Abstract

The study sought to determine the effect of Commercial bank loans on the economic development of Cameroon, case study of Eco Bank, Buea. The research recognizes the growing need for economic development in countries across Africa and the world. With the ever growing difficulties in getting loans by citizens, motivated by the lack of security, and the high risk of recovering granted loans by banks, coupled with the ever growing economic social, political and economic uncertainties in the country, it becomes difficult to raise capital to inject in the economy for development. It becomes vital to look at the effects that commercial bank loans have on the economic growth of the nation.

The study has objectives to assess the effects of Eco bank loans on economic growth; assess the effects of eco bank loans on infrastructural development; and assess the effects of eco bank loans on hum an capital development tin Buea. The study Adopted questionnaires for the collection of primary data, and gathered secondary data from numerous referenced sources. An ordinary linear regression model was used.

The regressions were conducted using statistical package for social sciences (SPSS) version 25. The regression results indicated that commercial bank loans have an effect on economic development, as hypothesis testing presented that eco bank loans have effects on infrastructural development, Human capital development, and economic growth.

CHAPTER ONE

INTRODUCTION

This chapter introduces the theme of study, covering the background, the problems, what the study seeks to address, and the thematic limitations of the work. The study covers the background of major concepts in the study.

1.1  Background of the Study

The first contributor to economic growth and development must be credited to Rev Thomas Malthus in 1798. He was worried about population explosion, and advocated means to avoid the development trap. Over the years, growth and development were the same thing, but with time, ideas started differentiating development from growth, positioning development as a broader category of growth encompassing a couple of other things.

The study of modern growth and development theory was initiated by Frank Ramsey in 1928, who tried to find out the optimal saving for future production. However, when he put consumption as objective, he could not solve the mathematics. T.C Koopmans and David Cass independently in 1965 both tried to complete Ramsey’s task, only to create more problem.  Then the works of neoclassical theorist Solow earlier on in 1956 developed the so-called neoclassical growth theory, whereby he solved Ramsey’s optimal saving by equating savings to population growth. The theory of growth kept developing over the years to the current usage as laid by the works of scholars such as John Maynard Keynes, Lionel Robbins and Adam Smith (Choi, nd).

The Basel Committee on Banking Supervision (2012) noted the influence of loans on economic development when it argued that that the monetary policy affects the supply of bank credit and banks, being the players in the credit market, contribute to the transformation of the monetary policy into macroeconomic outputs in the economy. One of the macroeconomic outputs is economic development.

Cameroon is a developing market which is leaning towards ensuring that credit is made available to citizens as an approach to encouraging economic development, and emergence in 2035.

However, scholars posited that loans did not always lead to economic development. They presented the argument that the effect of bank loans on economic growth is context-based. While loans drove growth in some countries, they did not do much to encourage growth in others. Such divergent views indicate that, unless established so, it cannot be taken for granted that commercial bank lending drives economic development and casting doubt on whether encouraging access to loans is a mechanism that can spur development.

A bank is a person or corporation which holds, receives, from the public, deposits payable on demand. Gobat (2012) asserts that a bank is a financial institution whose primary role is to take in deposits from those with idle money, pool the deposits, and lend them to those who need the funds. A bank becomes a commercial bank when it deals in money and credit for profit. A commercial bank, therefore, is a financial institution that deals in money by way of accepting deposits of money from the public to keep them in its custody for safety.

Commercial Bank Loans are credit extended to a business concern within the context of a direct relationship between a borrower and lender where some part of the principal is repayable after the passage of one year.

However, there is the recognition that a loan can be given to non-business entities too. This widens the definition of a loan. A loan can also be defined as a written or oral agreement for a temporary transfer of a property, usually wealth, in cash form, from its owner called the lender to a borrower who promises to return it according agreed terms (Dhikary, 2006). The terms involve interest, time of repayment and the pattern of the repayment. If the loan is a term loan, it is repayable when the lender demands for its repayment. If it is an installment loan of the lender requires repayment in equal monthly payments. In case the lender requires a lump sum to be made at the end of the time agreed then this type of loan is a time loan. Banks also classify their loans into categories such as consumer loans, commercial loans, industrial loans, construction and mortgage loans, and secured and unsecured loans.

