CHAPTER ONE

INTRODUCTION
1.1 Background to the Study

The expanding financial services, communications, manufacturing, technology and

entertainment sectors distinguished Nigerian economy is an emerging market. In recent years,
the federal government appropriations bills have been focused on sustainable growth and job
creation. The industrial sector which is critical in achieving these objectives is however
constrained by many structural imbalances including infrastructural deficit, tariff and non-tariff
barriers to trade, investment obstacle, multiple exchange rate regime and limited foreign
exchange rate capacity (Plecher, 2020). The industrial sector is a leading sector in many respects
in advanced economies. It plays a catalytic role crucial for economic transformation and has
ability to drive productivity, growth, innovation and trade. In 2018, the industry sector was the
second largest contributor to GDP in Nigeria. The sector contributed 25.75 percent to the GDP
ahead of agriculture sector’s 21.24 percent and below Service Sector’s 52.01 percent (Plecher,
2020). The manufacturing subsector of the industrial sector is a major driver of import
substitution which enhances exportations, foreign exchange earnings, employment creation,
consumption patterns and standards of living. To underscore the critical role of industrialization
and the manufacturing sector on the country’s GDP, both the fiscal and monetary authorities in
Nigeria have over years established intervention funds targeted at revamping the sector and
ramping up production. For instance, the Central Bank of Nigeria (CBN) established the N300
billion Real Sector Support Facility (RSSF) targeted at manufacturing, agriculture value chain
and selected sub-sectors thus providing a window for newly established manufacturing
companies to borrow up to N10 billion for 15 years at single digit interest rate. The CBN also
established the N200 billion intervention funds for refinancing and restructuring banks facilities
to the manufacturing sectors which was aimed at fast tracking the development of manufacturing
sectors and boosting access to credit by the sector. Similarly, the Federal Government of Nigeria
(FGN) through the Bank of Industry (BOI) established the N5 billion Special Intervention funds
for Micro Small Medium Enterprises (MSMEs) to stimulate economic activities in the SME sub-
subsector to drive industrialization and job creation.

Deposit Money Banks (DMBs) serves as veritable source in which credits are channeled
to different sectors of economy through their intermediation role. Given their intermediation role,

1
the FGN and CBN intervention funds for the manufacturing sector and other subsectors are
channeled through DMBs (as participating banks). Most of these funds are priced at single digit
rate (9 percent and below). In addition to the intervention funds, private sector deposits/funds are
another important source of credit DMBs lend or channel to the manufacturing sector for
investments purposes. These funds are however priced at double digit averaging 16.9% for prime
lending rate and 31.09% for maximum lending rate (CBN, 2018). Despite the continuous policy
strategy by the government to attract credits to the industrial sector, the sector has remained
unattractive to the DMBs as credit disbursed to the sector remain relatively low (Ogar, Nkamare,
and Effiong, 2014). Accordingly, Edirisuriya (2018) posit that manufacturing in Nigeria is
challenged with the problem of accessing credits at low lending rates (single digits) for
productive investment. Arising from the above, could the lackluster performance of
manufacturing sector in Nigeria be attributed to the high cost of funding which has impeded its
much-desired growth and contribution to the industrial output? It is against this backdrop, that
this study set out to examine the effect of Deposit Money Banks (DMBs) credit on the industrial
output in Nigeria.

1.2 Statement of the Problem

Bank credit can be described as a process of making fund available to another sector of
the economy based on some agreed terms in respect of repayment with interest. Loan may be
simple, fixed payment, coupon bond and discount bond. It is important to observe that Nigerian
government’s effort to industrialize her economy has made her to obtain series of bank credit
(loan) from outside world like Paris Club, London Club, World Bank, International Bank for
reconstruction and Development (IBRD). Therefore, it would be scholarly acknowledged to
study the effect of bank credit on industrial performance in Nigeria. It is obvious that industrial
sector needs fund for either working capital or for business expansion in order to boost its
productivity. Dualism in the Nigerian financial market inhibits proper channel of funds for
investment that to augment industrial output. The prevalence of the informal financial market
such as daily contribution, may be attributed to the traditional structure of the economy thereby
retarding industrial performance in terms of its productivity and efficiency to engender economy
growth. Another argument against bank credit is stringent conditions and requirements that must

2
be met before bank credit could be granted. Muhammed Yunus (2011) opined that lack of access
to credit on the part of the poor was one of the key constraints on their economy progress, a
conclusion that has been supported by later studies from around the developing world. The
conditions of lending such as character, capability, collateral, and confidence made bank credit
not to be accessible by the industrialists. It is also observed that the cost of bank credit to the
industrialist is so enormous as a result of poor infrastructure and inadequate intermediate goods
in Nigeria. Hence, the industrialists end up without achieving corporate primary target of
maximizing profit. Also, government policies on the bank credit have failed to achieve their set
targets. The study examine the effect of deposit money bank credit on industrial output in
Nigeria.

1.3 Research Questions

The following research questions guided the study.

i. To what extent does deposit money bank credit affect Industrial output in Nigeria?
ii. To what extent does inflation affect Industrial output in Nigeria?
iii. To what extent does the Lending Rate affect Industrial output in Nigeria?
iv. To what extent does money supply affect Industrial output in Nigeria?

1.4 Objectives of the Study

The main thrust of this research is to take an objective assessment of the controversy surrounding
the effect of Deposit Money Bank Credit on Industrial Output in Nigeria.
The main objective of this study are:
i. To examine the deposit money bank credit on Industrial output in Nigeria.
ii. To determine the inflation on the Industrial output in Nigeria.
iii. To ascertain the impact of Lending rate on Industrial output in Nigeria.
iv. To determine the money supply on Industrial output in Nigeria.

