Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
1 CHAPTER ONE INTRODUCTION 1.1. BACKGROUND OF STUDY Commercial banks play an important role in economic development of developing countries. Economic development involves investment in various sectors of the economy. The banks collect savings from the people and mobilize savings for investment in industrial project. The investors borrow from banks to finance the projects. Special funds are provided to the investors for the completion of projects. The bank provide a gurantee for industrial loan from international agencies. The foreign capital, flows to developing countries for investment in projects. Commercial banks are involved in the process of increasing the wealth of the economy, particularly the capital goods needed for raising productivity. The developed economies need the service of the banking system to enable the economy attain economic growth, while the developing economies need the service of banking system for sectorial development. 2 The financial institution are therefore, capable of influencing the major saving propensities and opportunity. The need to achieve sustained economic growth within any economy can be possible admist strong financial institution and precisely within the existence of a virile banking system. Their activities must be such that are tailored to work in the congruence with government policies and programmes in a bid to attaining the desired macroeconomic objectives as a nation. Schumpeter in 1934 observed that the commercial banking system was one of the key agent in the whole process of development. Generally commercial banks not only facilitates but speed up the process of economic development through making more funds available from resources mobilized. 3 THE ROLE OF COMMERCIAL BANKS IN ECONOMIC GROWTH IN NIGERIA The banking system is a catalyst and engine of growth that is responsible for being a lifewire to every sector of the economy. It is evident that no sector in the economy can flourish or prosper without the support and services of the banking sector, agricultural sector, manufacturing sector, mining or even services sector can’t do without banks. Commercial banks provide and encourage savings. The establishment of commercial bank especially in the rural areas makes savings possible, hence economic development is accelerated. Commercial banks provide capital needed for development. Deficit spender unit obtain medium and short term loans and overdraft from commercial banks to start a new industry or to engage in other development efforts. They engage in trade activities through making use of cheques and other financial instrument possible. They encourage investment, provide direct loans to the government and individuals for investment purposes. 4 They provide managerial advices to small-scale industrialists who do not engage in the service of specialist. Commercial banks also render financial advice to their customers including to invest in. Commercial banks create money as an instrument to the apex bank for all its activities. Commercial banks help to enhance development of international trade, these include acting as referees to importers, providing travellers cheque to those going abroad, opening letters of credit as well as providing credit for export. All these helps to promote international trade and relationship between nations, they provide backup liquidity to the economy. They are transmitters of monetary policy and they provide some “value added” from transfering funds from savers to borrowers and providing liquidity. The current credit crisis and the transatlantic mortage financial turmoil have questioned effectiveness of banks consolidation programme as a remedy for financial stabilty and monetary policy in correcting the defects in the financial sector for sustainable development. The consolidation of banks has been the major policy instrument being adopted in correcting 5 deficiencies in the financial sector. The economic rationale for the domestic consolidation is indisputable, an early view of consolidation was that it makes banking more cost efficient because larger banks can eliminate excess capacity in areas like data processing, personnel marketing or overlapping networks. Cost efficiency also could increase if more efficient banks acquired less efficient ones. Consolidation is viewed as the reduction in the number of banks and other deposit taking institutions with a simultaneous increase in size and concentration of the consolidation entities in the sector. The driving forces in bank consolidation include better risk control through the creation of critical mass and economies of scale, advancement of marketing and product initiative improvements in the overall credit risk and technology exploitation. These drivers has lead to improved operational efficiencies and larger and better capitalized institutions. 6 1.2 STATEMENT OF THE PROBLEM Given that the economic trend of the commercial banking industry, one wondered what has hindered economic growth, though an important avenue for banks to boost the growth of the economy through efficient and effective saving investment process(financial intermediation) to stimulate investment and productive activities. For the past three decades, the Nigerian economy has not shown any favourable sign of growth. For example, the real GNP growth rate figure was 2.8% in 1995 with negative figures in years like 1982, 0.3% etc as depicted in the CBN periodic bulletin in 1986. This shows that the Nigerian economy is not one that can inspire confidence, if no drastic improvement is shown by financial institutions with its economy especially in the new millenium. 1.In what extent does commercial bank as a financial intermediate contribute towards fund mobilization for economic growth and development of the country. 7 2.What is the essence of commercial banks in Nigerian economy towards fund mobilization for economic growth and development? 3.What are the problems commercial banks encounter in their performance towards mobilization of funds for economic growth and development? 1.3 OBJECTIVES OF THE STUDY The objectives of this research work are tactily stated as follows. -To determine the contribution of commercial banks towards a positive economic growth and wealth creation. -To examine ways in which the commercial banks in Nigeria can be made to play better roles towards fund mobilization for economic growth and development. -To analyse the constraints and short comings facing commercial banks in Nigeria towards fund mobilization for economic growth and development. 