets. Thus, they used time-series tests to yield causality inferences within a panel context that increases sample size. In contrast to Demetriades and Hussein (1996), Christopoulos and Tsionas (2003) found strong evidence in favor of the hypothesis that long-run causality runs from financial development to growth and that there is no evidence of bi-directional causality. Furthermore, they find a unique cointegrating vector between growth and financial development, and emphasize the long-run nature of the relationship between finance and growth. Rousseau and Wachtel (1998) conducted time-series tests of financial development and growth for five countries over the past century using more comprehensive measures of financial development. They used measures of financial development that included the assets of both banks and non-banks. They documented that the dominant direction of causality runs from financial development to economic growth. Similarly, Rousseau and Sylla (1999) expanded Rousseau’s (1998) examination of the historical role of finance in U.S. economic growth to include stock markets. They use a set of multivariate time-series models that relate measures of banking and equity market activity to investment, imports, and business incorporations over the 1790-1850 period. Rousseau and Sylla (1999) found strong support for the theory of "finance-led-growth" in United States. Moving beyond the U.S., Rousseau and Sylla (2001) studied seventeen countries over the period 1850-1997. They also found strong evidence consistent with the view that financial development stimulate economic growth in these economies. In a study of stock markets, banks, and economic growth, Arestis, Demetriades and Luintel (2000) found additional support for the view that finance stimulates growth but raise some cautions on the size of the relationship. They used quarterly data and applied time series methods to five developed economies and showed that while both banking sector and stock market development explain subsequent growth, the effect of banking sector development is substantially larger than that of stock market development.

Individual Country Time Series Empirical Studies

Some time-series studies focus on the experience of a single country. For instance, in a study of the Meiji period in Japan (1868-1884), Rousseau (1999) used a variety of VAR procedures and concluded that the financial sector was instrumental in promoting Japan’s explosive growth prior to the First World War. In a different study, Rousseau (1998) examined the impact of financial innovation in the U.S. on financial depth over the period 1872-1929. Innovation was proxied by reductions in the loan-deposit spread. The impact on the size of the financial intermediary sector was assessed using unobservable components methods. The paper found that permanent reductions of 1% in the spread of New York banks are associated with increases in financial depth that range from 1.7% to nearly 4%. Again, Cem (2010) investigated the relationship between credit market development and economic growth for Turkey over the period of 1961-2008 using an ARDL-Bounds testing approach. He tested whether credit market development spurs economic growth taking into account the negative effect of inflation rate as an intermittent variable on credit market and growth. He also tested the relationship between bank credit and GDP growth and estimated the short-run and the long-run elasticities. It was found that bank credit increased GDP growth both in the short and the long run until 2002 after which the impact reversed. The empirical results indicated that credit market development has a positive effect on economic growth until the period of the over-financialization in Turkey.

