CHAPTER ONE

INTRODUCTION

This chapter of the research describes the background, scope, and purpose of the

research being investigated, including the research questions, and hypothesis It sets

the stage for the thesis in order to put the research topic in perspective.

1.1 Background to the Study

Money is an integral part of any business. It is necessary for any company to have

sufficient money or funds in their pockets to run the business for investment purposes.

There may be situations arising when an individual or a firm may need funds to fulfill

their obligations. This need is fulfilled by loans and advances (credits).

In finance, a loan is the lending of money by one or more individuals, organizations,

or other entities to other individuals, organizations etc. The recipient (i.e., the

borrower) incurs a debt and is usually liable to pay interest on that debt until it is

repaid as well as to repay the principal amount borrowed. The recipient and the lender

must agree on the terms of the loan before any money changes hands. In some cases,

the lender requires the borrower to offer an asset up for collateral, which will be

outlined in the loan document. Loans can be given to individuals, corporations, and

governments. The main idea behind taking out one is to get funds to grow one’s

overall money supply. The interest and fees serve as sources of revenue for the lender.

Advances meanwhile, is a source of financing provided by the banks to organizations,

individuals, etc to meet their short-term requirements (less than one year).

Contrasting to loans, advances are a credit facility. The terms of the advances are

decided by the central bank, and the bank lending the amount.

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Different types of bank advances:

 Short term loan: The entire amount is given to the borrower at once.

 Overdraft: a provision by the bank, wherein the customer can overdraw

money from his/ her account until a specified cap.

 Bill Purchase: Advances granted by the bank upon pledging the bills.

 Cash credit: A provision by the bank, wherein a customer can advance

money up to an asset pledged.

Small and Medium Scale Enterprises (SME's) on the other hand exist in the form

of sole proprietorship and partnership, though some could be registered as limited

liability companies. They form the bulk of the businesses in Nigeria, this is so because

they are less capital intensive and flexible in filling the need in niche markets. SME's

can best be described through their capital base, scope and cost of projects, annual

turnover, financial strength and number of employees amongst other things. They out

number large firms considerably, employ vast numbers of people and are generally

entrepreneurial in nature, helping to shape innovation. Some of the business groups

that fall under the scope of medium scale industry include soap production, hair/body

cream production, chemical production, commercial poultry, and professional

practices such as law, accounting and education.

SME’s perform many roles in the development of the country, such as; yielding

revenue to the government in form of the taxes they pay, providing employment

opportunities to citizens of the country, rendering personalized services, making

goods available in places that large counterparts may not reach, playing significant

2
roles in the manufacturing and distribution of goods and services, changing the

business lines according to the needs of the citizens and many more.

1.2 Statement of the Problem

Notwithstanding the acknowledged roles of SME's, a number of factors limit their

growth potentials. They’re still faced with the issue of funding and to overcome this

problem, external borrowing has become inevitable. This study intends to appraise the

impact of commercial banks credit on the performance of SME's in Nigeria.

Previous works were limited to determine the impact of commercial banks credits on

the performance of small and medium scale enterprises in Nigeria during the period of

1990-2019. But this study will fill that gap by covering the period of 1981 - 2021 (a

period of 40 years). It is therefore necessary to investigate holistically Commercial

Banks Credits, and Small and Medium Enterprises in Nigeria. Arising from this

backdrop, this paper therefore empirically evaluates and investigates whether

Commercial Bank Credits influences the Performance of Small and Medium

Enterprises in Nigeria. In the light of this, the assessment of the bank system

(particularly in the area of credits; loans and advances) in Nigeria will be investigated

comprehensively between the periods of 1981-2021 and the question; What is the

impact of commercial bank credits on the performance of small and medium scale

enterprises in Nigeria?

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1.3 Objective of Study

The broad and general objective of this study intends to examine the Impact of

Commercial Bank Credits on the Performance of Small and Medium Scale

Enterprises in Nigeria. Hence, the following specific objectives are highlighted below:

1. To analyse the output of small and medium enterprises in Nigeria.

2. To analyse the trend of Commercial Banks Credits to SME’s

3. To determine the Impact of Commercial Bank Credits on the Performance of

Small and Medium Scale Enterprises in Nigeria

4. To determine the Impact of Commercial Bank Credits on the average capacity

utilization of SME's in Nigeria

5. To find out if the proliferation (increase) of SME's is helping to curb the rate of

unemployment in Nigeria.

