An Empirical Analysis of the Impact of Deposit Money Banks on the Manufacturing Sector in Nigeria (1980-2011)
Chapter One
OBJECTIVE OF THE STUDY
- To find out if inadequate credits from the deposit money banks to the manufacturing sector has contributed to the reduction in the productivity of the manufacturing
- To determine how the unwillingness of the deposit money bank to give loans to the manufacturing sector has
- Also to look into the problems that militates against the manufacturing sector apart from finance in Nigeria and the recommendation where necessary.
CHAPTER TWO
THEORITICAL LITERATURE
Bank credit is one of the policy option for financing the manufacturing sector. Bank credit which is the sum of loan and securities as deposit money banks, is widely viewed as providing information about the current and future state of the economy. Chizea, (2006).
The pattern of enterprise financial differs from country to country. There is a pronounced difference in prevalent corporate financial between mature and emerging firms with a certain economy finance themselves based on a firms with a certain economy finance themselves based on a firms stage in its life cycle.
Singh (1995) observed that developing countries firms finance themselves differently, mainly due to different financial environment. He examined financial patterns of 100 top cooperatives in ten developing countries in the eighties according to him, the basic differences are;
Firstly, there is an inverse “pecking order” in emerging economics; corporation rely more heavily on external financial, especially trade credits, stock issues and short term debt than their counterpart in developed economies.
Secondly, top corporations in developing countries rely more heavily on equity issues than their counterpart in developed economies.
Thirdly, most emerging market formation and development by pursing role in stock market formation and development by pursing aggressive pro- equity financing polices and placing limitations on debt financing of firms, especially from abroad. He state further that why developing countries have different cooperate financing patterns than developed economies is because of the fact that there are many factors determining the enterprise capital structure and firm specific. It seems to him that the overriding factor why there is such a great difference in how emerging market firms and mature market, firms finance themselves is because the countries financial environments are at difference phase of economic life cycle.
Olorunshola, (2005) enumerated the problem that the Nigerian manufacturing sector are faced with problem of weak purchasing power among generality of the population that directly translates to depressed demand, a high cost operating environment arising form collapsed infrastructural facilities coupled with depreciating and unpredictable exchange rate. Furthermore, recently the sector has been confronted with unfriendly business demands such as the recently introduced lagos state land use change which has led to the forceful closure of some business premises, worsening security situation, absence of long term finding and high and unsustainable interest rate.
Dr Ugwu,(2005) observed that in most African countries including Nigeria, the banks have the following distinctive features in lending, firstly, the maturity structure of the loan advances is mostly short term with the bulk of loans being repaid within 12 months. Secondly, majority of loans are guaranteed to commercial sector with smaller share going to the manufacturing and agricultural sectors thirdly, the size of borrower shows a market preference for lending to large firms.
Various experts have argued on what type of credits It needed to finance the manufacturing enterprises. In Nigeria idea as in other African countries banks mostly grant short-term credits and such loan are channelled mainly to general commerce and trade.
Mayer, (1997) stresses the importance of establishing strong commitment relationships between providers and recipient of long term capital that are conducive to the provision of cheaper and more abundant long-term finance and hence faster economic growth. He argues further that banks are the most efficient than capital markets centred model and therefore governments should focus on the development of an efficient banking system.
While Pinto (1994) argues that firms in less developed countries are found to be cost minimizing, but subject to some specific government related constraints. Government controls not only limit the potential menu of instruments, but frequently circumscribe the issue and pricing of permitted instrument.
Adenikinju and Chete (2008) point out the fact that manufacturing sector in Nigeria has suffered from precipitous cuts backs in raw materials and spare parts owing to limited financing. This was translated into wide spread industrial closures, extensive retrenchment of the industrial work force and massive drop in capacity utilization. Real output fell by 25% between 1982 and 1986, contrasting sharply with the annual growth rate of 15% recorded between 2005-2010.
O.J Nnanna (2006) stressed that the SMES have been general knowledge as the bedrock of the industrial development of any country. Apart from the numerous goods produced of SMES, they are usually labour intensive. They also provide training grounds for entrepreneurs even as they generally rely more on the use of local materials. Moreover if well managed, the SMES can gradually transform into the giant corporations of tomorrow. These contribute thus explain why governments and international agencies mobilize efforts towards the realization of sustainable industrial growth and the creation of mass employment through the rapid growth and development of the small- scale enterprises.
However, the SMES,have had limited access to institution credit facilities, owning to various factors, some of the major factors include.
- Consideration that the SMES are very risky in view of their vulnerability in the market as well as their high mortality
- Bank and other financial institution are operationally biased in favour of lending to large corporate borrowers, where there is assurance of
- Owning to their nature, SMES seeking loans are usually unable and unwilling to provide accounting records and other documentation required by banks, while most are unable to provide acceptable collateral for their
CHAPTER THREE
METHODOLOGY
The method chosen this research is the econometric method, the use of regression analyses. The choice of method is necessitated by the nature of the study which in this case is the analysis of relationship among variables.
The ordinary least square ( OLS) technique of estimation will be used in estimating the model. The OLS technique of estimation was chosen because its parameter estimators have best linear unbiased estimators ( BLUE) properties. However, OLS technique are simple to apply easy to understand and interpret.
MODEL SPECIFICATION
The specification of the model is based on the available data relevant to the study as embedded in standard economic theory and other major work, or else the model would be a theoretical. We postulate a model in this research work so as to captures the objective of the study. The functional form of the model can be specified as follows:
MAS= F (ER, CBC, FGE, INTRD) (1)
The statistical form of the model is specified as
MAS=B0 + B1ER +B2 CBC+ B3 FGE +B4 INTR (2)
The econometric form of the model is specified thus
MAS=B0 +B1CBC +B3 FGE +B4 INTR +Ut… (3)
Where MAS=manufacturing sector ER=exchange rate CBC=commercial bank credit
FGE=federal government expenditure INTR=interest rate
Ut=stochastic error term.
CHAPTER FOUR
DATA PRESENTATION AND INTERPRETATION OF RESULT
PRESENTATION OFRESULT
The regression result in line with the model specification on the model is presented below.
Table 4.1: Presentation of Result
CHAPTER FIVE
SUMMARY, RECOMMENDATION, AND CONCLUSION.
Summary finding
The summary of the findings are itemized below
- There is a positive but insignificant impact of commercial bank credit on the manufacturing sector in the
- Federal government expenditure has a negative but significant impact on economic
- There is a positive and insignificant impact of interest rate to the development of the
- Exchange rate has positive and insignificant relationship in the development of the
Recommendation
- Financial and banking issues, should initate conductive monetary and fiscal policies to boost the well being of the manufacturing
- A significant reduction in interest rate will at a stroke, bring relief to the manufacturing sector which will stimulate investment
- There should be moderation of sectoral credit limits, so that deposit money bank can give loan based on the rationality and viability of industrialproject
- Deposit money banks needs to be strengthened to enable the sector play its role of financialintermediary
- Government should seek to maintain stable exchange rate
- The deregulation of interest rate should be pursued to a lgical conclusion.
- Stable policies in the deposit money bank should pursued. As this will help enhance growth on the manufacturing
CONCLUSION
Based on the revelation in this study, will conclude that interest rate has significant impact on the manufacturing sector in Nigeria .Further more federal government expenditure has a negative impact though significant.
To achieve this manufacturing sector growth that is desired. The governments have to strive to regulate the interest rate through total liberalization or deregulation of interest in Nigeria.
With decreased rate of interest, more loans would be issued out for manufacturing sector.
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