This study examined
the effect of interest rate margin on the performance of deposit money banks in
Nigeria within the sample period of 1980 to 2016. The
general objective was to verify how interest rate margin affects the
performance of the deposit money banks. The data for this research work (Profitability
Rate, Interest Rate, Monetary Policy Rate, Deposit Rate and Lending Rate (LNDR) was obtained from the CBN Statistical
Bulletin (2016) and analyzed using Cointegration, and Error Correction Model approach.
Profitability Rate was regressed against Interest Rate, Monetary Policy
Rate, Deposit Rate and Lending Rate.
The result showed that all the
variables employed for the purpose of this study had a significant effect on
profitability rate in Nigeria for the period under review. The
f-statistics revealed that the explanatory variables jointly influence the
Profitability Rate. The unit root test indicates that all the
variables were stationary at first differencing. The cointegration test
revealed that the variables had a long run relationship with bank profitability
in Nigeria within the sample period this necessitated the application of
ordinary least square, which revealed that the variables are good
measures of bank profitability. Also the R2 was 0.87, showed that 87%
of the changes in bank profitability was as a result of fluctuations in the
explanatory variables. The Breusch-Godfreyshowed that there is no autocorrelation in the series. Hence, the result
could be employed for the formulation of policies.Based on these findings the
research recommends among others that; it was
discovered that the interest rate had a negative effect on the profitability
and overall performance of the deposit money bank; it was observed that once
the interest rate is high, investors tend not to borrow as they might not be
able to pay back. Therefore, for profitability of the deposit money banks to be
improved, there is the need to reduce the rate of interest as this will help
attract individuals to get loans for investment purposes hence, improve
Acknowledgement s v
List of Tables
ONE - INTRODUCTION
Background of the Study 1
Statement of the Problem 3
Objectives of the Study 5
Research Hypotheses 6
Significance of the Study 6
Scope of the Study 8
Limitations of the Study 8
TWO – REVIEW OF RELATED LITERATURE
2.1 Evolution of Commercial Bank in Nigeria 10
2.2 Conceptual Framework 14
2.3 Empirical Literature 28
2.4 Theoretical Literature 37
2.5 Theoretical Framework 40
THREE – METHODOLOGY
3.1 Research Design 47
3.2 Sources of Data 47
3.3 Area of Study
3.4 Description of Research Variables
3.5 Model Specification
3.6 Estimation Techniques
FOUR – PRESENTATION AND ANALYSIS OF RESULTS
4.1 Descriptive Analysis
4.2 Diagnostic Analysis
4.3 Cointegration Test
4.4 Error Correction Model
4.5 Test of Hypotheses
FIVE – FINDINGS, RECOMMENDATIONS AND CONCLUSION
5.1 Summary of Findings
Descriptive Result 56
Augmented Dickey Fuller Unit Root Trend and Intercept 57
Breusch-Godfry Serial Correlation LM Test
Heteroskedasticity Test: Breusch-Pagan-Godfrey
ECM Result 65
of the Study
financial systems of most developing nations have come under stress as a result
of the economic shocks of the 1980s. The economic shock largely manifested
through indiscriminate distortions of financial prices which includes interest
rates, has tended to reduce the real rate of growth and real size of the
financial system relative to non-financial magnitudes (Davidson and Gabriel,
2004). Rasheed (2010), states that Nigerian economy saw different sectors in
1970s through the mid-1980s (regulated regime, 1960-1985).
1986, the inception of interest rate deregulation, the government of Nigeria
has been pursuing a market determined interest rate regime, which does not
permit a direct state intervention in the general direct of the economy
(Adebiyi and Babatope-Obasa, 2004).