1.5 Research Hypotheses

Hypothesis One
H0: Deposit Money Bank Credit (DMBL) have no significant relationship with Industrial
output (MO) in Nigeria.

3
 Hypothesis Two
Ho: There is no significant relationship between Inflation rate (INFL) and Industrial output in
Nigeria.
Hypothesis Three
Ho: Lending Rate have no significant relationship with industrial output in Nigeria.
Hypothesis Four
Ho: Money Supply (MS) have no significant relationship with Industrial output (MO) in
Nigeria.

1.6 Scope of the Study

The study essentially focuses on effect of Deposit Money Bank Credit on Industrial
Output in Nigeria. The study use central bank of Nigeria (CBN) statistical Bulletin as a case
study. It will cover the period year 2005 – 2020.

1.7 Significance of the study

The findings of this study would be of importance to industrialists, government and
researchers on the relationship between bank credit and industrial performance. It was
discovered from literature that productivity is a direct function of capital and most of the loan to
industrial sector in Nigeria comes from banks. It was also discovered that both individual
industrialists and government parastals financed their businesses with bank credit. Then, it is
necessary to find out the reaction of productivity of industries to the policy of bank credit.

4
 CHAPTER TWO

LITERATURE REVIEW

2.1 Conceptual Framework

2.1.1 Deposit Money Banks (DMB)
Deposit Money Banks (DMB) are short and medium-term lenders. But in the recent
decades they have expanded this role to include the extension of long-term credits especially
through loan syndication (Tawose, 2018). Banks’ functions vary across countries and
institutions. For example, specialized banks are known to have created to deal specifically with
certain problems of economic development. In 2010, universal banking was repealed by CBN
which necessitated the re-introduction of Merchant banks, Commercial banks and Specialized
banks like microfinance banks, development banks, non-interest banks, and mortgage banks.
Commercial banks are licensed institutions with banking activities across region, nation and
international communities while banking activities relegated to region or nation only are carried
out by non-interest banks authorization by the CBN issues overtime. Example of other banks are:
Bank of Agriculture (BOA) and the Bank of Industry (BOI) etc. Merchant banks are institutions
that provide finance and credit to non-retail customers and are authorized to take deposit from
any natural or legal persons not below the sum of one hundred million naira per tranche or other
such minimum amount as may be prescribed by the CBN from time to time (CBN, 2010).
According to Adekanye (1983), the cannon of lending can be summarized into 6 C's.
They include: Character: customer's willingness to meet obligations when due; Capacity:
customers' ability to settle financial obligations. Which is derived from well analyzed financial
(cash flow) position of the firm; Capital: measures the customer's financial reserve which
provides an indication of the customer meeting obligation when necessary; Collateral: assesses
the value of pledged assets and determine their monetary value and also ensuring that they are
free of encumbrance; Condition: the position of being affected by prevailing economic situations
and Confidence: measures the faith of lender in the five C's discussed. Banks are always required
to prepare a comprehensive credit policy duly approved by their Board of Directors which
should, inter alia cover loan administration, disbursement and appropriate monitoring mechanism
etc. The policy should be reviewed at least every three years (CBN, 2010). The credit policies
are important to banks because they help mitigate risk, sets out procedures for determining
acceptable risk to onboard, and define procedures in dealing with credit relationship.

5
Banks credit are total amount of loans (advances) granted by the banking sector (CBN, 2003).
Most bank credit in developing economies like Nigeria are accompanied with collateral that
enforces repayment so as to avoid default. Credit aid channeling of savings vis-a-vis investment
facilitation thus boosting growth in the economy. Invariably, helping to fulfil the intermediation
role of banks, which is important for the growth of the economy. Business loans and advances
reflects bank credits to the industrial sector. According to Sanusi (2009), financial assistance
granted to organization or firms in need of financial resources for business enhancement if called
business loan.

2.1.2 Bank Credit, Small and Medium Enterprise (SMES) in Nigeria

The lending by the Nigerian banking industry to SME’s increased by 600% due to
favourable business condition, low interest rates and arrival of new technologies in the
[Link] Chukwuma Soludo, former CBN Governor, said that the banks credit in
Nigeria for SMEs has increased by 600% from N35 billion (US $ 0.30 billion) in 2003 to N204
billion (US $1.73 billion) in 2007, as reported by “All Africa”.According to Professor Soludo,
the growth in credit in the Nigerian banks showed that the consolidation of banks had a very
positively influence on the core private and real sector. The Nigerian banks’ credit to the private
sector has gone up from about N1,191.5 billion (Us $10.12 billion) in 2003 to N1,150.9 billion
(US $ 9.77 billion) in 2004, and then to N1,950.4 billion (US $ 16.56 billion) in 2005, N2490.4
billion (US $21.15 billion) in 2006, and N4,941.5 billion (US $ 41.97 billion) in 2007, recording
year on year growth rates of 26.6%, 29.3% 27.7% and 98.4% correspondingly. The primary
reason for the growth of the Nigerian banking industry is attributed to the growing economy of
the nation along with the development of infrastructure in the Nigerian banking sector. A number
of attractive policies like low interest rate, together with easy availability of loans, are also
responsible for incredible growth in the Nigerian banking industry. Besides, the various
innovative technologies in the banking industry, like mobile banking, payment through credit
and debit cards as well as net banking are also drawing a number of customers towards the
banks. In addition, CBN increased its loan rates or monetary policy rate (MPR) from 10% to
10.25% on June 3, 2008 to control the high inflation sparked off by mounting food prices all
over the world. Inflation in Nigeria stood at 7.8% in April 2007, but shoot up to 8.2% in March
2008.

