The Impact of Banks Credit in the Nigeria Economy (A Case Study of First Bank of Nigeria Plc and Zenith Bank Plc Ekwulobia)
This chapter of the research work deals with the review of relevant literature as it pertains to this study. Different materials such as text books, journals and other seminar work were consulted and issues related to the research topic were extracted.
2.2 MODELS TO THE RESEARCH QUESTIONS
Commercial banks credit plays crucial roles in the development of any economy. Nzotta, S.M., (2009) contend that bank credit influence positively to the level of economic activities in any country. It influences what is to be produced, who to produce it, and how much is to be produced. CBN seminar paper (2002) postulates that credit is the money that banks give out, loans and advances with future date of repayment. An important role of bank is to provide ways of providing loans to the various sectors of the economy. The CBN prudential Guidelines of 1990 however provides a wider definition of credit, and this includes aggregate of all loans, advanced overdraft, bills discounted, banks guarantee, banks acceptance, commercial papers, leases and indemnities. Essang and Olajide (1994) identified banks as a monetary institution owned by either government or private business for the purpose of profit making. In pursuit of this profit, the commercial banks performs a number of function, one of these functions includes acceptance of deposits from the public .The deposit are in turn given out as a credit to small medium scale enterprises and among others, which led to more production and provision of employment opportunities in the economy.
2.2.1 BANKS IN NIGERIA
The Nigeria economy constitutes various sectors such as financial, agriculture, industrial sectors etc. Under financial sector, there are various firms that make up the industry e.g. Money deposit banks development banks, and Central Bank of Nigeria (CBN). These firms make up the Nigeria banking industry. However, this sector in Nigeria economy needs credit (money) to enable it survive, expand and grow.
Therefore, the banking industry provides credit facilities to the sectors in the economy through various types of credit instruments. The impact of credit to banks and industries in an economy cannot be over emphasized because if there were no banks, the activities of providing credits to the firms and industries in order to encourage economic growth would not have been possible in the economy.
2.2.2 THE VARIOUS TYPES OF BANKS AND THE TYPES OF CREDITS GRANTED IN NIGERIA
There are different types of banks that exist in an economy such as Nigeria. These banks are however classified according to the activities which they perform one of which is the granting of Loan(credit).
MONEY DEPOSIT BANK: This is also known as commercial banks which are popularly known in the Nigeria economy. They are also the main source of economic growth and development in Nigeria.
The money deposit banks in Nigeria accept money from the public and make them available to the public in form of loan. Due to the fact that many deposit banks receive money on short term notice (3-12months). However, due to the concept of universal banking and increase of capital base of money deposit banks, they now land in mid -term basses(between 5 to 10 years) and also little on long term basis (10 and above). These money deposit banks grants mainly two types of
Credit facilities namely,
OVERDRAFT: These are credit facilities that are collectable at the bank request. This is a credit facility that is granted by money deposit bank to its current account holder .The facilities are usually collectable on a short time notice by the banks.
LOAN: This is also credit facilities that are granted by money deposit banks .They concentrate most of their lending on short term bases and lend little on medium and long term bases .Loan granted by money deposit banks are repayable at maturity in full including interest or it is repayable installmentally Onyeagba(2004).
These two credit facilities provided by money deposit banks provides credit to the various firms that exist in the Nigeria economy. The credit facilities also have great impact in the Nigeria economy because it provides credits to the various firms that exist in the Nigeria economic growth.
2.2.3 CENTRAL BANK AS THE CONTROLLER OF CREDIT IN NIGERIA
Objective of credit control:
According to Aguolu (1998) control is the measure that central bank of Nigeria uses in controlling the lending policy of money deposit banks. The CBN control in the Nigeria economy to achieve the following objectives:
- To stabilize the internal price level: The major objective of credit control is to stabilize the price level in the economy of a country. Frequent charges in the price adversely affect the economy. Inflation or deflation trends needs to be prevented, this can be achieved by adopting a judicious policy or credit control.