In this study the adopted meaning of commercial bank loans is that used by De Haas, Ferreira & Taci (2010) in which commercial bank loans are the sum of all the loans issued. Commercial bank loan is therefore any type of loan issued out to any type of borrower by a registered commercial bank.

The term economic development is a term that is not easy to define though it connotes changes in quantity of physical product of an economy, and improved quality of life of its citizens. Economic development is measured by economic growth, and social growth (World Bank, 2014). The measure of economic growth should have a quantitative aspect. In this perspective, economic growth for any nation is a sustained increase in its population and product per capita.

The United Nations’ Human Development Report of 1996 defines economic growth as simply as increase in a nation’s total wealth. However, this definition ignores the effect of the population on the wealth.  The Department for Business, Innovation and Skills in the United Kingdom in a 2011 report provides a more sophisticated definition of economic growth by positing that economic growth is the continuous improvement in the capacity to satisfy the demand for goods and services, resulting from increased production scale, and improved productivity. Therefore, economic growth in a nutshell is the process of increasing the sizes of national economies as indicated by macro-economic indicators especially the Gross Domestic Product (GDP) per capita, in an increasing but not necessarily linear direction (Mulu, 2014).

Social welfare on the other hand in the increase in quality of life. It is the wellbeing of the people of a society as a result of economic growth. It is marked by increased standards of living, better human capital development, the availability and accessibility of social amenities, improved health and educational facilities, social justice, a drop in crime rates and an overall prevalence of peace, freedom and security. Therefore, economic development is a situation where there is a persistent or continuous growth and expansion of the GDP per head, and a corresponding or proportional increase in the overall quality of life in a given society.

Over the decades’ research has established that there is close connection between commercial bank lending and economic output. This is because, ordinarily, more lending increases investment in goods and service production which by simple mathematical logic would increase the GDP of a country. On the contrary, reduced commercial bank lending would reduce investment in the production of goods and services and therefore contracting GDP. This summarizes to a positive theoretical relationship between commercial bank lending and economic growth.

To another extent, lending is not an automatic means to economic growth. The contexts within which the loans are given out are a contributing factor to the effect of the lending on economic growth and development. The relationship is affected by the management of the loans both by the lending commercial banks and the borrowers.  Therefore, basing on this analysis, there may be a relationship between bank loans and economic development but cannot conclude whether the relationship is positive or negative (Louzis, Vouldis, & Metaxas, 2010). This posits that, the success of commercial bank loans in fostering economic growth and development is also determined by interest rate. Lending would be encouraged as long as interest rates are below the marginal productivity of capital and this would stimulate economic growth. On the other hand if interest rates are higher than the marginal.

The Banking Industry in Cameroon is governed by laws and regulations whose sources are: International Conventions, Customs Laws, Ordinances, Presidential Decrees, Ministerial Orders, Circulars and Court Decisions. These regulatory instruments are flexible in character, meaning they can be a subject of modification based on some socio-cultural, political and economic development within Cameroon. Banking regulations vary between jurisdictions.

The Ordinance N° 85/002 of 31 August 1985 relating to the establishment of Credit Institutions or Loan Houses is one of the most important Texts regulating the Banking Sector in Cameroon. This Ordinance has been ratified by Law N° 88/006 of July 1988 and Law N° 90/019 of August 10, 1990. These laws repeal the old practice whereby only persons of Cameroonian nationality had the privilege to head banking institutions in Cameroon.

The main banking regulatory instrument is the COBAC Text of 17 January 1992 harmonizing banking regulations in the six member States of BEAC. This text differentiates banks from other financial institutions, makes provision for licensing procedure of financial institutions appointment of its key executive members and sanctioning of contravening institutions, indicates minimum paid up capital, capital adequacy for operation of financial institutions and finally, makes provisions on risk coverage sharing and liquidity ratios.

Apart from Conventions, Laws, Ordinances, Presidential Decrees, Ministerial Orders and Circulars that govern Banking in Cameroon, the most recent harmonized legislation that governs business activities, (banking inclusive) in the CFA Zone is the OHADA Treaty.

The OHADA Treaty became effective in Cameroon in January 1998 and lays down conditions for the incorporation, functioning and dissolution of companies (financial institutions inclusive) in the CFA Zone.