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2.1.3 Monetary Policy Guidelines and Small Scale Industries

Before the promulgation of the Nigeria Enterprises Promotion Decree in 1972, the
government had found it necessary to direct financial institutions through the Central Bank of
Nigeria’s (CBN) credit guidelines and extend a certain percentage of their total loans and
advances to indigenous borrowers i.e business in which Nigerian equity participation is not less
than 50%. The percentage allocation increased progressive from 35% in the late sixties to 90%
for fiscal year 1984. As a result of the indigenization decree, most business became at least 60
percent owned by Nigerians. It was therefore possible for banks to activate full compliance with
the directive on lending to indigenous borrowers without necessarily extending facilities to small
scale enterprises, which the policy was originally designed for.

2.1.4 Self-Help Groups (SHGs) Linkage Program

Self-Help Groups (SHGs) are voluntary grass-root organizations at the group, community
or local level. They have functioned for centuries in Nigeria, meeting a variety of people’s needs
for goods and services. The SHG in Nigeria include credit associations like the ‘Esusu’ or
“Adashi’ which works through small savers-borrowers to make small loans available to
members. In 1991, however, the CBN formalized the SHGs to promote group synergy, cross
guarantees, peer-group pressure and more importantly, allow loan applicants under the ACGSF
to overcome the problem of collateral often demanded by banks. This initiative was also
introduced to raise the level of bank credit channeled to the rural sector of the economy,
inculcate the habit of savings by the rural poor, reduce the cost of loan administration as well as
ensure the viability and sustainability of agricultural credit delivery. A total of 413 SHGs was
formed in the first 12 years of the program, while a total of N12.52 million was mobilized as
savings (CBN, 2009). Apart from the target of increasing agricultural support especially for the
rural poor, the program has some direct bearings on poverty alleviation and wealth creation.

7
2.1.5 Trust Fund Model (TFM)
The TFM was introduced in 2001 as a strategy for reducing the exposure of banks that
grant agricultural loans to small scale farmers without collateral. The process involves the
intermediation by some parties willing to pledge funds in the bank as cash or treasury
instruments as security for loans to target borrowers. The parties could be Federal or State or
Local Government, religious bodies, Non-governmental organizations (NGOs), companies,
especially those in the oil sector etc. For instance, the total amount placed under the scheme by
the various stakeholders as at end-December, 2008 stood at N4.887 billion, with the Government
Ministries, Departments and agencies having the highest of N2.361 billion. As a scheme
managed by the CBN, it shows the impact of the Bank on the 7-point agenda of government in
creating income and wealth for the rural poor
2.1.6 Interest Drawback Program (IDP)
Following the high incidence of loan default under the ACGSF, the IDP was introduced
in 2003 to reduce the effective borrowing rate under the scheme without the complication of
introducing dual interest rates. The objective of the program is to encourage prompt loan
repayment as well as reduce the cost of loan recovery. The IDP is funded by the Federal
Government and the CBN in the ratio of 60:40 with capital base of N2 billion. The operation of
the program is such that farmers could borrow from the lending banks at a market-determined
rates, while the program pays interest rebate of a determined percentage of 40 per cent of interest
repayment to farmers who were to repay their loans as at when due. As at endDecember 2008, a
total of 71,981 IDP claims valued at N275.2 million had been paid to the eligible farmers (CBN,
2009). To this end, this is another major contribution of the CBN in encouraging agricultural
production as well as wealth creation

8
2.1.7 Small and Medium Enterprises Scheme (SMEs)
The growth of the small and medium scale enterprises have been recognized as effective
vehicles for the promotion of accelerated industrial development, employment, income
generation and poverty reduction in Nigeria. For this reason, the Federal Government launched a
programme to enhance the allocation of credit to SMEs, in addition to some of the measures
taken by the CBN in acting as growth catalyst for the SMEs, The Federal Government of Nigeria
secured a loan from the African Development Bank (AFDB) known as SME I in an initial
attempt to use the SMEs model as a framework to stimulate growth, generate employment and
create wealth. The scheme during the period, however did not achieve its stated objectives. The
scheme was managed by the defunct Bank for Commerce and Industries. For this reason, the
CBN secured a World Bank facility known as the SME II, for on-lending to small scale
enterprises, while the loan had tenure of 15 years. Disbursements commenced in 1990 and the
bank was responsible for loan recoveries and remittance of same to the World Bank. By the time
operations of the scheme stopped in 1996, the sum of N2.0 billion (USD $ 107.2 million) had
been disbursed to 194 projects through 27 participating banks (CBN, 2009). Following the
transfer of the debt management function from the CBN to the newly-established Debt
Management Office, in 2000, the Federal Ministry of finance assumed responsibility for
servicing the facility with effect from that year.

2.2 Theoretical Framework

The critical role of Deposit Money Bank (DMBs) credits in stimulating industrial sector
output cannot be overemphasized. This is because DMBs are at the center of financial
intermediation of mobilizing funds from surplus units to deficit units of the economy for
productive purpose. The intermediation role of DMBs is therefore important to the performance
of the industrial sector output. However, the dearth of credit and high lending rate to the
industrial could be attributed to the abysmal performance of the sector. This study is therefore
been carried out on the strength of the following theories: Loan pricing theory and the Neo-
classical theory of interest rate.

2.2.1 Loan Pricing Theory

The loan pricing theory affirm the inability of banks to set high interest rate. For instance,

9
high banks interest rates may induce adverse investment selection problems due to the narrowing
of investment to only potential high-risks borrowers willing to accept it. High interest rate loans
can instigate high risky projects/investment which can cause moral hazard behaviour of
borrowers (Chodecai, 2004). Thus, the potential borrowers who are the most likely to default
(adverse outcome) and create non-performing loans for the DMBs balance sheet are the most
likely to be selected and granted credit because they aggressively pursue these loans with well
packaged business plans and proposals likely to meet the credit policy criteria of the banks. Most
of these loans when disbursed turn out to be bad credit risk (non-performing loan or toxic assets)
due to the adverse selection process. Therefore, lenders may decide not to extend loan facilities
(risk asset) even though they are inundated with viable business proposals in the marketplace to
create good credit risks (Magaji, 2017). Asymmetrical information necessitates moral hazard
which might dictate borrowers' activities into immoral engagements to meets requirement of
loans (Ajayi, 1981).

