The importance of credit in economic development cannot be over-emphasized, especially in the context of developing countries that are trapped in a web of poverty which has become known as the vicious circle of poverty. As noted in Jhingan (2011), the vicious circle of poverty implies a circular constellation of forces tending to act and react upon one another in such a way as to ensure that poverty is self-perpetuating. Several theories emphasised the over-riding importance of capital in breaking the grip of poverty, removing structural rigidities and promoting economic development. For instance, the “big push” theory contends that a high minimum amount of investment is required to overcome the obstacles of development in poor countries and to launch it on the part of progress. Similarly, the “take-off” in Rostow’s stages of growth theory is largely predicated on massive investment of capital.
Globally, economies (especially those of developing countries) are sometimes subject to serious financial shocks and capital constraint which impact negatively on macroeconomic variables, and cause the financial intermediation mechanism to suffer. This in turn dislocates the central role of banks as agents of savings mobilization and lenders for investment. To ameliorate this trend, especially after the 2007-2008 global financial crises, central banks around the world began to adopt traditional as well as unconventional credit easing policies to inject liquidity into the banking system so as to obviate recessionary outcomes in the economy. Thus, public authorities in Nigeria have in the last several years rolled out a number of credit or development interventions with the aim of promoting income and employment expansion at both the firm and aggregate levels, build basic infrastructure and engender overall sustainable development.
The experience of Nigeria leaves no doubt that capital is a prerequisite for its economic and social progress as well as for effective public policy making. The Central Bank of Nigeria (CBN) recognizes that for the economy to function efficiently given structural rigidities, and for the private sector to develop and flourish, businesses need to have access to credit. In view of the paucity of credit, coupled with the problems of inadequate infrastructure, huge skills gaps, and very large informal sector, the CBN and other development partners such as the Bank of Industry (BoI), the Bank of Agriculture, among others embarked on significant credit injections to support the critical sectors of the economy.
First, indirect monetary policy intervention was used from 2004 to 2008 to inject funds into major financial and non-financial institutions in order to revitalize the entire economy. These capital injections prevented the bankruptcy of various financial institutions by strengthening their balance sheets and restoring their ability to raise and productively deploy credit. Despite several policy initiatives of the CBN, small and medium–sized businesses in Nigeria continued to experience difficult moments in accessing funds.
The second class of intervention were those made to the critical sectors of the economy aimed at bridging the yawning financing gap that have existed over time. In this regard, some notable interventions in recent years by the CBN include the N200 billion Commercial Agriculture Credit Scheme; N200 billion Restructuring and Refinancing Facility; N200 billion SME Credit Guarantee Scheme; and N300 billion Powers and Airline Intervention Fund, amongst others. For instance, the Bank of Industry (BoI) implemented some intervention funds such as the N5 billion BoI/Dangote Matching Fund, Cassava bread Fund, N1.1 billion Cottage Fund, N5 billion FGN Special Intervention Fund for MSME, N800 million National Programme for Food Security, N13.6 billion Rice and Cassava Intervention Fund, Sugar Council Development Fund, National Automotive Council Fund comprising N1billion for Automotive Assembly Plants, N200 million for automotive component manufacturers, N100 million for automotive garage workshop and N20 million for artisans, craftsmen and mechanics. Also the Bank has disbursed N8, 479,486.76 under the Cement Fund. Similarly, the Bank of Agriculture disbursed N41 billion to over 600 enterprises across Nigeria in the last ten years, N3 billion on-lending facilities to about twelve states of the Federation and N4 billion to about 30,000 beneficiaries. In addition to these, a total of US$86.56 billion was received as capital inflows into the economy in the form of direct and portfolio investment, trade credits and loans as well as currency and deposits from 2011 to 2015.
Given the multiplicity of credit interventions by the CBN and other funding institutions, it is plausible to express some doubt about the absorptive capacity of the economy. The basic problem of interest is that credit purveyance may lead to sub-optimal outcomes and poor resource allocation decisions if local conditions are unfavourable, which may eventually cascade into a huge stock of non-performing credit facilities. Thus, a number of important questions come to mind: Does the growth enhancing attribute of credit depend on the absorptive capacity of the economy? What are the factors constraining the absorptive capacity for further credit in Nigeria? Does the macroeconomic policy framework have any effect on domestic credit absorption? Given the absorptive capacity of the Nigerian economy, what is the threshold point beyond which credit ceases to significantly impact on growth? Providing the answers to these questions constitute the objectives of this paper.
Specifically, the three-fold objectives of the paper include: to determine the necessary factors that influence the absorptive capacity for credit in the Nigerian economy; examine public policy effects on the absorptive capacity for credit; and assess the possibility of diminishing return to credit. The contribution of this paper to empirical literature hinges on the fact that it is perhaps the first study on absorptive capacity of credit in Nigeria that is focused on the above objectives. The approach adopted in this study is yet to be seen in any similar study in Nigeria. The remainder of the paper is structured as follows: section two reviews the relevant literature for the study; section three discusses the methodology/specification; section four presents the findings of the study; and section five concludes the paper.