8 -To determine and test the effects of some relevant economic variable and factors on the real gross domestic product(GDP) of Nigeria. 1.4 STATEMENT OF THE HYPOTHESIS This research work will be guided by the following hypothesis. Commercial banks do not contribute significantly towards fund mobilization for economic growth and development of the country. The variables of commercial banks are lending deposits, real investment and interest rate etc do not have any impact in the Nigerian economic sector. The constraints on the activities of the comercial bank do not affect their economic role and activities. 9 1.5 SIGNIFICANCE OF THE STUDY The study makes clear the actual contributions and operations of commercial banks in Nigeria. It will also sensitize the society on the importance of commercial banks in Nigeria. The study will be important to the policy makers and the federal government inorder that to adapt and implement policy measures that will boost the economy through the financial institution. It will also depict the negative and positive side of the activities of the general public and bankers, for some correction and changes inorder to boost the economy. 1.6 LIMITATION OF THE STUDY The main task of the study is to give in full detail the role of commercial banks in fund mobilization for industrial growth and development but due to insufficient time frame for the purpose of simple and articulate analysis, the study is restricted to commercial banks specifically. The study is limited to the period 10 of 1975-2008 which saw the significant role played by the financial sector in the Nigerian economy. 11 CHAPTER TWO LITERATURE REVIEW 2.0 THEORITICAL LITERATURE Reforms are predicted upon the need for reorientation and repositioning of an existing status inorder to attain an effective and efficient state. There could be fundamental bottle-neck that may inhibit the functioning of the institutions for growth and the achievement of core objectives in the drive towards inhancing and sustaining the economic and social imperatives of human endeavour carried out through either government institution or private enterprises. Consequently, the banking sector, as an important sector in the financial landscape, needs to be reformed inorder to enhance its competitiveness and capacity to play a fundamental role of financing investment. Many literature indicates that banking sector reforms are propelled by the need to deepen the financial sector and reposition it for growth, to become integrated into the global financial architecture, and involves a banking sector that is 12 consulting with regional integration requirements and International best pratices. The contention that the contributions of commercial banks should matter at all for growth and development has given rise to various opinions and theories among economists. Examining the current changes and advancement in more sophisticated growth models, which include financial intermediation, it was fairly obvious by the financial market have an important role to play in promoting industrial growth. Robinson(1952) maintained that it is economic development that demand financial services. A recent work done by Levine(1997) however argues that the preponderance of theoretical reasoning and empirical evidence suggets a positive first order relationship between financial insititutions and economic growth. Goldsmith(1969) asserted that banking sector’s role matter for real development because the banking super-structure in the form of both primary and secondary securities accelerate economic growth and development, they also improve economic performance to the extent that they facilicitate the transfer of funds to the best 13 users, ie to the economic system where the fund will yield the highest social return. Deveraux and Smith(1994) maintained that commercial banks can only mobilize economic growth through its influence, or decrease the savings rate and therefore growth is an open question. Greenwood an Jovanic(1990) are of the opinion that for commercial banks to affect economic growth through fund mobilization, commercial bank can increase the marginal productivity of capital called interest rate which determines to a great extent the amount that is saved or invested. According to Udochi (1981:11), despite the obvious benefits derived from the commercial banks, most Nigerians are not well motivated to make adequate saving and investments in this hard period, due to the financial crunch prevailing in the banking and non-banking secor of our economy. The public don’t hope to obtain enough funds from the banks neither could the bank afford to lend to an unpredictable project. 14 Barnger(1994:24) financial market development is very sensitive to the nature of macro-economic growth. It depends upon policies which promote the efficient allocation of resources in accordance with market forces rather than government directives. The development of financial market also depends on the provision of an adaptable regulatory and supervisory framework, which provides a balance between market freedom and investors protection. Specifically, she stated that the following conditions are necessary for a competitive and stable financial environment: conducive and stable macro-economic environment. Progressive monetary and fiscal policies, appropriate regulatory and enforcement medians. A major problem concerning commercial banks in Nigeriais that there is no much link between it and the outside. Brown, in his book, “The Nigeria banking system” 1998 saw statistical difficulties as one of the chief handicap of commercial banks in the country. He indicated the inclination of all firms including the commercial banks to present as a favourable picture as possible when they draw up their balance-sheets, which meant nothing more than 15 WINDOW-DRESSING. This is because a bank’s balance sheet may represent a true and fair picture of the affair of the bank on the last day of its financial year, but have a little to do with bank’s affairs other or subsequent days. 2.1 HISTORICAL BACKGROUND The Evolution Of The Nigerian Banking Sector. The banking operation began in Nigeria in 1982 under the control of the expatriates and by 1945, some Nigerians and Africans had established their own banks. The first era of consolidation ever recorded in Nigerian banking industry was between 1959-1969. This was occasioned by bank failures during 1953-1959 due to the liquidity of banks. Banks, then, do not have enough liquid assets to meet customer