Project – Bank lending and industrial sectors financial performance in Nigeria

CHAPTER ONE

Introduction

1.1    Background of the study

Recently, most industries in Nigeria have been existing in the form of small industries (cottage industries) this includes household carrying out industrial activities in the traditional methods without paid employment. (Akinwumi Adesina, 2010).

Hence small and medium industries can be said to be the cornerstone of any nation’s industrial and economic well-being and successive government have directed policies encouraging the development and growth of industries.

The small and medium scale industries (SME’s) were not accorded significant importance in Nigeria until 1975 when the government realize that its industrialization strategy of import substitution only resulted in the setting up of large industries. It was not until the third national development plan of 1975 to 1980 that the programmes for the small and medium scale industries were explicitly spelled out; “The creation of employment opportunities, mitigation of rural-urban migration, mobilization of local resources, and a more even distribution of industrial enterprises in different parts of the country”. (Olu Ajakaiye and M. A. Olomola, 2003).

Despite all efforts by the three tiers of government to enhance the development of industrialization, historical survey indicates that there have been inadequate credit facilities. This has been a major impediment in the development to small and medium scale industries in Nigeria. For this reason, many of them are either proprietary or partnership and so cannot obtain funds from the capital market.

As a result of this, they are either starved of funds or, at best obtain fund on extremely unfavourable terms from other sources like money lenders, thrift societies etc. The problem of finance hinders them from operating profitably in a competitive and depressed economy.

In other to overcome this problem, the federal and state government set up industrial credit schemes and gave guideline to commercial banks to increase their lending to these categories of enterprises.

Blatantly, the past military and civilian administrative made effort toward the development of small and medium scale industries, notably among them was the past military administration of General Babangida with introduction of the structural adjustment program (SAP). The introduction of SAP in 1986 gave birth to various government organs and general conditions, which encourage the development of industries even in rural areas. Some of these organs involves the Better Life for Rural Women Programme, National Directorate of Employment (NDE), the Export Promotion Council and the Nigeria Economic Reconstruction Fund (NERFUN). Whether these organs are really achieving the derived results or not is above the scope of this study.

The establishment of the Nigerian Banks for commerce and industry (NIDB) and various industrial development centres all over the country by past administrations show the desire of the nation toward industrialization. The transformation of the economy of a depressed nation such as ours from her present agrarian positions of productions of production and industrial productivity can only be brought about by indigenous industries.

Inegbenebor (1991) states that the desire of most developing countries including Nigeria is to have a self-reliant and self-sustain growth. Nigeria is blessed with abundant mineral resources and if these resources are vividly harnessed and managed, she will compete with other industrialized nations of the world.

In realisation of credit (finance) as core input in stimulating production through the acquisition of capital equipment and other factor inputs that foster production and economic growth and following the treatise of Schumpeter in 1911 and 1934, Central Bank of Nigeria has at various times developed macroeconomic models, banking reforms and policies aimed at encouraging commercial banks to play the significant role of mobilising and providing credit to all segments of the economy but with special priority to the real sector. Available statistics from the Central Bank of Nigeria’s Statistical Bulletins (various years) show that over the years Banks’ credit to the various sectors of the Nigerian economy and especially the productive sectors have been on the increase. In the same vein, Nigeria’s economic growth proxied by Gross Domestic Product has been making positive growth except for a few negative growths within the study period. In assessing the performance of the Nigerian economy, Udeaja and Obi (2015) in their study traced that during the oil boom era (1970 ­ 1978), gross domestic product (GDP) grew positively by 6.2 per cent annually. However, negative growth rates were recorded in the 1980s while in the period (1988­1997) that constituted the period of structural adjustment programme (SAP) and economic liberalisation, gross domestic product (GDP) grew at a positive rate of 4.0 per cent. In his submission, Sanusi (2010) posits that economic growth rose substantially in the last 15 years, i.e., 1996 ­ 2010.

An in-depth look at the major contributors to gross domestic product (GDP) reveals that agriculture, services and industrial sectors rank highest. Nonetheless, with increases in Banks’ credit and economic growth over the years of study, economic growth indices (unemployment rate, the level of income per capita, poverty) are abysmal. Worried over this situation, Sanusi again echoed that available statistics have put the national poverty level of Nigeria at 54.4 per cent while unemployment has risen to 19.7 percent by National Bureau of Statistics.

Currently, these figures are 62.6% and 13.9% as at 2016 respectively, Sanusi expressed that while China and Thailand occupy a 5 and 22 the position in 2009 Global Hunger Index, Nigeria was ranked 64 The ugly situation of Nigerian economic indicators underscores the United Nations Development Program’s Annual Report (2014) that Nigeria continues to be an example to the rest of the World on many fronts, having attained the rank of being the biggest economy in Africa after rebasing.

However, juxtaposing United Nations Development Program’s (UNDP) positive remarks and the poor economic growth indices of Nigeria, one is poised to ask if commercial Banks’ Credit to real sector has any impact on economic growth in Nigeria. It is on the basis of this question that the research work is premised and further, the research attempts to study the impact of Commercial Banks’ Credit to the productive sectors on the growth of Nigerian economy. Consequently, this work evaluates the relationship between commercial banks’ credit to the real sector and economic growth in Nigeria.

1.2    Statement of the research problem

The Nigerian industries are confronted with a myriad of problems but notable among them is financial constraint caused by the sources of funds used in financing the project. An industrial project has a long maturity or gestation period and to finance such firms requires long term sources of funds instead of short-term funds often provided by commercial banks.

