CHAPTER ONE

INTRODUCTION

1. BACKGROUND OF THE STUDY

The manufacturing industry remains a key driver of economic growth. Its performance is driven largely by monetary policy action, especially bench mark interest rate. Precisely, an appropriate interest rate remains crucial for achieving improved productivity and promoting economic growth and development.

High interest rate increases cost of borrowing, retards domestic investment, diminish aggregate demand, increase unemployment and contract economic growth. It poses serious concerns for policymakers about economic growth; investment and financing options.

On the other hand, lower interest rate stimulates aggregate demand, output, investment, employment, and business confidence and export competitiveness. The benchmark policy rate set by the monetary authority directly affects interest rates that banks and other financial institutions charge.

These charges by banks for on-lending to economic agents are, however, determined by both explicit and implicit costs. The explicit costs are the costs of obtaining deposits, while the implicit cost is the opportunity cost associated with firms' use of its own resources.

The poor performance of the manufacturing sector has been attributed to high bank lending interest rates, among other factors (Adebiyi and BabatoeObasa 2004; Obamuyi et al., 2012; and Gideon et. al., 2015). The high rates charged by banks are influenced by increased overhead costs, contributions by deposit money banks (DMBs) to the Banking Sector Sinking Fund, payment of the Nigerian Deposit Insurance Corporation's (NDIC) premium, as well as the cash reserve ratio (CRR) and the liquidity ratio, placed additional pressure on banks' earnings and the cost of funds. These additional costs may partly be transmitted to high lending rates which have remained double digit over the years (Jibrin et. al., 2015).

The manufacturing sector provides catalytic functions in the transformation and diversification of the Nigerian economy. It enables the economy to achieve full utilization of its factor inputs and endowments, and the generation of employment opportunities (Gbadebo, Adekunle, Muritala&Fadeyi, 2017).

Furthermore, Nwandu (2016) opined that the manufacturing sector generates investment capital at a faster rate than any other sector and also promotes wider and efficiently strong linkages with other sectors of the economy. Loto (2012) revealed that the Structural Adjustment Programme (SAP) introduced in 1986 was partly designed to energize the manufacturing sector by shifting emphasis to increased domestic sourcing of inputs through monetary and fiscal incentives.

In spite of these role played by the manufacturing sector in growth process, it has been noted by scholars that the manufacturing sector is compounded by many difficulties some of which are desertion and maladministration (Okafor, 2012).

The contribution of the manufacturing sector to the gross domestic product in periods before the oil boom of the 1970s was 7.5%. In 1982, the contribution of the manufacturing sector to the gross domestic product reached a peak of 7.83% and since then, it has been reducing (CBN, 2000).

In Nigeria, there is a growing dissatisfaction among investors on the current high cost of production due to increase in interest rate and the stringent conditions expected to be met before funds can be granted to investors, which has constrained their efforts at creating wealth and reducing unemployment in the country (Akpan, Yilkudi&Opiah, 2016).

1. STATEMENT OF THE PROBLEM

One of the problems that have raised the interest of economists is to know the determinants of lending interest rates. Attracting and retaining profitable customers, and increasing revenue from those customers, is a priority of the managers of all banks in today’s globalised marketplace. It is particularly important in the highly competitive retail financial services market, where the core business of banking continues to be “the profitable management of risk”

Finally, several researches has been carried out on the analysis of some inner factors affecting the lending rate and commercial bank behavior but not even a single research has been carried out on bank lending rate and the performance of the manufacturing sector in Nigeria.

1. AIM AND OBJECTIVES OF THE STUDY

The main aim and objectives of the study is to examine bank lending rate and the performance of the manufacturing sector in Nigeria. Other specific objectives of the study include:

1. to determine the factors affecting bank lending rate and its effect on the performance of manufacturing  sector in Nigeria.
2. to determine the extent to which bank lending rate affects the performance of manufacturing sector in Nigeria.
3. to determine the relationship between bank lending rate and manufacturing sector of Nigeria.
4. to proffer possible solutions to the problems.
   1. RESEARCH QUESTIONS

1.     What are the factors affecting bank lending rate and its effect on the performance of manufacturing sector in Nigeria?

2.     What is the extent to which bank lending rate affects the performance of manufacturing sector in Nigeria?

3.     What is the relationship between bank lending rate and manufacturing sector of Nigeria?

4.     What are the possible solutions to the problems?

1. RESEARCH HYPOTHESIS

Ho:  Bank lending rate has no significant effect on the performance of manufacturing sector.

Hi:   Bank lending rate has a significant effect on the performance of manufacturing sector.

1. SIGNIFICANCE OF THE STUDY

The study on bank lending rate and the performance of the manufacturing sector will be of immense benefit to Nigerians in the sense that it will encourage the government and other well-meaning private investors are encouraged to embrace growth in the economy through the growth in the manufacturing sector.

This might be achieved by increasing the funds set aside for the manufacturing sector by the government and commercial banks. The commercial banks will be encouraged to also reduce the stringent conditions to be met before investors in the manufacturing sector can assess commercial banks’ loans and advances.

However, this must be done carefully in order to avoid increase in non-performing credits and bad loans. More so, it will encourage the public to save. This will increase the volume of funds which will be available to the manufacturers and investors.

Finally, the study will contribute to the body of existing literature and knowledge to this field of study and basis for further research.

1. SCOPE OF THE STUDY

The study on bank lending rate and the performance of the manufacturing sector is limited to Nigeria.

1. LIMITATION OF THE STUDY

Time Constraints: One of the challenges experienced by the researcher is the issue of time; the research will simultaneously engage in departmental activities like seminars and attendance to lectures. But the researcher was able to meet up with the deadline for the submission of the project.

Financial Constraints: Every research work needs funding; however lack of adequate funds might affect the speed of the researcher in getting materials for completion of the project.

1. DEFINITION OF TERMS

Bank:       A bank is a financial institution licensed to receive deposits and make loans.

Lending: The action of allowing a person or organization the use of a sum of money under an agreement to pay it back later.

Lending Rate: Lending rate or interest rate is the amount charged by lenders for a certain period as a percentage of the amount lent or deposited.

Performance:  The action or process of performing a task or function.

Manufacturing sector:   Manufacturing, any industry that makes products from raw materials by the use of manual labour or machinery and that is usually carried out systematically with a division of labour.