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CHAPTER ONE

INTRODUCTION

Background to the Study

Domestic bank lending brings out problems encountered by bank in lending to their customers, these statement reports the lending policy of a bank at a particular time, the bank activities and resulting profit or losses during the most recent period and the flow of resources occurring within the bank during the same period. Furthermore, to the central bank of Nigeria this will be use to them because they have to adjust their already stipulated credit guideline central bank of Nigeria usually demands a minimum lending to earn sector but the merchant bank loan are mainly to the manufacturing sectors but they cant expand loans to these sectors because of CBN restrictive guideline before loans are given under the corporate impartment the purpose of the loan has to be stated, financial information has to use produced one of collateral is adequate export will be  made to increase collateral offered by borrowers. Domestic bank lending, more especially include the commercial bank merchant banks and development banks. As regards commercial bank it was observed that their prospective borrowers must have large amount of money in his/ her account before he could borrow money from them. And all these contributed a lot towards the problems facing domestic bank lending.

A typical capitalist or mixed economy is made up of surplus and deficit units. In performing their primary function of intermediation, banks collect deposit from the surplus unit of the economy and lend it out to the deficit unit in form of loans and advances (Kalu, 2009). The role of the financial system in mobilizing and channeling of funds to the real sectors of the economy cannot be taken for granted. Sound financial system is recognized as a necessary and sufficient condition for rapid growth and development for every modern economy (Sanusi, 2012).

The financial system consists of institutions like banks, insurance, stock market, and other financial institutions. In Nigeria, the banking sector is an important part of the financial system. The banking sector dominates the Nigerian financial system as it accounts for about 90 % of the total assets in the system and about 65 % of market capitalization of the Nigeria Stock Exchange (Soludo, 2009a). However, the banking sector has not contributed significantly to the growth and development of Nigerian economy as expected. The poor performance of the sector has been attributed to numerous problems that faced the sector such as inadequate capital, high nonperforming assets which had led to frequent distress in the sector and collapse of some banks in the past (Sanusi, 2012).

If banks cannot grant loans to the deficit economic units within their immediate operational environment, the business sector will not grow, deposits will be limited and this will hinder the ability of banks to generate income (Galac, 2001: Honohan, 1997). For most banks, loanable funds account for about fifty percent or even more of their total assets and about half to two-thirds of their revenue (Udoka and Effiong, 2006). This made lending the first and most important function of banks. The function is considered important due to number of reasons. First, the general public or customers use lending in assessing banks stability. Banks that are willing and able to give out loans are considered more stable than those that mostly reject loans proposals of their customers.

Second, lending is regarded as part of   legal requirement by the monetary authority, which may stipulate certain percentage of bank lending to some sectors like agriculture, small scale industries etc. Third, lending is use as tool in implementation of the monetary policies of government, which affects money supply and demand in the economy. Fourth, lending affects pattern of production, level of entrepreneurship and consequently, aggregate output and productivity. The last and the most important reason why the lending function of banks is crucial and important in every economy is that it is generally accepted that there is positive relationship between bank credit and economic growth (Oluitan, 2009).

Economic growth entails positive change in the national income or the level of production of goods and services by a country over a certain period of time (Oluitan, 2009). Economic growth   is measured in terms of the level of production within the economy, factor productivity, technological change, physical capital accumulation and real Gross Domestic Product, (GDP) (Odedokun 1998; Allen & Ndikumama 1998; King and Levine 1993). According to Bencivenga & Smith (1991), consumption of goods in the economy is produced from capital and labour. Capital is usually mobilized from either personal savings of entrepreneurs and/or loans from banks. This makes banks loans relevant to economic growth of countries. Research findings have revealed that   bank loans can be a causal factor for economic growth. For instance, according to Bayoumi & Melander (2008), a 2.5% reduction in overall credit causes reduction in the level of GDP by around 1.5%. Demetriades & Hussein (1996) who studied 13 countries supported the causal relationship between bank loan and economic growth, but argued that the causality is time and country bound specific rather than general.

STATEMENT OF PROBLEM

In Nigeria, there is detailed information about Nigerian banking industry and its activities, but little information is available about how bank lending specifically affects economic growth (Oluitan, 2009). In view of this development. The period we witnessed in decline in the terms of economic activity in Nigeria due to the oil glut, this period witnessed declining oil revenue, choosing down of factories a show down on investment security of raw material and retrenchment. During this period, the government were involved in a lot of measures to revamp the economy and most of its policies where implemented through the domestic bank. From the economic activity decline overall, the level of domestic out put, which improved slightly in 1979, stagnated in their was a decrease in the money supply but bank credit increased that their by 1.408.3 million at 16. 6% increase compared with 1989.

In 1990, development was unsatisfactory, industrial production fill petrol production fill sharply due to the glut, but agriculture witnessed as improved by 3.4% credit by banks during this period increased by 50.8% to 10, 2685.5 million, the factor being credit expansion to the government. In 1992, there was a continuous decline in production compared to 1991 increase were minimal bank credit rose from 34.7% to 21.899.7 million, this was borne mainly by commercial banks whose loans and advance to the private sector increased to 10, 453.5 million.

In 1993, economy was in severe mess. Agriculture decline because of natural disasters, this affected mainly all subsections industry plummeted pectoris closed down, crude oil out put went further down construction fill, but bank credit increased by 50% to 5.5million. In 1994, there was no significant change from the 1993 figures; the continuous decline was still there and government measures. Were basically the same? In 1995, the economy went into a depression but there was increased in GDP, which rose by 2.4% in contrast with 93/94 decline where there was a full in the increase of bank credit 4.9% compared with 10.5% lending was low at the beginning but plucked up in July to 32.7 billion.

OBJECTIVE OF THE STUDY

The objective of this study is to examine the impact of bank lending on economic growth in Nigeria for the period 1987 to 2012.

HYPOTHESIS OF THE STUDY

In order to examine the impact of bank lending on economic growth in Nigeria, the following hypothesis is postulated:

Ho: There is no significant relationship between bank lending and economic growth in Nigeria.

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