This article is published by the Zamfara International Journal of Humanities.
By
N.D. Ahmadu
1Department of Humanity and Social Sciences,
Federal Polytechnic, Nasarawa,
Nasarawa -Nigeria.
donnoelah@gmail.com1,
I. D Nkon1
& M. B. Gozuk2,
1,2Department of Economics,
University of Jos,
Plateau - Nigeria.
nkonishaku@gmail.com1, magdalenegozuk@gmail.com32
Abstract
The impact of
Deposit Money Banks’ (DMB) lending rate on Economic Growth in Nigeria was
examined in this study. Time series secondary data on deposit money banks’
lending rate, Gross Domestic Product, and loans and advances spanning between the
period 1986-2022 were collated from the Central Bank of Nigeria’s (CBN)
Statistical Bulletin and used to run a regression using the Auto-regressive Lag
Technique. The other instrumentality adopted in the study included among
others; Augmented Dickey-Fuller, Error Correction Mechanism, and Cusum of Squares.
The coefficient of Deposit Money Banks’ lending rate (-2.6132) shows that
a negative and insignificant relationship at a 5% level of significance exists
between Deposit Money Banks’ lending rate and Gross Domestic Product (GDP). The
coefficient of total loans and advances (-0.1614) shows that a negative and
insignificant relationship at a 5% level of significance exists between
Economic Growth and the lending rate in Nigeria. It was discovered that Deposit
Money Banks’ lending standards which discriminate between firms based on the
credit risk of the various sectors of the economy thereby leading to the
under-performance of Deposit Money Banks’ loans and advances. The study
recommends among other things that; Government should implement appropriate
policies that will change Banks’ lending behaviour that discriminates between
firms based on the credit risk and encourage lending standards that will ensure
that funds get to the production sector rather than unproductive ventures and
individual pockets.
Key words: Economic Growth, Gross Domestic Product, Error Correction, Mechanism, Deposit Money Banks, Lending Rate
Introduction
The economic growth of any country reflects its capacity to increase
the production of goods and services which to a large extent depends on the
interest rate. It has been asserted by Etale and Ayunka, (2016) that
high-interest rates discourage investment and thereby forestall economic
growth. Similarly, a high-interest rate increases the cost of borrowing which
could ultimately lead to the reduction of output; hence spurring up the
unemployment rate in a country such as Nigeria, while a low-interest rate is
likely to stimulate production and real economic development. However, before
the deregulation of the banking sector in Nigeria in 1986, interest rates were
administratively determined by the Central Bank of Nigeria (CBN) and there were
ceilings on both Deposits and Lending rates.
During this period, most developing countries intervened
substantially in their financial sector just like Nigeria, by setting interest
rates and equally directing the allocation of credit to accelerate the most
desired development in the economy. This development was said to be
counter-productive as the repressed financial sector could not mobilize
loanable funds for investment. Thus, this led to the financial sector reforms
to correct the financial repression problem caused therefrom. This
consequently, led to the introduction of reforms such as the removal of the
ceiling and other controls on credit allocation and the interest rate
liberation. The financial reforms which commenced in July 1986 relied mainly on
market forces and the main objective was to eliminate the financial repression
to improve the incentive structure and ensure productive efficiency in the
economy (Obainuyi and Olorunfemi, 2011).
The review of the past empirical literature on this field showed a
lack of consensus among the findings of scholars, indicating the existence of a
research gap. This study attempts to bridge that gap and contribute to existing
literature. Thus, the main objective of this study is to examine the
relationship between interest rate and Economic Growth in Nigeria. Deposit
Money Banks’ loans were introduced as the control variable for a more robust
analysis of data and testing of hypotheses.
Literature
Review and Conceptual Clarification
Concept of
Deposit Money Banks’ Lending Rate
Deposit Money Banks’ lending rate is the reward DMB receives for
issuing loans to the public. It is the cost of borrowing from DMBs usually
expressed as a percentage of the amount borrowed. Adebiyi (2002) stated that
Deposit Money Banks' lending rate is the return or yield on Equity or the
Opportunity Cost of the current consumption been deferring into the future.