Money Banks are the most important savings mobilization and financial resource
allocation institutions. Consequently, these roles make them an important phenomenon
in economic growth and development. In performing this role, it must be
realized that banks have the potential, scope and prospects for mobilizing
financial resources and allocating them to productive investments and in return
promote their performances. Therefore, no matter the sources of the generation
of income or the economic policies of the country, Deposit Money Bank would be
interested in giving out loans and advances to their numerous customers bearing
in mind the three principles guiding their operations which are profitability,
liquidity and solvency (Adolphus, 2011).
are paid some amount as interest for parting with their fund while borrowers
are charged some amount as lending rates for making use of the funds. The
difference between the lending and the deposit rate constitutes the margin. Net
interest margin or interest rate margin and interest rate spread are used
interchangeably in most literature. However, some authors prefer to use the
term net interest margin when using ex-post data (difference between banks
quoted lending and deposit interest rate) (see Enendu, 2003). In this study, to
avoid ambiguity, ex-post data was used and interest rate margin was defined in
broad term as the ratio of difference between interest income and interest
expenses to total assets for individual banks. High margin increases banks
profitability but tends to decline the efficiency of financial intermediation
process, and efficient financial intermediation is a necessary condition for
the achievement of price stability of the monetary authority and growth in the
margin has remained relatively high over the years in Nigeria with adverse
implications for savings mobilization and investment. For instance, from
January 2011 to June 2014, interest rate margin averaged 20.51 percentage
points, compared with average consolidated deposit rate of 3.42 percent. High
margin imply interest rate movement in two directions and corresponding
consequences. A lower deposit rate encourages saving and therefore reduces bank
deposit, resulting in scarcity of investible funds. On the other hand, high
lending rates curtail borrowing and investment. In an economy like Nigeria
where the bulk of intermediation is by the banks, the scenario could stifle
investment and curtail growth in the economy.
Statement of the Problem
orderto curb the adverse effect of the 1980s financial repression, Nigerian
government deregulated interest rate in 1987 as part of the Structural
Adjustment Programme (SAP) policy package. The official position was that
interest rate liberalization among other things, enhance the provision of
sufficient funds for investors especially manufacturers (a priority sector) who
were considered to be prime agents by implication promoters of economic growth.
in a policy reversal, the government in January 1994 out-rightly introduced
some measures of regulation into interest rate management. it was claimed that
there were “wide variations and unnecessary high rate” under the complete
deregulation of interest rates immediately, deposit rates were once set at 12%
to 15% per annum while a ceiling of 1% per annum was fixed for lending rate.
The Cap on interest rate introduces in 1994 was retained in 1993 with a minor
modification to allow for flexibility. The Cap stayed in place until it was
lifted in 1997, thus enabling the pursuit of the flexible interest rate regime
in which bank deposit and lending rate were largely determined by the forces of
demand and supply for funds (Omole and Falokun 1999).
rate is crucial elements in the transmission of Monetary Policy actions to
economic activities (Craig, 2000). The interest rate policy in Nigeria for
example has changed within the time frame of regulated and deregulated regimes.
However, impacts of these variables on the economic growth of Nigeria have
remained controversial (Acha et al,
2011). In 1993, a new framework focused on the deregulation of interest rates;
interest rates were very high and volatile. In 1994, due to high volatility of
interest rate government decided to fix the Monetary Policy Rate at 13.5% (CBN,
1994) the Capital on interest rate adopted in 1994 was lifted in October 1996
and a flexible interest rate regime largely determined by the forces of supply
and demand for funds were put in place and this has remained so since late
1990s to date (CBN, 2007) however, the problem has been that market based
approach to interest rate management in Nigeria has always been associated with
substantial interest rate volatility (CBN, 2006).
1986, Nigeria interest rate was as low at 2.5%, it rose to 8.9% (CBN, 1990).
Auction markets for securities were introduced, capital adequacy standards were
reviewed upward and the extension of credit based on foreign exchange deposits
was banned (Hussainatus, 2008). Nigeria’s interest rate fluctuates overtime as
the Central Bank was to regulate and supervise all interest rate administered.