In Nigeria, researchers have also attempted to examine the relationship between the financial market development and economic growth. However, most of the existing empirical studies focus more on the capital market with very little money market evidence. For instance, Ted et. al. (2005) examine the empirical association between stock market development and economic growth in India. Whereas the authors found support for the relevance of stock market development to economic development during pre-liberalization, they discovered a negative relationship between stock market development and economic development for the post liberalization period. Adam and Sanni (2005) examined the roles of stock market on Nigeria’s economic growth using Granger-causality test and regression analysis. The authors discovered a uni-directional causality between GDP growth and market capitalization and a bi-directional causality between GDP growth and market turnover. They also observed a positive and significant relationship between GDP growth turnover ratios. Similarly, Abu (2009) examined whether stock market development raises economic growth in Nigeria, by employing the error correction approach. The econometric results indicated that stock market development proxied by market capitalization to GDP ratio increases economic growth in Nigeria. Other recent studies including Osinubi and Amaghionyeodiwe (2003), Obamiro (2005), Kolapo and Adaramola (2012) amongst other also examined the relationship between Nigeria stock market and economic growth and found positive relationship between the stock market and economic growth. Ezeoha et. al. (2009) investigated the nature of the relationship that exists between stock market development and the level of investment proxied by domestic private investment and foreign private investment flows in Nigeria. The authors discovered that stock market development promotes domestic private investment flows thus suggesting the enhancement of the economy’s production capacity as well as promotion of the growth of national output. However, the results show that stock market development has not been able to encourage the flow of foreign private investment in Nigeria. Nyong (1997) developed an aggregate index of capital market development and used it to determine its relationship with long-run economic growth in Nigeria. The study employed a time series data from 1970 to 1994. Four measures of capital market development, the ratio of market capitalization to GDP, the ratio of total value of transactions on the main stock exchange to GDP, the value of equities transaction relative to GDP and listings were used. The four measures were combined into one overall composite index of capital market development using principal component analysis. Result showed that capital market development is negatively and significantly correlated with long-run growth in Nigeria. Ewah et al (2009) appraised the impact of capital market efficiency on economic growth in Nigeria using time series data on market capitalization, money supply, interest rate, total market transaction, and government development stock between 1961-2004. By applying the multiple regression approach and ordinary least squares estimation techniques, they found that the capital market in Nigeria has the potential to induce growth, but it has not contributed meaningfully to the economic growth of Nigeria because of low market capitalization, low absorptive capacity, illiquidity, misappropriation of funds among others. Above all, Oluitan (Undated) examined the significance of bank credit in stimulating output within the real sector and the factors that prompted financial intermediation within the economy. Evidence from the work shows that real output causes financial development, but not vice versa. It was also observed that export of oil and non-oil export are not significant in driving financial development; but growth in the financial sector is highly dependent on foreign capital inflows.

3. Methodology

Empirical Design and Data: The paper employed the ex-post facto research design in obtaining, analyzing and interpreting the relevant data. The justification for the choice is that ex-post facto design allows the researcher the privilege of observing one or more variables over a period of time. Accordingly, the research variables for this study were observed over a 23 year period 1986–2008. The timeframe is justified as it coincides with the structural adjustment period of the federal government of Nigeria and covers all other subsequent federal government credit programmes. The paper utilized secondary data on contributions of agriculture, manufacturing and mining/quarrying on Nigeria’s gross domestic product (GDP) at current producers’ price and commercial banks’ credit to agriculture, manufacturing, and mining/quarrying respectively (see appendix 1). Data were got from the Central Bank of Nigeria (CBN) Statistical Bulletin. The extracted data were subsequently analyzed and tested with the aid of the statistical package for social science (SPSS) computer version 17 to determine the impact of commercial banks’ credit on economic growth performance in Nigeria as proxied by the gross domestic product (GDP).

Research Hypotheses: Three major hypotheses were formulated in the null form to guide the study as follows:

H01 : There is negative and significant effect of Nigeria commercial banks’ credit to agriculture on Nigeria’s total gross domestic product.

H02 : There is negative and significant effect of Nigeria commercial banks’ credit to manufacture on Nigeria’s total gross domestic product.

H03 : There is negative and significant effect of Nigeria commercial banks’ credit to mining and quarrying on Nigeria’s total gross domestic product.

Analytical Econometric and Justifications: The adopted model for this paper draws theoretical strength from Endogenous growth models. Endogenous growth models among other things demonstrate the channel by which trade financial policies affect economic growth and development. Accordingly, the model chosen is consistent with previous local and foreign studies on finance and growth including Adam and Sanni (2005), Abu (2009), Demetriades & Andrianova (2004), Ghirmay (2004), However, the study specifically patterned the bivariate model developed by Ghirmay (2004). The model is of the form: -

LYt = β0 + β1LCt-1 + εt --------------------------------------------------------------------------------------------- (i)

where: -

LY = Log of Real Gross Domestic Product growth

LC = Log of Real Private Sector Credit growth

β0 and εt are the constant and the error terms respectively

The above function is patterned to model our three hypotheses as follows:

LGDPagric = β0 + β1LBankagric t-1 + εt ........................................................................... (ii)