Jhingan (2003) citing Professor Lerner asserts that Deposit Money
Banks’ lending rate is the price that equates the Demand for credit or
Investment plus Net 'Hoarding' to the supply of Credit or Savings plus the Net
increase in the amount of money in the period. In this definition, the lending
rate is considered the price of credit which, unlike other prices, is
determined solely by the forces of demand and supply of loanable funds.
Piana (2002) postulates that the lending rate is the difference (in
percentage) between money paid back and money collected earlier from Deposit
Money Banks, keeping into account the amount of time that elapsed. Similarly,
Kumar (2018) describes the lending rate as the price paid by the borrower of
money to its lender (Deposit Money Bank).
The definition given by Piana (2002) earlier is adopted as the
operational concept for this study. It is adopted because this study sees
Deposit Money Banks’ lending rate as the difference (in percentage) between
money paid back and money collected earlier from Deposit Money Banks, keeping
into account the amount of time that elapsed.
Economic
Growth: Conceptualization
Economic growth can be seen as an increase in economic variables
(National Income, Savings, Investment, and Output of a country). Haller (2012)
asserted that economic growth is the process of increasing the sizes of
national economies that is, the macro-economic indicators especially the GDP
per capita, in an ascendant but not necessarily linear direction, with positive
effects on the economic-social sector. Zhattau, Abdullahi, and Pam (2016) citing
Lipsey and Chrystal saw economic growth as the long-term increase in the
standard of living of people. So, economic growth is seen as a powerful tool
for improving the livelihood of the people. Economic growth according to Obadan
and Okojie (2010) is an increase in the average rate of production of a country
usually measured within one year. Todaro and Smith (2006) posited that economic
growth is a steady process by which the productive capacity of the economy is
increased over time to bring about rising levels of national output and income.
Economic growth is an important aspect of economic performance which
is determined by two major factors. That is an increase in the efficiency of
labour as a result of advances in technology and improvements in economic and social
organization. Kuznets (1971) believes that economic growth is a persistent rise
in the supply of diverse Economic goods to a country’s population as a result
of advancements in Technology, Institutional and Ideological adjustments needed.
He explained further that, technological advancement will definitely lead to
economic growth provided positive institutions, attitudinal and ideological
changes are made. Nwosu (2000) also is of the view that economic growth is the
process of augmenting the productive forces or expanding productive capacity
which is accomplished by effective mobilization, assemblage, and management of
human, mental and financial resources.
The definition given by Haller (2012) is adopted as the operational
concept for this study; because this study sees economic growth as the increase
in Gross Domestic Product (GDP) as a result of the efficient mobilization of
funds from surplus spenders to deficit spenders in the economy at a given cost.
Empirical
Review
Obamuyi (2009) examined the relationship between interest rate
liberalization and economic growth in Nigeria. Using time series analysis and
annual data from 1970 to 2006, he applied a co-integration and error correction
model to capture both the long-run and short-run dynamics of the variables in
the model. The result showed that the real lending rates have significant
effects on economic growth and a long-run relationship exists between economic
growth and interest rate liberalization. He concluded that the behaviour of
interest rate in a liberalized economy is important for Economic Growth.
Moreso, Owusu (2011), in his empirical findings shows that in the
long run interest rate liberalization will lead to economic growth in Nigeria.
Also, the studies of Chipote, Mgxekwa, and Godza (2014), who examined financial
liberalization on economic growth in South Africa, employed the VECM technique and
found long-run equilibrium conditions among the variables included in the
model, lending rate and financial deepening have a positive influence on
economic growth as the exchange rate negatively impacted on it.
Ogun (1986) using a cross-sectional analysis of data for 20
countries in Africa from 1969 – 1983 estimated the correlation between interest
rate liberalization and economic growth and finds no support for the economic
growth enhancing capabilities of financial liberalization. Owusu and Odhiambo (2013)
investigated financial liberalization and economic growth in the Ivory Coast
with the use of the Auto-regressive Distributed Lag (ARDL) framework. Their
findings show that the effect of financial liberalization policies on Economic
Growth is negligible; both in the short-run and long-run
situations.