demands. There was no well organised financial system with enough financial instruments to invest in. Hence, banks merely invested in real assets which could not be easily realised to cash without loss of value in terms of need. This prompted the federal government 16 then, backed by the World bank report to institute, of the loynes commission on September 1958. The outcome was the promulgation of the ordinance of 1958, which established the Central bank of Nigeria(CBN). The year 1959 was remarkable in the Nigerian banking history not only because of the establishment of Central Bank of Nigeria(CBN) but that the treasury bill ordinance was enacted which led to the issuance of our first treasury bill in April, 1960. The period (1959-1969) marked the establishment of former money, capital markets and portfolio management in Nigeria, in addition, the company acts of 1968 were established. This period could be said to be the genesis of serious banking regulation in Nigeria. With the CBN in operation, the banking industry restructing was motivated by the need to establish a healthy banking sector that will carry out its financial intermediation role at a minimal cost which effectively provides services consistent with world standards. The major aim of the consolidation program was to store up the capital base of banks consolidated through 17 mergers and take-over to local banks. This allows foreign banks to participate in the banking industry by providing additional capitalisation through investment infrastructure in new banking products, operating technologies and buying shares of the existing banks. The banking sector reforms, involve the reform of the regulatory and supervisory framework, the safety net arrangement as well as mechanisms to speed up attempts at resolution of banks non-performing loans. In an attempt to revitalize the banking system, a package were comprising among others. 1. The government would consider the possibility of establishing a new system for the prompt infusion of state capital into undercapitalised banks which are called “preemptive” capital injections. 2. The government would act to ensure a tightening of assessments of bank asset quality, possibly involving the 18 use of discounted cash flow(DCF) techniques in the assessment of adequacy of provision. 3. Adoption of criteria concerning the bank’s use of deferred tax assets with regulatory capital with no limits or timetable for implementation. 4. Government conversion of bank preference shares that it already own, because of previous bail-outs, into common stock in order to trigger nationalisation for institutions whose operations had been seriously impaired, and the establishment of a new body to operate with the resolution and collection corporation(RCC) to rehabilitate troubled companies whose future prospects appeared bright. It stands to reason that bank consolidation would not in the least of a sufficient condition to redress weaknesses in the banking sector. This is the time to look for appropriate mechanism to correct the weaknesses in the financial sector. 19 2.0.2 COMMERCIAL BANKING IN NIGERIA The history of commercial banking in Nigeria dates back to August 1891, the opening of a branch of the African banking corporation(ABC) in that year. It was established essentially as a means of facilitating the shipping business of Elder Dumpster and Company. This company later acquired the bank branch in 1893 by paying #2,000 to ABC. It was thereafter incorporated as the Bank of British West Africa(BBWA) in 1894. The bank intermetamorphosed to Standard Bank of Nigeria, and thereafter till date, to First Bank of Nigeria PLC. A second bank, the Anglo African Bank was established. However, with the conclusion of a merger with the BBWA in 1912, this bank closed up. In 1917, a colonial bank was established, this became the second BBWA of banking activities in the country, however, this bank having been absorbed by Barclays Bank in 1925 became known as Barclays Bank dominion colonial and overseas. A feature that was common to those two banks in Nigeria is the fact of their foreign ownership. This feature characterized 20 banks in Nigeria until the early 30s when the first successful indigenous bank was of the domestic banking scene by foreign banks. In 1929, the industrial and commercial bank was established and collapsed in 1936. Next to national banks was Agbonmagbe Bank set up in 1945. This bank metamorphosed to WEMA bank. Within this same period the PENNY bank was established and collapsed quickly thereafter in 1946. In 1947 the third successful indigenous bank, the African continental bank was established. In that year too, the Nigerian Farmers and Commercial bank was established. This failed in 1953, indeed between 1929 when the first attempt at setting up an indigenous bank and 1959 when the regulatory Apex bank, Central bank of Nigeria was ste up. Thus, the successful establishments of the three indigenous banks viz: National bank of Nigeria, Agbonmgbe (WEMA) bank and African continental bank stood out as no means of achievement in the history of commercial banking in Nigeria. By 1996, two of these three indigenous banks, National bank of Nigeria and African continental bank had gone the way of 21 their counterparts that failed shortly after establishment. And WEMA bank is presently under suspension by CBN. The period 1892-1959 can for purpose of analytical convienence be considered as one era in the history of banking in Nigeria, the key feature of that era being the absence of statutory provisions to regulate the business of banking. The period 19591985 can be considered as another era in the history of banking in Nigeria. It saw the establishment of Central bank of Nigeria in 1959, empowered to effect the regulatory activities were over banking business in Nigeria. Within this period many banks, some wholly indigenous and others partly indigenous were established. This period is also will also witnessed the promulgation and the implementation of the indigenous enterprises promotion decree in 1972. A third phase in the development of commercial banking in Nigeria can be considered to be the period 1986-1995, this phase is characterized by boom in banking business. A boom occassioned by the inception of the Structural Adujustment 22 Programme (SAP) wth its emphasis on privatization/ commercialization of government owned enterprises, Liberalization of the foreign trade sector and very importantly the deregulation of such key aspects of the economy as pricing of Agricultural commodities as well as