Finance is required by individuals, organizations and other economic agents for different purposes. To provide the needed finance, there exist varieties of institutions rendering financial services, broadly divided into the money market and the capital market. In the money market, commercial banks render financial services by way of intermediation, channeling funds from surplus spending units to deficit spending units of the economy, thereby transforming deposits into loans.

The role of credit in economic development is recognized through loans obtained by various economic agents to meet operating expenses. Business firms obtain loans to acquire machinery and equipment; farmers borrow to purchase seeds and fertilizers and to erect farm structures; government bodies borrow to finance recurrent and capital expenditure; and individuals and families take loans to acquire goods and services. Alhassan, Ogoja, Hannah and Nkemakonam (2022) note that banks perform this allocative role by mobilizing surplus funds and directing them to entrepreneurs in the real sector, and recommend that regulatory authorities continually free up the banking sector to avoid systemic shocks that would otherwise disrupt this allocation. Loans extended on this basis help firms attain efficient scale, support the expansion of informal economic activity, and facilitate resource substitution, while also cushioning an economic activity against total collapse following a natural disaster such as flood, drought, disease outbreak or fire, or helping to revive an enterprise that has suffered a setback.

The banking sector facilitates the availability of loans by mobilizing surplus funds from savers with no immediate need for such funds and channeling them to investors who possess viable ideas for wealth creation but lack the capital to execute them. Kolawole, Abdulmumin, Babaita, Adejare, Osunkunle and Adegboyega (2024) confirm, using an ARDL framework on Central Bank of Nigeria data, that credit to the private sector has contributed positively to Nigeria's economic growth, alongside a significant positive relationship between stock market trading volume and growth. The sector remains of prime importance in many developing economies because it is often the principal formal means of attracting private savings on a large scale. More recent scholarship continues to affirm this intermediation function: Adebayo (2025) notes that, although financial development indices show a long-run cointegrating relationship with output in Nigeria, the relationship is subtle and the contribution of credit to growth is not always statistically robust, underscoring continuing debate over how efficiently bank intermediation translates into growth.

By making loans available, banks render a valuable service because production expands, capital investment increases, and a higher standard of living is realized. Adeyemo and Tamunowariye (2022) similarly find a positive nexus between financial development, trade performance and growth in Nigeria, reinforcing the view that credit-driven financial deepening supports real economic outcomes. Economic growth itself remains a principal objective of macroeconomic policy and a crucial means of raising living standards and achieving development. While economists define economic growth variously, it is generally understood as an increase in national income or in the output of goods and services over a given period, commonly proxied by an increase in Gross Domestic Product (GDP). GDP is accordingly adopted as the proxy for economic growth in this study, while bank loans refer to the aggregate funds extended by commercial banks for consumption, business and investment purposes.

Recent empirical work reinforces the continued relevance of this subject. Using an Autoregressive Distributed Lag (ARDL) framework covering 1992 to 2023, a study on commercial and merchant bank credit found a positive short-run effect of credit expansion on output growth that reverses into a significant negative effect in the following period, while the long-run coefficient, though positive, was statistically insignificant, a pattern attributed to allocative inefficiencies and high lending costs (Adeyemi & Okonkwo, 2024). Similarly, a 2023 study covering an extended period found that bank credit had a measurable effect on the growth of the Nigerian economy, supporting the view that the banking sector's intermediation role remains consequential, even where its magnitude is debated (Eze & Out, 2023). At the sectoral level, evidence from 2022 to 2024 also shows that commercial bank credit allocated to agriculture has had a significant positive effect on output, even where credit to other sectors has not always shown the same result (Chukwu & Nwosu, 2022; Mathias & Inedu, 2023).

1.2 Statement of the Problem

Commercial banks have continued to extend credit to the Nigerian economy, yet the precise impact of this lending on growth remains contested. Between 2020 and 2025, Nigeria's economic growth rate has fluctuated markedly, shaped by the COVID-19 pandemic, naira redesign and foreign exchange unification, fuel subsidy removal, and tightened monetary policy, and the extent to which bank credit has driven growth through this turbulent period remains an open empirical question: some studies report a significant positive effect, while others find no significant effect at all.

