Afro Asian Journal of Social Sciences

Volume VII, No I. Quarter I 2016

ISSN: 2229 – 5313

THE IMPACT OF CENTRAL BANK OF NIGERIA’S DEVELOPMENT FINANCE ON

ECONOMIC GROWTH AND DEVELOPMENT OF NIGERIA

Nasir Ahmad Sarkin Dori

Lecturer, Faculty of Arts and Social Sciences, Department of Political Science, Federal
University Dutse, Jigawa State, Nigeria

ABSTRACT

Without sufficient and effective development finance economic growth and development are
impossible. Healthy development finance in a country ensures capital formation, higher
productivity, better standard of living for citizens and stable and growing economy. Policy
measure of development finance intervention which supplies capital in form of finance and credit
to the productive sectors of the economy is important and in fact necessary for meaningful
economic growth and development. The state of economic development in Nigeria is invariably
associated with extent of the growth and development of the financial institutions. Development
finance is any finance, donation or credit geared towards achieving economic growth and
development in an economic system. This paper examines and assesses the relationship and
effects of Central Bank of Nigeria’s development finance policy on economic growth and
development of Nigerian economy. Central bank of Nigeria development finance is the financial
initiatives involved in the formation and implementation of policies, schemes, programmes and
innovations for the provision and supply of credit, loans, finance, donations and funds to the
productive sectors of the economy to deliver economic services in an effective, efficient and
sustainable manner to achieve economic growth and development. Central Bank of Nigeria plays
a development finance roles through its credit schemes like agriculture credit guarantee scheme.
The major findings of the study were greater number of the productive sectors of Nigeria lack
access to adequate finance and credit this reduces their total productive capacity and affects the
economy negatively. However, Central Bank of Nigeria’s development finance policies and
schemes have increased the productivity, investment, savings, employment and output of the

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productive sectors of Nigeria. In this case the development finance has enhanced the progress of
Nigerian economy. The conclusion derived from the findings as contained in the
recommendations includes: the three tiers of governments should give the central bank of
Nigeria’s development finance policy and schemes necessary support, adequate attention and
publicity. Sufficient and adequate fund and finance should be provided to development finance
schemes. Effective monitoring mechanism and written rules and regulations should be
implemented with (development goals) to guide the operation and performance of the
development finance schemes. There is the necessary need to increase, improve and encourage
development finance institutions in Nigeria in order to accelerate inflow of capital to the sectors
of the economy to facilitate economic growth and development

Introduction
Development financing is one of the major and necessary requirements or instruments for rapid
and sustainable economic growth and development in any nations which supply finance, fund,
credit and donations to various sectors of the economy in order to achieve welfare improvement,
greater productivity and facilitate economic growth. Development finance is the financial
initiatives involving the formulation and implementation of policies, innovations, schemes,
programmes, appropriate financial supply/credit to deliver economic services in an effective,
efficient and sustainable manner to achieve economic growth and development.

Furthermore, conceptually an contextually development finance encompasses the ideology,

philosophy, objectives goals, strategies, schemes, programmes, institutional policy and economic
or financial agents or agencies that provide, facilitate and enhance the provisions or supply of
finance and credit for productive and economic activities to sectors such as agricultural
industrial , manufacturing and entrepreneurial activities that can assist in achieving accelerating ,
improving and facilitating economic growth and developments. Development finance role is the
conglomeration of various markets instruments, operations and institution that interact with the
economy to produce or supply financial services and financial resources mobilization and
allocation to enhance sectors’ productivity, output, income, saving, capital accumulation,
employment generation, standard of living and economic development at large.
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Development finance role can be internal or international financial institutions. Internal financial
institutions comprised of Central Bank of Nigeria, commercial banks and other internal financial
institutions that supply finance or credit to the sectors of Nigerian economy. International
financial institutions that also supply finance or credit for the purpose of economic problems
such as poverty, economic growth and development comprised of World Bank, IMF, Paris and
London clubs, African Development Bank and other international financial donors and creditors.

