Project Materials





Background of the Study

Commercial banks play an important role in the economic development of developing countries. Economic development involves investment in various sectors of the economy. The banks collect savings from the people and mobilize savings for investment in industrial projects. The investors borrow from banks to finance the projects.

Special funds are provided to the investors for the completion of projects. The bank provides a guarantee for an industrial loan from international agencies. The foreign capital flows to developing countries for investment in projects.

Commercial banks are involved in the process of increasing the wealth of the economy, particularly the capital goods needed for raising productivity. The developed economies need the service of the banking system to enable the economy to attain economic growth, while the developing economies need the service of the banking system for sectorial development… (Scroll down for the link to get the Complete Chapter One to Five Project Material)

The Role of Commercial Banks in Economic

The banking system is a catalyst and engine of growth that is responsible for being a livewire to every sector of the economy. It is evident that no sector in the economy can flourish or prosper without the support and services of the banking sector, agricultural sector, manufacturing sector, mining, or even services sector can’t do without banks. Commercial banks provide and encourage savings.

The establishment of a commercial bank especially in the rural areas makes savings possible, hence economic development is accelerated. Commercial banks provide the capital needed for development. Deficit spender unit obtains medium and short term loans and overdraft from commercial banks to start a new industry or to engage in other development efforts. They engage in trade activities by making use of cheques and other financial instruments possible.

They encourage investment; provide direct loans to the government and individuals for investment purposes. They provide managerial advice to small-scale industrialists who do not engage in the service of a specialist. Commercial banks also render financial advice to their customers including investing in. Commercial banks create money as an instrument to the apex bank for all its activities… (Scroll down for the link to get the Complete Chapter One to Five Project Material)

Statement of the Problem

Given that the economic trend of the commercial banking industry, one wondered what has hindered economic growth, though an important avenue for banks to boost the growth of the economy through the efficient and effective saving-investment process(financial intermediation) to stimulate investment and productive activities.

For the past three decades, the Nigerian economy has not shown any favorable sign of growth. For example, the real GNP growth rate figure was 2.8% in 1995 with negative figures in years like 1982, 0.3%, etc as depicted in the CBN periodic bulletin in 1986.

This shows that the Nigerian economy is not one that can inspire confidence if no drastic improvement is shown by financial institutions with its economy especially in the new millennium… (Scroll down for the link to get the Complete Chapter One to Five Project Material)

Research Objectives

The objectives of this research work are tacitly stated as follows.

  • To determine the contribution of commercial banks towards positive economic growth and wealth creation… (Scroll down for the link to get the Complete Chapter One to Five Project Material)

economic growth


The availability of financial capital is a prerequisite for the rapid development and transaction of any nations economy, it is generally acknowledged that the provision and efficient management of the scarce resources is facilitated by the existence and appropriate functioning of financial institutions in the economy, it follows that bank has a vital role to play by making their vast financial resources available for financing and promoting development.

According to Anyaele J.O. (1990), commercial banks are institutions set up purposely for safekeeping of money, valuable goods, and documents like wills and others.  He said the existence of banks has been a big boost to business activities.

In an annual dinner of the Nigerian Institute of bankers in 1975 in Lagos, the governor of the central bank, Mallam Adamu Ciroma, blamed the “excess liquidity in the banking system.”  He saw the strict adherence of the commercial banking system to the orthodox doctrine of the lending short term loans as an in the desirable act and urged commercial banks to take some risk in a given medium and long term loans.

Some of the changes that come out of the foreign public reaction of commercial bank activities are in the area of declining contribution… (Scroll down for the link to get the Complete Chapter One to Five Project Material)

History of Commercial Banking in Nigeria

Commercial banking activities started in 1892 with the establishment of the African Banking Corporation ledger depositor and Co. a shipping company based in Liverpool was instrumental in its formation.  This bank was, however, taken over in 1984 by the bank of the British West African which later became a standard bank and now first bank of Nigeria Plc with the bank on observation.

The next was Barclays bank and the company (now Union Bank of Nigeria Plc) was established in 1917.  These banks were set up to provide banking services for the British Commercial interest and the colonial administration in West African when the west African currency board (Gyasi Central Bank) was set up in 1912, the bank of British became the agent of the currency board… (Scroll down for the link to get the Complete Chapter One to Five Project Material)

Banking Function in the Economy

Below are some of the products and services the bank offers to its numerous customers in promoting economic development in Nigeria.