the adoption of completly freely floating exchange rate. This last policy thrust of SAP as a vital tonic to the boom in banking business within this era. Thus, within this era, several commercial and merchant banks emerged in the banking terrain to take advantage of the deregulated exchange rate regime which enabled banks record fantastic profit from speculative activities in the foreign exchange market with little or no real banking activties being carried by them. Thus ,at as 31st December 1985, the number of commercial banks in Nigeria stood at 28 with a branch network 1,297. However at the end of December 1986, the number stood at 29 commercial banks with a total branch network of 1,369 by December 1990, a little over 3years into the inception of SAP, the number of comercial banks had risen to 58 with a total branch network of 2,013. The number however fell from 64 to 63 23 at the within a space of about ten years .As we had remarked earlier,these banks were SAP-induced.Thus in the wake of a decline in the momentun of the implementation of SAP policies or even an outright reversal of came a protracted,crisis in the commercial banking therein . A further feature of this era is promulgation of Decree 22 of 1988 which established the Nigerian Deposit Insurance Corportion NDIC a body empowered to provide Deposit Insurance and related services for the banks as well as provide Insurance cover to depositors of funds in banks with statuory empowerment to pay up to maximum of #50,000 of a depositor’s total deposit in case of collapse of the bank in which the deposit lodged. The increased sophistication gained by the financial services industry in Nigeria froooooom 1987 onwards prompted increased official action to address the problems of the sector through such measures as stabilization of the naira exchange rate,strengthen the enforcement of banking laws including the absolute implementation of the failed bank[decree designed to bring those responsible for bank failure to justice] repealing the laws which 24 hinder foreign investment and improving all these results in a mixed performance of the sector. As of now,Nigeria can boast of 25 commercial banks,after the consolidation exercise which was announced by the CBN on the 6th of July 2004 and ended as at December 2005 [that is 18months notice]with thnew minimum capitalization given at 25billion this exercise led to the shrinkage in the number of commercial banks from 89to25. The 25considered strong commercial banks after December 2005 consolidation exercise are now having liquidity problem causing lose of confidence in banking.The bank crisis witnessed in 2009 is necessiated by loan defaulter and illegal of the bank directors by collaborating and aiding loan defaulters. 2.1 EMPIRICAL LITERATURE One recent empirical paper by Beck,Levine and Loayza [1999]estimates four types of regressions that explains economic growth,per capital GDP growth.The authors found a strong casual impact on real per capital GDP growth and per-capital 25 productivity growth from banking sector development, while the result on capital accumulation and savings are ambiguous.The results are consistent with the view that commercial banks choose which firms that will use society’s savings.therefore commercial banks are capable of altering the path of economic progress by affecting the allocation of saving rate.Similiar results on this topic have been obtained by Kings and Levine [1993] interestingly,Levine and Zeros (1998) showed that legal and regulatory changes that strenghten creditor rights, contract enforcement and accounting practices, also serve to boost financial intermediary progress and induce a rapid acceleration encouraging growth. Murinde (1996), examines the effect of financial institution on seven African countries. He finds only weak support of the motion that financial has played a significant role in the growth process. Odeokun (1996), investigate the effect on economic efficiency from financial variables such as Financial intermediation, Real interest rate, Inflation and Exchange rate valuation. The result suggest financial debt (broad and narrow 26 money supply) that are measured in the form of real monetary or credit stock variable are negatively related to efficiency. If these variables are measured in the form of real monetary or credit flow variable, there is a strong positive relation with economic efficient. The real appreciation following a current account deficit hinders efficiency. Berthelemy (1996), shows that insufficient financial progress can creat poverty, even when other important conditions such as macroeconomic stability and trade openess have been established. Harrison (1998), present evidence that industries which rely heavily on external funding, grow relatively faster in countries with well developed financial intermediaries and stock markets. He also stated that there is a feedback effect between real and financial sectors. Nwankwo (1980:150) asserts that different people organisations such as corporative societies and firmly duly but to reciprocate at the time of making credits available,one would realize that they are profit oriented and would see their operation in that way otherwise they will crumble. 27 Nwankwo therefore argue that people are to do business and their stock in trade is money. Individuals should show that they are credit worthy, financially trustworthy, and enable them repay loan as agreed. In the research work Newlyn and Rowan, and other financial institutions encourage thrifts, assists saving mobilization ventures. They also available a safe speedy and cheap remittance of funds (Newlyn and Rowan 1954: 207-208). In majority of the work seen it was observed that banking is indispensable in any economy. For an economy to grow or develop its financial institution (banking system) must be sound and strong so as to create confidence in the publc to save. This was stressed by( Abid 1997:6) that the location of savings is based on the condition that the more developed a financial institution is, the more proportion of domestic savings that will channeled through it. For successful extension of the role, the financial system must not only depend on direct saving but make available other access like use of securities which will strengthen the dependence on indirect external finance among the various units of the economy. 