2.1.2 Neo-Classical Theory

The Neo-Classical Theory of Interest Rate: The neo-classical or the loanable fund theory
of interest as propounded Wicksell (Swedish Economist) was later developed and supported by
several leading economists like professor Robertson, bertil Ohlin, Lindhal and Myrdal. However,
the theory in its present form is associated with Professor Robertson. According to the theory,
struggles between demand and supply of loanable funds influences the interest rate. In the
markets, there are those who supply loanable funds and those who borrow them. Interest rate will
be such as shall bring about equilibrium between the loanable funds’ demand and supply. The
theory of loanable fund is a distinctive improvement on the old classical theory of interest
because the term ‘supply of loanable funds’ is wider in scope and includes not only savings out
current income but also bank credit, dis-hoarding and dis-investment. Bank loans represents
important funds, which are available on payment of interest by the borrower. Since loanable
funds theory is more comprehensive, it is often referred to as real as well as monetary theory of
interest. This theory is just the one of the two general approaches that have been followed in
developing the modern monetary theory of interest rate. The loanable funds theory provides a
link between deposit money bank credits and industrial output, because the theory buttresses that
borrowing by business for investment is determined by the cost of credit (interest rate).

10
In line with the loan pricing theory, interest rate set by banks as cost of credit facility to
customers should be commensurate with the risk appetite of the borrower. This will place the
financial institutions in a better position to perform its traditional function of financial
intermediation. The attendant benefit of this is increased credits disbursement to all the
productive sectors of the economy. In Nigeria, the manufacturing sector has not attracted the
much-needed funding to enhance its output.

2.3 Empirical Review

Andabai and Eze (2018) investigated a causality between bank credit and manufacturing
sector growth in Nigeria for the period of 1990- 2016. Using VECM and Johansen co-
integration, the study revealed that bank credit had no short-run and long run equilibrium
significant relationship with manufacturing sector growth in Nigeria. Causality test indicated that
bank credit had no causal relationship with manufacturing sector growth in Nigeria. The study
thus conclude that bank credit had not significantly contributed to manufacturing sector growth
in Nigeria.

Ugwuanyi and Utazi (2017) examined the growth of manufacturing sector as a reaction to
commercial bank credit in Nigeria for the period between 1980 - 2015. Using the OLS technique
and ARDL for variables like; manufacturing value added (MVA), lending interest rate (LINT),
exchange rate (EXR) and bank deposits (BD); the study showed that lending interest rate and
exchange rate are the major constraints to manufacturing sector of Nigeria economy. The two
variables negatively and significantly impacted on the economy in the first model and second
model. This implies that manufacturing sector growth in Nigeria will be possible only when bank
lending/interest rate and exchange rate is low to allow investors access to capital for investment
and acquisition of machines and other equipment’s for manufacturing in Nigeria.

Ebele and Iorember (2017) examined the impact of inflation and interest rate except loans
and advances and broad money supply on manufacturing sector in their study of loan interest rate
components and manufacturing sector in Nigeria. This is contradicted by the position of Tomola,
Adebisi and Olawale (2012), Ebi and Emmanuel (2014) and Ogar, Nkamere and Effiong (2014)
who revealed that commercial bank credit had a significant relationship on the manufacturing
sector.

11
 Akpan, Yilkudi and Apiah (2016) investigate the impact of lending rate on output of the
manufacturing sub-sector using the Vector Error Correction Model (VECM) and annual data
from 1981-2014. The empirical results indicated that high lending rate had negative impact on
manufacturing output in the long-run. This suggests that increase in lending rate undermines
manufacturing output, thus retarding growth in the real sector. This finding is line with Hassan
(2016) whose multiple linear regression techniques study revealed that only the agricultural
sector has enjoyed much of Bank credit with positive impact on the Gross Domestic Products
(GDP) while other sectors had limited attention in terms of bank credit to spur development in
their sector.

Tawose (2012) investigating the effect of bank loans and advances on industrial
performance in Nigeria between 1975 to 2009 and using Johansen and ECM discovered that
industrial performance co-integrated with all the identified exploratory variables. Industrial
sector as dependent variable was proxied by real GDP, while money deposit banks’ loan and
advances to the industrial sector, aggressive saving, interest rate, and inflation rate were
independent variables. This suggested that the behavior of real GDP contribution to the industrial
sector in Nigeria was significantly explained by the deposit money bank credit facilities.

Okafor, Ogbonna and Anaemena (2020) examined monetary policy and the industrial
output of selected developing African economies using ARDL regression. The study found that
monetary policies has significant impact on industrial output of Nigeria, South Africa and
Kenya. However, the study also showed panel results that revealed that monetary policy has
insignificant influence on industrial output in Africa. Based on these divergent findings, this
study intends to ascertain the role of Domestic Money Bank credit on industrial output in
Nigeria.

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 CHAPTER THREE
METHODOLOGY
3.1 Introduction
The focus of this chapter is on the methodology employed in this study. The description of
the research method justifies the findings of the study. Specifically, the chapter discusses the
nature, sources of data collected, and the techniques of data analysis and model specification.

