IMPACT OF CREDIT FACILITIES ON THE PERFORMANCE OF THE MANUFACTURING FIRMS

CHAPTER ONE

INTRODUCTION

1. Background of the Study

Credit facilities plays a very important and vital role in the economy of any country in world. It also very crucial in the growth and development of any economy of the world. Credit facilities can therefore be referred to as a financial product offered by banks and other financial institutions to their customers, which enable them to borrow money for a specific purpose or period. According to Ojelabi et al. (2015), bank credit is described as a process of providing funds to the various sector of the economy on the basis of an agreed repayment with interest. These facilities can take various forms, such as loans, overdrafts, lines of credit, and credit cards. In Nigeria, credit facilities have been a critical component of the financial system, particularly for small and medium-sized enterprises (SMEs) and household. It can also provide an alternative source of funding that can help these businesses to grow and expand (Oloruntoba et al., 2018). The growth of an economy to a large extent, depend on the level of funding received by the manufacturing sector (Ogunmuyiwa, et al., 2017). However, Credit facilities enable manufacturers to invest in capital expenditure project that enhance productivity and efficiency. According to a report by the Central Bank of Nigeria (CBN), access to long term credit facilities has contributed significantly to the growth of the manufacturing sector in Nigeria. The report states that “the availability of long-term financing has facilitated investment in new technologies, machinery, and equipment, which has led to increased productivity and competitiveness” (CBN 2021). For instance, Dangote Cement Plc, one of Nigeria’s largest cement manufacturers, secure a $300 million loan from a consortium of international banks to finance the expansion of its cement plants in Nigeria and other Africa countries (Dangote Cement Plc, 2021). This loan enabled Dangote Cement Plc to increase its production capacity and improve its competiveness in the market. It was also noted that the use of credit facilities is not without its challenges and one of the major challenges is the high cost of credit due to high interest rates and fees. According to a study by the CBN, the average interest rate on loans to SMEs in Nigeria was 23% as of September 2021 (CBN, 2021). This is high cost of credit can make it difficult for borrowers to repay their loans and can increase debt burdens. Even when credit is available, high lending rate which is sometimes go over 30%, make such credits unattractive, given the fact that returns on investments in the sub-sector have been below ten percent (10%) on the average (Nwasilike, 2006).

Also, credit facilities help manufacturers manage working capital needs and cash flow challenges. Working capital refers to the current assets and liabilities required to run a business on a day to day basis. Manufacturers require working capital to finance activities such as inventory purchases, accounts receivable financing, and account payable management. According to a study by KPMG Nigeria, “access to working capital finance is critical for manufacturers as it enables them to meet their short-term financial obligations and fund their day to day operations” (KPMG Nigeria, 2018). For example, a Guinness Nigeria Plc secured a $150 million loan from a consortium of international bank to finance working capital requirements and repay existing debt obligation (Guinness Nigeria Plc, 2021). This loan enabled Guinness Nigeria Plc to manage its cash flow effectively and improve its liquidity position. A company with strong access to working capital has sufficient funds to cover its everyday operating expenses and can meet its financial obligations as they come due. This is important because it helps the company maintain good relationships with suppliers and creditor, avoid late payment penalties, and prevent cash flow problems that could lead to bankruptcy.

Credit facilities is also estimated to have provide manufacturers with the necessary financial resources to weather economic shocks and crises. The COVID-19 pandemic has had a significant impact on the global economy and affected various sectors, including the manufacturing sector. According to a report by the Nigeria Bureau of Statistics (NBS), “the manufacturing sector experiences a significant decline in output during the second quarter of 2020 due to the COVID-19 pandemic” (NBS, 2020). However, some manufacturers were able to mitigate the impact of the pandemic through access to credit facilities. For instance, Lafarge Africa Plc secured a $150 million loan from a consortium of international bank to finance its operations during the pandemic (Lafarge Africa Plc, 2021). This loan enabled Lafarge Africa Plc to maintain its production capacity and supply chain operations during the crisis.

