Impact of deposit Money Bank on Foreign trade in Nigeria

The impact of deposit money bank on foreign trade in Nigeria cannot be over emphasized. This research examine the impact of deposit money bank on foreign trade in Nigeria within the period of 1981-2016. Download the full work in doc file.



1.1 Background to the Study

Businesses, unlike people, are not created equally. There are some companies that would be missed if they ceased to exist, but life would go on. There are others whose collapse would cause vast sections of economies and societies to implode. Into this second category falls the deposit money bank. Deposit money banks are the most important savings mobilizing and financial resource allocation institutions. Consequently, their roles make them an important phenomenon and strong pillar in economic growth and development.

Deposit money banks which are also known as commercial banks are financial institutions that provide services, such as accepting deposits, giving business loans and auto loans, mortgage lending, and basic investment products like savings accounts and certificates of activities deposit. According to mainstream theory, they act as financial intermediaries to channel savers’ money to firms and individuals who seek funding for their acts. Their importance as a catalyst to economic growth/development is widely recognized by both monetary and development economists.

The financial system of Nigeria is dominated by the banking sector, especially the deposit money bank which provides the foundation for the development of financial system. Their credit component constitutes a major link between the monetary sector and the real sector of the Nigerian economy. In performing these roles, deposit money banks must realized that they have the potentials, scopes and prospects of mobilizing financial resources and allocating them to productive investments and, in return, promote sustainable performance and ensures that businesses are flourishing and alive. They not only store our saved cash and lend us money when we need it, but act as the system of arteries that transport money around the economy, that is why they are often known as financial intermediaries. Hence their key function is to transfer money, en masse, from those who want to lend to those who want to borrow.

In order for an economy whether rich or poor to function properly, it must have a well-developed and healthy deposit money banks. Why? The companies like medium and small scale enterprises and individuals need to borrow money to start business and subsequently to build decent, formidable and innovative businesses which constitute the launching pad for any meaningful growth in any developing economy and this is why Oluyemi (1995) regards the deposit money banks as an engine of growth of a country’s economy that could greatly assist in the promotion of rapid economic growth. The financial institution has also been described to be a catalyst for economic growth when it is well developed and judged to be healthy (Adeoye, 2007). A World Bank (1997) study emphasizes the role played by the banking sector in the process of financial integration in developing countries.

This is to say that deposit money banks are inseparably linked to economic growth of any nation. Figuratively, they are like the body and soul in the overall functions of the human person.  Proper functioning of this banks leads to promotion of foreign trade and economic growth of a nation.  They play an important role in economic growth of a nation. They are patterns of resources that aim to meet the needs of medium and small scale enterprises. Sequel to our discussions so far, one could be induced to conclude that the use of monetary policy in Nigeria seems not to attract the desired level of economic stability. This conclusion follows the dismal performance of the economy in recent years. Little wonder Donli (2004) writes that the last two decades witnessed series of reforms armed at the revitalization of the Nigeria economy owing to series of crises that influence the growth of the economy during this period. The problems were seen to be a direct derivative of structural imbalances in our economy system. The imbalance started right from colonial era nurtured by inappropriate policies after independence in 1960, and reinforced by the wind face gains form petroleum in the 1970s.

Donli (2004) further contends that these structural defects consisted or undiversified monolithic and monoculture production bases, undue reliance on foreign trade from 1973. The outcome of those events was that the growth process relied heavily on external factors instead on the internal ones. However, of all the independences, the exclusive reliance on petroleum turned out to be the must devastating to the economy. The dismal economic outlook in Nigeria above dismal economic outlook in Nigeria above desires investigation into whether or not monetary policy as claimed by the monetarists impact on Nigeria’s economic stability and foreign trade.

1.2   Statement of the problem 

Deposit money bank as a technique of economic management to bring about sustainable economic growth and development through encouraging both local foreign trade by giving loans to their customers investing. The industrial sector and exporter in Nigeria is faced with the problem of accessibility of funds for productive investment, hence its poor performance in recent years (Edirisuriya, 2008). It is against this back ground that this paper intends to investigate the effects of deposit money bank credit on the manufacturing sector in Nigeria. There are daily reports of how Nigerian banks rip off their customers through various charges and practices. Often, customers complain and cry out for appropriate regulatory intervention. Unfortunately, their complaints seem to fall on deaf ears, because they are unaware of any positive regulatory action in response thereto. Emboldened by financial regulatory inaction, government overspending in capital projects that are not directly profit-yielding to the GDP, crude practices and indifference, many Nigerian banks now engage in more exploitative practices. The categories of such predatory bank practices are unfolded daily.

