The Role Of Banks In Industrial Development Of Nigeria

THE ROLE OF BANKS IN INDUSTRIAL DEVELOPMENT OF NIGERIA

The Role of banks in industrial development cannot be over-emphasized due to its importance in the Nigeria economy.  The role of banks in industrial development of Nigeria could be seen through the various services which these banks provide for the sustenance of industrialization in the country.

Industrialization is the act of establishing different type of industry in the country for the purpose of stabilizing the nations economy and utility improving the standard of living of its citizens.

Industrialization leads to

1. Diversification of the Nations economy.
2. Acceleration of economic development.
3. Stimulation of foreign exchange earning and international recognition.
4. Provision of employment opportunities.
5. Ensure export, expansion and import contraction.

According to Uzoagu commercial banks particularly the indigenous group have made significant contribution to the development of Nigerian economy.

As a result of this, government decided to make extra effort even to establish banks like Nigeria Industrial Development Bank (NIDB), Nigeria Bank For Commercial And Industry (NBCI) all towards the maintenance and development of Nigeria industries.

These banks have contributed immensely to the industrial development of Nigeria. According to Nwabuzor (1990:32), the main function of NIDB include –

1. To provide medium and long time financial for both public and private companies not satisfaction performed by commercial and merchant banks.
2. To identify investment bottle-neck in the Nigeria economy and in so doing help determine investment priorities not only for government but also for private sector entrepreneurs.
3. The promotion and development of viable projects for investment.
4. To offer consultancy service by giving financial, technical and manageably assistance such as manageably guidance, feasibility studies of investment projects etc. to companies in both public and private sector including those enterprises in which the bank may not even have loan or equity interest.
5. To support the implementation of these project financed by banks obtaining progress report on them and paying visits to project site (project supervision).
6. Nominating technical and managing advisers and/or partners to industrial project organizers, particularly in the indigenous private sector etc. This banks was designed to provide soft loan with attractive repayment grace periods to medium and large scale Nigerian enterprises which were not very comfortable with the loan requirement of the conventional bank.

THE NEED FOR BANKING INVOLVEMENT IN INDUSTRALIZATION

Some of the advantages Nigeria will enjoy if industrialization is intensively pursued have been outlined.  However, it should be borne in mind that for these wishes or dreams to become realities, all hands must be on deck, government policies and programmes have to be remolded and redirected to accommodate intensive industrialization.  To achieve this, greater emphasis must be placed on practicalities rather than theories.  This is because a lot of theories, study group recommendations and the ultimate government policies has been postulated to look very appealing but sooner than later it is realized that these policies could not be translated into actions due to its inconsistencies with the Nigerian environment, with the effect that the ultimate result becomes zero.

In Nigeria, some of the policies which the Federal Government should propound to sound very active if industrialization and other business activities will grow are private property ownership, a system of rewards and incentives, freedom of people and market etc, while down playing hinderances such as sectionalism and political bigotry.

Nigerian bankers will contribute their quota through this ambit, also the government should not loose sight of making active the policy of Banks involvement in the industrial sector because of their importance in the economic development of the country.

A vitally necessary ingredient for industrial establishment and growth is capital formation.  Capital formation is basically a two phased process that is savings and investment.  These have been a monopoly of banking in Nigeria.  Savings are often associated with commercial banks whose function is to collect the savings of many individuals and put them to productive use.  Similarly, this means channeling the funds (collected through savings) to entrepreneurs for multiplier production of capital goods.  There can be no investment without savings and savings are unproductive unless accompanied by investment in capital goods.  It is basically against this background that an attempt should be made at this point to briefly expose how bank’s services should be indispensably employed for the benefit of industrial growth of the country.

The first and of course the most important services rendered by these banks to the industrial sector is the allocation of capital.  This is important because for an industry to be established and nurtured to maturity, it needs capital and as monopolists in savings and investment (i.e. capital formation), the banks becomes the only source from which this very much needed capital could be raised, capital here refers to short, medium or long-term money loaned for period between five and fifteen or twenty and thirty years.  Before the bank agrees to grant this type of loan, the project for which the loan is sought for is usually evaluated to determine its viability.  Also the knowledge of the expected returns from the loan, the default risk of the loan and the risk control measures to be adopted are very important to both the bank and the client.  Evaluation is often based on the feasibility studies of the project coupled with the project financial statement provided by the client.  These projection, usually include cash budgets, income statements like profits and loss accounts and sources and application of funds statements.

The loan can then be granted after the evaluation has been concluded and the projects viability determined but often not without attaching certain risk control measures to avoid total loss in case of default.