- To stabilize the foreign exchange rate: with change in the internal price level, exports and imports are always affected when price falls. Export increase while import decline. Consequently, the demand of foreign exchange increases and that of a local currency falls. Exports increases while imports falls thereby lowering the exchange rate of domestic currency since it is volume of credit that affects prices, the central bank can stabilize that effects prices. The central bank can stabilize that foreign exchange rate by controlling banks credit.
- To control business circle: Business circle are common phenomenon to capitalist and mixed economy countries which lead to periodic fluctuations in production, employment and prices. They are characterized by depression during booming period and expansion of the bank credit during depression prosperity. This is large extension in the volume of credit and production and as such, price falls. The control bank can contract such cyclical fluctuation through contraction of bank credit during depression.
- To meet business needs: Another major objective of bank control is to adjust the volume of credit of business activities in the country. Credit is needed to meet requirements of trade and industry. As business expands, large quantity of credit is needed and when and when business contracts, lesser credit is needed, therefore, it is the central banks that can meet the requirements of business by controlling the credit of the country.
- To have growth with stability: Exchange rate stability is one of the important objective of credit control .However, the aim of credit control is to help achieve full employment and increase growth and stability in the country without inflationary pressure and balance of payment deficit. However, when the credit of a country is effectively controlled by the central bank, there are trends to be economic growth and development in the country Jhingan(2008).
DEVELOPMENT BANK: This is a type of bank that is being established for the purpose of development in a country, Johnson(2008).According to Ezeanate (2005), development banks are government owned banks established for non-profit making purpose but designed and equipped with facilities and basis government support to provide all the ingredient required for industrial and economic growth in the country. According to Asuzu (2003) development banks are long term financial institutions providing medium and long-term credit for the crediting and expansion of agricultural, commercial and industrial enterprises in developing countries such as Nigeria. The activities of development banks are geared towards the development of the country. They provides long term and medium term credit to various industries in various sectors of the Nigeria economy in order to stimulate industrial growth and development banks in Nigerian namely:
- Nigeria Banks for commerce and industry (NBCI) (Ezeanata 2005)
- Nigeria agricultural corporative and rural development banks (NACRB), Samuel (2008)
This is the apex bank in any country. In Nigeria, it is called central Bank of Nigeria (CBN). According to Asuzu(2003),The central bank is the most important institution in any country.
The central bank of Nigeria is the apex financial institution saddled with the responsibilities of supervision, controlling, and regulating the operations of the banks in Nigeria .The main activity of the CBN is to control the activities of other banks that are in the country in order to stabilize the economy against any form of inflation (Ezenata 2005). The central bank is usually the national bank of a country charged with the responsibility of issuing new currencies and controlling the banking system in the interest of the nation (Okoye 2010). The central bank of Nigerian do not grant credit to individuals or institutions but they grant credit to money deposit banks and other financial institutions in times of tight liquidity. Some of the functions of central bank of Nigeria are as follows:
- Banker to other bank as well as the government
- Issuer of nations currency
- Lender of last resort etc (Ezeanata 2005)
2.2.4 VARIOUS INSTRUMENTS USED BY BANKS IN CONTROLLING CREDITS
According to Anyanweta (2003) the central bank controls the credit policies of money deposit banks through various instruments of monetary policy such as;
- open market operation(Omo)
- Bank rate
- Cash deposit
- Directives and moral suasions
- Special deposits
USE OF OPEN MARKET OPERATION: This refers to situations whereby the CBN appeals to the money deposit banks to increase or decrease their credits to the public so as to be in line with government monetary policy Okoye(2010). It is also refer to the buying and selling of government securities such as treasury bills and bond from the public and business organizations. If the amount of money in circulation is high and the central bank wants to reduce it, will sell securities to the public and financial institutions. When they buy, they pay cheque to the central bank, the cheque are cleared, the amount of money left with the commercial bank will fall thereby reducing their lending capacity and this will help to reduce the amount of money in circulation. However, if the amount of money in circulation is too low, and the central The bank rate is the rate at which the central bank discount or rediscount bills for money deposit banks or the rate at which it lends money to them. The bank rate influences other interest rates in the economy. A higher bank rate leads to higher interest rate. If there is inflation, the central bank will increase the bank rate. This will force the money deposit banks to increase their interest rate. People and organizations will be discouraged from borrowing money from the money deposit banks. Their lending ability is therefore reduced, leading to a reduction in the amount of money in circulation bank wants to increase it will buy securities from the public and financial institutions and make payments to them. This will increase the amount of money left with the money deposit banks, thereby increasing the lending power, the amount of money in circulation will increase.
