EFFECTS OF HIGH BANK LENDING RATES ON THE MANUFACTURING SECTOR OF THE NIGERIA ECONOMY

CHAPTER ONE

INTRODUCTION

1.1      Background of the study

Granting that no country of the world can ever attain an expected level of economic development without a virile and highly productive manufacturing sector makes it imperative that Nigeria as a country must pursue policies aimed at stimulating a rapid growth capable of increasing the productivity of the manufacturing sector and thus, improve national economy. This very important sector transforms our numerous raw materials into marketable finished products that are required in our daily existence as a people and as a nation. The sector generates foreign exchange through the exportation of its finished products. Realizing the importance of this sector, Nigerian government had before now, made concerted efforts to give reasonable support and assistance to the realization of the growth of the manufacturing sector in Nigerian economy.It is greatly accepted that the oil boom of the 70's greatly improved Nigeria’seconomyand earned her industries need foreign exchange to import raw materials. Regrettably, thus boom changed drastically in the 80's with the dwindling oil revenue. The effect however saw the folding up of some industries, thus, negatively affecting the manufacturing sector of the economy. The harsh economic situation of the time wholly informed that sectors should be opened so as to supplement the poor oil revenue. This unpleasant economic condition got worse with military leadership which was considered unstable. Yet, the manufacturing sector remains the most wanted sector to supplement the foreign exchange earnings of the oil sector through exportation of their finished products. Nevertheless, military regimes are known not to offer enabling environment for effective industrial growth but with the emergence of a democratically elected government in May 1999, the Nigerian nation started the creation of enabling opportunities and environment to promote the gradual development of the manufacturing sector. However we must realize that the manufacturing sector of the economy has been the most unfortunate and hardest hit by the high interest rates. Odimaya (2000:17) noted that "banks no longer want to lend on long-term it is usually at cut-throat interest rates".This situation has continued to affect the manufacturing sector, even in this democratic dispensation with the federal government economic policy of deregulation of the banking sector. This condition according to kazeem (2004:23) has greatly affected the manufacturing sector. This opinion of kazeem is made stronger when he wrote that the banks high interest lending rates continue to threaten the agreement reached by the Nigerian government, the central bank of Nigeria (CBN) and the banks that lending rates should not be more than the minimum rediscount rate. The above agreement was to encourage bank lending to industrialists and so, stimulate the manufacturing sector development and improvement of the national economy which would guarantee rapid industrialization in line with development objectives.Manufacturing which cannot afford the high bank lending rates hardly survive and they are mostly neglected by government policies and it’s these small scale industries that respond to the lives and needs of the ordinary citizen. Libanio (2006:22) argues that the manufacturing sector has an important role in the growth and performance of the economy but the manufacturing output was not enough to generate sizeable. Growth in the economy. Regrettably, the performance of the manufacturing sector in Nigeria has been constrained due to inadequate funding culture of the Nigerian banks and even when banks lend, they lend on a high rate of interest on the loan and banks are the primary source of capital for manufacturers or industrialists. Goldman Sachs (2008:24) talks about the objective of the approved vision 20-2020 study projections that Nigeria will be 20th and 12th largest economy of the world and Africa respectively.This vision is to be realize through the growth of the private sector therefore, overconcentration and overdependence should be reduced on the oil sector because there have been a growing concern on the decline of the output of the manufacturing sector in Nigeria which is faced with the problem of accessibility of funds and high interest rates of banks.

STATEMENT OF THE PROBLEM

The first problem of the study is the poor capacity utilization of the manufacturing sector.The second problem of the study is the high cost of product pricing of the manufacturing sector. The third problem of the study is lack of profitability of the manufacturing sector.

OBJECTIVE OF THE STUDY

The main objective of this study is effects of high bank lending rates on the manufacturing sector of the Nigeria economy.  But for the successful completion of the study; the researcher intends to achieve the following sub-objectives;

1.   To examine the effects of high interest rates on manufacturing sectors capacity utilization

2.   To examine the effects of high interest rates on the profitability of the manufacturing sector.

3.   To examine the effects of high interest rates on the product pricing of the manufacturing sector

4.   To ascertain the relationship between high bank lending rates on the manufacturing sector and the Nigeria economy

RESEARCH HYPOTHESES

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

H0: there are no effects of high interest rates on manufacturing sectors capacity utilization

H1: there are effects of high interest rates on manufacturing sectors capacity utilization

H02: there is no significant relationship between high bank lending rates on the manufacturing sector and the Nigeria economy

H2:there is a significant relationship between high bank lending rates on the manufacturing sector and the Nigeria economy

1.5 SIGNIFICANCE OF THE STUDY

This significance of this study could be reflected in a number of ways;

In the first place, it could help to appraise the relationship between the banking sector and the manufacturing sector towards the economic development of the nation. Secondly, the study could make things clearer to workers in both sectors to realize their co-operative relationship in the development of the economy.Also, the study would make the masses realize the relevance of the sectors in the overall development of our national economy.Furthermore, to the educationists and researchers, this could serve as a reference material to them.More so, to the government, this could throw more light on how the government could effectively utilize the roles of the two sectors in the economic development of the nation. Finally, the study could make the central bank of Nigeria (CBN) realize how to use policy concerning lending rates to strike a good balance or parity between the sectors and so, facilitate National Economic Development.

1.6 SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers the effects of high bank lending rates on the manufacturing sector of the Nigeria economy. The researcher encounters some constrain which limited the scope of the study;

a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study       

b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities. 

1.7 DEFINITION OF TERMS

BANK: A bank is a financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through

BANK LENDING: In finance, a loan is the lending of money from one individual, organization or entity to another ... If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it

MANUFACTURING: Manufacturing use of machines, tools and labor to produce goods for use or sale. Includes a range of human activity, from handicraft to high-tech, but most commonly refers to industrial production, where raw materials are transformed into finished goods on a large scale

ECONOMY: The state of a country or region in terms of the production and consumption of goods and services and the supply of money.

1.8 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study.