THE
EFFECT OF BANK INTEREST RATE DEREGULATION ON THE ECONOMIC GROWTH IN NIGERIA
CHAPTER ONE
1.0 BACKGROUND OF THE STUDY
The term interest can simply be define as the cost of using someone else
money or viewed from the under point of view, as the price charged for allowing
one to use someone else money. The role of interest is the reward for parting
with liquid for a specific period of time.
The Nigerian Banking sector is among the most heavily regulated sector of
the Nigerian economy. The special interest of government in the banking sector
is due to its relevance in the provision of credit facilities of industries and
most importantly the provision of soft loan for small scale businesses for
development of economy in the country. As financial intermediary, banks help in
channeling founds from surplus economics regions to the deficit one’s on order
to facilitate business transaction and economic development in general. The
real sectors economics are not left out in benefit found from the surplus
spenders in the economy.
Anyonwu (1997) opined that,
commercial
banks encourage savings. Since investments are made out of savings, the
establishment of
commercial
banks especially in the rural makes savings possible home economic
development is accelerated.
Bearing in mind that funds are owned by other people (the investing public /
depositor) the banking ethic demands that such funds should be efficiently and
effectively managed in order to build and maintain the confidence of depositor
investors in the banking system and also uphold the competence and continued
soundness of the banking system to reduce drastically the risk or possibility
of bank failure or distress.
The government most of ten may think its necessary to intervene in the
operation of the banking system with the intention of correcting the short
comings of the price fixing mechanism to ensure that what is commercially
rational for an individual bank is appropriately rational for all socially
interest rate charged by banks could be regulated to encouraged saving
mobilization, ensure and faster adequate investment for rapid growth and
development, bearing in mind the view of Goldsmith (1969) that the financial
super structure of an economy accelerates the migration of funds to the best
user i.e. to the place in the economic system where the funds yield the highest
social return.
The opinion of Greenwood and Jovanoric (1990) clearly approximate the view
of Goldsmith (1990). They stated that financial intermediation promotes growth
because it allows a higher rate of return to be earned on capital and growth in
turn provides means to implement costly financial structure.
According to Akiri and Adofu (2007), the exisitence of externalities and
imperfection in the financial markets of most developing economics has often
called for intervention by the government through its appropriate agent (the
central Bank in the case of Nigeria) to encourage investment and to re-channel
credit to those economic unity with high social race of returns but low
commercial rate of returns
Under the deregulated interest rate system, the market forces of demand and
supply plays a very prominent role in the determination of interest i.e to
arrive at a suitable interest role on both deposit and loans.
Interest rate being cost of money, the government by deregulation interest
intends to stop central on credit expansion by banks. If the cost of money is
high, the business sector would not borrow and when they don’t borrow, it will
go long way to reduce the inflationary tendencies associated with excess
liquidity.
This study attempts to find the probate
effect
of bank interest rate deregulation on economic growth in Nigeria.
1.2 STATEMENT OF PROBLEM
Generally, banking industry operate on a profit base mobilizing fund
from surplus sectors and lending it to into deficit sector in which interest
rate is being charged on both the bank usually paid sector but charges higher
interest when they want to lend it into deficit sector in order to make profit
for banks to fulfill this, care must be taken in lending in order to safeguard the
profitability of such banks.
1.3 OBJECTIVE OF THE STUDY
The study attempt to makes in-dept analysis of
the
effect of bank interest rate deregulation on the economic growth in Nigeria
and thereby assess the effect of the charges in interests rates on saving
through the structure and growth of bank deposit implication on the economic
growth.
1.4 STATEMENT OF HYPOTHESIS
At the end of this research work, the following opinion will be
tested.
1.
Hi:
The high interest rate induces savings in banks
Ho:
The high interest rate does not induces saving in banks
2.
Hi:
The high bank interest rates discourage customers from borrowing
Ho:
The high bank interest rate does not discourage customers from borrowing.
This study will help the bank to know whether they should be more committed
to increasing there changes on rate of interest and to know whether this will
increase there customer patronage good will and profitability. To proffer
policies, to determine the effect of lending policies on economy of Nigeria, to
know the need for partial equilibrium analysis of bank deposit management to
assess the effect of the changes in interest on saving through the implication
of threat on the economy.
1.5 SIGNIFICANT OF THE STUDY
The researcher therefore, that by studying the pricing decision, it will be
of benefit to the economy and individual alike, it will be of benefit to the
economy in the sense that it will as to determine approximation compensation
for labour used in production.
This study will equally enable firms to known how consumer perceive
products, the reasons for the high and low price. In addition, the study will
serve as reference point for future researchers relevance area.
1.6 DELIMITATION OF THE
STUDY
It is highly imperative to state categorically that this study paves way for
others to further studies into areas that are not adequately covered by this
researcher. Also there is room for further research into area cover by the
researcher.
1.7 LIMITATION OF THE STUDY
Apart from the fact the writers intend to have detailed study of the above
mentioned target area, writer is limited to these areas because of the
following reason:
1. Time: -
It is indeed pathetic that the researcher have a very limited time to carry out
the research therefore, the writer needs to manage the source that is available
in order to finish the research within the allocated time.
2. Financial
Constraint: - The researcher would have loved to moved wider but this
is not possible due to limited amount of money the researcher have, the
researcher spirit all he could to make this work successful.
3. Inadequate date:
- This research work will be limited to the volume of information acquired
through materials like national dailies, periodic journals, text books,
internet materials and write – up on related subject.
4. Uncooperative
Attitude of Respondents: - As it unduly know that banks are often busy.
So questionnaire administrations were not answered very well because majority
of the staff were occupied with the customers. This constraint might be regard
as that of non-response during peak periods.
1.8 DEFINITION OF TERMS
Interest Rate: - An interest rate is the rate at which
interest is paid by a borrower for the use of money that they borrow from a
bank as loan or overdraft etc.
Deregulation: - Is the removal or simplification of
government rules and regulations that constraints the operation of bank on
interest rate for loan given.
Lending: - Is concerned with granting of credit facilities
to customers.
Normal Interest Rate: - This is the interest on the face
value or coupon rate in the case of loans floated as securities.
Real Interest Rate: - This is the interest adjusted for the
effect of inflation. Real interest is only used in performance assessment.
Prime Lending Rate: - This is the rate banks lend to their
first class loan risk customers. For other customers the lending rate will be
higher, the difference representing a premium for risk under taken by the
lender.
Interest rate Spread: - This is the differences between
lending rate and borrowing rate.
Borrowing Rate: - Borrowing rate to a banker’s customer the
“borrowing rate” i.e. bank’s lending rate.
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THE EFFECT
OF BANK INTEREST RATE DEREGULATION ON THE ECONOMIC GROWTH IN NIGERIA
