The Impact of Commercial Banks Lending on the Economic Growth in Nigeria

Abstract Of The Impact of Commercial Banks Lending on the Economic Growth in Nigeria

Commercial banks are profit making ventures, they are not a charitable organization and as such they share with the other business the same set of expectation concerning the health of the economy. It is in this light that they source fund from surplus economic unit and make loans available to borrowers on interest which is otherwise known as intermediation role of commercial banks. This role is a major sources of profit to commercial banks. So the purpose of this study is to know how fair the commercial banks lending has contributed to the growth of the economy. In order to achieve the objectives, the researcher set forth hypotheses that has been tested with chi-square. The information require for this research were generated from secondary data and primary sources through the use of questionnaire.

CHAPTER ONE

INTRODUCTION

1.1Background of the Study

Lending which may be on the long term short term or medium term basis is one f the services that commercial banks do render to their customers. In other words banks do grant loans and advances to individuals, business organizations as well as governments in other to enable them embark on investment and development activities as a means of aiding economic growth in particular or contributing in the economic development of Nigeria in general.

Commercial banks are the most important saving, mobilization and financial resources allocation institutions. Consequently, these roles makes them an important phenomenon in economic growth and  development. In performing this role it most be realized that banks have the potential, scope and prospects for mobilizing financial resources and allocating them to productive investment. Therefore, no matter the sources of generation of income or the economic policies of the country, commercial banks would be interested in giving out loan and advances to their numerous customers bearing in mind the three principals guiding their operation which are, profitability, liquidity, and solvency. However, commercial banks decision to lend out loans are influenced by a lot of factors such as the prevailing interest rate, the volume of deposits, the level of their domestic and foreign investment banks liquidity ratio, prestige and public recognition to mention a few.

Lending practices in the world could be traced to the period of industrial revolution which increased the pace of commercial and production activities thereby bringing about the need for large capital out lay for projects many captains of industries at this period were unable to meet up with the sudden upturn in the financial requirements and therefore turns to the banks for assistance. According to Adedoyin and Sobodun 91991) “Lending is undoubtedly the hearts of banking business therefore its administration requires considerable skills and dexterity on the part of the bank management. However, the emergency of banks in Nigeria in 1872 with the establishment of African Bank Corporation (ABC) and later appearance of other banks in the scene during the colonial era witnessed the beginning ofbanks lending practices in Nigeria. Though, the lending practices is the banks were biased and discriminatory and could not be said to be operating on international practices of best standards as only the expatriates were given loan and advances. This among other reasons led to the establishment of indigenous banks in Nigeria. Prior to the advent of structural adjustment programme (SAP) in the country in 1986, the lending practices of banks were strictly regulated under the close surveillance of the banks supervisory bodies. The SAP period brought about some relaxation of the stringent rules guiding banking practices. The bank and other financial institution Act; Amendment (BOFIA) 1998, requires banks to report large borrowings to the CNB. The CBN also requires that their total value of a loan credit facility or any other liability in respect of a borrower, at any tune, should not exceed 20% of the shareholders fund impaired by loss in the case of commercial bank other banking enactment stipulated that banks loan should be directed to preferred sector of the economy in order to enhance economic growth and development. In full consideration of all these regulations the bank resorted to prudential guideline necessary to avoid facture and to enhance maximum profitability in the bank lending activities. These generally depends on type of bank, the capital base the deposit base and density of deposit, the credit guideline issue from time to time by the controlling authority and internal policies of the banks since loans and advances account for highest percentage of the total assets of the bank. This study becomes imperative because commercial banks in Nigeria need to understand how to manage this huge assets in term of their loan and advances. For the banks to balance their main objectives of liquidity, profitability and solvency banks must behave in a way, that their potential customers are attracted and retained. This study will by to provide insight into the best lending practices, behaviour and how commercial banks have impacted on economic growth of Nigeria.

The major objectives of this project work is to confirm the effectiveness of the common determinant of commercial banks lending on the economic growth in Nigeria, starting from its emergence to this present day.