Another recent innovation in the Cameroon Banking Sector is the introduction of the Western Union system and Money Gram, by which systems the transfer of currency from one country to another can be effected even for individuals without bank accounts

Cameroon today is a member State of the Bank of Central African States (B.E.A.C.) and also a member of the Central African Economic and Monetary Community (CEMAC). With this, the following bodies govern the banking system of Cameroon;

– COBAC (The Banking Commission for the six Central African    member States).

– MINFI (The Ministry of Finance).

– NCC: The National Credit Council.

– BEAC: The Bank of Central African States.

– APECAM: The Banking and Credit/Finance Association.

Commercial banks in Cameroon include the following;

Société Générale des Banques au Cameroun (SGBC);

–           Standard Chartered Bank of Cameroon (SCBC);

–           SCB – Crédit Lyonnais du Cameroun (SCB-CL);

–           Amity Bank Cameroon PLC;

–           ECOBANK; – Afriland First Bank;

–           CITIBANK;

–           Commercial Bank of Cameroon (CBC);

–           Union Bank of Cameroon (UBC);

–           Banque International du Cameroun pour l’Epargne et le Crédit (BICEC). was created following the restructuring of “Banque Internationale pour le Commerce et de l’Industrie du Cameroun” (BICIC).

Apart from Amity Bank PLC, Afriland First Bank, Commercial Bank of Cameroon, Union Bank of Cameroon, ECOBANK, CITIBANK and Standard Chartered Bank, which are privately owned, the other banks above have government share holdings of between 35% to 83% and are heavily influenced by the government. Banks in Cameroon are all commercial banks mainly handling traditional banking functions, lending short-term and specializing in short-term self-liquidated trade finance. Long-term loans are accorded by the Central Bank (BEAC).

Other financial institutions in Cameroon include;

Insurance/Re-Insurance Companies.

–           Hire Purchase/Leasing Companies.

–           Real Estate Companies.

–           Loan Funds for Investing In Real Estate.

–           Investment Corporations.

–           Recovery Corporations.

1.2. Problem Statement

According to the Wicksell (1901) theory, lending had a close effect on economic growth within the context of interest rates. If the interest rates are below the rate of return on capital, entrepreneurs would borrow at the money rate to purchase capital goods which would spur a higher economic growth rate. Conversely, if the interest rates are above the rate of return on capital entrepreneurs would sell the capital goods and hold money in effect reducing economic growth.

The government of Cameroon has encouraged lending from banks to private investors. Cracknell (2012) argues that facilitating financial access provides a boost to the strengthening of the financial sector which is a key player in economic growth and development. Cameroon seems to have borrowed this argument and is working tirelessly to increased access of Cameroonians to more financial facilities from banks to drive economic growth. However, there seems to be no automatically positive relationship between lending and economic Development, as proven by the ever worsening economic conditions since the financial crisis of 1996.

With the development of severe shakedown of the banking sectors from the late 1990s to the 2010s, characterized by sever corruption, and connivance in the granting of loans, ever growing concerns for lack of collateral securities, high risk of default, uncertain economic and socio political situations, the granting of loans by commercial banks is become a riskier endeavor. With all these problems capital becomes scares, and without capital to fuel economic activities, the economy stagnates.

In this light, with Eco bank being one of the most prominent banks in the country, it is therefore necessary to assess the driving force of the loans provided by this bank, and to establish whether these loans have an effect on the economic development of Cameroon.

1.3. Research Objectives

The main objective of this research is to determine the effect of commercial bank loans on economic development of Cameroon. Other objectives include;

1. To Identify the types of loans given out to customers by eco bank
2. To assess the effects of Eco bank loans on human capital development
3. To assess the effects of Eco Bank loans on infrastructural development
4. To make policy recommendations based in the findings of the study.

1.4. Research Questions

The study is guided by the following questions;

1. What are the types of loans given out to customers by eco bank?
2. What are the effects of Eco Bank loans on human capital development?
3. What are the effects of Eco Bank loans on infrastructural development?

1.5. Research Hypothesis

The hypothesis adopted for the work include;

H1. Loans provided by commercial banks contribute to economic growth in Cameroon.

H2. Loans provided by commercial banks play a role in human capital development in Cameroon

H3. Loans provided by commercial banks play a role in infrastructural development in Cameroon.