THE EFFECT OF BANK INTEREST RATE DEREGULATION ON THE ECONOMIC GROWTH IN NIGERIA

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THE EFFECT OF BANK INTEREST RATE DEREGULATION ON THE ECONOMIC GROWTH IN NIGERIA

CHAPTER ONE

INTRODUCTION

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-respo nse 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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