THE CONTRIBUTION OF FINANCIAL INSTITUTIONS IN NIGERIA TO THE GROWTH OF MANUFACTURING INDUSTRY

ABSTRACT

This project examined the Contribution of Financial Institutions in Nigeria to the Growth of Manufacturing Industry. The research adopted ex-post facto research method. Data was basically collected by secondary means through CBN Statistical Bulletin. Data garthered span 2005 to 2014.

Three hypotheses were formulated and tested with the used of regression analysis and T-test. Based on the result of the analysis, the three null hypotheses were rejected and the alternate hypotheses accepted. It was thereby concluded that; Interest rate has significant impact on manufacturing output; Bank credit does not have significant impact on the output of the manufacturing Sector in Nigeria; that bank credit has significant impact on the output of the manufacturing Sector in Nigeria and there is significant relationship between manufacturing output and economic growth of Nigeria.

Recommendations were proffered to Bank to give credit to the manufacturing sector of the economic as it is contributing significantly for the growth of GDP in Nigeria.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

CHAPTER ONE        -  INTRODUCTION                                                                        

1.1      Background to the Study

1.2      Statement of the Problem

1.3      Objective of the Study     

1.4      Research Questions          

1.5      Statement of Research Hypotheses

1.6      Significance of the Study

1.7      Scope of the Study           

1.8      Limitations of the Study  

1.9      Operationalization of Variables

1.10   Definition of Terms

            References              

 

CHAPTER TWO       -  LITERATURE REVIEW

2.1      Introduction

2.2      Conceptual Framework  

2.3      Theoretical Framework  

2.4      Empirical Framework      

            References

CHAPTER THREE     -  RESEARCH METHODOLOGY

3.1      Introduction                       

3.2      Research Design    

3.3      Population of the Study

3.4      Sample Representation   

3.5      Sample Technique            

3.6      Re-Statement of Research Questions              

3.7      Re-Statement of Research Hypotheses          

3.8      Method of Data Collection         

3.9      Instrument of Data Collection               

3.10   Validity and Reliability Test                    

3.11   Method of Data Analysis                         

3.12   Model Specification          

 

CHAPTER FOUR  -  DATA PRESENTATION AND ANALYSIS

4.1      Introduction           

4.2      Presentation of Data        

4.3      Test of Hypotheses           

4.4      Analysing the Model                    

4.5      Discussion of Results

 

CHAPTER FIVE         -  SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.0      Introduction

5.1      Summary of Findings       

5.2      Conclusion                          

5.3      Recommendations                        

            References                                      

 

 

CHAPTER ONE

INTRODUCTION

 

1.1     BACKGROUND TO THE SYUDY

There has been a growing concern on the decline of the output of the manufacturing sector in Nigeria in recent times, despite the fact that the government embarked on several strategies aimed at improving industrial production and capacity utilization of the sector. This worry is understandable in view of the fact that it has been generally acclaimed, through the Kaldor’s first law, that manufacturing sector is regarded as the engine of growth of the economy (Libanio, 2006). The unimpressive performance of the sector in Nigeria is mainly due to massive importation of finished goods and inadequate financial support for the manufacturing sector, which ultimately has contributed to the reduction in capacity utilization of the manufacturing sector in the country. Enebong (2003) argued that the level of the Nigerian manufacturing organisations’ performance will continue to see a decline because as it is now, the manufacturers will have even more problems in assessing raw materials due to stiff competition from the foreign firms.

Even the financial sector reform of the Structural Adjustment Programme (SAP) in 1986, which was meant to correct the structural imbalance in the economy and liberalize the financial systems did not achieve the expected results. As Edirisuriya (2008) reported, financial sector reforms are expected to promote a more efficient allocation of resources and ensure that financial intermediation occurs as efficiently as possible. This also implies that financial sector liberalization brings competition in the financial markets, raises interest rate to encourage savings, thereby making funds available for investment, and hence lead to economic growth (Asamoah, 2008). Therefore, it is logical to assume that financial liberalization enhances funds mobilization and accessibility, which are required for firms’ performance and economic growth.

However, this research project has been designed to examine the contributions of financial institutions to the growth of manufacturing industry.

 

1.2     STATEMENT OF THE PROBLEM

This study was motivated by the challenges pose by the lack of sufficient bank credits to meet the increasing needs in the manufacturing sector of the Nigerian economy. There is no iota of doubt that bank credits is very crucial and essential in revitalizing the manufacturing sector.  As important as bank credits is to the sector in spite the continuous policy strategies to attract credits to the sector, most Nigerian enterprises have remained unattractive for bank credits For instance, as indicated in central Bank of Nigeria (CBN) reports, almost throughout the regulatory era, commercial bank’s loans and advances to the manufacturing sector deviated persistently from prescribed minima.  Furthermore, the enhanced financial intermediation in the economy following the financial reforms of the 1990s notwithstanding, credits to manufacturing as a proportion of total banking credits has not improved significantly averaging 15.7 percent between 1990 and 1994 and 25.8% between 1995 and 2000.  Consequently, many manufacturing firms in the country have continue to rely heavily on internally generated funds, which have tended to limit their scope of operating.