The monetary authority introduced the indirect monetary instruments in order to
control the interest rate and the rate of inflation. The interest rate has
doubled through the period of 1997 and 2007 attaining a peak of 24.62% (CBN,
Ordinarily, high interest rate should spur
the desire for bank vaults. Likewise, low interest rate should naturally
discourage depositors. But most often times this is not the case, hence this
study seeks to examine how interest rates affects the performance of Deposit
Money Banks in Nigeria from 1980-2016.
Objectives of the Study
broad objective of the study is to examine the effect of interest rate margin
on the performance of Deposit Money Banks in Nigeria from 1980-2016.
objectives include the following:
investigate the effect of interest rate margin on the performance of Deposit
Money Banks in Nigeria.
determine the effect of Monetary Policy Rate (MPR) on the performance of Deposit
Money Banks in Nigeria.
determine the effect of Lending Rate on the performance of Deposit Money Banks
determine the effect of Deposit Rate on the performance of Deposit Money Banks
the objectives of the study, the following forms the research hypotheses
There is no significant effect of interest rate on the performance of Deposit
Money Banks in Nigeria.
There is no significant effect of Monetary Policy Rate (MPR) on the performance
of Deposit Money Banks in Nigeria.
H03: There is no significant effect of Lending Rate
on the performance of Deposit Money Banks in Nigeria.
H04: There is no significant effect of Deposit Rate
on the performance of Deposit Money Banks in Nigeria.
Significance of the Study
significance of this study will be of immense benefit to the following groups:
Money Banks: interest rate unavoidably is an important factor in the survival
of the industry especially as it concerns their profitability. as interest rate
keeps on changing as can be seen from the unstable interest rate regime in
Nigeria, such frequent changes could affect banks overall profitability. so
with this study, it will be of immense benefit for the Deposit Money Banks to
know how to run interest rate so that they can be able to enhance the
confidence of the stakeholders, maximize shareholders wealth as well as being
able to stay competitive in the financial market.
Bank of Nigeria (CBN): this study will help them to highlight on why interest
rate policies fluctuate and show inconsistency from regulation to deregulation.
It will also help them to know what measures to take in setting interest rate
so that it will have a positive effect on performance of Deposit Money Banks in
Government: this study will enable them to know the causes of lack of funds
within the economy. It will help them to understand the impact of an effective
monetary policy regime on the performance of Deposit Money Banks in Nigeria. It
will also help them to know which policy to adopt so that DMBs will improve on
their performance while will in turn increase the nation’s economy.
Bank and Depositors: interest rate has a long run effect on deciding whether
bank customers deposits in banks or not and this will have effect on the
nation’s economic development. most oftentimes, banks usually crave for
customers deposits of fund into their banks, part of the ways they attract
deposits is by offering high interest rate to depositors, so carrying a study
on this area will be of great benefits to both the banks and depositors alike.
Researchers and Students: this study creates an understanding concerning the
relationship between interest rate and banks performance. it will serve as a
source of secondary data for further research and equally add to the existing
stock of knowledge.
Scope of the Study
The scope of this study covers only a
detailed discussion on the effect of interest rate margin on the performance of
Deposit Money Banks (DMBs) in Nigeria from 1980-2016. The study focuses on Nigerian
Deposit Money Banks which interest is mainly on four (4) of them. They
includes; Zenith Bank Plc, Access Bank Plc, First Bank Plc and Union Bank Plc.
Limitations of the Study
researcher encountered a number of problems which hindered the research work.
study covers a stipulated range which is from 1980-2016. Also related materials
or literatures were limited in supply as observed in the cause of this study. The
study covers the Structural Adjustment Programme (SAP) and P-SAP period of
1986-1999 and 2000-2013 respectively and even extend to 2016.
study investigated four variables which are interest rate, monetary policy
rate, lending rate and deposit rate. Other variables could have been studied
but due to limitation of time and other resources interest was focused mainly
on the above mentioned variables.
researcher faced some financial difficulties as the current recession in
Nigeria makes it difficult for money to circulate.
combining academic work load alongside with this study is a major limitation.
Despite the above mentioned limitations the research work had to progress