1.4 Research Questions

For the purpose of this study, the following research questions would be asked, which

the researcher seeks to find answers to:

1. How has the output of small and medium enterprises in Nigeria changed?

2. How has Commercial Bank Credits to SME’s changed?

3. What is the Impact of Commercial Bank Credits on the Performance of

Small and Medium Scale Enterprises in Nigeria?

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 4. Has Commercial Banks Credits impacted the average capacity utilization of

SME's in Nigeria?

5. Has the proliferation (increase) of SME's helped to curb unemployment in

Nigeria?

1.5 Research Hypothesis

H01: There is no significant growth in the output of SME’s.

H02: There is no significant change in Commercial Bank Credits to SME’s.

H03: Commercial Bank Credits has no significant impact on the performance of

SME’s in Nigeria

H04: Commercial Bank Credits has no significant impact on the average capacity

utilization of SME’s in Nigeria

H05: Increase in SME’s has not curbed unemployment in Nigeria

1.6 Scope of the Study

The scope of the study is limited to investigate the Impact of Commercial Bank

Credits on the Performance of SME’s in Nigeria from 1981 to 2021. In the course of

carrying out this study the researcher encountered some problems which imposed

some limitations on the study. The paucity of relevant information and statistical data

placed a heavy limitation on this work. Also the time available for this work was very

limited as the time for this research was combined with the researcher’s academic

work. Financial constraint is also a limitation as a result of high cost of data (airtime)

for research, cost of typing and photocopy of some materials and other miscellaneous

5
expenses. Despite these limitations the researcher tends to work assiduously to carry

out and present a thorough and extensive work on the above topic.

1.7 Significance of the Study

The study is expected to ascertain the Impact of Commercial Bank Credits on the

Performance of SME’s in Nigeria over the years with a view to come up with a

desirable change or otherwise. The Impact of Commercial Bank Credits on the

Performance of SME’s in Nigeria holds a lot of benefits to our overall economic

progress.

I. The government and its agencies will find this work resourceful in formatting

policies and directives for the adequate provision of funds to SME’s

II. It will be very relevant for the maintenance of SME’s, because it examines

how Commercial Bank Credits affects the Performance of SME’s in Nigeria

III. It will also be relevant to the private sector in making financial decisions and

improving its financial activities.

IV. It is hoped that this study would contribute to the existing knowledge and

serve as a useful reference material for scholars and policy makers in

economic decision making and will equally present a platform for further

research study in this area.

1.8 Definition of Terms

COMMERCIAL BANK; a commercial bank is one of the most important

institutions for savings mobilization and financial resource allocation.

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CREDITS; refers to the amount of credit available to a business or individual from a

banking institution in the form of loans or advances.

LOAN; is the lending of money by one or more individuals, organizations, or other

entities to other individuals, organizations etc.

ADVANCES; is a source of financing provided by the banks to organizations,

individuals, etc to meet their short-term requirements (less than one year).

SMALL AND MEDIUM ENTERPRISES (SME’s); these are businesses whose

personnel, revenue and asset fall under a certain limit or threshold. They are mostly

made of of sole proprietorship businesses and partnership.

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 CHAPTER TWO

LITERATURE REVIEW

This chapter of the research or report covers an overview of major writings and other

sources on this study. This chapter provides a description, summary and evaluation of

each source. The sources covered in the review may include scholarly journal articles,

books, government reports, web sites, etc

2.1 Conceptual Framework

2.1.1 Concept of Small and Medium Enterprises
SME's in Nigeria are seen as the backbone of the economy and a key source of

economic growth, dynamism and flexibility. Indeed, there appears to be an agreement

that the development of SME's in Nigeria is a step towards building a vibrant and

diversified economy. According to the Federal Ministry of Commerce and Industry,

SME's are defined as firms with a total investment (excluding cost of land but

including capital) of up to N750, 000, and paid employment of up to fifty (50)

persons. SME's exist in the form of sole proprietorship and partnership, though some

could be registered as limited liability companies and characterized by: simple

management structure, informal employer/employee relationship, labour intensive

operation, and simple technology, fusion of ownership and management and limited

access to capital. For both developing and developed countries, micro, small and

medium scale firms play important roles in the process of industrialization and

economic growth.