The above problems can be summarized as follows;

  1. High interest rate on Bank lending to the manufacturing sector.
  2. Financial institutions have not played vital role in revitalizing the manufacturing sector. The output of the manufacturing Sector has in Nigeria?
  3. The economic impact of the manufacturing industry is not felt has most products are still imported into the country for consumption

 

1.3     OBJECTIVE OF THE STUDY

The main objective of this study is to examine the contribution of financial institutions in Nigeria to the growth of manufacturing industry. However, other specific objectives include:

  1. Examining the impact of interest rate on manufacturing output of the manufacturing sector
  2. To assess the impact of bank credit on the output of the manufacturing sector in Nigeria.
  3. To assert the relationship between manufacturing output and economic growth of Nigeria

1.4     RESEARCH QUESTIONS

In order to achieve the purpose of this research study, the study will attempt to provide answers to the following research questions.

  1. How does interest rate impact the manufacturing output of the manufacturing sector?
  2. To what extent does bank credit impact the output of the manufacturing Sector in Nigeria?
  3. What is the extent of the relationship between manufacturing output and economic growth of Nigeria

 

1.5     STATEMENT OF RESEARCH HYPOTHESES

Hypothesis is a tentative answer to a research question. It is a conjectural statement about the relationship that exist between two or more variables which needs to be tested empirically before they can be accepted or rejected. To provide answer to the research questions arising from this study, the following hypotheses are postulated.

Hypothesis One

Ho:    Interest rate does not have significant impact on manufacturing output

 H1:   Interest rate does has significant impact on manufacturing output

 

 

 

Hypothesis Two

Ho:    Bank credit does not have significant impact on the output of the manufacturing Sector in Nigeria

 H1:   Bank credit has significant impact on the output of the manufacturing Sector in Nigeria

Hypothesis Three

Ho:    There is no significant relationship between manufacturing output and economic growth of Nigeria

 H1:   There is significant relationship between manufacturing output and economic growth of Nigeria

 

1.6     SIGNIFICANCE OF THE STUDY

This research work tends to examine the contribution of financial institutions to the growth of manufacturing industry. An insights on the empirical relationship between financial sector reforms and manufacturing output, can assist the government in formulating accommodating policies to enhance industrial production and economic growth.

The study contributes to knowledge in three ways: First, it reveals the current situation of manufacturing sector in Nigeria. Second, the link between manufacturing output and economic growth will also be established. Finally, the determinants of manufacturing output will be identified. Thus, the appropriate policy towards accelerating growth through manufacturing sector can be formulated and implemented.

 

1.7       SCOPE OF THE STUDY

This research work is to examine the contribution of financial institutions to the growth of manufacturing industry. The scope of the study is the entire manufacturing sector of Nigeria economy in large. The geographical location of the research in Nigeria. The study covers data for period 2005 – 2014. The organization of the research is Nigeria Breweries Plc.

 The sample size would be limited to one hundred which will be drawn from the population. The simple sampling technique will be used in drawing the sample.

 

1.8     LIMITATIONS OF THE STUDY

In the course of conducting this research work it is expected that the following will constitute impediments to the effective conduct of the study

Access to Data: inability to access relevant information is a foreseen challenge to the success of this research. The tax authourity may not reveal data or a true information which they which they may choose to keep for themselves.  

Time Constraint: this study would have choose to cover a larger scope to consider the thirty-six state tax authority which would yield a more reliable result but due to the limited time available, the scope is limited to Lagos State tax authority.

 High cost of running a large area: Also the financial implication of covering the entire nation could be a predicament to the success of this research.

Nevertheless, I believe the above limitations will in no way affect the reliability and validity of the research study.

 

1.9     OPERATIONALIZATION OF VARIABLES

In testing the validity of the already stated hypothesis, this model will be used; manufacturing output is a function of commercial banks and interest rate. Mathematically this can be expressed as:

Moutput = f (COML,IR)

Where

Moutput = manufacturing output

Coml =commercial bank loans

IR =commercial bank interest rate

The ordinary least square model is based on the following function.

Moutput = b0 + b1COML + b2IR + U

Moutput = Dependent variable

COML,IR = Independent variables

b0 = Regression constant

b1, b2= Unknown parameters or coefficients

U = stochastic error

 

                                                                            

1.10   DEFINITION OF TERMS

BANKING SYSTEM: a network of commercial, savings, and specialized banks that provide financial services, including accepting deposits and providing loans and credit, money transmission, and investment facilities

FINANCIAL CONTAGION: A situation in which a faltering economy in one country causes otherwise healthy economies in other countries to have problems

INTERBANK: The financial system and trading of currencies among banks and financial institutions, excluding retail investors and smaller trading parties

GLOBAL ECONOMY: The international spread of capitalism, especially in recent decades, across national boundaries and with minimal restrictions by governments.

FINANCIAL INSTITUTIONS: An organization, which may be either for-profit or non-profit, that takes money from clients and places it in any of a variety of investment vehicles for the benefit of both the client and the organization

LIBERALIZATION: The removal or reduction of restrictions or barriers on the free exchange of goods between nations.

COMMERCIAL BANK: A financial institution that provides services such as accepting deposits and giving business loans.

HUMAN CAPITAL: The set of skills which an employee acquires on the job, through training and experience, and which increase the employee's value in the marketplace.

MONEY MARKET: A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded

BOND MARKET: The environment in which the issuance and trading of debt securities occurs

EQUITY MARKET: The market in which shares are issued and traded, either through exchanges or over-the-counter markets.

RELATIONSHIP BANKING: A banking philosophy that aims to establish long-term relationships with customers and reduce the customer's desire to go elsewhere for banking services.

 

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