LGDPman = β0 + β1LBankman t-1 + εt ............................................................................ (iii)

LGDPmin/Q = β0 + β1LBankmin/Q t-1 + εt ......................................................................... (iv)

Where:-

GDPagric/man/min = Contributions of agriculture, manufacturing, and mining/quarrying to Nigeria’s Gross Domestic Product at current producers price

Bankagric/man/min = Commercial banks’ credit to agriculture, manufacturing, and mining/Q

4. Results and Discussions

Table (4.1) and (4.2) below are summary statistics of the results emanating from the SPSS computer output (See appendix 2):

Table (4.1) : Coefficients ( @ 95% Confidence Interval for B)

Constants of the Regressors

Indepnt Variable (Bank Cr)

Hypo

Variables

Beta

t-stats.

t-sig.

Beta

t-stats.

t-sig.

H01

Agric

-191563

-0.560

0.581

58.638

8.763

0.000

H02

Manf

64353

3.908

0.001

0.774

9.992

0.000

H03

Min/Q

2651.485

2.846

0.010

0.049

11.527

0.000

Source: Computed from SPSS Output in appendix 2

Results arising from the coefficient table (4.1) above made striking revelations for the three hypotheses. For hypothesis one, the constant value is -191563. The value is negative and statistically not significant at 0.581. The constant value is the intercept of the regression line indicating that agriculture contribution to gross domestic product (GDP) in Nigeria will be less 191563 units assuming other explanatory variables are zeros. The coefficient of commercial banks’ credit to agriculture is 58.638. This value is positive and statistically significant (i.e, 0.000) at both 95% and 99% significant values respectively. This means that for every one unit increase in commercial banks’ credit to agriculture in Nigeria holding other variables constant, agriculture contribution to GDP will increase by 58.638 units. On the other hand, the constant term for hypothesis two is 64353 and statistically significant at 0.001 implying that the contribution of manufacture to GDP will be 64353 units if other explanatory variables are zeros. The coefficient of commercial banks’ credit to manufacture is 0.774. This value is also positive and statistically significant (i.e, 0.000) at both 95% and 99% significant values respectively. This means that for every one unit increase in commercial banks’ credit to manufacture in Nigeria holding other variables constant, manufacture contribution to GDP will increase by 0.774 unit. Similarly, the constant term for hypothesis three is 2651.48 and statistically significant at 0.010 implying that the contribution of mining/quarrying to GDP will be 2651.48 units if other explanatory variables are zeros. The coefficient of commercial banks’ credit to mining is 0.049. This value again is positive and significant (i.e, 0.000) at both 95% and 99% significant values respectively. This means that for every one unit increase in commercial banks’ credit to mining/quarrying in Nigeria holding other variables constant, mining contribution to GDP will increase by 0.049 unit.

Table 4.2: Relationship and Variance Statistics

Hypo

Variables

Pearson

R

R2

Adj. R2

F

F-Sig

H01

Agric

0.886

0.886

0.785

0.775

76.784

0.000

H02

Manf

0.909

0.909

0.826

0.818

99.843

0.000

H03

Min/Q

0.929

0.929

0.864

0.857

132.866

0.000

Source: Computed from SPSS Output in appendix 2

The above submission is further confirmed using relevant descriptive statistics summerized in table 4.2. The Analysis of Variance (ANOVA) tested for the acceptability of our model from statistical significant viewpoint by looking at the goodness of fit from the F-statistics. Accordingly, the significant values of the F-statistics from the ANOVA table are 0.000 for the three models. 0.000 is less than 0.05, an indication that the models did good job in explaining the variations in the dependent variables. The signs of the Pearson correlation coefficient between GDPagric/man/min and Bankagric/man/min are 0.886, 0.909, and 0.929 respectively. This is an indication of strong positive relationship between production sector contribution to GDP and commercial banks’ credit to production sector in Nigeria. The multiple correlation coefficient (R) for the three models are similar to the pearson correlation coefficients, an indication of strong relationship between the predicted and the observed values of the dependent variables. The R square statistics are 0.785, 0.826 and 0.864 implying that 78.5%, 82.6%, and 86.4% of the variations in the dependent variables respectively are explained by the independent variables. Again, the R square adjusted are also high at 0.775, 0.818, and 0.857 signifying that after adjusting for errors, 77.5%, 81.8%, and 85.7% of the variations in the dependent variables are still explained by the independent variables in the models.