Apart from increasing income and output, MSME's create employment opportunities,

enhance regional economic balance through industrial dispersal and generally

promote effective resource utilisation considered critical to engineering economic

8
development and growth (Sule, 1986 and Udechukwu, 2003). Micro, small and

medium enterprises (MSME's) are companies whose headcount or turnover falls

below certain limits. The definitions change over time and depend, to a large extent,

on a country's level of development. Thus, what is considered small in a developed

country like the USA could actually be classified as large in a developing country like

Nigeria.

Table 1: Classification of MSME's in Nigeria

S/N Size Category Employmen Assets (N’million)

t (excluding land and
buildings)

1. Micro enterprises Less than 10 Less than 5

2. Small enterprises 10 -49 5 to less than 50

3. Medium 50 -199 50 – less than 500

enterprises

Source: Small and Medium Enterprises Development Agency of Nigeria (SMEDAN),

Abuja, 2007.

2.1.2 Roles of SME’s in the Economic Development of Nigeria

The vital roles played by SME’s have elicited the drums of support and assistance

from Nigerian governments. SME’s are valid source of employment generation,

development of indigenous technology, even dispersal of industrial set ups, increased

production of manufacturing exports, and increasing local content of industrial output

by fostering forward and backward industrial linkages to enhance the general level of

economic activities. Thus, the specific roles of SME’s include:

 Employment generation

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  Output expansion

 Utilization of total resources

 Transformation of indigenous technology

 Production of intermediate goods

 Contribution to government revenue base and

 Rural development acceleration through wide industrial dispersal and

others.

2.1.3 Problems of SME’s in Nigeria

Despite the catalytic role of SME’s in the economic development of Nigeria, some of

their operational challenges Include:

 Lack of trained manpower and management skills.

 Most Nigerian Entrepreneurs do not have the investment culture of ploughing

back profits.

 SME’s often do not carry out proper strategic planning in their operations.

 The high rents charged by store owners on good locations have forced real

small-scale operators into the streets or at best into accessible places.

 The accounting system of most SME's lack standards hence, no proper

assessment of their performances.

 SME’s are faced with the problems of double taxation. This has in no small

measure increased the cost of doing business.

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  Instability in government policies have in no small measure made some

SME's to collapse.

 SME's are still faced with the issue of funding and to overcome this problem,

external borrowing has become inevitable. Commercial banks appear to be

the most likely source of funds. While commercial banks are expected to

come to the rescue of SME's, the truth must be said, that these institutions are

profit oriented and may not be in a vantage position to give long term loans

with depositors funds that are predominantly short tenured.

2.1.4 Concept of Bank Credit

The term bank credit refers to the amount of credit available to a business or

individual from a banking institution in the form of loans. Bank credit, therefore, is

the total amount of money a person or business can borrow from a bank or

other financial institution. A borrower's bank credit depends on their ability to repay

any loans and the total amount of credit available to lend by the banking institution.

Types of bank credit include car loans, personal loans, and mortgages (Jonathan

Golin, 2013).

2.1.5 Understanding Bank Credit

Banks are one part of the larger financial system, which links savers and borrowers.

Savers supply the funds for borrowing and borrowers provide the demand. A key

element between lenders and borrowers is the interest rate, which is the price one pays

to borrow money and the reward one receives for lending. Bank credit consists of the

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total amount of combined funds that financial institutions advance to individuals or

businesses. It is an agreement between banks and borrowers where banks make loans

to borrowers. By extending credit, a bank essentially trusts borrowers to repay

the principal balance as well as interest at a later date. Whether someone is approved

for credit and how much they receive is based on the assessment of their credit

worthiness.

Approval is determined by a borrower’s credit rating and income or other

considerations. This includes collateral, assets, or how much debt they already have.