Also, Obainuyi and Olorunfemi (2011) examined the implications of
the financial reforms and interest rate behaviour on the economic growth in
Nigeria. The study involved statistical time series panel data collected for
the period 1970 – 2016. They employed co-integration statistics and an error
correction model to analyze their study data. The results of the study
indicated that financial reforms and interest rates have a sufficient impact on
economic growth in Nigeria. They concluded that interest rate behaviour has
important economic implications for economic growth and development in
Nigeria.
In a related study, Udoka and Roland (2012) investigated the effect
of Interest rate fluctuation on the economic growth of Nigeria for the period 1970
– 2010, using the ordinary least square multiple regression analytical
technique. Their analysis spanned two time periods; before and after the
interest rate deregulation regimes. Their ex-post facto research design used
secondary time series panel data collected from the Central Bank of Nigeria
(CBN) statistical Bulletin. The findings revealed that interest rate had an
inverse relationship with economic growth in Nigeria.
Nwanyanwu (2010) examined the role of banks’ credit on the Nigerian
economic growth from 1992-2008 and found out that bank credit has not impacted
significantly on the growth of the Nigerian economy. She used simple regression
analysis with GDP as a function of domestic bank credit.
Akujuobi and Chima (2012) examined the effect of commercial bank
credit on the production sector and economic development in Nigeria. Adopting
the multiple regression model for data spanning the period 1960-2008. The study
concluded that Commercial banks’ lending to the production sector has not
performed well in terms of contribution to Nigeria’s economic development which
could be due to the deviation of credits to other non-productive sectors.
Makali (2014) examined the effect of commercial bank loans on the
Economic Growth of Kenya. The data from 2008 to 2012 that covered all the
forty-three banks in Kenya showed that the economic growth rate was not
normally distributed but skewed towards the right, the distribution of the rate
of change of loans issued to borrowers was normally distributed, and the
correlations between Economic Growth rate and the rate of change in the amounts
of loans issued was -0.097 as measured by the Pearson’s Correlation
coefficient. This indicates that a positive change in amounts of loans issued
was matched with a slight drop in Economic Growth. He concluded that economic
growth in Kenya is not strongly determined by loans issued by banks to private
borrowers.
Mamman and Hashim (2014) examined the impact of bank lending on
Economic Growth in Nigeria for the period 1989-2012. The study relied on
secondary data; using multiple regression analysis, the study found out that
bank lending accounts for about 82.6% variation in Economic Growth in Nigeria
for the period under study. The study concludes that there is a statistically
significant impact of bank lending on economic growth in Nigeria which shows
that the performance of the Nigerian economy is greatly influenced by bank
lending.
Theoretical
Framework:Schumpeterian Theory
The basis for adopting this theory is that its explanation
incorporates the need for lending rate on Banks’ Credit and its impact on
Economic Growth which is the basis of this research. Schumpeter in the theory
assumes a perfectly competitive economy that is in stationary equilibrium. In
such a stationary state, there is perfect competitive equilibrium without profits,
interest rates, savings, investment, and involuntary unemployment. According to
Schumpeter, this equilibrium is characterized by circular flow which continues
to repeat itself in the same manner year after year. In the circular flow, the
same products are produced every year in the same manner, “for every demand,
there awaits somewhere in the economic system a corresponding supply.”
Schumpeter noted that development is a spontaneous and discontinued
change in the channels of the circular flow, disturbance of equilibrium, which
forever alters and displaces the equilibrium state previously existing. These
spontaneous and discontinuous changes in economic life are not forced from
without but arise by their initiative from within the economy and appear in the
sphere of industrial and commercial life. The development consists of the
carrying out of new combinations for which possibilities exist in the
stationary state. New combinations come about in the form of innovations which
he assigned the role to the entrepreneur who innovates to earn profits.
