Bank Lending and Output Growth in Nigeria

Abstract

This paper examines the relationship between bank lending and output growth in Nigeria over the period 1981 to 2012 using annual data obtained from secondary sources. Specifically, the study examines the impact of sector level bank lending on output growth of three selected sectors measured by index of production. Using the Johansen-Fisher combined panel cointegration methodology and panel Fully Modified Ordinary Least Squares (FMOLS) as a method of estimation, the results provide evidence of a negative significant relationship between bank lending and output growth of the sectors under consideration (namely, agriculture, manufacturing, and mining and quarrying). Howerver, a positive significant relationship is found between human capital measured by secondary school enrolment and output growth of the sectors. This study concludes that the expansion needed to boost output growth in these sectors is hampered by financial constraints made possible by high interest rates charged by financial institutions and that output growth is not only a function of finance as most firms do show but also a function of human capital (that is, labour embodied with knowledge). Therefore, to ensure output growth, there is the need for government intervention to increase the volume of credit that goes to these sectors and enforcement of compliance with monetary policy guidelines. Futhermore, labour needs to be retrained on relevant skills required and there is the need for reduction in budget or current account deficit in order to drive interest rates down.

Keywords: Bank lending, Output growth, Nigeria