In Nigeria, the apex of financial regulatory body the central bank, without an iota of doubts has
been playing this development finance role for supporting the sectors of the economy such as
agriculture, industry and entrepreneurs with the supply of finance, credits and donations for
growth and development of Nigeria economy. It is basic that inadequate and insufficient capital
to productive sectors lead to low productivity, output, income, saving, investment, employment
and backward economy. Central Bank of Nigeria is the sole designer, initiator, administrator and
regulator of all forms of development finance policies and schemes in Nigeria. All the internal
financial institutions, lending institutions development finance institutions and commercial banks
are controlled, guided and operated under the central bank of Nigeria’s directives. The Central
Bank of Nigeria’s development finance role initiatives involve the participation of Central Bank
Nigeria directly or indirectly in the economy in terms of the formulation and implementation of
various policies, schemes, programmes innovations and directives for the provision of sufficient
or adequate finance and credit to the productive sectors of Nigeria with primary objective of
facilitating economic growth and development. The central bank of Nigeria conducted
development finance roles through its credit schemes such as:

1. Refinancing facilities for agricultural export commodities.

2. Rural finance and banking support scheme
3. Agricultural credit guarantee scheme
4. Commercial agricultural credit scheme
5. Small and medium scale industry credit scheme. etc

However, the Central Bank of Nigeria role in promoting economic growth and generally a
healthy economy goes beyond the conduct of monetary policy. Generally, lack of access to
adequate finance and capital needed by Nigeria sectors of the economy have been the major
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problem that lead to their inability to source sufficient and effective inputs to expand output,
productivity, income, saving, investment and employment . Therefore, the perpetual decline and
downfall in productivity, output exports, foreign trades, foreign direct investment , GDP, foreign
exchange earnings in Nigeria economy should be attributed to inadequate finance and capital
needed by the productive sectors. Obviously, those have been the problem that hindered,
undermined and impeded the growth and development of the productive sectors and rooted a
perpetual crisis in Nigerian economy such as extreme vicious circle of poverty, unemployment,
inequality, insecurity and general economic crises. Therefore, sufficient and effective supply of
just and easy credit to the productive sectors like agriculture, industry and entrepreneur will
helps Nigerian economy to achieve high productivity and facilitate economic growth. Otherwise,
Nigerian economy would continue to be in crises.

The primary objectives of this paper are: to determine the nature and scope of the Central bank
of Nigeria’s development finance, to examine and assess the effects of Central Bank of Nigeria
development finance role on economic growth and development of Nigeria economy. And
finally, to identify challenges of the development finance and suggest measures for sustaining
and improving the development finance in Nigeria.

Theoretical Framework

This paper adopts the classical theory of political economy and development in understanding
the relationship between development finance and economic growth and development. The
theory is concerned with economic growth, the factors socio-economic, political and financial,
which impeded or facilitates these economic growth and development. However, it is the study
of economy, production, distribution, exchange and consumption of goods and services within
the context of specific politics and society. In relation to this topic the central argument of this
theory is that sufficient and sustains access and inflow of finance and capital to productive
sectors would enhance their capital formation, productivity and investment while insufficient
finance and capital needed to them would mount a decline in their productivity. The famous
scholars in this theory comprised of Adam Smith, David Ricardo, Thomas Malthus and others.
Smith believes that the banking sector play an important role in channeling finance, capital,

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credit and investment to productive agents like agriculture, industry, entrepreneur and processing
agents within the economy and therefore act as a catalyst of economic growth and development.
The main implication of this theory, therefore, is banking sector credit policies, programmes and
schemes aims at enhancing productivity and investment which embrace openness, competition
and simplicity, will promote economic growth and development. The theory agrees with
sufficient capital in form of finance and credit enhances productivity and investment, in turn
accelerates economic growth and development and the reverse is the case. According to Smith
credit is the source of capital formation and capital formation is the source of high production.
Sufficient capital accumulation is a key to economic progress and sufficient capital in form of
finance to farmers, producers and businessmen is a key to economic growth and development.
And farmers, producers and businessmen are the agents of economic progress. Sufficient finance
and access to adequate credit enable the productive sectors of an economy to source adequate
modern inputs, additional workers, modern technology and reinvestment these enhances
productivity and boost economic activities in a nation. Therefore, finance or credit plays a
significant vital role in influencing capital formation, productivity and investment of the
economy sectors and stimulates growth. According to Ricardo supply of finance affects
economic growth and development, stagnation or even declining in any economic system.

Literature Review

Academically, various studies have made and shown that there is a strong and positive
relationship between the development finance and economic growth and development.
According to Porter (1996), the level of financial institution development is the best indicator of
general economic development.

