The causal effect of bank management ratios on rural lending and small and medium scale enterprises in Nigeria

This study examines the causal relationship of selected bank financial ratios on lending to small and medium Enterprise (SMEs) in Nigeria. The data used for this study were gathered from Central Bank of Nigeria (CBN) statistical Bulletin for a period of 27 years (1983 – 2010). Granger causality and OLS were applied to a set of differenced bank financial ratios and it was found that a critical gap in bank intermediation still exists in the lending to SME sector in Nigeria. A positive relationship exists between ratio of Rural Loan to Deposit (RRLD) and aggregate liquidity ratio (LR) while the causal relationship flows from cash reserve ratio to liquidity ratio. The result suggests that the excess liquidity in the banking system between 1983 – 2010 did not improve the flow of credit to SMEs in Nigeria. Consequently, the banks have failed in their social role of financing the SMEs by restricting the spread of fiat money contrary to the expectations of the Keynes – Schumpeter model. There is also no evidence to show that the banks are dealing significantly with the problem of information asymmetries through improved relationship lending to the SMEs in Nigeria. Monetary Policy should therefore target critically bank variables (LR, CRR and LDR) while ensuring compliance with prudential standards and balancing aggregate portfolios between large and small businesses. Restoring the mandatory credit allocation regime could also help in improving SMEs lending.