Project evaluation and its ultimate viability determination is very important to the industrialists because it helps to expose same of the problems the industrialist will face in real life situations to be distinct from the rosy pictured painted by the projections.  Also, it has been discovered that due to the perennial illiteracy problem confronting most of these industrialists, they do not possess the necessary financial expertise required to put together bankable propositions.  What they usually do is to seek the advice of an outside consultant who often prepares the reports and projections to suit their client requirements and earn their fees.  Therefore if a loan is granted based on this type of financial projections, the industrialist sooner than later finds himself in trouble thereby making the loan a problem to the bank, and in many cases, the loan is not repaid.  Therefore only the close involvement of the banks themselves in the initial development of the project can solve the problem and this can only be done through project evaluation and its ultimate viability determination, which the banks do themselves.

Another important service which the bank renders to the development of industrialization in Nigeria is the monitoring of credit advances to customers.  This is to make sure that the loan is carefully applied for the project for which it is meant.

In cause of their loan request, industrialists usually express the desire to comply with any condition stipulated by the banks in order to obtain the loans.  But once the loans have been obtained, some of them are diverted to other uses to the detriment of the project for which it was meant for.  Also where the loan has been obtained against a charge on the assets proposed to be acquired with the funds, the banks interest is immediately jeopardized if the client fails to apply the loan for the purpose for which it was obtained.  Not only is loan misapplied, it is often not repaid resulting in a huge accumulation of arrears and bad debts.  Because of their lack of qualified personnel, the administration of the loans rest mostly on the banks who have to ensure for instance, that term loans are utilized on the acquisition of fixed assets while overdrafts are reserved for working capital.  Moreso the banks may insist that periodic financial statements should be sent to the bank to help in measuring the success of the project.  This is an important weapon because it encourages the industrialists to work harder for the success of the business especially where an acceleration clause is included in the loan agreement.

Generally, banks in the country usually parade a long list of qualified professionals and experts in different levels of human endeavour.  This makes them possess the potentials necessary for the rendering of expert and specialized professional advice to industrialist as one of the important services they render for the benefit of industrialization.  The professional advice include among others;

1. Advice on financial management such as how to raise capital and how to use such capital, coupled with the advice on how to prepare their finance proposals that will be acceptable to any lender.
2. Advice on how to go about acquiring other business and on how they expect to be merged to another business.
3. How to obtain loans
4. How to develop or promote oversees trade
5. How he can overcome his working capital problem either through invoice discounting or factoring of trade debts.

There are many other services and advice which banks in Nigeria can offer for the benefit of Industrial development so as to make the country reduce strive to the minimum and harness to the maximum the advantages of industrialization.  In view of this, government should evolve a policy that will actively involve the banks in pursuing the industrial policies of the country to a logical conclusion.

Recently, Banks, especially Merchant Banks in the country has evolved different types of specialized services that are very vital to the industrial development of Nigeria.  Services such as bill financing, factoring, invoice discounting, leasing and the determination of the external funds required by the firm are important for the proper financial management and for the provision of adequate resources for the day-to-day running of the business.

Most often, borrowers more especially illiterate industrialists do not know the actual amount they require to make them reach their target.  This is a dangerous situation because if the actual fund required is not known, the amount invested may not lead to expected results thereby making the loan a problem one as repayment may be impossible.  To avoid this problem, banks have devised a mathematical means used for the determination of the external funds required by a firm with the help of the firm’s balance sheet and given projected revenue from sales.

Another service, though not involving cash, which contributes to the indispensability of banks involvement in industrial development is leasing.

These are excerpts of the services provided by banks for the benefit of industrial development of Nigeria.

2.3         THE LEVEL OF BANKS INDUSTRIAL FINANCING

The role of industrial financing in Nigeria is chiefly performed by Banks and other related financial institutions.  However, legal provisions and conventional practices seem to have limited this role mainly to development banks such as the Nigerian Industrial Development Bank, (NIDB), the Nigerian Bank for commerce and industry (NBCI) etc and the commercial banks.

The laws and objectives advanced for the establishment of these banks confirm their deep involvement in industrialization, for instance, the establishment of the Nigerian Industrial Development Bank on the 22^nd of January, 1964 (as a result of re-organisation of the investment company of Nigeria) was due to the fact that:

“The country needed an institution which had the full backing of all the governments of Nigeria without being under their direct control, and command and enjoyed the free confidence of local and foreign investors.  Such an institution would be in a position to promote economic development effectively because it would be independent of political or other influences”.

To achieve this, four clear objectives were spelt out for the bank in the first National Development Plan under which it was established.