The entrepreneur breaks up the circular flow with innovation to earn
profits. The circular flow is broken by bank credit expansion. Since investment
in innovation is risky the entrepreneur must pay interest on it. Once the
innovation becomes successful and profitable, other entrepreneurs follow it in
“swarm-like clusters.” Innovation in one field may induce other innovations in
related fields. For instance, the emergence of the car industry will bring
about investments in the construction of highways, rubber tyres, and petroleum
products (Jhingan, 2013).
Methodology
Sources of
Data
The data for the study are mainly time series secondary data sourced
from the Central Bank of Nigeria Statistical Bulletin for the period 1986 to
2022. The choice of the period 1986 to 2020 is to cover various banking reforms
embarked upon by the regulatory authority.
The variables under study include the Gross Domestic Product (GDP)
which is used as a proxy for economic growth and is the dependent variable. It
is gotten by summing the values of the domestic products of the various sectors
of the economy. The lending rate is the first explanatory variable. It is the
main explanatory variable in the study whose effect on economic growth the
study intends to examine. The next variable is Deposit Money Banks’ credit to
various sectors of the economy. It is used as a control variable.
Model Specification
The model for this research study is specified in the
following functional form:
GDPt
= f(LDtt,LRt)
The stochastic relationship is shown below:
GDPt
= β0 + β1LRt + β2LDt+
εt
Where:
GDPt =
the Gross Domestic Product of Nigeria which measure economic growth.
LDt = Deposit money banks’ loans and advances to
various sectors of the Economy.
LRt =
Lending rate
t =
the time period chosen for this study from 1986-2022.
β0 =
the constant term for model
β1, β2, = slopes of the independent variables
εt =
the error term which captures other variables that affect the changes in the dependent variable but are not mentioned
in the model.
Apriori
Expectation
Theoretically, it is expected that Deposit Money Banks’ lending rate
will harm Economic Growth (GDP) while the lending will have a positive impact
on economic growth.
Method of
Data Analysis
The study adopted the multiple regression techniques of Ordinary
Least Square to establish the macroeconomic relationship between the lending
rate and economic growth in Nigeria. Analytic tests such as unit root,
auto-correlation, and normality tests were also conducted.
Presentation
and Discussion of Results
This section contains the results and the discussion of the results
obtained from the analysis of data. Data for all the variables were converted
into natural logarithms since they are not of an equal unit of measurement. The
justification is to ensure that the data do not give biased result.
Table 1: Augmented Dickey
Fuller Result of Unit Root Test - Summary of the Augmented
Dicky-fuller Result
Variable ADF Stats. P. Value 5% Critical Order
of
Integration Remarks
Ln (GDP)t -6.2121 0.0000 -2.9604 1(1) Stationary
Ln (LD)t -5.8695 0.0000 -2.9604 1(1) Stationary
Ln (LR)t -4.3135 0.0019 -2.9571 1(0) Stationary
Source: Author’s
computation using E-view 9.0, 2022
The result in table 1 shows that Gross
Domestic Product Growth and Total Deposit Bank’s lending was stationary at
first differencing while Deposit Bank’s lending rate was stationary at level.
Model Estimation
Table 2: ARDL Co-integrating
and Long-Run Form
Vector Auto-regression Estimates
GDP
GDP (-1) 0.735911
(0.19603)
[ 3.75414]
GDP (-2) 0.002148
(0.20237)
[ 0.01062]
C 1.713730
(4.18098)
[ 0.40989]
LR 0.470905
(1.39294)
[ 0.33806]
LD -0.049764
(0.10336)
[-0.48145]
R-Square 0.583573
Adj R-Square 0.519507
Sum Sq resids 42.14903
S.
E. Equation 1.273231
F-Stats 9.108981
Log likelihood -48.74908
Alkalike AlC 3.467682
Schwarz SC 3.698971
Mean depandent 10.73662
Source: Author’s computation using
E-view 9.0, 2022
Table 3: Long-Run Coefficients
The
Long-run dynamics of the estimated parameter is depicted below;
Variable Coefficient Std. Error t-Stats. Prob.