Credit facilities also facilitate technology transfer and capacity building in the manufacturing sector. Access to credit enables manufacturers to invest in research and development activities that lead to technological advancement and innovation. According to a report by the Nigeria Export-Import Bank (NEXIM), “access to finance is critical for technology transfer and capacity building in the manufacturing sector as it enables manufacturers to acquire new technologies and skills” (NEXIM, 2018). For example, BUA Cement Plc secured a $65 million loan from a consortium of international banks to finance its green field cement plant project in Sokoto state (BUA Cement Plc, 2021). This loan enabled BUA Cement Plc to acquire new technologies and skills that improved it production capacity and efficiency.

Credit facilities is very important to firms because it help them to protect their sales from being eroded or overtaken by competitors and it also help to attract potential customers to buy at a favourable rate. As long as there is competition in the industry, selling on credit becomes inevitable. A business that does not extend or facilitates credit facilities will lose her customers to other competitors. Thus, for a business to survive, she must invest in accounts receivables (Gamlath, 2019). According to a report by the CBN, manufacturers that has access to credit facilities are more likely to invest in research and development and new technologies than those that do not have access (CBN, 2021). This will enable them to compete favorably with other firms either domestic or international.

Nigeria however, has suffered from their relegation of the manufacturing sector owing to their reliance on oil. Regrettably, regardless of her enormous natural endowments, the manufacturing sector has been in a pitiable condition as the sector still accounts for a very low percentage of the Gross Domestic Product (GDP) due to high interest rate and most especially, lack of access to credit facilities (Ume; et al.;., 2017). Lack of access to credit facilities due to high interest rate has made it difficult for industries to invest in modern machines, information technology and human resources development which are critical in reducing production costs, raising productivity and improving competitiveness (Odufuye, 2017). High lending or interest rate which sometimes go over 30% make such credit unattractive given the act that returns on investment in the sub-sector is below ten percent (10%) (Elijah et al. 2019).

1. Statement of the Problems

The manufacturing sector in Nigeria is a critical component of any economy, as it contributes more significantly to economic growth, employment generations and export earning when it has access to credit facilities. However, the manufacturing sector in most especially in Nigeria has been facing several challenges, including inadequate access to credit facilities.

Studies have shown that access to credit is a critical factor in the growth and performance of the manufacturing sector. According to a report by the Central Bank of Nigeria (CBN), access to credit is a major constraint for small and medium-sized enterprises (SMEs) in Nigeria’s manufacturing sector. The report further highlights that SMEs account for over 90% of all manufacturing firms in Nigeria but contribute less than 20% to the sector’s output due to inadequate access to credit facilities (CBN, 2018).

The high interest rates on credit facilities are also making it difficult for manufacturers to sustain their operations and remain profitable. The high interest rate on credit facilities are a major concern for manufacturers. According to a report by the Manufacturers Association of Nigeria (MAN), the average interest rate on loan in Nigeria is around 25%, which is significantly higher than the global average (MAN, 2021). The high interest rate makes it difficult for manufacturers to sustain their operations and remain profitable, as they have to allocate a significant portion of their revenues towards interest payments. As a result, many manufacturers are struggling to invest in new technologies, expand their operations, and compete with foreign competitors

Also, the lack of collateral requirement for credit facilities most especially in Nigeria is leading to an increase in non-performing loans (NPLs) and financial risks for lenders. It has hindered the growth of most manufacturing sector most especially the small and medium-sized enterprises (SMEs) in the country. Collateral however, refers to an asset that borrower pledges as security for a loan.

Furthermore, the lack of regulatory frameworks for credit facilities in Nigeria is leading to a lack of transparency and accountability in the lending process. According to a report by Transparency International, corruption is a major problem in the Nigeria banking system, with many loans being awarded based on political connections rather than merit (Transparency International, 2021). This lack of transparency and accountability has resulted in a misallocation of resources and an increase in non-performing loans. Moreover, it has also led to a lack of trust between borrowers and lenders, as borrowers may perceive that they are being unfairly treated or charged excessive fees.

1. Research Questions

The impact of credit facilities on the performance of the manufacturing sector will be guided by the following research questions

Do credit facilities affect the output of the manufacturing sector?
Do money policy variables (such as inflation, interest rate, and exchange rates) affect the performance of manufacturing sector?
1. Objectives of the study

The broad or main objective of this study is to examine the impact of bank lending on the productivity of manufacturing companies. The specific objectives of the study are;

To examine whether the manufacturing sector performance is affected by credit facilities.
To examine the effect of monetary policy variables manufacturing firms’ performance.
1. Research Hypothesis...

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