Normally, when a customer secures a loan from a bank, the latter fixes a negotiated lending rate, based on the prevailing interest rate approved by the Apex Bank. Any change in the interest rate should be brought to the notice of the borrower, except otherwise agreed. In Nigeria, however, the lending rate is rarely negotiated, and when it is reviewed upwards by the Central Bank of Nigeria (CBN), the average bank automatically applies the new rate to the outstanding loan without notifying the borrower (Okafor, 2011). Ironically, the same bank hides the fact of any downward review of the lending rate from its mostly uninformed customers, thereby illegally subjecting the customers to a higher interest regime. Unfortunately, some greedy banks play on the credulity and ignorance of their illiterate customers to make fabulous profits through illegal charges and sharp dealings against the overall interest of the customer.

Often, what the bank staff presents to a prospective borrower, during loan negotiations as the total charges, become hydra-headed once he swallows the bait. While processing loans, Nigerian banks impose on borrowers both “processing” and “administrative” fees which are duplicates. Again, they charge borrowers and corporate customers higher than what they pay the lawyer to conduct searches at land and company registries. We believe that the interest rates Nigerian banks display at their offices and report to CBN per section 23 of the Banks and other Financial Institutions Act are different from what most of them impose on customers.  Bank fraud, poor lending of SMEs and credit mismanagement practices in the Nigeria banking sector sometime in the past forced the Central Bank of Nigeria to revisit the capital structure of commercial banks in Nigeria. These, among other things, led the Central Bank of Nigeria (CBN) to give a directive that all banks should recapitalize from N2 billion to N25 billion with effect from January 1, 2006. It was hoped that the consolidation would make the banks stronger so as to be able to provide larger amounts of funds to productive sectors of the economy, which is largely dominated by small and medium enterprises, thereby making them grow into large firms, with enough resources to contribute to economic growth/development.

This development led to various financial activities in the Nigerian financial sector, with most banks initially opting for additional source of funds from the capital market via floating of shares. Most banks, at this stage, started inviting members of the public to acquire new shares in order to meet up with the new minimum capital directed by the Central Bank of Nigeria.  Notwithstanding, some banks were not capable of raising the new minimum capital by themselves; hence the need for merging and consolidating of banks resulted to reducing the total number of banks in Nigeria to twenty three (23). However, the consolidation of the banking sector presented new challenges to the banks which required more efforts to control cost and increase their efficiency. These, in turn, affected the volume of credit facilities granted to small and medium-scale enterprises in Nigeria.

However, it is common knowledge that getting financial support from deposit money banks has been grossly inadequate for budding indigenous entrepreneurs and even for those who have been in the manufacturing business for a long term. Therefore, this research work investigates performance of deposit money banks in promoting foreign trade in Nigeria: Issues and analysis within the sample period of 1981-2015.

1.3       Research Questions

(1)        Is there any significant impact of commercial bank credits on foreign investment?

(2)        Is there any long run relationship between foreign investment and commercial bank credits?

1.4       Research Objectives

The general objective of the study is to assess the relationship between deposit money bank and foreign investment in Nigeria. The specific objectives include the following:

(i)         To investigate the impact of deposit money bank credit and foreign investment in Nigeria.

(ii)        To evaluate if there is long-run relationship between foreign investment and deposit money bank credit in Nigeria.

1.5       Research Hypothesis

In this study, the hypotheses below shall be tested;

H0i:      Deposit money bank has no significant impact on foreign investment in Nigeria.

H0ii:     There is no long-run relationship between foreign investment and deposit money bank credit in Nigeria.

1.6. Significance of the Study

This study aims at investigating deposit money banks and foreign investment in Nigeria by evaluating issues relating to deposit money bank credit and foreign investment in Nigeria. The study will be of great importance to policy makers, government and its agencies, private individuals and firms at large.  The study will be also of great importance to student s of economics and other researchers who may have interest in foreign trade and its impact on Nigeria economy. Finally, the findings of this study would add to the stock of econometric literature of Nigeria.

1.7       Scope and Limitation of the Study

The geographical scope of this work will be centered on the Nigerian economy with particular emphasis on the industrial se foreign investment and deposit bank between 1981-2015. The industrial sector as used in this context refers to the sector of the economy that involves deliberate and sustained application and combination of suitable technology, management techniques and other resources to move the economy from the traditional low level of production to a more automated and efficient system of mass production of goods and services (Ayodele and Falokun, 2003).

The researcher encountered a number of constraints in the course of this work to include; data sourcing or data inconsistence due to poor nature of information management in Nigeria. Other constraints are; time factor, financial constraints and host of other constraints that prevent the researcher to present a better work than this.

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