THE USE OF BANK RATE: On the other hand, if the volume of money in circulation is too small and the central bank wants to increase it, it will reduce the bank rate. This will encourage money deposit banks to reduce their interest rate. Borrowing will therefore be encouraged, and the amount of money in circulation will be increased.
USE OF CASH DEPOSIT RATIO: This refers to the minimum legal cash reserve requirements of the money deposit banks. It relates to the ratio of cash reserve to their total deposit liabilities. If the amount of money in circulation is too large, and has to be reduced, the central banks will increase the cash deposit ratio, if the money deposit banks keeps a higher percentage of their total cash deposit as reserve, their lending ability will therefore reduce.
However, the central banks will reduce the cash deposit ratio, if the amount of money in circulation is too small and it wants to increase it.
USE OF DIRECTIVES AND MORAL SUATIONS: The central banks give instructions to money deposit banks to grant loans to some sectors of the economy such as agricultural sector.
Moral Suasion is an appeal or suggestion by the central bank to the money deposit banks to pursue certain lending policies.
2.2.4 ROLE OF MONEY DEPOSIT BANKS IN THE NIGERIA ECONOMY.
Besides performing the normal banking function, money deposit banks in Nigeria plays an effective role in the development of the country. This is due to the fact that majority of the people in Nigeria are poor, unemployment and engages in traditional agriculture.
There is acute shortage on capital; industries are depressed coupled with the global financial crisis/melt down. The money deposit bank in Nigeria has helped to some extent in overcoming these problems and promoting economic development.
However, some of the roles performed by the money deposit banks in Nigeria economy are as follows;
- MOBILIZING SAVINGS FOR CAPITAL FORMATION:
The money deposit banks in Nigeria helps in the mobilization of savings through their network of branches all over the country. According to the people in the country, there have been various income but banks introduced them to save by introducing varieties of deposit schemes to suit the needs of undivided depositors. They also mobilize savings through the money deposit banks and channel them into productive investments. Thus they help in capital formation of the country.
- FINANCING INDUSTRIES: According to Ihingan,(2008) money deposit banks finances industries in some numbers of ways; they provide short term and long term loans to industries. They don’t only provide finance for industries but helps in the development of money market.
- FINANCE TRADE: According to Samuel, (2008), money deposit banks helps in financing both internal and external trade. The banks provide loans to wholesalers and retailers to stock goods in which they need. They also help in the movement of goods from one place to another by providing all types of trade facilities such as discounting and accepting bills of exchange, providing foreign exchange facilities to importers and exporters of goods and services.
- FINANCING AGRICULTURE: According to Samuel(2008), money deposit banks helps in financing agriculture by providing loans to agricultural sector. They do this by opening networks of branches in the rural areas to provide agricultural credits. They also provide finance directly to agriculturalist for the purpose of marketing their product, for the modernization and mechanization of their farms for providing assistance for animal husbandry during farming poultry farming and horticulture.
- FINANCING CONSUMER ACTIVITIES: Due to the low level of income earned by most people in the country, they may not be able to buy some durable consumer goods such as house, car etc. The money deposit banks help by providing loans to this class of people and as such improving the standards of living of the people. Samuel,(2008).