Under this plan, the bank was expected to:

1. Join foreign skills and experience and foreign private capital with Nigerian skills and capital in the development of new industries and the expansion of existing ones.
2. Evaluate proposals on commercial principles but sand ready to finance enterprises which cannot get funds through regular commercial channels either because such channels do not exist or because the risks are deemed unattractive for private financing.
3. Create attractive opportunities for investment in Nigerian industry and provide outlets for productive investment of Nigerian savings.
4. To work closely with the various regional government and regional development corporations.

Although it would be concerned primarily with medium and large scale enterprises, it was expected to provide some facilities for small scale industries, through other expanded credit institutions.

In accomplishing the above objectives, the Bank level in industrial financing is categorically influenced by the following guiding principles:

1. The bank only provides medium and long term finance to enterprises in Nigeria which are privately owned and managed thus public corporations or government projects were excluded except where the government’s interest, as measured by voting power or the control of the management of the enterprise was not predominant or where the government’s investment was temporary.
2. The bank operations is limited to mining and industry thus eliminating such projects like agriculture, trade and transports.
3. The project to be financed are those which by reason of their size will make a significant contribution to Nigerian’s economic development.
4. The project should be economically desirable that is they must show promise of raising living standards, providing employment or conserving foreign exchange. Also they should be technically feasible and commercially viable, adequately costed, properly managed and have favourable market prospects for the products.

The bank finances projects in a number of ways viz.

Either through direct subscriptions or under writing of equity, preference stocks, or any combination of these methods.  In either case, it limits its overall financing participation in any one project to a minimum of fifty thousand naira (#50,000) and will not invest in, more than 49% of the total capital needed in any enterprises.

NIDB Loans are granted for between five and fifteen years but a longer though not a shorter amortisation period can be considered in exceptional cases.  This means that although loan for longer than fifteen years can be considered, a period of le s than five years will not be considered. .

0

Another development bank whose level of industrial financing merits a place in this work is the Nigerian Bank for commerce and industry (NBCI).  Established by the Decree No. 22 of 5^th May 1973, the NBCI was sufficiently equipped to provide equity capital and funds by way of loans to indigenous persons, institutions and organizations for medium and long-term investments in industry and commerce at such rates and upon such terms as may be determined by the Board in accordance with the policy directed by the Federal executive council (Decree No.22, 2^nd April 1973).

However, being aware of the obvious limitations of, end gaps created by the operations of the existing financial institutions in Nigeria, and wanting to speed up the rate of economic development, the government utilized the opportunity to equip the NBCI with powers to act as a catalyst in development by operating like an all purpose universal bank to engage in all types of investment banking and underwriting operations.

Historically speaking, the role of industrial financing in Nigeria started with the commercial banks.  Infact the commercial banks started financing industries before the central bank was established in 1959.

Even after the establishment of the Central Bank of Nigeria in 1959, the Nigerian industrial development Bank in 1964 and the Nigerian Bank for commerce and industry in 1973, the commercial banks in the country has remained prominent in industrial financing in the country possibly because of the following reasons:

Also Read: The Role of Banks in International Trade

1. PROXIMITY TO FINANCIAL SEEKERS:

This is correct because commercial banks are scattered in all nooks and corners of the country so it becomes easier for a loan applicant to walk into the nearest bank to him and seek for loan.

1. DEVELOPMENT BANKS POLICIES:

This is true because the policies and guiding principles of these development banks only show that not every project will be financed by them and not all persons and needs will be accommodated within the dictates of their credit guidelines but this is different with the commercial banks who can finance any project and accommodate any person as far as it;

1. Falls within their lending policy.
2. That the expected return from the loan is attractive.

• That the default risk of the loan can be determined.

1. That the risk can be controlled with available risk control measures.
2. That the loan terms to be offered are determinable and acceptable to both the lender and the applicant or customer.

1. LACK OF KNOWLEDGE:

This is because most industrialists especially small scale and illiterate industrialists have development banks some who are aware of their existence has refused to acknowledge their functions and importance.

There are other reasons why the commercial banks are preferred more than the development banks.  However the commercial banks has continued to lead in the level of industrial financing in the country.

Most of the industrialists find it difficult to obtain loan from the development banks than from the commercial banks because of the administrative bottleneck which hinders fast approval of the loans.

There are other institutions that contribute to industrial financing in Nigeria, these institutions like the investment houses located all over the country, the insurance companies who can participate in equity as well as lend to these industries and all other financial investment houses who have been empowered by law to undertake the business of industrial financing.

[simple-links category=”3209″]