Interest Rate Deregulation and the Impact on Profitability of Commercial Banks
CHAPTER ONE
OBJECTIVES OF THE STUDY
The objectives of this study among other things include;
- To examine the interest rate policy in Nigeria since 1986
- To examine the factors affecting interest rate in the economy.
- To determine the impact of the deregulatory of interest rate on the profitability of commercial banks.
- To identify the factors militating against sound interest rate policy should evolve.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
DEFINITION OF INTEREST RATES
There are various definition of interest rate. According to Jhigan (1991:163), interest rate is the puce of credit. It is also the opportunity cost of liquidity preference. This definition has it bases on the definition of interest rate by the classical economist who defines it as “the price that is paid for the use of savings of other people”.
In their own words, market rate of interest is the rate which clears the bond markets and the same rate equates savings and investment this. Ensuring the equality between the nominal real rate and money rate interest. But in his analysis of interest rate Kilick (1993:106) state that equilibrium demand for resource investment with the readiness to abstain from the present consumption. It is the price which equilibrates the desire the hold wealth in the form of cash. In other words, it is the reward for thrift to abstaining from consumption today.
According to him, real interest rate is the nominal rate minus the rate of inflation. Furthermore, he view it as an instrument for more effective mobilization of saving as deposit rate through the other or realistic rate on monetary savings, such a time and savings deposits, claims on financial institution and government securities. A decrease in the market rate of interest discourage saving and increase demand for goods and service since savings should now rather consume more then keep their funds in the bank with every low interest rates. This also creates profits opportunities for entrepreneurs due to the increase in the demand for good and services and raw materials which previously been held in check by the higher rate of interest, banks raise their lending interest rate when they are threatened with solvency.
CHAPTER THREE
RESEARCH METHODOLOGY
This chapter of the research work will explicitly deal with how low the research will be executed. It will among other things highlight on the type of data collected and sources, location and method of collecting such data. In addition, it will equally deal with how the data are analysis.
Therefore, this chapter will serve as a plan, showing what and how the research was carried out.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
In this chapter, the researcher present and analysis the data collected for the purpose of this study.
Table 4.1: Administration of questionnaire
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
SUMMARY OF FINDINGS
Having analysed the data, the following the finding are made. The monetary authorities had until the last decade operated a regime of interest rate control. This regime of control was justified on the basis of the responsibilities of the banking system in ensuring a sound banking system, achieving economic growth, checking inflation, creating more employment achieving balance of payment stability and encouraging investment and savings.
Prior to the deregulation of interest rate, the Nigeria economy was characterized by instability in the financial system, decline gross domestic product, falling investment and savings, balance of payment deficits mounting external debts and high rate of inflation and unemployment.
The objectives of the interest rate deregulation policy include achieving a more efficient allocation of financial market resources including more innovations and inventions in the banking system, industry and ensuring that a market determined interest rate is consistent with the programme of deregulation and liberalisation of economic process. Interest rate deregulation has enhanced the profitability of commercial banks.
However, it had some adverse implication for some macro-economic variables such as inflation, unemployment, investment and savings.
CONCLUSION
Based on the research findings, the following conclusions can be drawn.
- There is a correlation between interest rate and profit. This correlation can be positive or negative depending on the prevailing economic circumstances.
- The deregulation of interest rate has had an undulation trend in the profitability of commercial banks while the profit level increase in some years, it decreased in some other years as the interest rate varies.
- The effectiveness of interest rate policy depends on the prevailing situation.
- The deregulation of interest rate has adversely affect macro-economic variable such as savings and investment among others.
- Finally, the interest rate deregulation in Nigeria has succeeded in imposing on the economy a very stringent financial environment as most investment and business decisions have to bottle now on the difference between survival or extinction and stagflation or growth in the economy.
RECOMMENDATIONS
Based on the research findings, the following recommendations were made.
- At any given time, changes in the rediscount rate should be very minimal so as to ensure a reasonable degree of stability in the financial system. This is necessary because other interest rate depends on the Central Bank of Nigeria minimum discount rate and it is obvious that leaving the deposits and lending rates of interest to be determined by the uncertainties in the economy.
- Changes in the rediscount rate in any given time should be between 0.5% and 15% depending on the monetary policy pursued or intended to be pursued.
Also, within the frame work of the current market economy as it relates to interest rates, there should be sufficient institutional control or regulatory legislation to ensure that these very vital sectors of the economy that would ordinarily survive the deregulation require are adequate created for.
REFERENCES
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