3.2 Model Specification

This study adapted the model used by Ogar, Nkamare, and Effiong (2014) but however
considered a longer period study from 2005 to 2020. The study retained the components of
industrial output as a function of deposit money bank loans, lending rates and the control
variables as money supply (MS) and inflation (INFL). The model is expressed in a mathematical
form as follows:

Mo = f (DMBL, LR, MS, INFL)......................................................(1)

Mo = bo + b1DMBL + b2LR+b3MS + b4lNFL+U......................... (2)
Where:
Mo = manufacturing output
DMBL = deposit money bank loans
LR= deposit money bank lending rate
MS = broad money supply
INFL = inflation rate
The stochastic or explicit form of the model is expressed as;
bo =Regression constant
bi-b4 = Unknown parameters or coefficients
U = stochastic error
On a priori, bi is expected to be positive because an increase in loans will lead to increase in
the manufacturing output. (bi >0). Similarly, b3 is expected to be positive, hence an increase
in broad money supply will lead to increase in industrial output(b3>0). On the other hand, b2
is expected to be negative. This is because increase in lending rate will discourage borrowing
thereby leading to reduction in the industrial output(b 2<0). Similarly, b4 is expected to be
negative in that, increases in inflation potentially reduces the value of investable funds
13
thereby leading to a reduction in the level of output.

3.3 Sources of Data

This study intends to use time series data (Secondary data). The data used in this research
were obtained from sources such as: Central Bank of Nigeria (CBN) statistical bulletin and
National Bureau of Statistics (NBS various issues) from 2005-2020, Journals, textbooks,
unpublished papers, seminar papers and Articles.

3.4 Method of Data Analysis

The study intends to use Ordinary Least Square (OLS) estimation technique with the aim
of E-view package was employed. On demonstrating effect of Deposit Money Bank Credit on
Industrial Output in Nigeria. Industrial Output was regressed on deposit money bank loans,
lending rates and the control variables as money supply (MS) and inflation (INFL).
3.5 Definition of Variable

Deposit Money Bank Loans: these are loans given by resident depository corporations and
quasi corporations which have any liabilities in the form of deposits payable on demand,
transferable by cheque otherwise usable for making payments.
Lending Rate: is the amount charged by lenders for a certain period as a percentage of the
amount lent or deposited. The total interest on the amount or the principal sum is determined by
the duration of time over which the amount is deposited or lent. Most loans use simple interest.
Money Supply: is the total amount of money—cash, coins, and balances in bank accounts—in
circulation. The money supply is commonly defined to be a group of safe assets that households
and businesses can use to make payments or to hold as short-term investments
Inflation Rate: is the percentage increase or decrease in prices during a specified period,
usually a month or a year. The percentage tells you how quickly prices rose during that period.

14
 CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.1 Introduction
This section is divided into three subsections. The unit root test is presented first,
followed by Parsimonious Regression analysis. This leads to the presentation of the ARDL
Bound test for long run study.
4.2 Data Presentation and Analysis
The table below shows the variables generated from CBN bulletin from 2005 to 2020.
Table 1 Deposit Money Bank Loans (DMBL), Deposit Money Bank Lending Rate (LR),
Money Supply (MS), Inflation Rate (INFL)
YEAR DMBL (B N) LR (B N) MS % INFL %
2005 16.11 17.95 24.35 17.86

2006 24.27 17.26 43.09 8.23

2007 27.26 16.94 44.24 5.39

2008 46.52 15.14 57.78 11.58

2009 15.59 18.99 17.21 12.56

2010 16.56 17.59 6.91 13.72

2011 19.98 16.02 15.43 10.84

2012 22.58 16.79 16.37 12.22

2013 739.92 16.72 1.29 8.48

2014 988.59 16.55 -2.01 8.06

2015 29.17 16.85 6.06 9.01

2016 43.78 16.87 17.78 15.68

2017 530.99 17.56 2.33 16.52

2018 200.07 19.33 12.13 12.09

2019 202.59 15.53 9.16 11.4

2020 107.52 12.32 30.57 11.08

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SOURCE: CBN BULLETIN 2020

Test for Stationarity

Table 2: Unit Root Tests for Stationarity
Variables ADF TestCritical Values P-value Order ofRemarks
Statistics Integration
D(DMBL) -4.050865 -2.945842 0.0033 I(1) Stationary @ 5%
D(INFL) -5.585463 -2.945842 0.0000 I(1) Stationary @ 5%
D(LR) -7.789069 -2.945842 0.0000 I(1) Stationary @ 5%
D(MO) -2.749366 -1.950687 0.0074 I(2) Stationary @ 5%
D(MS) -4.757827 -3.540328 0.0026 J(1) Stationary @ 5%
Source: Researcher’s E-view 10.0 Computation

The Augmented Dickey-Fuller Unit root test was used for the study. The results revealed
that all the variables were found to be stationery at order one (1) except MO which was
stationary at order two (2). At both First and Second difference as reported, the test statistics was
more negative than the critical value at the set level of significance. The reported P-values were
all less than 0.05 chosen level of significance for which cause, the Null Hypothesis of the
presence of unit root in all the variables are convincingly rejected. Since, the variables were
integrated of mixed order, the study will test for long-run relationship using ARDL bounds test
for cointegration study.