Goldsmith (1969) contends that financial development is of prime importance for real
development because the financial superstructure in the form of both primary and secondary
securities accelerates economic growth and improves economic performance to the extent that it
facilitates the migration of funds to the best user. In his empirical study, however, Goldsmith
calculated the value of the development interrelation ratio, the ratio of all financial instruments at
a given time, to the value of the national wealth and development. He found that the ratio for

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developing countries was far lower than those of developed countries and concluded that because
the development of financial institutions affects development in developed countries and
financial development is lowest even lower in developing countries which led to backwardness.
The low level development of financial superstructure affects development negatively.
Ake (1981) development strategy aim at expansion and diversification of agricultural export
commodities, a unified financial and economic approach to development (i.e. development
finance), import substitution, export promotion, integrated rural development and basic needs
approach. Any process of financing those activities could be regarded to as development finance
role.

World Bank (1982) further contends that development finance encompasses the increase in the
stock assets or the ability of financial institutions to effectively mobilize financial resources for
economic growth and development. This view accepts the fact that financial systems
contribution to the economy depends on the quality and quantity of its services and the efficiency
with which it performs them.

Nzotta (2009) classify development finance into two sectors. The informal sector which
characterized by: it has no formalized institutional framework, no formal structures no guided
written rules and regulations and they are more of traditional comprises of local money lenders
thrift cooperative society and associations while the formal sector on the other hand could be
clearly distinguished into money and capital markets institutions such as central banks,
commercial banks, world bank, IMF, African development bank etc.

Schumpeter (1911) sees development finance as the role of financial intermediation through the
banking system or financial institutions that plays a private role in economic development by
affecting the allocation of saving, investment and fund, thereby improving productivity, technical
change and the rate of economic growth.

The Impact of Central Bank of Nigeria’s Development Finance on Economic Growth and
Development of Nigeria

The apex bank, the central bank of Nigeria in propelling the nation’s economy and facilitating
economic growth is implementing various reforms like credit schemes and financial programmes
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which have direct impact on the economy of the country. The development finance department
of the central bank of Nigeria is the driver of these major reforms in order to achieve
microeconomic goals at attaining rapid and balanced growth of the economy and the alleviation
of poverty, unemployment and inequality. The development finance department was created in
1977 to manage the central bank of Nigeria’s development finance policies, schemes and
programmes.

Central Bank of Nigeria influences economic activities and progress through the following
Credit Schemes.

1. The refinancing facilities for agricultural export commodities. This is the intervention
by CBN in rural finance markets with the provision of refinancing facilities for
agricultural export oriented commodities. This scheme had made significant contributions
to Nigerian economy. It has increased inflow of credits to the farmers producing export
commodities in Nigeria. Therefore, sufficient and access to credit and financial
donations to the farmers producing agricultural export oriented commodities will enhance
agricultural export commodities, export promotion, foreign trades, foreign exchange
earnings, balancing of trade and payment , foreign direct investment, employment and
foreign reserve and of course these would facilitate economic growth and development
in Nigerian economy.
2. Rural banking and finance programme is designed to increase access of the rural
dwellers to financial and credit services aimed at promoting the financing of agriculture,
small scale rural industrial activities. For many years Nigerian rural areas were
economically backward and poor with high rate of poverty, unemployment, and
inequality and rural to urban migration. Lack of access to adequate capital and finance to
rural agriculture and industries have been the genesis of downfall of the rural economy in
Nigeria. However, this credit scheme has improved the life, economy and development of
the affected rural. Though not all the Nigerian local government benefited from the
scheme. Therefore, if government can improve and spread the activities of this scheme to
all Nigerian rural areas or local governments would go a long way in improving the rural
economy and of course the Nigerian economy. However, sufficient and effective supply