The banking sector, by nature of its operations has loanable short-term deposits, which are very liquid. Thus, for banks to tend on long-term basis creates a deposit loan maturity gap as the owners of such deposits can call for their money at short notices. To solve this problem, commercial banks adopt a careful strategy of strategic approach in extending medium to long-term financing which always attracts high interest rate. This constitutes a hard condition for promoters or investors.

With the increasing cost of production and falling real income of consumers, the demand for goods and services are on the decline. This leads to stockpiles of finished goods (inventory) in their warehouses. As stated by Anao and Osaze (1990):

“In financing the traditional small business in Africa often has to depend on a mortgage from a commercial bank. Survival after a few years may lead to success with obtaining seasonal overdrafts and lines of credit from commercial banks, but no fund for permanent growth…”

Access to foreign exchange is another impediment to industries. Most of these industries need to import machinery and they find it extremely difficult to obtain foreign exchange even if they have the naira cover closely related to the above. There is also the inability to secure foreign loans due to high cost of servicing the loans.

This study on bank lending and industrial performance in Nigeria delves into the relationship between the banking sector’s lending practices and the overall performance of industries within the Nigerian economy. It may examine how access to credit from banks impacts the growth, productivity, and competitiveness of the industrial sectors in Nigeria. Factors such as interest rates, loan terms, and availability of credit might be analysed in relation to their effects on industrial output, employment, and investment. Additionally, the study might explore any potential challenges or constraints faced by industries in accessing bank loans, as well as the role of government policies in shaping lending practices and industrial development.

1.3    Research Questions

In line with the research gaps, following research questions are answered in the study:

How does the bank credit to Industrial sector influence the Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) of industrial firms?

What is the impact of Current Liabilities on the EBITDA of industrial firms?

How do Non-current Liabilities affect the EBITDA of industrial firms?

1.4    Objectives of the study

The broad objectives of this study are to examine the effect of bank lending and industrial sector financial performance in Nigeria. The specific objectives are to:

To analyze the relationship between the bank credit to Industrial sector and the EBITDA of industrial firms.

To investigate the effect of the current liabilities on the EBITDA of industrial firms.

To analyze the relationship between non-current liabilities and the EBITDA of industrial firms.

1.5    Statement of the hypothesis

The issue of banking sector credit made available to industries has been a running battle between the government and banks. In the light of the above, the study will attempt to test certain hypothesis, which will include;

The bank credit to Industrial sector does not significantly influence the EBITDA of industrial firms.

Current Liabilities do not significantly affect the EBITDA of industrial firms.

Non-current Liabilities do not significantly affect the EBITDA of industrial firms.

1.6    Significance of the study

The significance of the study is derived from the basic feature of lending as a time important function of most banks. The findings of this study are believed to be of great value to the government especially in terms of policy-making, the banking sector, the industrial sector operators, other researchers, to students alike and the society at large.

1.7    Scope of the study

The study comprehensively examines various factors, including the credit to Industrial sector, short term debt (current liabilities) and medium- and long-term loans (Non-current Liabilities), to understand their respective impacts on industrial firms’ Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA). These Industrial firms also take a critical look at the effects of banking sector credit (loans) on the overall performance or growth of the Nigeria industrial sector from 1993 to 2023. It intends to know the possible ways through which Nigeria can become an industrialized giant.

1.8    Operational Definition of Terms

1.8.1 Bank Lending: The process by which financial institutions, such as banks, provide funds to individuals, businesses, or governments with the expectation of repayment, usually with interest. This includes various types of loans, such as commercial loans, mortgages, and overdraft facilities.

1.8.2 Industrial Performance:

The quantitative and qualitative measures of the productivity, output, profitability, and competitiveness of industrial sectors within the Nigerian economy. This encompasses factors such as GDP growth rate, employment levels, capacity utilization, technological innovation, and export performance.

1.8.3 Credit Accessibility:

The ease with which individuals and businesses can obtain loans or credit facilities from banks and other financial institutions. This includes factors such as interest rates, loan terms, collateral requirements, credit scoring criteria, and the availability of alternative sources of financing.

1.8.4 Current Liabilities:

The total debt owed by an organisation to credit firms that is due for payment within 12 months (1 year). It comprises short-term debts, dividends, accounts payable, notes payable and income tax owed.

1.8.5 Non-Current Liabilities:

The total debt owed by an organisation to credit firms that is not due for payment for at least 12 months. It usually comprises Long-term loans, long-term leasing, debentures, bonds payable, obligations, deferred tax liabilities.

1.8.6 EBITDA:

It is a financial metric used to evaluate a company’s operating performance which shows the cash earnings generated by the core operations of the business. It provides an indication of a company’s ability to generate cash from its operations, which is crucial for assessing profitability and also for comparing the financial performance of companies across different industries.

1.8.6 Loan Terms:

The specific conditions and terms under which a loan is provided by a bank or financial institution. This includes the duration of the loan (term), repayment schedule, interest rate, collateral requirements, and any other contractual obligations agreed upon by the borrower and lender.

1.8.6 Industrial Sector:

Refers to specific segments or categories of economic activity within the Nigerian economy, such as manufacturing, agriculture, mining, construction, and services. Each industrial sector may have unique characteristics, challenges, and contributions to overall economic growth and development.

1.8.7 Government Policies:

Refers to the regulations, laws, and directives implemented by the Nigerian government to influence economic activities, including bank lending and industrial performance. This includes monetary policies (set by the central bank), fiscal policies (set by the government), trade policies, industrial policies, and regulatory frameworks governing the banking and industrial sectors.

Project – Bank lending and industrial sectors financial performance in Nigeria