16
Table 3: ARDL Parsimonious Regression

Dependent Variable: MO
Method: Least Squares
Sample (adjusted): 2005 2020
Included observations: 34 after adjustments
Variable Coefficient Std. Error t-Statistic Prob.
MO(-2) 0.837794 0.131585 6.366935 0.0000
DMBL(-1) -0.369010 0.072410 -5.096124 0.0000
DMBL(-2) -0.418776 0.075688 -5.532921 0.0000
DMBL(-3) -0.304308 0.069633 -4.370204 0.0002
INFL 0.504829 2.072609 0.243571 0.8097
INFL(-4) 1.552929 2.079096 0.746925 0.4627
LR -1.357376 7.731726 -0.175559 0.8622
MS(-1) 0.232844 0.095751 2.431780 0.0232
MS(-2) 1.252519 0.123121 10.17307 0.0000
MS(-4) -0.685291 0.123038 -5.569747 0.0000
C 23.25734 156.9986 0.148137 0.8835
R-squared 0.998203 F-statistic 1277.267
Adjusted R-squared 0.997421 Prob (F-statistic) 0.000000
Durbin-Watson stat 1.822118
Source: Computation by author usingE-view10.0
The results of the t-statistics for the four variables: Deposit Money Bank Loans (DMBL);
Inflation Rate (INFL); Lending Rate (LR); and Money Supply (MS) including their probability
values are -5.096124 (0.0000), -5.532921 (0.0000),-4.370204 (0.0002) all for DMBL at lag 1, lag
2 and lag 3 respectively, while MS at lag 1, lag 2 and 3 show 2.431780 (0.0232), 10.17307
(0.0000),-5.569747 (0.0000) respectively. These results prove that only DMBL and MS at their
lagged periods have significant relationship with Industrial output (MO). However, INFL and LR
at 0.243571 (0.8097) and -0.175559 (0.8622) respectively have insignificant relationship with
MO in Nigeria. The R-squared and Adjusted R-squared of 0.998203 and 0.997421 further prove
that variation in the output of Manufacturing (MO) are mostly captured in the changes in the
components of DMBL, INFL, LR and MS to the tune of 99%. This implies that variation in the
components of the variables combined by 1 will prove changes to the tune of 99% in MO. The
1.822118 as revealed by Durbin Watson statistics showed that there is absence of autocorrelation
in the study and the findings of our study is fit and accepted for policy implementation

17
Table 4: ARDL Bound test and Long Run Result

Null Hypothesis: No levels

F-Bounds Test relationship
Test Statistic Value Signif. I(0) I(1)
Asymptotic:
n=1000
F-statistic 4.145014 10% 2.2 3.09
K 4 5% 2.56 3.49
2.5% 2.88 3.87
1% 3.29 4.37
Finite
Sample:
Actual Sample Size 36 n=40
10% 2.427 3.395
5% 2.893 4
1% 3.967 5.455
Finite
Sample:
n=35
10% 2.46 3.46
5% 2.947 4.088
1% 4.093 5.532
Source: Computation by author usingE-view10.0
The results of the ARDL bounds test shown in table 3 indicates that the F-statistic with a
coefficient of 4.145014 is greater than the lower bound value of 2.56 and upper bound
value of 3.49 at 5% level of confidence show long run relationship in the study. Thus, a
long run position is established between deposit money bank credit and industrial output
in Nigeria.

Test of Hypothesis One (1)

H0: Deposit Money Bank Credit (DMBL) have no significant relationship with Industrial
output (MO) in Nigeria.
The component of Deposit Money Bank Credit (DMBL) has t-statistic values of -
5.096124, - 5.532921,-4.370204 and p-values of 0.0000, 0.0000, 0.0002 at lag 1, lag 2 and
3 respectively at 5% significance level and were found to have significant relationship
with the Nigerian industrial output. However, this significant relationship was negative
implying that DMBL negatively influence the industrial output in Nigeria. The study
therefore holds that industrial output was boosted but negatively and significantly by

18
 deposit money banks credits within the period of the study.
Decision rule: We reject null hypothesis of no significant relationship. Thereby, accepting
the alternative that there is significant impact of DMBL on Nigerian manufacturing
output.
Test of Hypothesis Two (2)
H0: There is no significant relationship between Inflation rate (INFL) and Industrial output in
Nigeria.
The component of INFL has t-statistic value of 0.243571, 0.746925 with p-values of
0.8097 and 0.4627 and was found to have an insignificant relationship with the Nigerian
Industrial output but the impact was both insignificant and positive for INFL at 5%
significance level since its p- value was well above 0.05 at both normal and lag 4 period.
The study noted that past level of INFL position also influenced the present industrial
output position in Nigeria as indicated in the results but insignificantly. The parsimonious
regression result holds that the components of INFL boosted the Nigerian industrial
output but insignificantly within the period of the study.
Decision rule: We accept the null hypothesis of no significant relationship between INFL
and Nigerian manufacturing output.

Model Three
Test of Hypothesis Three (3)
H0: Lending Rate have no significant relationship with industrial output in Nigeria.
The component of Lending rate (LR) has t-statistic value of -0.175559, and p-values of
0.8622 and was found to have an insignificant relationship with the Nigerian industrial
output. The impact was however both insignificant and negative for LR at 5%
significance level since its p- value was well above 0.05. The study noted that past level
of lending rates positions also influenced the present industrial output negatively in
Nigeria as indicated in the results. The study therefore holds that LR influence the
Nigerian industrial output insignificantly within the period of the study.
Decision rule: We accept the null hypothesis of no significant relationship between
Lending Rate (LR) and Nigerian Manufacturing Output.

