IMPACT OF BANK FUNDING ON THE GROWTH OF NIGERIA MANUFACTURING SECTORS

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The manufacturing sector is vital to the growth and progress of the contemporary economy. The industrial sector comprises the manufacturing sector as a subsector. In numerous respects, the manufacturing sector is a frontrunner in developed economies. It facilitates the increase in employment and per capita income, which in turn generates distinctive consumption patterns, and generates foreign exchange-earning capacity while promoting productivity through the substitution of imports and expansion of exports. In addition, it is the sector that generates investment capital at the quickest rate of any industry, fostering more extensive and efficient interconnections between sectors. The manufacturing sector holds a dominant position in terms of its contribution to the Gross Domestic Product (GDP). In several countries that are members of the Organisation for Economic Co-operation and Development (OECD), it has surpassed the services sector (Anyanwu, 2020). In light of the subsector's potential contributions, several Nigerian government administrations have implemented policy initiatives and programmes to provide adequate funding and incentives for industrial growth (Orji, 2018). In order to emphasise the significant and indispensable contribution of manufacturing sectors to capital formation, domestic savings, sustainable economic growth, and overall prosperity in Nigeria, the Federal Government has implemented several initiatives at various points in time, including the Small Scale Industries Credit Scheme, World Bank SME II Loan Scheme, Industrial Development Centres, National Economic Reconstruction Fund (NERFUND), Nigerian Bank for Commerce, and others. As the Manufacturers' Intervention Fund, the Central Bank of Nigeria, acting on behalf of the Federal Government, allocated N200 billion in 2010. "Increasing output, generating employment, diversifying the revenue base, expediting the development of the manufacturing sector of the Nigerian economy by enhancing access to credit for manufacturers, bolstering the financial position of deposit money banks, and increasing foreign exchange earnings are some of the goals of the fund." Additionally, its purpose is to supply sustainable inputs to the industrial sector (CBN, 2015). Likewise, the inclusion of private sector entities in the manufacturing sector, including the Dangote group and HoneyWell, has contributed to its growth. The primary objective of governmental policy was to stimulate expansion within the manufacturing industry. The importance of bank credit to the expansion of the manufacturing sector cannot be emphasised enough. An example of a broad policy objective outlined in the Federal Government's Appropriation Bill for 2005 is the attainment of a substantial economic growth rate, defined as a minimum GDP of 5%, by means of enhanced resource mobilisation and judicious allocation. This objective cannot be attained absent the mobilisation and deployment of substantial financial sector resources to finance the expansion and growth of businesses. In order to facilitate the movement and allocation of deposits towards production-oriented sectors of the economy, particularly manufacturing, banks must function as efficient intermediaries.

Industrialization serves as an effective means of achieving the aspirational and desirable objective of enhancing the general population's quality of life. It has been asserted that one or more sectors in every economy function as prime movers, propelling the progress of the remaining sectors. As part of the industrialization process, the industrial sector has traditionally served as the growth motor or leading sector. The finance-led growth hypothesis, as posited by Schumpeter in 2018, asserts that the financial sector assumes a critical function in directing savings towards productive investment, with a particular emphasis on the formal sectors of the economy. According to Were, Nzomoi, and Rutto (2012), the commercial bank sector serves as the primary means of financial intermediation within the economy. The significance of commercial bank credit in stimulating economic development has been widely recognised; for example, Schumpeter (2020) demonstrated that the banking sector acts as an intermediary to facilitate technological innovation. Real economic performance can be attained through the identification and financing of entrepreneurs who have the highest probability of effectively implementing innovative products and production processes, as emphasised in his remarks regarding the efficient allocation of savings. According to Nwanyanwu (2022), the banking sector facilitates credit accessibility by channelling surplus funds from depositors who do not require the money immediately into credit for investors who possess innovative ideas for generating additional wealth in the economy but are unable to procure the required capital to implement those ideas. Additionally, his research demonstrates that the significance of credit in an economy has been acknowledged, given that economic agents obtain credit in order to cover operating expenditures. For example, corporations acquire credit in order to procure apparatus and equipment; agricultural practitioners obtain credit to acquire farm inputs including fertilisers, seeds, and farm structures; and the government obtains credit to fulfil a variety of capital and recurrent government expenditures.

 Based on the aforementioned, this study will examine impacts of bank funding on the growth of manufacturing sector in Nigeria. 

