No economy can grow and improve the living standards of its population in the absence of credit to the real sector. The deposit money banks in Nigeria are not optimally impacting positively on the economy in spite of the momentous support and incentives given to them by the government. The banks contribute little to the Gross National Product (GNP) and encourage high interest rates on lending, making credits inaccessible to the real sector.
The trend of lending by the banks revealed that out of a total of about ₦6.42 trillion and ₦7.18 trillion loans and advances from the banking industry as at December 2011 and third quarter, 2012 respectively, contributions to agriculture received marginal 3.35% and 3.45%, while power and energy sector got a paltry 0.39% and 0.80% during the same period. Growth rate of credit often fluctuate, while actual credit has not reflected the proportionate contribution of the banking sector to the Gross Domestic Product (GDP).
Role Of Nigerian Banks In The Development Of Real Sector Economy
The real sector encompasses activities related to the aggregate supply and demand in an economy. The McKinnon-Shaw paradigm postulates that government restrictions on the operations of the financial system, such as interest rate ceiling, direct credit programs and high reserve requirements may hinder financial deepening, and this may in turn affect the quality and quantity of investments and, hence, have a significant negative impact on economic growth. This means that the McKinnon-Shaw financial repression paradigm implies that a poorly functioning financial system may retard economic growth. However, a sound government, couple with an efficient financial system, will reflect on the positive growth of the real sector.
A well structured financial system enhances investment by identifying and funding good business opportunities, mobilising savings, enabling trading, hedging and diversifying risk, and facilitating the exchange of goods and services. These functions result in a more efficient allocation of resources, rapid accumulation of physical and human capital, and faster technological progress, which in turn result in economic growth and, by extension, the development of the real sector.
An efficient financial system is one of the foundations for building sustained economic growth and an open, vibrant economic system. Therefore, the performance of the real sector can be used to measure the effectiveness of macroeconomic policies. If the banking system in a country is effective, efficient and disciplined, it will bring about a rapid growth in the various sectors of the economy. Some other functions expected of financial institutions towards real sector economy include:
- Promotion of trade and industry.
- Promote capital formation.
- Development of agricultural sector.
- Resuscitating infrastructural decay.
- Influencing economic activity through availability of credit and moderate interest rate. If the commercial banks are able to increase the amount of money in circulation through credit creation or by lowering the rate of interest, it directly affects economic development. A low rate of interest can encourage investment. The credit creation activity can raise aggregate demand which leads to more production in the economy.
Schemes Through Which The Banking System Has Stimulated Economic Growth
1. Commercial Agricultural Credit Scheme
2. Development bond towards financing the real sector and infrastructure projects, and improve credit flow to the sector
3. Small and Medium Scale Enterprises Guarantee Scheme. The scheme provides guarantees on loans by banks to the sector in order to absorb the risk element that inhibit banks from lending to the real sector.
4. Other scheme being introduced by Bank of Agriculture, Bank of Industry and other financial institutions to stimulate economic growth by extending their services to Agriculture, Manufacturing and Small-Medium Scale Enterprises.
Lending And Growth Pattern In The Banking Industry
Total currency in circulation stood at ₦1.57 trillion in December 2011, highest since 2008. The growth recorded was 16.80% in 2011, which fell below what was recorded in the preceding year with a growth rate of 29.00%. As at the end of Q3, 2012, currency in circulation was N1.36 trillion. Total deposits at the Central Bank amounted to ₦6.8 trillion in Q3, 2012, indicating a decline of 1.50% below the level at the end of the preceding quarter. The development reflected, largely, the increase in Deposit Money Banks and Federal Government deposits. Of the total deposits, the percentage shares of the Federal Government, banks and other sectors were 70.00%, 22.00% and 8.00% respectively, compared with 73.00%, 18.00% and 9.40% in the preceding quarter.
Total loans and advances of the Deposit Money Banks (DMBs) to the domestic economy decreased to ₦6.49 trillion in 2011 as against ₦6.6 trillion recorded in 2010 but increased by 3.03% in Q3, 2012.
Credit to the domestic economy (net) grew by 42.40% as at December 2011, compared with 10% in December 2010. At that level, net domestic credit exceeded the indicative benchmark of 29.3% for 2011 fiscal year. The development reflected the 52.70% growth in credit to the Federal Government and the 31.60% rise in credit to the private sector. Net domestic credit to the economy contributed 32.10% to the growth of total monetary assets at end December 2011. The significant growth in credit to the private sector reflected the injection of funds by the Asset Management Corporation of Nigeria (AMCON) into the intervened banks.
Aggregate domestic credit (net) declined by 3.48% in October 2012 relative to the level as at December 2011, while the banking system’s credit to the private sector rose by 4.70%. Broad money supply (M2) grew by 8.23 per cent in October 2012 over the level recorded at the end of December, 2011, which annualises to 9.87%.
