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CHAPTER ONE

INTRODUCTION

1.1    BACKGROUND TO THE STUDY

It is crystal clear that any nation that wants a viable economy must have a viable financial sector and previous studies overtime confirmed that be significant and strong link show between the financial sector of a nation and performance overall country economy. Banks play important role in any economy because they are the cynosure of the financial sector. The importance of banks in any economy cannot be over emphasized, because sound financial system is recognized as a necessary and sufficient condition for rapid growth and development for every modern economy (Sanusi 2012). Banks are expected to support their region or local communities in which they operate with adequate supply of credits for all legitimate  business and customers financial needs to ensure that credit is reasonably in line with competively determinable interest. Indeed, providing credit in form of loans and advances is one of the principle economic functions of banks. Sanusi, 2012, opined that the availability of investible funds is a key factor in the growth process of any economy. This is why banks today are recognized as the life blood of trade and general commerce. For instance, business firm obtain credit to buy machinery and equipment. Farmers collect loans to buy seeds, fertilizers, erect various kind of farm buildings etc. government bodies obtain loans to meet various kinds of recurrent and capital expenditure. Furthermore, individuals and families also take credit to buy and pay for goods and services (Adeiyi, 2016).  A typical capitalist or mixed economy is made up of surplus and deficits units.

In performing intermediation function which is banks principle economic function; they mobilize and consolidate bank deposits and transformed the mobilized and consolidated deposits into the bank credits, usually loans and advances. It is simply the process of taking in money from depositors and then lending some out to borrowers for investment and other economic development purposes. The process allows financial institution acting as intermediaries channeling funds from surplus economic units (individuals and firms having surplus savings) to deficit economic units (firms and businesses in need of funds to carry out desired business activities). Relatively, it involves the conversion of bank largest liabilities (deposits liabilities) to bank largest interest earning assets (bank credits which include majority loans, overdraft and advances). It is expedient to know that bank credits are processed deposits of bank customers in the various accounts which they hold or operate with the bank. Banks credits therefore constitute or rather enables banks to carry out their primary principle economic function which is known as intermediation. Credits therefore has been defined by central bank of Nigeria (CBN) prudential guide lines issued 1990 as financial facilities granted by banks to their customers which includes all loans, advances, overdrafts and other loss contingencies connected with a bank risk.

The researcher has decided to proxy bank credits with bank loans and advances. The performance of Nigerian economy can be linked to concept of output and concept of output is absolutely important in the field of macro economics, essentially as it relates to the economy of nations output. Output is defined as the quantity of goods and services produced in a country in a given period of time usually a year. Officially, gross domestic product (GDP) is the most popular measure of the output of a country. GPD indicates the market value of all officially recognized final goods and services produced within a nation at a specific period of time. The relevant of GDP of any nation (economy) cannot be over emphasized because it is the major indicator of a country economic growth and the living standard of the citizens there in. indeed the best index to understand a country’s economy performance is by looking at its output in terms of GDP because by global standard, it is the output (GDP)  that show how rich and viable a country is economically, thus a country may be said to be in recession if its output (GDP)  growth is negative for three consecutive years and when critically accessed, three consecutive quarters. The researcher will therefore proxy economic performance of the Nigeria economy with gross domestic product (GDP) of Nigeria.

Commercial banks now known as deposit money banks (DMBs) are the most important savings mobilization and financial resource allocation institutions.  Consequently, these roles make them an important phenomenon in economic growth. In performing these roles, it must be realized that banks have the potential, scope, and prospect for mobilizing financial resources and allocating them to productive investments. Therefore no matter the sources of the generation of income or the economy policies of the country, commercial banks would be interested in giving out credits (loans and advances) to their numerous customers, bearing in mind the three principles guiding their operation which are profitability, liquidity and solvency. However commercial banks decision to lend out loans are influenced  by a lot of factor such as prevailing interest rate, the volume of deposits, money supply by the directives of central banks of Nigeria and mention a few. It should be taken into cognizance that these prevailing influencing factors also affect the gross domestic product (GDP) of the country because they directly affect the level of credits given out for investment in the economy and the level of credits determines the level of nations output (GDP) for that period of time. See appendix 1. For my literature survey on this work.

STATEMENT OF PROBLEM

The banking industry is seen as the oil that lubricates the wheel of economy to avoid friction and plodding, and without this lubricant (bank) the entire economic activities may grind to a halt and be in a state of comatose. There seems to be a consensus in the theoretical and empirical literatures that financial development can influence and foster output (GDP) development, that there is a visible correlation between bank credits and economic growth, being synonymous to GDP growth and that banks credits facilitates the efficiency of financial system of any nation. These core economic facts appear to be eluding the Nigeria situation because the Nigeria banking industries in recent time have undergone series of financial turbulence and capital adequacy problems, the consequences of which appears to cast doubts on the role of bank credits on the economy. It is also argued that the Nigerian economy output in terms of gross domestic product (GDP) has not utilized or commensurate banks inputs in terms of banks credits that has been granted on release in the economic activities. Thus, this research will tend to analyze the extent and volume of banks credits inform of loans and advances released into the economy and also ascertain the extent at which these credits were utilized to enhance the GDP of Nigeria and ascertain whether the output (GDP) can be commensurate with the banks inputs (credits).

1.3     OBJECTIVES OF THE STUDY

The major objective of the study is to empirically investigate the effects of banks’ credit on the economic growth of Nigeria (performance of the economy).
The following are the objectives:

To determine whether banks loans and advances affect the growth of Nigeria economy (GDP).

To determine whether money supply enhances the economy growth of Nigeria economy (GDP).

To determine whether lending (interest) rates has impact on the growth of Nigeria economy (GDP).

To determine whether deposit volume has effect on the growth of Nigeria economy (GDP).

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