19
 Test of Hypothesis Four (4)
H0: Money Supply (MS) have no significant relationship with Industrial output (MO) in
Nigeria.
The component of Money Supply (MS) has t-statistic values of 2.431780, 10.17307, -
5.569747 and p-values of 0.0232, 0.0000, 0.0000 for lag 1, lag 2 and lag 4 respectively at 5%
significance level and was found to have significant relationship with the Nigerian industrial
output. However, this significant relationship was negative at lag 4 suggesting that MS
negatively influence the industrial output in Nigeria after lagging of 4 years. But the
significant relationship was positive at lag 1 and lag 2 signifying that after 1-year and 2-years
lag, the component of MS positively influences the industrial output in Nigerian significantly.
Thus, the study holds that industrial output was boosted significantly by money supply within
the period of the study. Decision rule: We reject null hypothesis of no significant relationship
between Money Supply and Industrial output in Nigeria.
4.3 Discussion of Findings,
From table 2 to 4, the results showed the conditions of our findings and the position of
the independent variables on the dependent variable. The normality results present that all the
variables and findings of the study are normally distributed. Four hypotheses form the basis of
the study and the ADF unit root test showed that all the variables are stationary and good for
analytical procedures. The ARDL parsimonious regression which was necessitated by the
presence of different levels of stationarity showed that the four variables facilitated both positive
and negative influence on industrial output and the result also showed the presence of significant
long run relationship in the study. Signifying that all the deposit money bank loans and other
components like money supply, inflation and lending rate variables combined were able to
facilitate long run significant change on the industrial output in Nigeria. The short run dynamics
proved that only DMBL and MS variables can facilitate significant change on the industrial
output with DMBL showing negative influence while MS had positive impact. The inflation and
lending rate components proved that they were unable to significantly distinguish any major
change in the industrial output within Nigeria for the period under study. However, the overall
adjusted r-squared proved that a large proportional change manifested on industrial output by
virtue of an increase in the variables to the tune of 99.8% approximately in Nigeria. The Durbin
Watson statistics result (1.822) further approved the acceptability and reliability of the result of

20
the study for the Nigerian economy.
The results inclusively showed that deposit money bank credit or loans and money
supply facilitates significant change in industrial output in Nigeria. The findings thus imply
that deposit money bank loans and money supply enhance industrial output in Nigeria within
the period under review. The result of the study is supported by the findings of Ebi and
Emmanuel (2014) whose study revealed that commercial banks credit improved industrial
output and a more robust support of our findings is Okafor, Ogbonna and Anaemena (2020)
who found a significant relationship both in the short run and long run between monetary
policy and industrial output for Nigeria, South Africa and Kenya. However, the panel data
study revealed that monetary policy was unable to significantly improve the industrial output
in Africa which is contrary to our findings. But the components of lending rate and inflation
rate proved to insignificantly improve the components of industrial output which have been
as a result of high cost of production, low infrastructural capacity, illiquidity,
misappropriation of funds among others. The findings of the study confirms that the central
bank's mandate of ensuring monetary and price stability through the use of policy instruments
to control inflation as well as its risk based pricing model policy issued to promote
transparency in pricing and setting rates with the ultimate goal of driving down lending rates
in Nigeria and boosting industrial output growth have not achieved the desired result. The
study noted that the accumulated years of infrastructural (power, road, energy etc) decay and
neglect by successive administrations (fiscal authority) in Nigeria could have contributed to
the high cost of doing business in the country and by extension high lending rate. The cost of
doing business (indirect cost) is a cost element in the cost components of determining lending
rates in Nigeria.

21
 CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary
In this study, we examined the effect of Deposit Money Bank Credit on Industrial Output
in Nigeria from 2005-2020. The result also showed the presence of significant long run
relationship in the study. Signifying that all the deposit money bank loans and other components
like money supply, inflation and lending rate variables combined were able to facilitate long run
significant change on the industrial output in Nigeria. The short run dynamics proved that only
DMBL and MS variables can facilitate significant change on the industrial output with DMBL
showing negative influence while MS had positive impact. The inflation and lending rate
components proved that they were unable to significantly distinguish any major change in the
industrial output within Nigeria for the period under study. However, the overall adjusted r-
squared proved that a large proportional change manifested on industrial output by virtue of an
increase in the variables to the tune of 99.8% approximately in Nigeria. The Durbin Watson
statistics result (1.822) further approved the acceptability and reliability of the result of the study
for the Nigerian economy. The results inclusively showed that deposit money bank credit or
loans and money supply facilitates significant change in industrial output in Nigeria. The
findings thus imply that deposit money bank loans and money supply enhance industrial output
in Nigeria within the period under review. The result of the study is supported by the findings of
Ebi and Emmanuel (2014) whose study revealed that commercial banks credit improved
industrial output and a more robust support of our findings is Okafor, Ogbonna and Anaemena
(2020) who found a significant relationship both in the short run and long run between monetary
policy and industrial output for Nigeria, South Africa and Kenya. However, the panel data study
revealed that monetary policy was unable to significantly improve the industrial output in Africa
which is contrary to our findings. But the components of lending rate and inflation rate proved to
insignificantly improve the components of industrial output which have been as a result of high
cost of production, low infrastructural capacity, illiquidity, misappropriation of funds among
others. The findings of the study confirms that the central bank's mandate of ensuring monetary
and price stability through the use of policy instruments to control inflation as well as its risk
based pricing model policy issued to promote transparency in pricing and setting rates with the
ultimate goal of driving down lending rates in Nigeria and boosting industrial output growth

22
have not achieved the desired result. The study noted that the accumulated years of
infrastructural (power, road, energy etc) decay and neglect by successive administrations (fiscal
authority) in Nigeria could have contributed to the high cost of doing business in the country and
by extension high lending rate. The cost of doing business (indirect cost) is a cost element in the
cost components of determining lending rates in Nigeria.

5.2 Conclusion
Therefore, the study concludes that the well thought-out policies of the central bank
such as the risk based pricing model cannot achieve its intended purpose without the
collaboration of the fiscal authorities noting that unless deposit money bank loans sourced
especially from private sector deposits achieve a single digit lending rate and supported by a
well-developed infrastructural system in Nigeria, optimal industrial output growth may
remain a challenge.

5.3 Recommendations
The study therefore recommends improved policy measures by the central bank
towards controlling inflation and reducing inflationary pressure on manufacturing firms'
profitability and ability to meet contractual obligations with the DMBs as and when due.

The increase in budgetary allocation and releases for capital investments to over
global average would have a direct impact of driving down the cost of doing business and
lending rate in Nigeria and ultimately boost industrial sector borrowings and investments.