LD -0.1614 0.1296 -1.2451 0.2227
LR -2.6132 1.5105 1.7301 0.0939
C 3.5606 4.5992 0.7742 0.4449
Source:
Author’s computation using
E-view 9.0, 2022
The result in Table 2 shows the vector auto-regressive result. It is
a model used to restore equilibrium and validate the long-run equilibrium
relationship existing among the variables. The result shows the long-run and
short-run relationship between Deposit Money Banks’ lending rates and Economic
Growth in Nigeria.
The coefficient of lending rate (LR) (β1= 0.4709) shows that a
relationship exists between economic growth and the lending rate in Nigeria.
The result shows that if all the independent variables are kept constant, there
will be an increase in economic growth by 0.4709 units as a result of a unit
increase in interest rate in the short run.
Based on the E-views 9 output shown in table 2, the result of the
regression analysis for the model is interpreted as follows: The coefficient of
Deposit Money Banks’ loans and advances (LD) (β1= -0.049) shows that a negative
relationship exists between Deposit Money Banks’ lending and Gross Domestic
Product (GDP). It shows that GDP falls by 0.049 units as a result of a unit
increase in Deposit Money Banks’ lending in Nigeria in the short run, keeping
all the other independent variables constant.
Long-run
For this study, the long-run effect of Deposit Money Banks’ lending
rate on economic growth in Nigeria is our focus. From the result, in table 3
the long-run effect of the Deposit Money Bank lending rate (LR) has a negative
sign. This sign indicates that lending rates have a decreasing effect on economic
growth. The probability value shows that the statistic is insignificant at a 5%
level of significance.
The long-run effect of Deposit Money Bank lending (loans and
advances) (LD) has a negative sign. This sign indicates that loans and advances
have a decreasing effect on economic growth. The probability value shows that
the statistic is insignificant at a 5% level of significance. This implies that
most Deposit Money Banks’ loans and advances collected are not used for
feasible investment purposes expected to bring about economic growth in
Nigeria.
Discussion of
Finding
The result of the relationship between Deposit Money Banks’ lending
rate and GDP indicated that there is no significant relationship between
Deposit Money Banks’ lending rate and Economic Growth in Nigeria. This result
supports the work of Owusu and Odhiambo (2013) whose findings show that the
effect of financial liberalization policies on Economic Growth is negligible;
both in the short-run and long-run situations and Udoka and Roland (2012) whose
findings revealed that interest rate had an inverse relationship with economic growth
in Nigeria.
On the contrary, the finding does not support the result of Obamuyi
(2009) who examined the relationship between interest rates liberalization and
economic growth in Nigeria and concluded that real lending rates have significant
effects on economic growth. It also contradicts the result of Obainuyi and
Olorunfemi (2011) who examined the implications of the financial reforms and
interest rate behaviour on the economic growth in Nigeria and concluded that
financial reforms and interest rates have a sufficient impact on economic growth
in Nigeria.
Conclusion
and Recommendations
The banking sector in Nigeria has witnessed significant growth since
the adoption of the structural adjustment program (SAP) with the potential to
contribute to the growth of the Nigerian Economy. Thus, the impact of Deposit
Money Banks’ lending rates on economic growth in Nigeria has been discussed in
this study.
Based on the result of this research study, the following policy
recommendations were made:
I.
Government should implement appropriate
policies that will change banks’ lending behaviour that discriminates between
firms based on the credit risk and encourage lending standards that will ensure
that funds go to the production sector rather than individual pockets and
unproductive ventures;
II.
There should be a strong and
comprehensive legal framework that will aid in monitoring the performance of
commercial banks’ loans and advances to the private sector and recovering debts
owed to the banks;
III.
The issue of high-interest
rates should also be resolved since businesses are likely to migrate to a less
risky environment where the cost of capital is low leading to low domestic
production capabilities of the Nigerian private sector.
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