Banks typically offer credit to borrowers who have adverse credit histories with terms

that benefit the banks themselves — higher interest rates, lower credit lines, and more

restrictive terms (Jonathan Golin, 2013).

2.2 Theoretical Literature Review

2.2.1 The Pecking Order Theory
Myers and Majluf (1984) popularized the pecking order theory, which states that

equity is a less preferred means of raising capital because when managers issue new

equity, investors believe that managers believe the firm is overvalued and that

managers are profiting from this overvaluation. As a result, investors will give the

new share offering a lesser value. The pecking order hypothesis (or pecking order

model) in corporate finance states that when asymmetric knowledge becomes more

prevalent, the cost of borrowing rises. Businesses should prioritize their funding

sources, going from internal (cash flow or the entrepreneur's personal capital) to

external investment, according to this theory. Internal cash, debt, and new stock are

the three sources of funding. Companies prioritize their funding sources, choosing

internal financing first, followed by debt, and finally obtaining equity as a "last

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resort." As a result, internal finance is employed first, followed by debt, and then,

when it is no longer feasible to issue more debt, stock is issued. This theory holds that

firms follow a hierarchy of funding sources, preferring internal financing when it is

available and debt over equity when external financing is required (equity would

imply issuing shares, which would imply bringing external ownership into the

organization). As a result, the type of debt a company chooses might serve as an

indication of its need for outside capital (Frank, & Goyal, 2018). In the present study,

the pecking order theory serves as a basis to describe the prioritization of funding

sources of small and medium enterprises.

2.2.2 The Financial Led Growth Theory

According to the financial led growth theory, financial institutions' operations are an

excellent tool for improving the economy's productive capacity. They claimed that

countries with welldeveloped financial systems prosper more quickly. Following the

global financial crisis of 2008-2010 and Nigeria's economic and financial recession of

2015-2017, the causal link between the financial sector and economic growth has

spurred economic and financial discussion. Granger creates economic growth through

financial intermediation to the real economic sectors, which was first investigated by

Schumpeter in 1911. (Udo et al., 2019). Robinson (1952) counters that economic

growth drives financial sector expansion through the growth rate of GDP per capita.

The supply-led growth and demand-led growth theories both advocate for the causal

link. Patrick (1966) referred to these approaches as finance led-growth and growth

led-finance. The core premise is that finance-led growth and growth-led finance work

together to buffer internal and foreign economic and financial shocks while also

13
promoting economic and financial development. According to Adeyeye et al. (2015),

economic growth is stimulated by resourceful mobilization and circulation of

financial resources for investment. According to King and Levine (1993), economic

growth is determined by financial system stability in investment, instruments,

domestic saving, services, capital productivity, and efficient information management.

The supply-led growth hypothesis implies a link between finance and economic

growth (Ndubuisi, 2017). In the present study, the finance-led growth theory serves as

a yard stick to describe and measure economic growth as affected by welldeveloped

financial system.

2.3 Theoretical Framework

This work is hinged on the The Pecking Order and Money Led Growth Theories

which stipulates that firms follow a hierarchy of funding sources, preferring internal

financing when it is available and debt over equity when external financing is

required. So, equity is the least preferred means of raising capital. As a result, the type

of debt a company chooses might serve as an indication of its need for outside capital

(Frank, & Goyal, 2018). In the present study, the pecking order theory serves as a

basis to describe the prioritization of funding sources of small and medium

enterprises. Also, financial institutions' operations are an excellent tool for improving

the economy's productive capacity. Therefore, Economic growth is stimulated by

resourceful mobilization and circulation of financial resources for investment.

2.4 Empirical Literature

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Empirical work on the Impact of Commercial Banks Credit on the Performance of

Small and Medium Enterprises in Nigeria has been enormous using different

econometrics tools. Some of these studies are reviewed in this sections;

Ikechi and Nwadiubu (2021) evaluated the effect of commercial bank loans on the

performance of small and medium scale enterprises in Nigeria. The examination used

an ex-post facto research methodology; to determine associations, a least square

regression analysis was performed on time-series data, and unit root tests were used to

avoid the formation of misleading results. The study's findings revealed that in

Nigeria, there is an inverse link (albeit not statistically significant) between the

quantity of commercial bank loans (CBLSME) made available to SMEs and their

output (OPSME). The study also found that an apparent increase in SMEs' operations

may not have reduced Nigeria's unemployment rate because a large percentage of

SMEs' employees are likely underemployed. Finally, our commercial banks'

incapacity to provide effective loans to SMEs has resulted in a low ratio of SMEs'

output to GDP. This has had a detrimental influence on average capacity utilization,

resulting in a rise in Nigeria's already high unemployment rate.