28 In his study, Abid (1997:30) found out that the reason behind " poor performance" of organised bank in some developing countries is the issue of financial regression hypothesis. The intervention of government for less developed countries has placed restrictions on the activities of the banks by regulating the interest rates, imposition of mandatory credit guidelines, which has to be followed by the financial intermediaries. Other forms of restrictions includes ceiling on loans and advances and deposit rates by the so-called lending policies placed on the less developed countries. These restriction tend to limit the extent to which financial institutions could have contributed to the growth of the economy of these nations. It limites their power to create more, as this is their joy and area where their interest lie most not withstanding if these restrictions are removed, it will make the market to be under "invisible" hand or market forces which will ensure maximum financial deepening and most efficient credit allocation. In his writing, Kieran Cooke Jakara (1985) stressed the importance the removal of these restrictions on the banking 29 sector, has countinued to develop in mid 1983. These include removing all quantitative ceilings formally imposed on bank credit and time deposits and exempting from tax, all interested in time deposited. This has led to the observed economic growth and development in countries ( the banker 1985:51-52). Virtually, all those restrictions were removed from Nigeria banking system during period of liberation operation undre SAP, this would have worked well for Nigeria if the gains have been repressed. Rudolf Hilterding (1910) in his writing began with a discussion of money and credit was examined, the growth of joint stock companies and cartels. These considerations led to a theory of imperialism. Lauyi and Saraloghi (1983) have proved the effect of financial repression on economic growth taking a sample of 21 developing countries. Roubini and Sara 1 Martin (1991) have also studied the effect of financial repression and have shown that all types of control and government intervention in banking system is likely to inhibit economic growth based on Barrow’s (1995) cross sectional growth regression, for a sample of developing countries for the year 1970-1995 period. He added financial repression 30 proxies which are an index of degree of real interest rates distortions, the rat io of commercial bank reserve to money and an index of overall price distortions. The estimated co-efficient of these variable in regression are significantly negative, meaning that the shift from economics with low degree of financial distortions to one with massive public intervention in banking sectors reduces significantly economic growth. King and Levine (1993) also provided the same evidence using different measures of economic growth and financial development, they have shown that financial sector development positively affect economic growth, the measure of the economic growth used are : the average growth of capital, the investment ratio (as a percentage of GDP). The indicators of financial deepening used were linked to financial intermediation activities, the ratio of liquid liabilities to GDP also called debt, the ratio of private firms credits to GDP. Domectic assets in deposit money bank and central banks, it was found that different indicators of financial deepening are positively and significantly correlated with the measures of economic growth. Obi Tayo (1992) emphasized 31 that the process of developing countries has been constrained by shortage of what he called productive factors e.g Capital. This productive capital can only be supplied by the financial institutions and thus making them to play role in economic growth on such countries. For institutions to be able to provide these productive factors, there must be a dynamic, which is the most important pre-conditions for accelerated economic growth while investment generates investment. It is not possible to sustain a sound investment effort without adequate savings mobilizations (Ragazzi 1981). Bhatia and khakhate (1975:133), have outlined the role financial intermediaries in saving investment process and hence capital formation in the development process as followws. Their impact of growth of savings. Their role in the financailization of these savings (ie. Savings in financial form) and their ability to ensure the most efficient transformation to mobilize funds into real capital. 32 Gurly (1967) pointed that economic does not depend on anything that happens to its financial system. According to him some countries in the past history has attained this economic growth through other means that is outside financial or banking system. So if this could happen why not now (Abid 1997:15). Cameron and patrick (1980:28) said that the proliferation of number and variety of financial institutions and substantial rise in the ratio of the money and other financial assets relative to total output and tangible wealth are apparently the universal characteristic of the process of economic growth. Then, it is left for us to find out which one are causes and the other. Partial solution to this problem can be traced to these two phenomena. Supplied leading and supply followed as put forward by (Patrick 1980). 33 CHAPTER THREE 3.1. RESEARCH METHODOLOGY Appied Econometric research (Econometric methodology). It is concerned with the measurement of the parameters of economic relationships and with the predictions (by means of these parameters) of the values of economic variables. The relationship of economic theory which can be measured with one or another economic technique are causal, ie, they are relationships in which some variables are postulated as causes of the variation of another variable Koutsoyannis (1977:11). Econometric modelling which this research work make use of three major steps which includes: - Model Specification - Data Collection, Construction and Estimation - Model Evaluation, Soludo (1998:90) The purpose of this research work however, is to ascertain how and to what extent the explanatory variables included in the model determines the dependent variables for the period of years 34 caused in this work, and also the extent to fund mobilization as an important factor for investment and economic growth in Nigeria. 