  • Term Loans: To enable their customer finance specific projects which usually require large capital outlay, the bank provides medium to long term financing for a new project and project expansion.
  • Overdraft Facilities: The bank services also include the provision of short-term facilities in the form of overdrafts. The overdraft facilities are usually granted for a maximum period of one (1) year (which may be renewed annually) to enable their client to meet pressing cash calls or finance their working capital needs… (Scroll down for the link to get the Complete Chapter One to Five Project Material)

CBN Regulations on Commercial Banks

Commercial banks operate, usually as most other profit-maximizing business organization. But unlike most other enterprises, the “private business” of commercial banks impinges in many important ways, on the public interest.  In fact, banks are considered so vital to the welfare of the community within which they operate that government considers it unwise for them so be permitted to operate free of all constraints.

The result is that commercial banks are subject to more control than most other profit-seeking enterprises. Commercial banks are subject to special numbers of peculiar attributes, which makes that existence; structures are performances vital to the rest of the economy… (Scroll down for the link to get the Complete Chapter One to Five Project Material)

The following are the instrument used by CBN to regulate the activities of commercial banks:

  • Open Market Operation: Open market operation (OMO) means that buying and selling of short term and long term government securities in the money and capital market by the CBN sells government securities… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
  • Liquidity Reserve Ratio: The liquidity reserve ratio specifies the required ratio of certain selected assets and securities to the deposit liability of commercial banks (treasure bill and treasury certificates). The major use of liquidity reserve ratio is helping to float government securities by providing a ready i.e… (Scroll down for the link to get the Complete Chapter One to Five Project Material)


  • Introduction

This chapter presents the methodology employed in the study in an effort to establish the impact that the banking sector has on economic growth in Nigeria. In this regard, the section starts off by explaining the econometrics methodology used and presenting the model specifications, before it goes on to explain the data used, the period covered, its source and frequency.

Furthermore, the section provides the sampling method considered, justification of variables used as well as the methods employed to analyze the data collected. The section closes off by highlighting the research validity and reliability as well as its limitations.

  • Research Approach and Strategy

According to McMillan and Schumacher (2001), the research design is a plan for a study that sets out the activities to be undertaken, such as data collection procedures and sampling strategy in order to provide answers to the research questions.

In this regard, the study makes use of a quantitative approach, thereby employing the mathematical, statistical, and numerical analysis of the data to establish the relationship among measured variables. The study is therefore of an explanatory nature, in the sense that it employs an econometrics model to analyze the relationship and cause factors among various bank-specific variables and the macro-economic variable.

This research approach allowed for the quantitative data collection for all the variables considered in the study in order to answer the research questions and achieve the research objectives.

Specification of the Model

The model is specified based on the empirical literature reviewed with regard to the relationship between banking sector development and economic growth in various jurisdictions.

In this regard, the model is specified in a similar manner to the studies that also examined the long-run relationship between banking sector development and economic growth such as Aurangzeb (2012), Petkovski and Kjosevski (2014), Ojiegbe et al. (2016) while making minor adjustments to suit the Nigerian environment.

This confirms that the specification of the model is well-aligned to similar studies conducted in different jurisdictions… (Scroll down for the link to get the Complete Chapter One to Five Project Material)

  • Data Analysis Methods

Toinvestigatetherelationshipbetweenfinancialdevelopmentandeconomicgrowth, the study employed the autoregression distributive lag modeling (ARDL) approach as it was also used in a similar study by Kiprop et al. (2015). The choice of this model is justified by so many reasonsasoutlinedbyPesaranandShin(1999).

Firstly, this approach enables simultaneous estimation for both short-run and long-run coefficients. Secondly, all the variables enter the model as endogenous… (Scroll down for the link to get the Complete Chapter One to Five Project Material)

economic growth



This chapter presents the results and the detailed empirical analysis of the study on which the conclusion and recommendations were based. The section on empirical analysis is divided into nine sub-sections as follows.

Section 4.2.1 presents the correlation coefficient test, section 4.2.2 presents the unit root test, section 4.2.3 presents the determination of the optimal lag length, section 4.2.4 presents the cointegration test, while section 4.2.5 and 4.2.6 presents the long term and short term ARDL regression results, respectively.

Furthermore, section 4.2.7 presents the bivariate error correction models; Section 4.2.8 presents the model diagnostic test and section 4.2.9 presents the pairwise granger causality test.

Empirical Analysis

  • Correlation Coefficient Test

In determining whether or not a linear relationship exists between the variables employed in the model, the study made use of the Pearson correlation coefficient test. The test was also conducted to determine the possible existence of multicollinearity within the variables, which if present, can lead to errors in the coefficient estimates of the multiple regression.

In this regard, all coefficients between all variables as indicated in Table 4.1 below were above 0.9, which indicates the possible existence of multicollinearity given that they are close to 1. This outcome entails that, reliance cannot be placed on the estimation results of multiple regression as multicollinearity could severely affect these results, hence the need to run a separate model for each banking sector development indicator.

