Factors affecting Deposit Money Banks’ Credit to Manufacturing Sector in Nigeria

Abstract

This study examined the effect of inflation rate, liquidity ratio, loan to deposit ratio and prime lending rate on banks’ credit to manufacturing sector in Nigeria. Annual time series data spanning from 1986 to 2021 sourced mainly from CBN Statistical Bulletin was used. The study employed Augmented Dickey-Fuller test and Autoregressive Distributed Lag estimation techniques. Findings revealed that inflation and prime lending rates have positive but insignificant effect on banks’ credit in the long run. Also, liquidity ratio has positive significant effect in the short run, but affects banks’ credit negatively in the long run. Moreover, results showed short run causality from explanatory variables to deposit money banks’ credit. The study concluded that inflation rate, liquidity ratio, loan to deposit ratio and prime lending rate are critical factors that influence banks’ credit to manufacturing sectors. Therefore, it is recommended that the Central Bank of Nigeria should formulate favorable monetary and macroeconomic policies in order to encourage banks’ lending to manufacturing firms in Nigeria thereby enhancing economic growth.