3.2. MODEL SPECIFICATION Model Specification is showing or expressing the mathematical and economic relationships that exist between the dependent and independent variables. Several factors of Commercial bank have been identified as variables that influences GDP growth in developing countries. Some of these variables include: Real Interest Rate, Total Loans, Real Investment, Aggregate Deposit etc. Most of these variables are very significant in the determination of GDP growth but owing to economic ambiguity and parsimon not all of them were captured in this study. Thus, the growth of the economy in any country is the measures of her Public Consumptions, Government Expenditure, Aggregate Investment and Net-Export, which can be referred to as Gross Domestic Product of the economy (GDP). However, GDP is dependent on 35 Aggregate Deposit, Real Investment, Total Loans and Real Interest Rates. Consequently, for the sake of conveniences and most importantly to reduce the changes of Multicollinearity, having carried out preliminary checks of data, this model will include the following measures of explanatory variables such as - Real Interest Rates - Total Loans (TL) - Real Investment - Aggregate Deposits These varaibles are considered to be very important and relevant as the means through which commercial banks mobilize fund for economic growth in Nigeria. Thus, the model GDP is a function of real interest rate, total loans, real investment and aggregate deposit. Mathematically the model can be expressed as : RGDP=B0 + B1 RINT + B2 TL + B3 RINV+B4 AD +μt 36 Where ; RGDP = Real Gross Domestic Product RINT = Real Interest Rates TL = Total Loans RINV = Real Investment AD = Aggregate Deposit B0 = The intercept B1 B2 –-- B4 = The coefficient of the individual parameters. μt = The Sochastic error term. The Ordinary Least Square (OLS) technique of the time series economic methodology is employed in this research work, in finding out the role of commercial banks in fund mobilization for economic growth and development. The following are the malor reasons for the preference to employ this technique in estimating the model. 37 The phenomenon which this research work seek to investigate, is a simple one and requires only a simple equation model. It involves a linear relationship between the dependent and explanatory variables, Thus, the OLS technique is the most suitable for the estimation of this model. This research work, pays particular attention to the property of unbiasedness and also lays emphasis on the value of the Standard error and test for statistical significance. Thus, the OLS estimators posses the BLUE properties of best, linear and unbiased estimators, which are consistent and sufficient. The Ordinary Least Square technique is relatively simple to use and there are also readily available soft ware packages for use like the Ms Excel, Pc Give, E-views and SPSS that are friendly. Data requirments are also minimal and it is also easier to understand by non- experts in econometrics. 3.3. ESTIMATION PROCEDURE The Ordinary Least Square (OLS) technique of the time series econometric methodology will be employed in this research 38 work, in finding the role of commercial banks in fund mobilization for econometric growth and development. The following are the major reason for the preference to employ this technique in estimating this model. The phenomenon which this research work seek to investigate, is a simple one and requires only a simple equation model. It involves a linear relationship between the dependent and explanatory variable. Thus, the OLS technique which is the most suitable for the estimation of this model. The Ordinary Least Square technique is relatively simple to use and there readily avaliable soft ware packages such as Ms Excel, Pc Give, E-views and SPSS. The E-views econometric package will be adopted for this analysis. However, the following are some of the assumptions underlying OLS according to the Gaussion classical linear regression model (CLRM) which is the corner stone of most econometric theory (Gujaratti 1995:59). The assumptions : - That the disturbance term Ui has a zero model value. 39 - That given the value Xi, the variance ⋋, is the same for all observations. - That there is no auto correlation between the disturbances - That the regression model is correctly specified ie there is no specification based in the model used - That there is no perfect multicollinearity ie perfect linear relationship among the explanatory variables. 3.4.TECHNIQUES FOR EVALUATION OF RESULTS Apriori Expectations. Economic theories suugest the expected signs of the parameters as B0: The B0 is expected to be positive because there would be a real GDP growth in an economy with or without the influence of the independent variables stated B1. B1: is expected to be negative because the Harrod Dommar growth theory, states that the increase in real interest rates reduces investment and economic activities etc. The relationship 40 between the independent (RINT) and the dependent variable (RGDP) growth is negative. B2: The B2 is expected to be positive, because an increase in total loan granted to investors, leads to higher investments and thus boost economic growth. B3: the slope of B3 is expected to have a positive relationship with gross domestic product conforming to the economic theory which states that the higher the investment growth, the higher the economic growth in the country. B4 :The B4 slope is expected to be positive because Milton Friedman (1968) theory, it states, when there is an increase in aggregate deposit, loanable funds increases along with capital investments and overall GDP growth rate increases, the relationship becomes : RGDP = B1< 0, B2> 0, B3>0, B4 > 0 41 3.4.1 STATISTICAL TEST (FIRST ORDER TEST) This test is carried out to determine the results obtained are significant or insignificant. R2 would show the changes in the dependent variables that are caused by changes in the independent variables t- test would the significance of each regression coefficient. Fr- test woul show the overall significance of the regression. 3.4.2 ECONOMETRIC TESTS The following tests would be carried out to provide evidence about the validity or violation of the assumptions of the linear regression analysis. 3.4.3 AUTO CORRELATION Autocorrelation is correlation between members of series of observations ordered in time (as in time series) or space (as in cross- sectional data). It can arise for many reasons, such as sluggishness of economic time series, specification bias, from excluding important variables from the model or using incorrect 42 functional forms of data formulation. Its fifth assumption of OLS estimation, its the value which "A" assumes in a present period and would not be dependent on any of its previous values. 