5. Empirical Validation of Hypotheses and Implications

The t-statistics in table 4.1 were used to validate the three formulated hypotheses. The critical t-statistics value from the statistical table at 95% confidence interval is 1.7171. This value is less than the computed t-statistics values of 8.763, 9.992, and 11.527 for banks credit to agriculture, manufacturing, and mining/quarrying respectively in table 4.1. Meanwhile, the t-statistics decision rule on test of hypothesis is to reject the null hypothesis and accept the alternate hypothesis when the computed t-value is greater than the tabulated t-value or decided otherwise when the computed t-value is less than the tabulated t-value. Based on this rule, we rejected the three null hypotheses and accepted their alternate hypotheses. We thus submit that there is positive and significant effect of commercial banks’ credit to agriculture, manufacturing, and mining/quarrying on the gross domestic product in Nigeria.

Our submissions however have certain implications to policy. First, credits directed so far to the production sector contrary to popular opinions by the government authorities and other concerned analysts have to a significant extent been judiciously used for production purposes hence, the positive and significant effect on GDP as evidenced. Secondly, out of the three production variables considered, agriculture has had the highest contribution to the GDP, followed but not closely by manufacturing. The mining/quarrying industry’s contribution has been very minimal. Result showed that for every one unit credit directed to mining/quarrying, its contribution to GDP was far less than unity (0.049 unit). The implications are double fold: It could be that the mining industry has not received adequate financial vitality to optimize its productive capacity or that the credits so far advanced have been unduely misappropriated.

6. Conclusions and Recommendations

One significant conclusion of this study is that finance leds growth and stimulate economic performance in Nigeria especially when measured using the production sector’s experience. Another is that the credits directed to the production sector are not often being wasted as earlier suggested in some studies, rather they are in most cases appropriately invested. This is evidenced in the effects of such credits on productivity and economic growth of the Nigeria economy. Our two conclusions are justified by the outcomes of the three hypotheses that: commercial banks’ credit to agriculture, manufacturing, and mining do positively and significantly affect agriculture, manufacturing and mining contributions to the gross domestic product in Nigeria. The above conclusions however are consistent with numerous existing findings including McKinnon (1973), Shaw (1973), Nzotta (2002), Kolapo and Adaramola (2012), Ogboi and Oladipo (2012), among others who postulate that financial deepening among other things stimulates investment and boost economic performance in a nation. Based on the results of this study, the following recommendations are made for fasttracking and optimizing the value-added impact of banks credit in Nigeria:

This paper reveals that an efficient money market is sine qua non to better economic performance. To achieve a more balanced and overall economic growth in Nigeria therefore, there is urgent need by the government for the removal of impediments to money market development including unhealthy tax system and major regulatory barriers among others.

Secondly, for bank credit to play effective growth role in the development of the Nigeria economy just as it is in the developed nations, the government through the central bank must effectively ensure thorough routine regulation of the money market.

The positive performance of banks credit to the production sector is an indication of its usefulness in steering up balanced growth in other sectors of the Nigeria economy. Regulatory authority should therefore initiate more policies that would encourage more sectors to access banks credit easily and affordably. They should however be more proactive in their surveillance role in order to check sharp practices that could undermine market integrity and erode investors’ confidence.

Finally, there is still urgent need for more supervision and monitoring of bank credit in the production sector. The performance experience of the mining/quarrying unit of the sector is a pointer to that effect. As part of banks credit officers’ responsibility, they should endeavour to consistently supervise projects for which purpose bank credits are granted and ensure that the credits are accordingly utilized for that purpose.

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