Olowookere and Hassan (2021) examined the relationship between SMEs financing

and sustainable economic growth between 1992 and 2019 has been carried out in this

study. The study used a Fully Modified Ordinary Least Square and Granger causality

technique after performing several pre-estimation tests such as unit root and

cointegration. As a result of this research, the following key findings emerged: broad

money supply and GDP growth rate show an insignificant inverse relationship. The

relationship between commercial bank loans to SMEs and GDP growth rate is

15
positive and significant. Gross fixed capital creation and total lending to the private

sector from commercial banks had a negligible positive connection with GDP growth.

On the other hand, commercial banks' loans to SMEs in Nigeria are motivated by

long-term economic growth.

Ovat (2020) studied the role played by commercial banks’ credit in facilitating the

growth of SMEs in Nigeria. In order to conduct this empirical investigation, it used

co-integration and error correction procedures. The findings found that commercial

banks' loan has had little impact on the expansion of Nigeria's small and medium-

sized businesses

Olaoye, Adedeji, and Ayeni-Agbaje (2018) examined commercial bank lending to

small and medium-sized businesses and the Nigerian economy over a twenty-year

period, from 1998 to 2017. The study looked at the impact of the average commercial

bank lending rate, commercial bank loans, and inflation rate on SMEs growth in

Nigeria, as well as the causal relationship between explanatory factors and GDP in

Nigeria. For the study period, secondary data was gathered from the Statistical

Bulletin of the Central Bank of Nigeria and the National Bureau of Statistics.

Descriptive analysis, correlation analysis, ordinary least squares regression analysis,

and Granger causality analysis were used to examine the data. Commercial bank loans

to SMEs had a negative and minor influence on the gross domestic product

16
Gololo (2017) examined the role of commercial banks in funding small and medium

scale enterprises in Nigeria. The purpose of this study is to determine the extent to

which commercial banks in Nigeria assist small and medium-sized businesses with

their financing needs. Secondary data was used in the study, which used the ratio of

commercial bank loans to Small and Medium Scale Enterprises as a percentage of

overall credit for the years 1991 to 2012. The study employed a paired sample t-test to

investigate the significance of the ratio of loans to Small and Medium Scale

Enterprises in order to assess the performance of the Small and Medium Scale

Enterprises Equity Investment Scheme by banks in providing credit to Small and

Medium Scale Enterprises. The results showed that commercial bank loans had no

substantial positive influence on loan disbursement to finance SMEs, even after the

equity plan was implemented.

2.5 Limitations of Previous Studies

From the empirical review most research looked at the effect of commercial bank

credits on the performance of SME’s in Nigeria using small samples and a majority

concluded that bank credit had no positive influence on the performance of SME’s.

But this work is here to fill the gap emanating from the literature review by making

use of large sample data and bringing in more variables like commercial bank loans to

small and medium enterprises,output of small and medium enterprises, average

capacity utilization, unemployment rate and interest rate to determine the effect of

commercial banks loans on the performance of small and medium enterprises in

Nigeria Economy for the period of 40 years (1981-2021). This study will investigate

17
holistically the Effect of Commercial Bank Credits on the Performance of Small and

Medium Enterprises in Nigeria.

18
 CHAPTER THREE
RESEARCH METHODOLOGY

This chapter of the research deals with the ways, procedures or steps followed in

carrying out the research or report study. This chapter describes the methodology used

in this study. Methodology consists of the procedures to be used for collecting data,

summarizing and analyzing the data gathered in order to answer the research

questions.

