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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.
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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.
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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.
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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
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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.
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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.
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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.
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-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.
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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
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of 1975-2008 which saw the significant role played by the
financial sector in the Nigerian economy.
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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
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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
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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.
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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.
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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.
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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
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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
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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
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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.
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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).
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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
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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
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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
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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.
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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
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