Table 4.1: Pearson Correlation Coefficient Test

LNGDP 1.000000 0.976556 0.977370 0.981389 0.972740 0.972134
LNFND 0.976556 1.000000 0.998207 0.992662 0.997044 0.995489
LNCRE 0.977370 0.998207 1.000000 0.994423 0.996691 0.991976
LNNETINT 0.981389 0.992662 0.994423 1.000000 0.989239 0.989219
LNCAP 0.972740 0.997044 0.996691 0.989239 1.000000 0.992204
LNLIQ 0.972134 0.995489 0.991976 0.989219 0.992204 1.000000
  •  Unit Root Test

While the ARDL technique does not require the data to be tested for unit root, it is important to conduct this test in order to make sure that the series is not integrated into an order higher than one. As such, using an ARDL technique with data series that is integrated into an order of more than one may lead to spurious results.

Using the ADF and PP unit root tests, the results as presented in table 4.2 below indicate that all variables are stationary either in level or after the first difference. This implies that the data is suitable to carry out an ARDL regression analysis and the null hypothesis of unit root can be rejected at 1 percent and 5 percent significance levels, respectively.

Table 4.2: Unit root tests: ADF and PP in differences 

Variable Model Specification ADF PP
 Levels First difference  Levels First difference Order of integration


Intercept and trend -5.304**  -6.316**  -5.300**  




Intercept -1.007 -6.365** -0.932 -27.585** 1
 LNFND Intercept and trend -3.803** -9.087** -3.734** -10.151** 0
Intercept -0.978 -9.085** -1.203 -9.803** 1
 LNCRE Intercept and trend -2.823 -6.572** -1.957 -6.909** 1
Intercept -0.594 -6.417** -0.577 -7.004** 1
 LNNETINT Intercept and trend -2.995 -7.004** -2.995 -15.430** 1
Intercept 0.261 -7.055** 1.388 -15.545** 1
LNCAP Intercept and trend -3.612** -10.259** -3.652** -11.429** 0
Intercept -0.378 -10.370** -0.224 -11.551** 1
LNLIQ Intercept and trend -5.134** -7.609** -5.160** -13.349** 0
Intercept -0.414 -7.698** -0.156 -13.599** 1

Note: ** means the rejection of the null hypothesis at 1% and 5%.

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Following the regression outcomes and analysis of the results outlined in the preceding chapter, this chapter seeks to present the conclusion of the study.

Research Conclusion

This study set out to establish the impact that commercial banks’ development has on economic growth in Nigeria. The study employed the quantitative methodology of ARDL in order to establish the long-run and the short-run relationship between GDP growth and banking sector development as well as the Granger causality test in determining the direction of causality… (Scroll down for the link to get the Complete Chapter One to Five Project Material)


Given limited research conducted on the subject matter in Nigeria, this study creates opportunities for further research extension on the subject. In this regard, future researchers can consider extending this research in various ways as outlined below:

  1. Considering that BON might adopt Basel 3 regulatory requirements in the near future, future researches can be based on the impact that complying with Basel 3 capital and liquidity requirements will have on the banking sector’s ability to support economic growth… (Scroll down for the link to get the Complete Chapter One to Five Project Material)

economic growth


Admati, A. R. (2011). The false trade-off between economic growth and bank capital.

Unpublished paper. Stanford University. Retrieved from

Agribank of Nigeria (2015). Annual report. Retrieved from

Apergis, N., Filippidis, J., & Economidou, C. (2007). Financial deepening and economic growth linkages: A panel data analysis. Review of World Economics, 143(1), 179-198.

Aurangzeb, Q. (2012). Contribution of the banking sector in economic growth: A case for Pakistan. Economics and Finance Review, 2(6), 45–54.

Bagehot, W. (1873). Lombard Street: A description of the money market. London, UK: H. S. King. Retrieved from

Bank of Nigeria (2009). Determination on Minimum Liquid Assets, (BID-6). Government Gazette, No. 4373, 6 November. Retrieved from a1c2-5541e5628608.pdf

Bank of Nigeria (2014). Domestic Systemically Important Banks for the Nigerian Banking System: An Indicator-Based Measurement Approach. (Economic Growth)(Economic Growth)(Economic Growth)(Economic Growth)

Bencivenga, V. R. and Smith, B. D. (1991). Financial Intermediation and Endogenous Growth. Review of Economics Studies 58(2), 195–209. (Economic Growth)(Economic Growth)(Economic Growth)(Economic Growth)

Calderon С., & Liu, L. (2002). The direction of causality between financial development and economic growth. Journal of Development Economics 72(1), 321–334. (Economic Growth)(Economic Growth)(Economic Growth)

Chukwu, J., & Agu, C. (2009). Multivariate Causality Between Financial Depth and Economic Growth in Nigeria. African Review of Money Finance and Banking, 7-21. (Economic Growth)(Economic Growth)(Economic Growth)

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economic growth

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