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This study examined the impact of credit to private sector (CPS) on the real sector of Nigeria with a view to assess the significant contribution of CPS to real sector growth in Nigeria. The study used aggregate time series date from 1981 to 2015, which was drawn from Central Bank of Nigeria (CBN) statistical bulletin and CBN annual report and statement of accounts. The data was analyzed using multiple regression and based on the coefficient of determination (R square), the study reveals 55.03% variation between the CPS and real sector growth in Nigeria. The study concludes that there is a statistically significant impact of credit to private sector of Nigeria. This, suggest that the performance of the real sector is greatly influenced by credit to private sector. The study recommends that the Federal Government of Nigeria through the central bank of Nigeria (CBN) should enhance the financing of the real sector as well as improve credit flow to the sector because of its strategic importance in creating and generating growth of the economy.







1.1       Background of the study

An economy is usually divided into four distinct but interrelated sectors. These are; the real, external, fiscal or government and financial sectors. Real sector activities include agriculture, industry, building and construction, and services. The sector is strategic for a variety of reasons. First, it produces and distributes tangible goods and services required to satisfy aggregate demand in the economy. Its performance is, therefore, a gauge or an indirect measure of the standard of living of the people.

Secondly, the performance of the sector can be used to measure the effectiveness of macroeconomic policies. Government policies can only be adjudged successful if they impact positively on the production and distribution of goods and services which raise the welfare of the citizen. Furthermore, a vibrant real sector, particularly the agricultural and manufacturing activities, create more linkages in the economy than any other sector and, thus, reduces the pressures on the external sector. Finally, the relevance of the real sector is also manifested in its capacity building role as well as in its high employment and income generating potentials (Anyanwu, 2010).

Over the years the Nigerian government hasembarked on various economic reforms aimed at getting policy incentives right and restructuring key implementation institutions. One of these reforms, the financial sector reformsfocused mainly on restructuring the financial sector institutions and markets through various policy measures having recognized the indispensable role finance plays in the growth and developmental process of any nation. As a component of the financial sector, the reforms in the banking sector seeks to get the incentives right for the sector to take the lead role in enhancing the intermediation role of the banks and enable them contribute to economic growth.

These reforms in the financial sector, some which include the deregulation and liberalization of the financial sector activities under SAP 1986, banking consolidation 2004, financial system strategy (FSS) 2007 and recently the financial inclusion strategy launched in 2012 has led to significant improvements in the amount of credit extended to the real sector.

According to Central Bank Annual Report 2015, the banking sector showed stronger capacityto finance real sector activities with substantial credit flow to the care private sector increasing from 2 million in 1960 to about 7 million in 1970 than to 118 million in 1980 and 528 million in 1990. In 2000, it rose to 8 billion in 2010 and by 2015, it stood at 186 billion.

However, despite these steady increase in the volume of credit to the private, Nigeria’s real sector growth has been dwindling, and has still remained fragile not strong enough to significantly reduce the prevailing level of parent. According to an NBS report released last year Nigeria’s economic growth contracted by recording a negative growth rate which plunged the economy into recession.

From the above indices, one would ask, what is the relationship between the increase in these private sector credit figures and Nigeria’s real sector economic growth?. This forms the bedrock of this present research effort.


1.2       Statement of the Problem

The real sector is a strategic component of an economy because it produces and distributes tangible goods and services required to satisfy aggregate demand in the economy. For this reason, there is need for adequate credit flow from the banking industry to the real sector, which in the Nigeria case, the credit flow has been grossly inadequate

Banking sector reforms in Nigeria have been embarked upon to achieve the following objectives, among others: market liberalization in order to promote efficiency in resource allocation, expansion of the savings mobilization base, promotion of investment and growth through market-based interest rates. Other objectives are: improvement of the regulatory and surveillance framework, fostering healthy competition in the provision of services and laying the basis for inflation control and economic growth (Balogun, 2007).

Five distinct phases of banking sector reforms are easily discernible in Nigeria. The first occurred during 1986 to 1993, when the banking industry was deregulated in order to allow for substantial private sector participation. Hitherto, the landscape was dominated by banks which emerged from the indigenization programme of the 1970s, which left the Federal and state governments with majority stakes. The second was the re-regulation era of 1993-1998, following the deep financial distress. The third phase was initiated in 1999 with the return of liberalization and the adoption of the universal banking model.

The fourth phase commenced in 2004 with banking sector consolidation as a major component and was meant to correct the structural and operational weaknesses that constrained the banks from efficiently playing the catalytic role of financial intermediation. Following from the exercise, the aggregate capital of the consolidated banks rose by 439.4 per cent from 2003-2009, while deposit level rose by 241.8 per cent. However, this was not reflected in the flow of credit to the real economy, as the growth rate of credit fell during this period, while actual credit did not reflect the proportionate contribution of the sector to the GDP (Anyanwu, 2010).

The current and fifth phase, was triggered by the need to address the combined effects of the global financial and economic crises, as well banks‘ huge exposures to oil/gas and margin loans, which were largely non-performing; corporate mis-governance and outright corruption, among operators in the system. This round of reform, therefore, seeks to substantially improve the banking infrastructure, strengthen the regulatory and supervisory framework, and address the issue of impaired capital and provision of structured finance through various initiatives, so as to provide cheap credit to the real sector, and financial accommodation for small and medium-scale enterprises (SMEs) (Anyanwu, 2010).

However, despite the strategic importance of the real sector, and the rapid growth experienced in the financial sector in Nigeria, the financial sector has not impacted positively on the real economy as much as anticipated. Development finance institutions set up for specific purposes, such as agricultural finance, housing finance, trade finance, urban development, did not achieve their stated mandates. Furthermore, credit flow from the deposit money banks to the real economy has been grossly inadequate (Anyanwu, 2010). An assessment of the National Accounts of Nigeria indicates that the real sector contributes over 60.0 per cent to the gross domestic product (GDP), but attracts only about 40.0 per cent of total credit. Worse still is the case of agriculture which contributes over 40.0 per cent of the GDP but attracts less than 2.0 per cent of total credit. Banks were reluctant to lend for real sector activities for reasons such as poor managerial ability, ability to repay, unfavourable growth prospects in the sub-sector, inherent risk and insufficient collateral (Anyanwu, 2010).  It is against the backdrop of the afore-mentioned problems that this study is carried out to examine the impact of private sector credit on the real sector of Nigeria for the period 1981 to 2015.

In essence the study will seek to answer the following research questions

  1. What is the impact of private sector credit on real sector performance in Nigeria.
  2. What is the long relationship between credit to the private sector and real sector performance in Nigeria.


1.3       Objectives of the Study

The main aim of this study is to examine the impact of private sector credit on the real sector of Nigeria. The specific objectives includes

  1. To determine the impact of private sector credit on real sector performance in Nigeria
  2. To examine the long relationship between private sector credit and growth of the real sector in Nigeria


1.4       Research Hypothesis

In order to achieve these set objectives, the following null hypotheses are proposed:

  1. Private sector credit has no significant impact on real sector performance in Nigeria.
  2. That there is no significant long relationship between credit to private sector and the real sector in Nigeria

1.5       Significance of the Study

The main significance of this study is to provide information on the role of private sector credit on the real sector performance in Nigeria. It would provide policy recommendation to policy makers on ways to boost real sector performance through private sector credit.

1.6       Scope of the study

The study would span a period of 34 years (1981 – 2015). The major reason for this range of coverage is owing to the availability of data.




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