3.1 Research Design

The study adopts the ex post facto research design which is a very common and ideal

method in conducting research in business and social sciences. It is mostly used where

variables are drawn from already conducted events and there is no possibility of data

manipulation. As for this work, there are two key reasons for the choice of the ex post

facto method. Firstly, the data is secondary and is ex post from the Central Bank of

Nigeria and the Nigeria bureau for statistics sources. Secondly, the reported figures or

proxies for the variables of Commercial Bank Credits to SME’s and Output of SME’s

are not susceptible to the manipulations or doctoring of the researcher because they

are information in public domain and are easily verifiable.

This study is a systemic and objective enquiry into events, developments and

experiences of the past (ex-post facto) research adopting it in determining and

forecasting the present and future situations of these events. It therefore involves

historical analysis of relevant data on policy instruments. Some macroeconomic

variables will be used and analyzed to determine the Impact of Commercial Bank

Credits on the Performance of Small and Medium Enterprises in Nigeria. The

research work therefore will specify relevant models and employ appropriate

19
statistical tools of Ordinary Least Square (OLS) to estimate and evaluate the models.

The variables to be employed in testing the Impact of Commercial Bank Credits on

the Performance of Small and Medium Enterprises in Nigeria include CBLSME

(proxy for commercial bank loans to small and medium enterprises), OPSME (proxy

for performance and output of small and medium enterprises), average capacity

utilization (ACUT), unemployment rate (UNEMP) and interest rate (INTR) which are

the explanatory variables.

3.2 Sources of Data

In the process of carrying out this research, the data used were collected from

secondary sources. The secondary data for this study were collected from publication

of the Central Bank of Nigeria (CBN) statistical bulletin and World Bank (WB) data

indicator. The study is focused on a quantitative approach to evaluate the data by

using E-views 10 software to examine the Impact of Commercial Bank Credits on the

Performance of Small and Medium Enterprises in Nigeria.

3.3 Model Specification

Model specification is the expression of a relationship into precise

mathematical form. It becomes imperative to include commercial bank loans to

small and medium enterprises (CBLSME) as a proxy for commercial banks credit to

small and medium enterprises which is the dependent variable while output of small

and medium enterprises (OPSME) is the proxy for performance of small and medium

enterprises, average capacity utilization, unemployment rate and interest rate are the

explanatory variables in the model. Economic theory does not indicate the specific

20
functional forms of the relationships. Therefore four functional forms: Linear, double

lag, squared root, and quadratic will be applied to the data. The functional form that

provides the best fit with respect to the R 2, F-statistic and the significance and signs of

the coefficient model will be selected for further analysis. The model is specified in

the functional form as:

CBLSME = F ( OPSME, ACUT, UNEMP, INTR)

Where;

CBLSME = Commercial Bank Loans to Small and Medium Enterprises

f = Functional notation

OPSME = Output of Small and Medium Enterprises

ACUT = Average Capacity Utilization

UNEMP = Unemployment Rate

INTR = Interest Rate

Econometric Model of the study is specified as;

CBLSME = αo + α1OPSMEt + α2ACUTt + α3UNEMPt + α4INTRt + μtt …. (1)

Based on the assumption of linearity of the variables, we take log-linear functional

form. Therefore, the model will be:

Log (CBLSME) = αo + α1OPSMEt + α2ACUTt + α3UNEMPt + α4INTRt + μtt

Where,

α0 = Constant term of the regression equation

CBLSME = Commercial Bank Loans to Small and Medium Enterprises

OPSME = Output of Small and Medium Enterprises

ACUT = Average Capacity Utilization

UNEMP = Unemployment Rate

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INTR = Interest Rate

t = Error term representing among other things, unobserved explanatory variables.

The functional relationship between dependent and the independent variables that will

be used in this study are established as follows.

Model I:

For objectives (i) and (ii) we will use descriptive statistic (graphs) and trend equations

to analyze the performance of small and medium enterprises using OPSME as it’s

indicator as well as the trend of commercial bank credits to small and medium

enterprises using CBLSME as it’s indicator.

Model II:

For objective (iii) we will use regression analysis and by doing this we adopt the log-

linear model where appropriate, using the ordinary least square (OLS) regression

analysis to determine the impact of commercial bank credits on the performance of

small and medium enterprises in Nigeria. .