1.2 Statement of the Problem

One of the overarching policy goals of the Federal Government's Appropriation Bill in recent years has been to facilitate improved resource mobilisation and judicious allocation in order to attain a substantial economic growth rate, defined as a minimum of 5% in GDP. The effective and efficient execution of this objective relies on the mobilisation and deployment of substantial financial sector resources to finance business expansion and growth; thus, the deposit money bank plays a crucial role in ensuring this objective is met. Financial institutions are obligated to fulfil their fundamental function of intermediation in order to facilitate the efficient movement and direction of capital towards the effective sector of the economy, particularly manufacturing. However, despite the federal government's persistent demand for improvement, which prompted the formulation of a policy strategy to encourage credit inflows into the manufacturing sector, deposit money banks continue to be unwilling to extend low-interest credit to the manufacturing sector. For example, according to a report by the Central Bank of Nigeria (CBN, 2015), commercial bank advances and loans to the manufacturing sector exhibited minimal deviations virtually throughout the regulatory era. According to a study conducted by the National Planning Commission of the Federal Republic of Nigeria in 2015, as banks' risk aversion increased in the wake of the financial crisis, both the quantity and quality of bank funding to the private sector declined. The lack of adequate funding has posed challenges for businesses seeking to invest in human resources development, information and communication technology, and modern machinery. These investments are critical for reducing expenses, increasing efficiency, and bolstering competitiveness. Despite the availability of credit, the exorbitant lending rates, which occasionally exceed 30%, render such credits unappealing, especially considering the average return on investments in the subsector, which has been less than ten percent (10%). Consequently, the manufacturing sector in Nigeria has encountered a challenge pertaining to the availability of capital for productive investments, which has resulted in its subpar performance in recent times (Edirisuriya, 2018). 

It is crucial to acknowledge that the majority of research examining the impact of bank lending on the performance of the manufacturing sector has focused on developed economies. The scarcity of research regarding its effects on developing and emergent economies, particularly Nigeria, has resulted in a substantial void in knowledge. Therefore, the primary objective of this current study is to rectify or diminish the existing information deficit.

1.3   Objectives of the Study

The general objective of the study is to examine the impact of bank funding on the growth of Nigeria manufacturing sectors. Specifically, the study will be guided by the following;

1. To examine the effect the sectorial distribution of banks’ loans and advances to the manufacturing sector has on the output and growth of the manufacturing sector in Nigeria. 

2. To determine the impact of lending rate on the growth of the manufacturing sector in Nigeria. 

3. To determine the impact of saving rate on the growth of the manufacturing sector in Nigeria. 

4. To examine the effect money supply has on the growth of manufacturing sector in Nigeria.

1.4 Research Questions

1. In what way has the sectorial distribution of commercial banks’ loans and advances to the manufacturing sector had an impact on the growth of the manufacturing sector in Nigeria? 

2. To what extent does lending rate have an impact on the growth of the manufacturing sector in Nigeria? 

3. To what extent does saving rate have an impact on the growth of the manufacturing sector? 

4. To what extent has money supply had an impact on the growth of manufacturing sector in Nigeria?

1.4 Research Hypothesis

Ho1: Sectorial distribution of bank loans and advances to the manufacturing sector does not have a positive and significant impact on the growth of the manufacturing sector in Nigeria 

Ho2: Lending rate does not have a positive and significant impact on the growth of the manufacturing sector in Nigeria. 

Ho3: Saving rate does not have a positive and significant impact on the growth of the manufacturing sector in Nigeria. 

Ho4: Money supply does not have a positive and significant impact on the growth of the manufacturing sector in Nigeria.

1.6 Significance of the Study 

The study is useful to the academic community because it will provide them with an insight of how the development of manufacturing sector would contribute to the efficient and effective growth of an economy if proper measures would be taken to meet the financial needs of the sector. 

This study is also useful to policy makers by making them aware of the problems affecting the growth of the manufacturing sector and pointing out steps or measures that can be taken in order to produce a better functioning sector. 

This Research would also serve as a platform for other researchers on the same or related subjects. 

This research will also satisfy the interest of the general public by creating awareness on sectorial issues of the economy.

1.7 Scope of the Study

The scope of this study boarders on  the impact of bank funding on the growth of Nigeria manufacturing sectors. This study will adopt time series data from 2000 to 2016. The data will be obtained from the publications of the central bank of Nigeria statistical bulletin and another academic journal. 

1.8 Limitation of the Study

As regarding the limitations on this research project, it would be impossible to include all manufacturing industries in Nigeria, therefore, this study was limited to some selected manufacturing companies.

Time constraint was another strong factor that posed as a limitation to this research because the study was carried out when the researcher had so much work load. Thus, it was difficult for the researcher to meet up some of the appointment with respondents.

1.9 Definition Of Terms

Bank funding: This is also known as bank lending or bank credits. It is the aggregate amount of credit available to a person or business from a banking institution. It is the total amount of funds financial institutions provides to an individual or business. A business or individual’s bank credit depends on their ability to repay and the total amount of credits available in the banking institution.

Lending/Interest rate: An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited or borrowed.

Sector: A sector is an area or proportion that is distinct from others. Therefore, the sectors of an economy are large groups of the economy, grouped according to their place in the production chain, by their kind of work (product or services) or ownership. For example the agricultural sector, the manufacturing sector, etc. Our focus, for the purpose of this research work is the manufacturing sector.

Saving rate: A saving rate is an amount of money, expressed as a percentage or ratio that a person deducts from his disposable personal income to set aside as a nest egg or for retirement. 

Money supply: Money supply is the total value of monetary assets available in an economy at a specific time. Money supply includes currency in circulation and demand deposits (depositors’ easily accessed assets on the books of the financial institution).