Thesis Abstract

<p> This study was embarked upon with a view to determining the impact of interest<br>rate on other selected macroeconomic variables in Nigeria. Data were sourced<br>from CBN Abuja and NBS. Data were analyzed using the ordinary least square<br>regression (OLS). Results indicate that Interest rate is inversely related<br>investment and also negatively related with GDP. On the basis of the above<br>stated findings some policy recommendations were made.(1)Government<br>should establish policies that encourage increase in savings deposit rate,<br>reduction in lending rates and also, efficient and reliable financial institutions<br>encourage people to save. (2) The require reserve ratio should be to strengthen<br>the lending rate of commercial banks. (3) We recommend that the government<br>and financial authorities should implement policies that favour income growth<br>such as job creation and increase in salaries and wage increase as these will<br>affect investment significantly. <br></p>

Thesis Overview

<p> INTRODUCTION<br>1.1BACKGROUND TO THE STUDY<br>Interest rates play important role in controlling major macroeconomic variables.<br>The primary role of interest rate is to help in the mobilization of financial<br>resources and to ensure efficient utilization of resources for the promotion of<br>economic growth and development (CBN 1970).<br>However, they are various states of interest rates in the financial system. They<br>are generally classified into two categories: Deposit and lending rates. Deposits<br>rate are paid to savings and time deposits of different maturities, while lending<br>rates are interest rates charged on loans to customers and they vary according to<br>cost of loanable funds and lending margins.<br>A number of factors influence the behaviour of interest rates in an<br>economy. Prominent among these are the volume of savings, inflation,<br>investment, government spending, monetary policy and taxation constitute the<br>major source (supply) of credit while investment represents the major demand<br>for credit. Therefore, the level of savings partly determines the level of interest<br>rates. For instance, a decrease in the accumulation of loanable funds (savings) is<br>bound to exert an upward pressure on interest rates, just as the reverse situation<br>would tend to have a moderating effect. Usually, when the structures of interest<br>rate are changed, the resulting relative rates of return will induce shift in the<br>assets portfolio of both banks and the non-banks public institutions. Hence, the<br>direction and magnitude of changes in the market interest rates are of primary<br>importance to economic agents and the policy makers.<br>Consequently, the Nigerian Economy has been highly prone to interest rate<br>volatility and fragility (CBN, 2000). Interest rates of all instruments have<br>experienced very volatile movements. Inconsistencies have been the order of<br>the day (Adewunmi, 1997).<br>Prior to the structural adjustments programme (SAP), the level and structure of<br>the interest rates were administratively determined by the Central Bank of<br>Nigeria (CBN). Both deposits and lending rates were fixed by the bank, based<br>on policy decision (CBN, 1962). At that time, the major reasons for<br>administering interest rates were the desire to obtain social optimum resource<br>allocation, promote orderly growth of the financial market and combat inflation<br>in implementing the credit policy. During this time, the minimum rediscount<br>rate which was very low, averaging about 7.25 percent between 1975 and 1985.<br>Also, preferred sectors could not access funds because financial institutions<br>were unable to raise sufficient funds form the money market at the favoured<br>concessionary rates (Staley and Morse, 1966). Within the general framework of<br>deregulating the economy in 1986, in order to enhance competition and efficient<br>allocation of resources, the CBN introduced a market based interest rate policy<br>in August 1987 (CBN, 1987).The policy decision was not without controversy,<br>and later,it was generally agreed that low interest rates did not encourage<br>savings. It was feared that high interest rate which was likely to accommodate<br>the deregulation of interest rates allowed banks to determine their lending and<br>deposit rates according to market conditions through negotiations with their<br>customers (CBN, 1987).<br>However, the minimum rediscount rate (MRR) which influenced interest rates<br>continued to be determined by the CBN in line with changes in overall<br>economic conditions. The MRR which was 15 percent in August 1987 was<br>reduced to 12.5 percent in December 1987 with the objective of stimulating<br>investment and growth in the economy (CBN, august 9, 2006). During the same<br>period, the prime lending rates of commercial banks and merchant banks were<br>on the average 18.0and 20.5 percents respectively. But following the need for<br>moderate monetary expansion in 1989, the MRR was raised to 13.5 percent. It<br>was also observed that there were wide disparities in the interest rates structure<br>of the various banks.<br>As it were, the ceiling on interest rates were removed in January 1992 and<br>retained in 1993. Interest rate in 1993 was volatile and rose to unprecedented<br>level. On the basis of the foregoing developments, some measures of<br>regulations were introduced in 1994. The developments in interest rates within<br>this period were generally within the prescribed limits but the rates on the other<br>hand were negative in real terms since inflation was estimated to be over 50<br>percent.<br>All the same, the banks still maintained the interest rate regime in 1995 with<br>some modifications just to make it flexible. Nevertheless, it should be noted that<br>the change in interest rates were significantly different from what prevailed<br>during the era of regulation. Over the past three decades, high macro-economic<br>instability has become a key determinant and the consequence of poor economic<br>management. Nigeria, a country blessed with abundant natural resources is seen<br>as one the countries that have the most volatile macroeconomic aggregates. This<br>is in order with National Economic Empowerment and Development strategy<br>(NEEDS, 2004) which says that “between 1975 and 2000, Nigeria’s broad<br>macroeconomic aggregates growth, the terms of trade, the real exchange rate,<br>government revenue and spending were among the most unstable in the<br>developing world”.<br>It is these developments which have fuelled the need to embark upon this study.<br>It could be possible that the macroeconomic instability is deep rooted in erratic<br>movements of interest rates.<br>1.2STATEMENT OF THE PROBLEM<br>It is a well known fact that the Nigerian Economy is characterized by volatile<br>interest rates, macro economic instability. Several measures embarked upon by<br>the CBN failed to correct these defects in the economy. The most important of<br>these measures were contained in the amendment of the CBN monetary circular<br>No 21 which diverted the control of rates from CBN on August1, 1987. The<br>bank had been in control of the cost of credit in the economy regulating the<br>interest rates charged by the commercial and merchant banks in their lending<br>activities.<br>As it is, banks determination and control of interest rates on loans did not help<br>for the stability of major macroeconomic variables due to the volatile nature of<br>rates during the planning period. Currently, interest rates are market determined<br>and the study intend to investigate the impact of interest rate on some selected<br>macroeconomic variables. In view of this, the research questions are stated as<br>below;<br>1. What is the nature of the relationship between interest rates and the gross<br>domestic product of Nigeria?<br>2. What is the nature of the relationship between the interest rates and the<br>level of domestic investment in Nigeria? <br></p>