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of credit and finance to rural famers, small and medium scale industries and companies
will enhance productivity, output, employment generation, location and localization of
industries in rural areas, standard of living, agricultural and industrial development in
rural areas and will reduce the rate of poverty, unemployment, income inequality, rural to
urban migration and improve the rural life and economic well-being of the people living
in rural areas. These would assist in achieving integrated rural development in rural areas
and facilitate economic growth and development of the Nigeria economy.
3. Agricultural credit guarantee scheme is designed to revamp and boost agricultural
sector through the provision of loans to small and medium farmers of Nigeria. One of the
major challenges facing our rural farmers is lack of access to adequate and just credit.
The study has discovered that this credit scheme has increased the inflow of credit to the
Nigerian farmers. Increased the acquisition and adaptation of new improved quality
seeds, fertilizer, pesticide and machines among the beneficiaries’ farmers. This increased
the farmers output, income, employment generation, potentialities, and standard of living.
Government should sustain this kind of scheme and sufficient fund should be provided to
the scheme, this will enable our small and medium scale farmers from remote rural areas
to acquire adequate capital from the credit to source enough inputs and expand their
output and income earnings. Expansion of farmers’ output and income earnings goes with
expansion of food production, food security, domestic trade, per capita output and
income, standard of living and import substitution on food locally produced. These would
expand the economy and stimulate growth in Nigeria. It has been discovered that this
agricultural credit scheme has supplied credit to all states of the federation and has made
positive impact to all of the beneficiaries’ farmers and the local governments.
4. Small and medium enterprises equity investment scheme. The scheme is designed to
provide finance and credit to small and medium enterprises in Nigeria to enhance
ownership of business. Provision of sufficient finance and credit to the Nigeria
enterprises will enhance investment, productivity, self-reliance, business ownership and
employment opportunity. These would help the Nigerian economy to develop local
technology, generate employment, encourage investment and productivity and of course
stimulate economic growth. A scheme like this should be sustained and well-funded to

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increase small and medium entrepreneurs’ investment locally. Nigeria needs to look
inward for the utilization of local available resources and possibilities. Because local or
internal investment always determine foreign direct investment.
5. Commercial agricultural credit scheme. Central bank of Nigeria designed this scheme
in order to fast track the development of the agricultural value sector of the economy
through provision of credit facility at single interest rate to large scale commercial
farmers. The scheme has also improved the commercial and large scale agricultural
production in Nigeria. And the scheme enhances the Nigeria export commodities and
foreign exchange earnings, foreign trades and investment. Nigerian government should
endeavor to sustain a credit scheme like this. Because sustained and sufficient finance
and credit to commercial and large scale farmers in Nigerian will enhance
commercialization and large scale agricultural production, agricultural export
commodities, foreign exchange earnings, commercial agricultural oriented sector, source
of revenue to the government, balance of trade and payment and international trade.
These would facilitate economic growth and development in Nigerian economy.
6. Small and medium scale industry credit scheme. The significant important of the
industrial and manufacturing development in an economy cannot be over emphasized.
These are the twin sectors that determine the nation’s level of technology, technical
know-how, manufacturing products and industrialization. This scheme is designed to
accelerate the provision and supply of finance and credit to Nigerian industries and
manufacturing sectors. Sustained and sufficient provision of finance and credit to these
sectors will help the Nigerian economy to accelerate and achieve industrialization,
advance manufacturing sector, advance technology, machines, mass production and
export. Industrialization is a key to any meaningful economic development. Our small
and medium scale industry needs sufficient capital formation to compete with
multinational companies and foreign industries. This will accelerate and stimulate the
production of manufacturing products and facilitate economic growth and development in
Nigeria.

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These are the positive relationship between central bank of Nigeria’s development finance role
and the economic growth and development of the Nigerian economy. Central bank of Nigeria
has been playing development role through its development finance.
However, CBN has been playing development finance role through its financial and credit
schemes. The entire financial and credit schemes are designed to affect all the economic sectors
of Nigeria. Parts of the major challenges of Nigeria’s productive sectors were inadequate capital,
insufficient finance and of course lack of access to sustainable and favorable credit.
Categorically, these are the epidemic problems that undermined and impeded the progress of our
economy. Sustained, sufficient and effective development finance in this country is expected to
enhance and accelerate productivity, exports, foreign earnings, balance of trade and payment and
reduces poverty and breaks extreme vicious circle of poverty, reduces destitution, narrow
economic inequality and control unemployment in the Nigerian economy. Central Bank of
Nigeria’s development finance intervention is to facilitate smooth, easy just, cheap and adequate
inflow of capital in form of finance and credit to the productive sector of the economy to enable
the sectors adopt new technologies and adequate inputs which would raise their productivity,
output, income, saving, investment, and general activities. Undoubtedly, development finance
affects Nigeria’s economic growth and development, stagnation or even declining. Lack of
access to adequate capital in form of finance and credit contribute to the stagnation and declining
in Nigerian economy. Therefore, for Nigerian economy to achieve economic growth and
facilitate economic development sustained sufficient and effective finance and credit should be
supply to our productive sectors of the economy. These would definitely accelerate and stimulate
capital formation among the sectors.
In nutshell, the role of financial intermediation at the center and heartbeat of Nigerian economy
cannot be quantified or even emphasized because financial institutions played a pivotal role in
economic growth and development by affecting the allocation of adequate financial resources,
investment, capital formation and saving thereby improving productivity, output, technological
change, Gross domestic product, Gross National Income, per capita and rate of economic growth
and development.