Interest rates in all segments of the money market moderated between September and October 2012. The average interbank call and the Open Buy Back (OBB) rates for the period were 11.68% and 11.38%, respectively. The average prime lending rate declined from 16.96% in July to 16.48% in October. The average maximum lending rate, however, increased from 23.45 to 24.65%, while the weighted average savings and term deposit rate stabilised at 5.30% during the period.
Credit to the core private sector by the DMBs grew by 31.30% in December 2011, in contrast to the decline of 4.40% recorded as at December 2010. Of the amount outstanding, DMBs’ credit to priority sectors constituted 36.00% of which 3.50%, 17.70%, 0.50% and 14.00%, were disbursed to agriculture, solid minerals, exports and manufacturing, respectively. The less preferred sectors accounted for 46% of outstanding credit, compared with 48% at the end of December 2010, while the unclassified sector accounted for the balance of 18%.
Real Sector Development
According to the National Bureau of Statistics (NBS), the estimated GDP, measured at 1990 constant basic prices, stood at ₦833.4 billion in 2011. This indicated a GDP growth of 7.40% in 2011, compared with 8.00% in 2010 and an annual average of 7.00% over the period 2007 to 2011. In terms of contribution to GDP growth, the services subsector contributed the largest with 2.40%. This was followed by agriculture with a contribution of 2.30%; wholesale and retail trade contributed 2.00%; and building and construction 0.20%. Industry as a group made a contribution of 0.30%.
Non-oil GDP recorded a growth rate of 8.90%, compared with 8.50% in 2010. The improved performance in the sector was driven largely by the agricultural sector which grew by 5.70%. A sub-sectoral analysis indicated that, solid minerals and manufacturing output grew by 11.50% and 7.60% respectively.
Lesson From Other Countries
As higher growth rates are significantly becoming the beam of various economies in the world, regional and societal disparities are also on the increase. This calls for a total overhaul of economic strategies in ensuring that the banking system unleashes its full potentials and contributes enormously to national growth and development.
The Reserve Bank and Government of India placed a strategy in ensuring better banking penetration and outreach, particularly to the credit needs of agriculture and small enterprises. A programme of interest rate subvention of 2% on crop loans to farmers was introduced in some districts, while interest rate waivers were introduced to identified distressed districts to stimulate agricultural growth. Similar measures have been taken to step up credit to the micro, small and medium enterprises (MSME) sector. The enabling environment created by the Government’s policy initiatives to improve the flow of credit to sectors such as agriculture and small and medium enterprises led to rapid economic development as seen in GDP growth rate from 4.30% in 2002 to 7.20% in 2011.
Though a significant portion of banking assets in Indonesia is foreign, Indonesia’s banks are widely considered as the country’s economic drivers. Her economic growth is largely dependent on the banking sector’s ability to fulfill credit demands. In 2010, domestic credit provided by the banking sector as a percentage of GDP stood at 36.53%, which slightly dropped from 36.98%. The Government operates a credit guarantee scheme for providing credit guarantee to banks for their loans to MSME so that they can give such loans based on the viability of the project and not insist on collateral.
Challenges And The Way Forward
The major challenges to real sector financing from banks have been identified as unfavorable macroeconomic environment, cumbersome documentation process, inadequate long-term finance, lack of data base on borrowers and poor infrastructure.
The rapid growth experienced in the financial sector in Nigeria has not impacted positively on the real economy as much as anticipated. Development finance institutions set up for specific purposes, such as agricultural finance, housing finance, trade finance and urban development, did not achieve their stated mandates. Also, credit flow from the DMBs to the real economy has been grossly inadequate. Thus, the need for creating financial accommodation for economic growth through initiatives such as development finance, foreign direct investment, venture capital and public-private partnerships has become very imperative.
However, the regulatory body, the Central Bank, should inaugurate policies that will ensure that financial sector contributes to the development of the real sector. Such policies should be defined to encompass the following measures:
- Attention to reforms in the interest rate regime in the next five years, which should break the uneven situation facing lending costs.
- Effectively address the real economy's problems of tight money and high financing costs.
- Leverage on the role of the bank as adviser to the government on economic matters, to ensure that the financial sector impacts on the real economy.
- Take the lead in measuring more accurately, the relationship between the real sector and financial sector, as well as the transmission mechanism.
- Evaluate continually the effectiveness of existing development finance initiatives such as agricultural credit and import-export guarantees.
- Take the lead in encouraging examination of critical issues for real sector developments.
- Cooperate with state governments to run pilot programmes in positively redirecting the financial sector’s contribution to the real sector.
To achieve greater development in the future, the financial industry must serve the real economy, improve the real economy's access to finance and prevent over-speculation and virtual bubbles. The interplay in policy, regulatory interventions and management strategies will determine the performance of the Nigerian banking sector towards economic development over the next few years.