Model III:

For objectives (iv) to (v) we will use regression analysis and by doing this we adopt

the log-linear model where appropriate, using the ordinary least square (OLS)

regression analysis to determine the impact of commercial bank credits on average

capacity utilization. We will also test if the increase in SME’s has curbed the rate of

unemployment in Nigeria.

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3.4 Method of Data Analysis

The result of this study was therefore analyzed using the economic, statistical and

econometric criterion.

 Economic Criterion

From the economic theory and perhaps, empirical result, the a priori expectations of

the model under study are that the parameters of the independent variables should

have positive and negative signs/relationships. The E-Views 10 econometric analysis

package was applied. The models as shown above are specified in log-linear forms.

Other tests to be conducted include the stationarity test also called the Unit Root Test

which was conducted using the Augmented Dickey-Fuller methodology. Therefore, in

the test of significance of the parameter estimates, the ordinary least square (OLS)

method was adopted.

 Statistical Criterion Intercept

I. T – test

This is used to test for the individual significance of the variables at 5% level of

significance

II. R2 Test

These are determined by the statistical theory and aim at the evaluation of the

statistics reliability of the estimates of the parameter model. The R 2 test is a test of the

fit of the regression model. It is a test of explanatory power of the model. The value of

R2 ranges from 0-1.

III. F-Test

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This is used to determine the overall significance of the regression line. It was used to

find out whether the joint impact of the explanatory variables actually has a

significant influence on the dependent variable. If F* > 0.05, we reject the null

hypothesis and accept the alternative hypothesis and vice versa.

IV. Unit Root Test

It is used to check whether a variable is stationary and to determine its order of

integration.

Test For Autocorrelation:

We used Durbin-Waston statistic to test for auto-correlation.

Decision Rule

a. Reject H0 ( Positive auto correlation) if 0 < α < α1, then take no decision if α1 <

α < αu

b. Reject H0 ( Negative auto correlation) if 4-d1 < d < 4, take no decision if 4 - αu

< d < 4 - α1

c. There is no auto correlation (Positive or Negative), do not reject H0 if αu < α <

4 - αu

α= Durbin Watson Statistics

α1= Durbin Watson lower level

αu= Durbin Watson upper level

Test For Heteroskedasticity:

We conducted heteroscedasticity test to check if the ordinary least square assumption

of homoscedasticity is violated using White’s heteroscedasticity test. Hence we run

24
the normal regression and save the residuals and then use the residuals to run the

auxiliary regression which can be stated as:

n n
μi2=0 + ∑ ❑ixi + ∑ ❑ixi2 +ixixj + vi
i=1 i=1

where

μi= squared residuals

Xi & Xi2= Vector of the squared values of explanatory variables

XiXj= Cross products of explanatory variables

0= Constant term or intercept

Then we obtain the product of the sample size and coefficient of multiple regression

R2 of the auxiliary regression and compare it with chi-square distribution X 2df with df

as degree of freedom which Z equal to number of the regressors.

Decision Rule

If product of sample size and coefficient of multiple regression is greater than chi-

square X2df from chi-square table, we conclude that there is heteroscedasticity.

Test For Multicollearnarity:

We conducted multicollearnarity test to determine if there are linear relationship

among our explanatory variables in the model. Such relationship is the violation of the

OLS assumption that explanatory variables in the regression equation are uncorrelated

with each other. We adopted Variance Inflation Factor (VIF) measure of dictating

multicollearnarity problem. It is given as

VIF=1/1- R i 2

Where

Ri2= Coefficient of determination obtained by regressing explanatory variables i on

others.

25
Decision Rule

If VIF > 10 (greater than 10) we conclude that multicollinearity is a serious problem

in the model,

If VIF < 10 (less than 10) we do away with multicollinearity issues.

Normality Test:

We conducted normality test to determine if the residuals of our model are normally

distributed using the Jarque-Bera normality test which is given as;

S ( k−3 ) 2
JB=N[ + ]
6 24

Where;

N= Sample size

S= Skewness coefficient

K= Kurtosis coefficient

JB test is based on the value of two measures: 0 for Skewness and 3 for Kurtosis

given the JB statistic as approximately 0.

Decision Rule

Once JB is 0 we finalize that our model is normally distributed.

26
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