3.5 METHOD OF DATA COLLECTION This area involves the showing of the data used for the coefficient of the various econometric varaibles used in this research work. For the dependent variables (GDP). The real GDP growth is used for the first independent variable (RIR) the second,Total loans (TL), third (real investment) and th fourth, (Aggregate years deposit). All these data are annual estimtes starting from 1975-2007 a period of 32 years. 43 CHAPTER FOUR 4.1.PRESENTATION AND ANALYSIS OF REGRESSION RESULT The result of the model was estimated using ordinary least square method OLS. The E-view 6.0 software package was used. The estimate were subjected to various statistical as well as econometric tests, after which an in-depth analysis was made on the result generated from the regression. The model was estimated with five variables real gross domestic products, real interest rate, total loans, real investment and aggregate deposit. These variables are added to capture their effects on real gross domestic product (RGDP). The variables used in the model were estimated in their norminal forms in other to get a consistent and unbiased result. 44 PRESENTATION OF REGRESSION RESULT Table 4.1: The result of the estimated model are presented below. Variables Coefficient Std.error t- statistics Prob C 85075.54 25314.81 3.360702 0.0027 RINT 135.7367 686.0783 0.147844 0.8449 RINV -519.0503 203.2779 -2.553403 0.0178 TL -0.023203 0.010776 -2.153180 0.0420 0.028637 10.12566 0.0000 AGG DEP 0.289970 R2 = 0.880625 Adjusted R2=0.859864 Durbin watson statistics=1.940698 45 4.2 EVALUATION OF RESULT Evaluation basedon economic criteria The essence of the evaluation of results is to decide whether the estimates of the parameter are theoreitcally meaningful and statistically satisfactory (Koutsoyannis :1977). The result on the table above would be evaluated under the following evaluation criteria, theoretical prior test, and statistical (first order) test and econometric (2nd order) test. 4.2.1 ECONOMIC (APRIOR CRITERIA TEST) In this section the theoretical aprior is determined by the principle of economic theory that is,determinig how well the estimated parameter of the variable in the model conforms to the aprior expectations. This is the reason for ascertaining the degree of correctness of the sign and magnitude of the parameters. From the result obtained in our model, the introduction of the variables in their norminal form brought about a more reliable estimation of the sign and magnitude. 46 APRIOR RESULT: From the table above the interpretation of the aprior expected sign is presented thus: Constant : The aprior result is positive. This is because RGDP will increase by 85075.54 if all factors influencing it are equal to zero. RINT: The aprior result is positive. This does not conforms to aprior expectation in conformation with the relationship between the independent (RINT) and the dependent (RGDP) growth is positive because an increase in RINT increases RGDP. TLoans: Total loans which does not conforms to aprior expectation that an increase in total loanable fund granted by the bank to investors,brings about high investment and thus increase economic growth. RINV:This does not conforms to aprior expectation, that states that the higher the investment the higher the output of the economy. AD:This conforms to aprior expectation. And it has a positive sign, according to Milton Friedman when there is an increase in 47 aggregate deposit loanble fund. Increase along capital investment and overall GDP growth rate increase. A: Adjusted R2 In our model R-square adjusted = 0.859864 which implies that 86% of the variations in RGDP is caused by the explanatory variables (Real interest rate,total loans,real investment and aggregate deposits) during the reference period (1980-2007) adjusted for degree of freedom. This signifies that the model is a good fit. B: Student t-test The t-ratio for each Bi = is compared with the critical value of "t" obtained in the t-tabulated with (n-k) degree of freedom at 5% level of significance. The underlying assumption for the student t-test of significance is thus: H0:Bi = 0 (statistically insignificant) H1:Bi ≠0 (statistically significant). 48 Where Bi is the coefficient of the parameters in the model. Decision rule: Reject H0 if t cal > t tab otherwise we accept H0, Where n = number of observation K = number of parameter estimates From the t-distribution of a two tail test for 28 observation and 5 variables (n-k) = 28-5=23 implies tons (23)= ± 2.069. Table 4.2 Student t-test Result Variables t-value t- table Decision Conclusion Constant 3.360702 ±2.069 Reject H0 Significant 0.197844 ±2.069 Accept H0 Insignificant -2.553403 ±2.069 Reject H0 Significant RINV -2.153180 ±2.069 Reject H0 Significant AD 10.12506 ±2.069 Reject H0 Significant RINT TL 49 C: F-TEST The f-test is used to determine the overall significant of the model. It follows an f distribution with degree of freedom k-1 (V1) and n-k (V2). This implies testing H0: B1 = B2 = B3 = B4 =0 H1:B1 ≠ B2 ≠ B3 ≠ B4 ≠ 0 Decision rule: Reject H0 if f cal > f 0.5 (V1/V2) Where V1 (numerator) = k-1 V2 (denominator)=n-k. From our result, f-cal = 42.41749. from the table, f-tab= 2.80, since, f-cal 42.41749 > f-tab (2.80), we reject H0 and conlude that the variable in the model are jointly statistical significance. This implies that there is a relationship between gross domestic 50 product (GDP) and other explanatory variables, this leads us to say that the model is a good fit. D: TEST FOR AUTO CORRELATION. This underlying assumption is that the succession values of the random variable (V1) are temporaily independent. The problem is usually dictated with the Durbin-Waston (DW) statistics. Decision rule: d* < dl reject H0, presence of positive auto correlation of first order d* > (4-dl) reject H0, presence of negative autocorrelation of first order. du < d* < (4-du) accept H0, no autocorrelation. dl < d* <du or (4-du) < d* (4-dl), test is inconclusive. Where du= upper limit dl = lower limit 51 d* = Durin- Waston (DW) dl = 1.104 du= 1.747; (4-du) =4- 1.747=2.253 d* = 1.94 Therefore , 1.747 < 1.94 < 2.253 that is du < d* < (4-du), we accept Ho and conclude the absence of autocorrelation. 52 CHAPTER FIVE SUMMARY, CONCLUSION AND POLICY RECOMMENDATION 5.1 SUMMARY Banks play crucial role in the process of economic development by mobilizing funds from surplus spending units in the economy and by lending such funds to the deficits spending unit for investment. This project was carried out with the intention that it adds value to the existing knowledge in the commercial banks in Nigeria’s economic growth and contribute immensely to solving the problems due to these institutions as well as to improve their protent state. It was observed from the econometric test carried out in chapter four that, majority of the individuals are more responsive to capital accumulation and re-inventing of disposable income than depositing them in the banks. This habit also favours the real GDP growth, they see higher net present value in investments and projects than saving cash in th banks. 