Finally, as a stop gap measure, the fiscal authority should intensify efforts at
increasing the quantum of intervention funds to equal or over trillion naira, priced at
single digit interest and targeted exclusively to the manufacturing sector thereby boosting
its access to credit, enhancing its productivity and boosting industrial output in Nigeria.

5.4 Limitation of the Study

In the course of this study certain limitations were encountered which in one way of the
other restricted this study. Also, include is the cost involved in the study, the distance of the case

23
and time factor involved in the project since the work is an academic one and stipulated time was
given for completion. The major limitation encountered in this study is the lack of sufficient time
to carry out the research work, which will hinder getting adequate information. Another
constraint is money, lot of money will be expanded on the research to get current and vital in
formations and the researcher is handicapped in this area.

24
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28
 EFFECT OF DEPOSIT MONEY BANKS CREDIT ON
INDUSTRIAL OUTPUT IN NIGERIA (2005-2020)

KAMILUDEEN, AJARAT OLAIDE

20/BAF/0871

BEING A PROJECT SUBMITTED TO

THE DEPARTMENT OF BANKING AND FINANCE,

FACULTY OF FINANCIAL STUDIES,

OSUN STATE POLYTECHNIC, IREE.

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF

NATIONAL DIPLOMA (ND) IN BANKING AND FINANCE

November, 2022

29
 CERTIFICATION

This is to certify that this research work was carried out by Kamiludeen, Ajarat O. 20/BAF/0871
under the supervision of Mr. Ogunwale S. J. as a requirements for the award of National
Diploma (ND) in Banking and Finance Department of Osun State Polytechnic, Iree, Osun State.

------------------------- --------------------------

MR OGUNWALE S. J. DATE

Supervisor

------------------------- ------------------------

MRS BABALOLA O. A. DATE

H. O. D.

30
 DEDICATION

I dedicate this project to Almighty ALLAH the most beneficent, the most merciful and
also to my caring parents Mr. and Mrs. Kamiludeen for their caring and support on me ever since
the day I was born. Thank you for always been there for me. I love you so much…

31
 ACKNOWLEDGEMENT

All praise and thanks to Almighty ALLAH, the beginning and the end, the master of the
universe, the one who spared my life and gives me the opportunity to be a living witnesses today.
I thank God for making this project to be a success, even throughout my days in school, it has
been God I really thank my heavenly father because without God I am nothing.

I express my profound gratitude to my supervisor Mr Ogunwale S. J., for his motherly

support and direction throughout the course and computing of this project work till the final
approval of the project and make us benefit from her knowledge may the supreme God bless and
provide for her and her family.

I can't but express my sincere gratitude to our H.O.D in person of Mrs. O. A. Babalola.
and staff adviser, examination coordinator, teaching and non teaching staff in department of
Banking And Finance for the significant contribution towards the completion of the courses.

Profound gratitude goes to my loving, caring and darling parents Mr. and Mrs.
Kamiludeen for their support both financial, morally, prayers and love, may Almighty God
continue to be with them, protect them and Grant them long life in good health and wealth, show
his blessings on them and give them the grace to life to reap the fruit of their labour..(AMEN)

I also acknowledge the contribution of my siblings, my love, my colleagues and friends

in the field for their support and advice. May God continue to be with us All...

32
 ABSTRACT

The study examines the effect of Deposit Money Bank Credit on Industrial Output in Nigeria. The
objectives are to ascertain the relationship between deposit money banks credit, money supply,
inflation rate and lending rate on industrial output in Nigeria. The study employed time series
data covering 2005 to 2020, sourced from CBN statistical bulletin and subjected them to ADF,
ARDL Bound test and Parsimonious regression. The finding of the study revealed that deposit
money bank credit and money supply have significant relationship with industrial output in
Nigeria while Inflation rate and lending rate have an insignificant relationship industrial output.
Further revealing showed that deposit money bank credit impacted industrial output in Nigeria.
The findings therefore conclude that deposit money banks credit improve industrial output in
Nigeria. Hence, the study recommended the need for government to increase its budgetary
allocation for capital investments especially in infrastructure (power, roads and energy) which
will have direct impact in driving down lending rates to single digit, boosting access to credit by
the manufacturing sector, enhancing productivity and boosting industrial output in Nigeria

33
TABLE OF CONTENTS PAGES

Cover page i

Title page ii

Certification iii

Dedication iv

Acknowledgements v

Abstract vi

Table of contents vii

CHAPTER ONE: INTRODUCTION

1.1 Background to the Study 1
1.2 Statement of the Problem 2
1.3 Research Questions 3
1.4 Objectives of the Study 3
1.5 Research Hypotheses 3
1.6 Scope of the Study 4
1.7 Significance of the study 4
CHAPTER TWO: LITERATURE REVIEW

2.1 Conceptual Framework 5

2.1.1 Deposit Money Banks (DMB) 5
2.1.2 Bank Credit, Small and Medium Enterprise (SMES) in Nigeria 6
2.1.3 Monetary Policy Guidelines and Small Scale Industries 7
2.1.4 Self-Help Groups (SHGs) Linkage Program 7
2.1.5 Trust Fund Model (TFM) 8
2.1.6 Interest Drawback Program (IDP) 8
2.1.7 Small and Medium Enterprises Scheme (SMEs) 9
2.2 Theoretical Framework 9
2.2.1 Loan Pricing Theory 9

34
2.1.2 Neo-Classical Theory 10
2.3 Empirical Review 11
CHAPTER THREE: METHODOLOGY
3.1 Introduction 13
3.2 Model Specification 13
3.3 Sources of Data 14
3.4 Method of Data Analysis 14
3.5 Definition of Variable 14

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.1 Introduction 15
4.2 Data Presentation and Analysis 15
4.3 Discussion of Findings, 20
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary 22
5.2 Conclusion 23
5.3 Recommendations 23
5.4 Limitation of the Study 23
References 25

35