Deposit Money Banks Sectoral Allocation of Credit and Economic Growth in Nigeria

Abstract

The size of Deposit Money Banks sectoral credit allocation keeps expanding over the years and one wonders if such increases have been accompanied by expanding economic growth in Nigeria. This research examines the impact of Deposit Money Banks sectoral credit allocation on economic growth in Nigeria for the period 1980 - 2014. To achieve this, time series data obtained from the Central Bank of Nigeria were analysed using The Vector Error Correction Model (VECM) estimation technique and VEC Granger Causality Wald test. The findings indicate that only Deposit Money Banks sectoral credit allocation to Production has statistically significant positive impact on economic growth while the other explanatory variables have negative significant impact on economic growth. The causality test indicates that there is no causal relationship between Economic Growth and Deposit Money Banks sectoral credit allocation and interest rate. From the findings, 1% increase in credit to the production sector leads to 3.5% increase in economic growth. It is recommended that the monetary authorities should direct Deposit Money Banks through the Credit Policy Guidelines to give priority and grant more credit to the production sector. The findings also indicate that a 1% increase in sectoral credit  to General Commerce and Services/Government/Personal/Professional/ Miscellaneous results in 1.4% and 1.95% decrease in economic growth respectively. A further recommendation therefore is that the Banking Supervision Department of the Central Bank of Nigeria should conduct thorough field investigation to ensure that loan amounts reportedly allocated to these sectors by the Deposit Money Banks are not diverted to other uses.