53 In the practical sense of it, it could be stated that the positive sign of real interest rate is favouarable to the RGDP. In its violability, from the research, interest rate and total loans has more favourable and economic relationship with the RGDP growth than aggregate deposit. The level of investment and capital accumulation is high, therefor the industrial sector of the economy is sound, and the total capital of companies quoted in the stock market is economically recommendable. This depicts a good measure of economic performance in Nigeria. 5.2. POLICY RECOMMENDATIONS The following are the policy recommendation, which the researcher believes, if applied will go along way in improving the roles and contributions of the commercial banks in ensuring economic growth in the country. Adjust the interest pain on deposits to be attributive in order to attract and increase the individual response to savings. Recognition of potential economics: Banks should realize potential economics in banking system by opening and operating 54 more offices/ branches in rural areas than concentrating and duplicating bank offices in the same area. Opening of rural branches should direct banks loan in favour of specific sectors such as small scale industries and agriculture in order to widen their investment interest and targets. Conductive public relationship: Industrial and banks shoul seek a trade off between their principle and thev responsibility for commercial profitability. Bureaucratic and Transaction checks; One of the factors which tends to deter the banking processing is the rising incidence of fraud in Nigeria, thus, leads to failures and distressing of banks. Its obvious consequences are to create fear and suspcious among customer and shareholders, reduces overall propensity to save, disengages staff jobs leaving banks securities open to question, commercial bank therefore needs to wage an all out war against fraud both from within and outside the banks in the interest of the public and economy at large. 55 Standard and stable capitalization: One of the major problems of the banks is undercapitalization. This issue can be tackled by attracting public patronage in form of deposits, high share offers with the assistance of the stock and security market in other to expand the banks resources and capital for stable and efficient existence and operation. Adoption of more creative banking policies: Policy makers are more especially the Apex which has the overall fulling powers on financial and banking issues, should initiate conductive monetary and fiscal policies to boost the wellbeing of the people. INNOVATIONS IN THE BANKING OPERATIONS AND SYSTEM; Modern technologies and engineering should be introduced into the banking system is in view that the introduction of computer system is a venture that would payoff handsomely in the longrun. 56 5.3 CONCLUSION The commercial banks have been the wheel of economic growth in Nigeria and will always be, having, thus discussed certain salient facts about the commercial banks upon which some conclusions must be arrived at. It is obvious that banks, inspite of all odds have created great positive impact on the nations economy. The banks have enough room to increase those impacts on the national economy. With the new capitalization policy, the increase in the number of banks and their branches. The introduction of modern technologies and policies, the financial institution will in the near future occupy a position of mainstay of the economy in Nigeria. It is expected that this research will be a contribution to the idea to boost economic growth through the roles and activities of commercial bank in Nigeria. 57 BIBLIOGRAPHY Adid, A. (1997). Commercial banks and economic development, the experience of eastern Africa, Newton; praeger. PP6,15,30 and 315. Agu, C.C (1984). The role of commercial banks in mobilization and allocation of resources for development in Nigeria savings and development journal No. 2;p64. Anyanwu J.C (1997). The structure of Nigerian economy,Onitsha, Jounal education publishers Ltd p.131. Barniger, C. (1999). Indigenous savings and credit societies in the third world; San Diego, califonia; p 24. Barro,Roberts and G. Jarlee (1995). Economic growth, New york; Mcgraw- Hill inc.p 348. Beck,T.R levine and N,loayza (1995). Finance and the source of Growth. the working paper 2057, the world bank, washington D.C berthley J.C (1996). Models of financial development and growth Lensink. 58 Brown, C. (1996). The Nigeria banking system. london George Allen and Unwind ltd, p 324. Cameron lond, (1997). Banking in italy stages of industrialization, New York, oxford University. p 280. Central bank of Nigeria (2002). Statistical Bulletin volume II No.2 (Dec, 2002). P 18. Central bank of Nigeria (2005).Annual report and statement of account for the year ended. 31 Dec.2005. Central bank of Nigeria (2001). Bulletin vol.14. Devereaux M and B smith (1994). International risk sharing and economic growth internal. Vol.5,p 3. Friedman,Milton (1968). The role of monetary policy, American economic review March. Vol. 9.p 1-7. Myers band magluf (1984).leading issues on Eford Economic development New York OxFord university press p 420 Murinde, F and C. Morrison (1990). Inequality and development. The role of dualism, journal development economics vol 51,pp233-25 59 Newlyn,popwan (1996). Investment in human American economic review, pp 61,69-95. Nwankwo,G.O (1980). The financial system, London Macmillian press ltd p 150. Odekun,V.C (1969). Financial intermediaries and endogenous growth to the review of econmic studies, vol.5.pp 195-209 Ogwuma P.A.(1996). The challenges for financial sector CBN bullion vol.20, No 4, oct/dec. 1996. Okigbo,P.N.C (1996). Nigeria financial system. London longman, p B3. Kayazzi,G (1981).savings mobilization in African savings development vol.1 No 5. Koutsoyiannis,S.A (1997). Theory of economics. published by palgrave New York, p 11. Rommer, paul M (1981). Increasing returns and longrun growth, Journal of political economy p 500-521. Udabah,S.I (2002). Economic development growth and planning Enugu Zinco press, Nigeria limited. P 95-108. 60