IMPACT OF CREDIT TO THE PRIVATE SECTOR ON ECONOMIC GROWTH IN NIGERIA

CHAPTER ONE

1. INTRODUCTION

1.1. Background of the Study

Credit to the private sector refers to the amount of loans or funds provided by the financial institutions to the private sectors, such as businesses, individuals, corperations etc. The relationship between credit to the private sector and economic growth has been a long-standing topic of interest in economics, particularly in the areas of developing countries. The private sector plays a vital role in driving economic growth, and access to credit is essential for it's Development.

Credit, defined as the provision of funds from lenders to borrowers, plays an important role in facilitating business operations, promoting investment, and driving economic expansion. In many economies, particularly in developing regions, the private sector is a significant contributor to overall economic activity, innovation, and employment. Thus, understanding how access to credit influences the private sector's performance is essential for formulating effective economic policies.

The private sector encompasses a wide range of businesses, from small and medium enterprises (SMEs) to large Corporations. This entities require adequate financing to invest in capital, hire employees and innovate. When credit is readily available, businesses can expand their operations, which in turn stimulates economic growth. However, the dynamics of credit markets are influenced by various factors, including the regulatory environment, the stability of financial institutions and the overall economic climate.

This study aim to explore the multifaceted relationship between credit to the private sector and economic growth, highlight the mechanism through which credit impacts business activities and economic outcomes. By examining the theoretical frameworks, empirical evidence and the challenges faces by businesses in accessing insights that can inform policy makers and contribute to economic strategies.

The Central Bank of Nigeria (CBN) recognizes that for the economy to function efficiently given structural rigidities, and for the private sector to develop and flourish, businesses need to have access to credit. In view of the scarcity of credit, coupled with the problems of inadequate infrastructure, huge skills gaps, and very large informal sector, the CBN and other development partners such as the Bank of Industry (BoI), the Bank of Agriculture, among others embarked on significant credit injections to support the critical sectors of the economy. Credit to the private sector can have a positive impact on sectoral GDP, (Were et al, (2012) and (Iqbal et al, (2012)).

1.2. Statement of the Problem

In Nigeria, credit to the private sector has been a crucial factor in shaping the country's economic landscape. Over the years, the availability and accessibility of credit have significantly influenced the growth and development of various industries, particularly in the context of Nigeria's emerging market status. Historically, access to credit in Nigeria has faced numerous challenges. The banking sector has often been characterized by high-interest rates, stringent lending conditions, and a lack of adequate collateral from small and medium-sized enterprises (SMEs). These factors have limited the ability of many businesses to secure the financing needed for expansion and innovation. Additionally, macroeconomic instability, inflation, and fluctuating exchange rates have further complicated the credit environment.

In recent years, however, there have been efforts to improve credit access for the private sector. The Central Bank of Nigeria (CBN) has implemented various policies aimed at enhancing the flow of credit to businesses. Initiatives such as the Anchor Borrowers' Programme and the Micro, Small, and Medium Enterprises Development Fund have been introduced to provide targeted support to specific sectors and encourage lending to SMEs. These programs aim to reduce the risk associated with lending and promote financial inclusion.

The impact of increased credit to the private sector on Nigeria's economic growth has been notable. Access to credit has enabled businesses to invest in new technologies, expand their operations, and create jobs. This, in turn, has contributed to overall economic growth and development. For instance, sectors such as agriculture, manufacturing, and services have benefited from improved access to finance, leading to increased productivity and competitiveness.

Despite these advancements, challenges remain. Issues such as inadequate infrastructure, regulatory constraints, and a lack of financial literacy among entrepreneurs continue to hinder the effective utilization of credit. Addressing these barriers is essential for maximizing the potential of credit to drive economic growth in Nigeria. In summary, while credit to the private sector in Nigeria has seen improvements, particularly through targeted government initiatives, ongoing challenges must be addressed to ensure that businesses can fully leverage credit for sustainable economic growth.

After the collapse of oil prices in the mid1980s, Egypt became more vigorously engaged in a process of structural reform whose aim was to increase the role of the private sector, the market and international trade in the economy. Since then, Egypt’s growth performance has varied from a declining phase in the latter half of the 1980s, to acceleration through much of the 1990s, followed by another declining phase during 1999-2003. This paper attempts to understand the determinants of this growth performance through a combination of graphical, econometric and diagnostic techniques. In terms of economic growth stimulation graduating to attendant development, credit to the private sector far outweighs credit to the public sector; which includes credit to government business-related companies, public establishments and also credit to central banks, even though credit to the private sector may sometimes include a considerable relative amount of credit to state-owned or partially state-owned companies.

According to the World Bank Index (2014), the engine of productive growth is private markets as they tend to create more productive jobs and generate greater incomes. According to Spencer (1977), credit is a promise made by one party to pay another for money borrowed or goods and services obtained. Thus, the concept of credit is inextricably linked to the banking sector; banks act as a conduit for cash to be received in the form of deposits from the economy's surplus spending units and transferred onto the deficit spending units that require funds for productive purposes (Chinweoke et al., 2014). Banks are therefore creditors to money borrowers and debtors to depositors. The borrowing power made available by the financial system through loans to individuals, governments, corporations, or organizations is known as bank credit. As a result,credit availability enables the banks' intermediation role to be fulfilled, which is critical for the economy's growth.The banking sector contributes to the availability of credit by mobilizing surplus funds from savers who have no immediate need for such funds and channeling the same in the form of a credit to investors who have brilliant ideas for generating additional wealth in the economy but lack the capital (Nwanyanwu, 2010). There is a plethora of research examining the role of banks as facilitators of economic growth. On the intermediation functions performed by the financial institution over the years, there seems to be broad consensus. Credit is money given by a lender to a borrower (Nwanyanwu, 2010). Credit serves two primary functions:

1. It facilitates the movement of capital or money to where it will be most effectively and efficiently employed.

2. It economizes the use of currency or coin money by having a multiplier impact on the volume of currency or coin in circulation.

1.3. Research Questions

1. To what extent does credit to the private sector impact economic growth in Nigeria?

2. To what extent is the relationship between credit to the private sector and investment in Nigeria.

1.4. Research Objectives

The major objective of this study is to :

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