The literature continues to debate the intermediary role of banks in driving growth, although there is broad consensus that intermediation supports growth in principle, with banks' traditional roles including the financing of agriculture, manufacturing, and the syndication of credit to productive sectors. The Nigerian banking industry has been subject to varying degrees of regulation since the 1952 Banking Ordinance, a history marked by the rise and collapse of numerous banks.

Recent studies sustain this line of inquiry into how regulation shapes the growth contribution of bank credit. Agada (2023) conducted an ARDL-based analysis of credit to commercial banks between 2000 and 2022 and found that credit to the manufacturing sector had a positive and significant effect on real GDP, while interest rate effects were also significant, suggesting that the regulatory and pricing environment continues to shape how effectively bank credit transmits to growth. Likewise, Olumide and Bassey (2024), in an OLS-based study covering an extended post-2014 sample, reported a significant positive effect of aggregate commercial bank credit on GDP, even as concerns persist about allocative efficiency. Given the continuing intermediary role of commercial banks and the unresolved nature of this debate, this study examines the impact of commercial bank credit on economic growth in Nigeria.

1.3 Objectives of the Study

The objectives of this research are to:

• Examine the impact of commercial bank credit on economic growth in Nigeria.

• Examine the contribution of commercial bank credit to Gross Domestic Product, with a view to assessing past and current trends based on historical data and the effectiveness of the sector.

• Examine the extent to which intermediation credit to the private sector has influenced economic growth in Nigeria.

1.4 Research Questions

• Does commercial bank credit contribute significantly to economic growth in Nigeria?

• How does growth in commercial bank credit respond to real-sector growth, or vice versa?

• To what extent does intermediation credit to the private sector influence economic growth in Nigeria?

1.5 Research Hypotheses

• H0: Commercial bank credit does not have a positive and significant impact on the growth of the Nigerian economy.

• H0: Commercial bank credit does not have a positive and significant effect on Gross Domestic Product.

• H0: Bank intermediation credit to the private sector of the economy does not have a positive and significant influence on economic growth in Nigeria.

1.6 Scope of the Study

This research focuses on the responsiveness of commercial bank credit to economic growth in Nigeria. The scope is determined and limited by the sample period chosen, covering 2020 to 2025, a period encompassing the COVID-19 pandemic shock, the 2023 foreign exchange and subsidy reforms, and subsequent monetary policy tightening, all of which shaped the behaviour of bank credit and its transmission to output.

1.7 Significance of the Study

This study is not the first in the field, as an extensive body of work already exists on the role of commercial bank loans in Nigeria's economic development. It nonetheless makes a distinct contribution by examining institutional quality as a driver of growth in the Nigerian economy. This is consistent with a growing recent literature linking institutional quality to financial development and growth outcomes: Adegoke and Suleiman (2024) find that institutional quality moderates the relationship between financial development, external debt and growth among comparable developing economies, while Pradhan (2023) similarly demonstrates strong interdependence between institutional quality, financial development and sustainable growth in lower-income countries. Within Nigeria specifically, recent extensions of the institutional-quality literature continue to find that weak institutions constrain the pace and quality of growth, supporting the broader proposition that institutions in developing countries remain comparatively weak and that this weakness shapes how effectively financial intermediation feeds into growth.

The findings are expected to benefit the following groups:

General Public: The study will inform the public about the relationship between borrowing from commercial banks and economic growth in Nigeria, and encourage productive use of bank credit to enhance investment and employment opportunities, which in turn supports economic growth.

Body of Literature: The study contributes to the existing literature on the responsiveness of bank loans to economic growth in Nigeria.

Central Bank of Nigeria: The findings will assist the CBN in calibrating its monetary policy rate to guide commercial banks in setting interest rates on loanable funds.

Commercial Banks: The findings may encourage commercial banks to adopt direct credit allocation favoring preferred sectors such as agriculture and manufacturing, while monetary authorities may consider reducing legal reserve requirements to enable banks to extend more credit to the economy.

REFERENCES

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