Bank Credit and Manufacturing Sector Output in Nigeria: A Nonlinear Approach

Abstract

This study examines the nexus that exists between bank credit and manufacturing sector output in Nigeria between 1981 and 2019 using the nonlinear autoregressive distributed lag (ARDL) model and Granger causality. Unlike most other studies, this study employs the use of bank credit to the manufacturing sector as a proxy for bank credit. The NARDL method used is to investigate the asymmetric relationship suggested in the literature. Results from the bounds test reveal that a long-run relationship exists between bank credit, manufacturing output and lending interest rate. Furthermore, the Wald test for asymmetry showed that there is a long-run asymmetry in the impact of bank credit on manufacturing output. Meanwhile, estimates reveal that positive changes in bank credit are positively associated with manufacturing output, while negative changes in bank credit are negatively related to manufacturing output in the long run. In the short run, however, there appears to be no significant impact of bank credit and lending rates on manufacturing output. More so, results reveal a unidirectional causality running from output to bank credit, lending rates to bank credit and lending rates to output. This study, therefore, concludes that the growth-led finance postulate is valid in this case and that finance encourages output growth in the manufacturing sector in the long run with an error correction of 21%.