- FINANCING EMPLOYMENT GENERATING ACTIVITIES: According to Jhingan,(2008) money deposit banks finances employment generating activities in Nigeria. They do this by providing loans for education of young people studying abroad and other vocational institutions of Nigeria. They also advance loans to young entrepreneurs, Medical and Engineering graduates and other technically trained people in establishing their own businesses.
- EXECUTOR OF MONETARY POLICY: Ezeanata(2009) says that money deposit banks are main executor of monetary policy in the country. The CBN depends on the money deposit banks in execution of the monetary policies formulated. The money deposit banks carry out the function with the aim of stabilizing the Nigeria economy against inflation.
2.2.5 ROLES OF MONETARY POLICY IN NIGERIA ECONOMY:
The monetary policy in the Nigeria economy plays an important role in increasing the growth rate of the Nigeria economy by influencing the cost and maintenance equilibrium in the balance of payment .So the principal objective of monetary policy in Nigeria are: To stabilize the price level, to stabilize exchange rate etc. These roles according to Jhangan, (2008) are as follows
(a) TO CONTROL INFLATIONARY PRESSURE: The monetary authority (CBN) controls inflation pressure arising as a result of development. It requires the use of both quantitative and qualitative method of credit control.
(b)INTEREST RATE POLICY:A policy of high interest rate is an incentive to higher savings. Development banks habit had speed up the monetization of the economy which is essential for capital formation and economic growth.
2.2. OTHER POLICY USED BY THE GOVERNMENT TO CONTROL INFLATION.(FISCAL POLICY): Fiscal policy is the means by which a government adjust its spending levels and tax rates to monitor and influence a nations economy. It is the sister strategy to monetary policy through which a nation influences its money supply Ogbekhase, (2012).
If there is inflation, the government using the fiscal policy as a tool to control the money supply in an economy will reduce its spending and increase tax rate on the other hand, when there is deflation, the government will increase spending and reduce tax rate with more money in the economy and fewer taxes to pay. Consumers demand for good and service will increase. This in turn, rekindles businesses and turns the cycle around firm stagnant active.
2.2.7 SPECIALIZED BANKS AND THEIR CREDIT ROLES
Specialized banks otherwise known as the development finance institution (DFI) are institutions established especially to contribute to the development of specific sectors of the economy. Their roles includes
- To give loans to enterprises.
- To take outermost induce rate float within the prescribed range
(c) Exertion clout through credits and agreement of account etc
2.3 THE IMPACTS OF THE BANKING SECTOR TO THE DEVELOPMENT OF NIGERIA ECONOMY: In Nigeria, the banking sector is an important part of the financial system. It dominates the Nigeria financial system as it accounts for about 90% of the total assets in the system. However, the banking sector has not contributed significantly to the growth and development of Nigeria economy as expected. The poor performance of the sector has been attributed to numerous problems that faced the sector as postulated by Ogbekhase(2012), such as inadequate capital; high non-performing assets which has led to frequent distress in the sector and collapse of the banks in the past.
The ultimate function of the financial sector is to help direct funds from the surplus sector to areas of needs depends to a large extent on the soundness of the capital base. The service of banking is supposed to be hinged on the effective satisfaction of both the surplus units and the deficit units of the economy but on the contrary, the Nigeria banking sector has not perfectly contributed to the development of the Nigeria economy.
2.4 SUMMARY OF LITERATURE REVIEW
The various credits by banks have gone a long way in stimulating industrial growth in Nigeria. The various types of banks that exist in the country have various roles they play and the various credits they grants. The money deposit banks which concentrates on short term and medium term credit. The development banks concentrates on long term and medium term credit while the central bank of Nigeria are in charge of expanding or contracting the credit in the economy through the use of monetary policy and fiscal policy.