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Impact Of
Interest Rate Policy On Investment In The Nigeria Economy
ABSTRACT
The focus of
this research work is based on the impact of interest rate policy on investment
in the Nigerian economy between the period of 1981 – 2009. because interest
rate and investment is at core of economic stabilization. The objective of this
study is to examine the impact of interest rate policy on Nigeria prior to
interest rate regulation in 1987 and to serve as a guide on how interest rate
can be fixed to enhance effective accumulation of savings that can be channeled
to investment. The study employed the ordinary least square technique which
also employ. Secondary data obtained from the central bank of Nigeria (CBN)
statistical bulletin. The main findings revealed that there is a negative
relationship between interest rate and investment and also there is a
significant relationship between savings and interest and finally,
recommendations were made on how interest rate can be performed optimally.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Interest
rate policy in Nigeria is a major instrument of monetary policy with regard to
the role it play in the mobilization of financial resources with the aim to
promote economic development and growth. Interest rate due to it importance in
the financial sector of the economy can be a major tool in promoting growth and
development of the economy.
Prior to August 1986 interest rate in
Nigeria was generally fixed by the
Central Bank of Nigeria with periodic adjustments depending on the government
sectoral priorities (Ucendu 1993).
On 31 July , 1987, however the Central Bank of Nigeria announced the
deregulation of interest rate, that is abolished (with effect from 1 August
1987) all control on SAP during the Ibrahim Babangida regime, stated that
interest rate became market driven that is, hence be determined by the forces
of demand and supply.
Again, it also focuses on trade
liberalization in order to stimulate exports and correct price distortions, the
need for financial liberalization was also realized. The steps that were taken
in this regard were interest rate deregulation, introduction of an auction
market for treasury bills, the identification of insolvent bank for
restructing, the introduction of more
stringent prudential guideline for
Bnaks, increase in banks minimum capital requirement and up grading and
standardization of accounting
procedures. Not all of these measures were implemented simultaneously
however, interest rate deregulation was the first step.
However, in a policy reversal, the
government in January 1994 out rightly introduced some measure of regulation of
interest rate management. It was claimed that there were it wide variations and
unnecessarily high rate under the complete deregulation of interest rate
immediately, deposit were once again set at 12% - 15% per annum, while a
ceiling of 21% per annum was fixed for lending.
The cap on interest rate introduced in
1994 was retained in 1995 with a minor modification to allow for flexibility.
The cap stayed in place lifting remained in force in 1997, thus enabling the
pursuit of flexible interest rate regime in which bank deposit and lending rate
were largely determine by the forces of supply and demand for fund.
Since 2004, the monetary policy
committee of the central bank in Nigeria has been meeting to deliberate and if
possible fix the monetary policy rate depending on the performance of the
economy (CBN website). In 2004, the lending rate was 20% while the minimum
rediscount rate (MRR) was 15% the time deposit rate for the same period was
10.8% while saving rate was 4.9% (NDIC 2002 Annual Report).
The adoption of the two interest rate
regime in Nigeria provides a case study for Keynesian investment theory as well
as Mckinnon and Shaw hypothesis. Hence, many reason abound while people and
interest, these include the direction of interest rate, the expected rate of
return from such investment etc.
This work will focus on the
understanding and identification of the relationship that exist between the
interest rate, saving and investment the Keynesian theory implies that low interest
rate as a determinant to increase investment demand.
1.2 STATEMENT OF THE PROBLEMS.
The financial system of most developed
countries like Nigeria came under stress as a result of the economic stock of
the 198os. Additionally, financial repression, largely manifested through
indiscriminate distortions of financial prices including interest rate, has
tended to reduce the reat of growth and the size of financial system relative
to non-financial magnitudes more importantly financial repression has retarded the development
process as envisage by Shaw.
In this research work certain problem
will be encountered among which are:
i Is there any effect which interest rate
policy has on investment?
ii Has interest rate policy made any
Significant impact on the level of investment?
iii To what extent has the variation of interest rate in Nigeria over the year been a problem to
investment?
1.3 OBJECTIVE OF THE STUDY
The major objective of this study is to
determine the impact of interest rate policy on investment in the Nigeria
economy, in order to achieve the above goal, this study has the following as
its specific objectives?
i To critically examine the effect of
interest rate policy on investment in Nigeria economy.
ii To ascertain how other variables such as
consumption, Saving, Exchange rate as well as gross domestic product (GDP),
that is the level of income affect investment in Nigeria.
iii To examine the impact of interest rate
policy on Nigeria prior to interest rate regulation in 1980.
iv To make appropriate policy recommendation
based on the findings.
1.4 RESEARCH QUESTION
In this work the following
questions shall be looked into.
i Is there any relationship between
interest rate policy and investment in Nigeria economy?
ii How can we identify the types of
relationship between interest rate policy and investment in Nigeria?
iii How do we examine the relationship between
government development, investment and interest rate?
iv Is there any relationship between interest
rate and gross Domestic Product (GDP) in
the Nigeria economy?
1.5 RESEARCH HYPOTHESIS
In view of the objectives of
the study, the research hypothesis will be tested as follows:
Ho: there is no positive relationship between
the interest rate and investment in the Nigeria economy.
Hi:
there is a positive relationship between interest rate and investment in
the Nigeria economy.
1.6 SIGNIFICATANT OF THE STUDY
This study
is very vital because Nigeria economy over the years have been faced with
problem of appropriate interest rate policy that could efficiently sustain
investment and enhance economic growth and development.
Again, this project is meant to find
the various kind of interest rate polices that have been used over the year and
how it have been able to affect the rate of investment positively or
negatively.
1.7 SCOPE AND LIMITATIONS OF THE STUDY.
This study will look on the effect of
interest rate policy on the level of investment in the Nigeria economy during
the period of 1981-2009.
This study has the intention of
looking into how Nigeria could solve her numerous macro economic problems and
achieve full economic growth and development by increasing the level and rate
of investment. This work also intend to
bring out the best interest rate policy that would suit and enhance
Nigeria Public investment.
In the other hand, the researcher has
so many limitations and problems against this work. One of them is finance. A
work of this nature require huge amount of money. The researcher has to travel
to many places like banks, example central bank of Nigeria and many other financial institutions to collect data
and materials for this work.
Another limitation is the refusal of
top government and bank of officials. Working in the selected financial
institutions billed for this work to grant the researcher audience and give him
the relevant information, materials and data he need for this work.
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