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Challenges

Unfortunately, approach to development finance over years in Nigeria had tendered to be

segment, uncoordinated, insufficient, ineffective, insufficient support and attention, politicized
and largely unsustainable. However, most of the credit loans and finance were unaffordable,
inaccessible, unjust, unavailable, unreliable and unfavorable to the productive sectors, more
especially agricultural sector which received only 1% out of the 100% total commercial banks
loans, and the sector was primary dominated by poor, small and medium rural farmers who have
nothing than hoe.

Furthermore, most of the credit schemes are bourgeoisie/elite oriented schemes, because most of
the beneficiaries are politicians, elites, senior civil servants and technocrats who have influence
and connection in government and who have mainly diverted the fund to their personal and
private life and to unproductive use.

In this regard, it is very difficult to achieve the objectives of development finance and enhance
Nigerian economy. Most of the development finance schemes faced with inadequate funds from
government. The Central Bank of Nigeria’s credit schemes however, faced with the following
challenges. High incidence of loans default among the beneficiaries, it is very difficult to recover
funds. There was high incidence of loans diversion among the beneficiaries, high interest rate
charge by some banks against Central Bank of Nigeria directives and the small size of the loans
to some beneficiaries. Most of the credit schemes lack affective mechanism for monitoring the
operation and the performance of the schemes, lack of clear written rules and regulations that
will guide the activities of the credit schemes, lack of adequate information and publicity to
creditors.

Recommendations

Categorically, we have seen the important vital roles and contributions of central bank of
Nigeria’s development finance schemes on economic growth and development of Nigeria.
Therefore the three tiers of government in Nigeria should give the credit schemes the necessary

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support adequate attention and publicity in order to sustain development finance practice in
Nigeria. Nigerian productive sectors (Borrowers), lending institutions and government however,
must show greater commitment and dedication to any development finance policy for the credit
schemes to achieve its target. There is the necessary need for effective monitoring mechanism
and clear written rules and regulations that will guide and monitor the operation and performance
of the credit schemes and policies to prevent future down fall or failure. Government should
create a development finance department or unit in all the productive sectors like Central bank of
Nigeria’s development finance department, this will help in coordinating and implementing
government policies and programmes on development goals and development finance initiatives
in Governmental structures. Government should also provide strong and sustainable incentives
and adequate funds to specialized development finance institutions in order to encourage the
supply of adequate, just, easy and favorable credit to the productive sectors of Nigerian
economy.

A specialized development finance agency like in developed countries should be created in

Nigeria to shoulder the development finance roles, responsibilities, directions and activities. This
will really help along the way in institutionalizing development finance practice and revive the
economy towards achieving economic growth and development in Nigeria.

Conclusion

This paper examines and assesses the relationships and effects of central bank of Nigeria’s
development finance role on economic growth and development of Nigerian economy. It has
discovered that the Central Bank Nigeria’s development finance role has made significant
contributions to the Nigerian economy by improving the productive sectors and facilitating
economic growth and development. It also identified some of the challenges facing the policy
which needed to be urgently addressed to allow it make meaningful contribution to the orderly
growth and development in the Nigerian economy. These include sufficient funds or financial
resources, adequate attention, necessary support, publicity and effective monitoring mechanism.
The Central Bank of Nigeria’s development finance role has made positive contributions to
Nigerian economy. Therefore, the important of development finance policies and schemes
cannot be overemphasized as the key source to the capital needed by the productive sectors of
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the economy which invariably enhance productivity and output, income, investment, saving
wealth creation. These stimulate and encourage economic growth and development. In nutshell,
any government development finance policy at any point of time should be to ensure that
financial system operate sufficiently and effectively such that the real sectors will receive the
necessary financial support to achieve economic growth and development in Nigerian economy.

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