Abstract
The study analyzed the effect of interest rate on the borrowing ability of commercial banks in Nigeria using time series data spanning from 2000 to 2017. High interest rate in the economy seems to be the major problem of bank customers in terms of raising capital fund and this has made it difficult for them to make investment due to lack of capital fund. The specific objectives includes: to examine the effect of interest rate on the borrowing ability of bank customers and to ascertain the effects of exchange rate on the borrowing ability of bank customers. The research design used in this research work was Ex post-Facto design. Based on the nature of the study as time series was used, the secondary data was used in collecting data. The data were sourced from Statistical Bulletin of the Central Bank of Nigeria (CBN), Federal Office of Statistics (FOS) and Annual Abstract of Statistic of the National Bureau of Statistic (NBS). The data were analyzed using the Ordinary Least Square Technique (OLS) and multiple regression to estimate the values of the parameters B0, B1 and B2. Borrowing ability of bank customers in the study was measured by total commercial banks loans, while interest rate (lending rate) and exchange rate was used as the explanatory variables. With respect to the general significance of the explanatory variables, the adjusted R-squared value (0.800738) implies that about 80.07% of the variations in commercial banks' loans (CBL) was explained by the variations in the explanatory variables which denotes that the regression has good fit and is reliable. The F-statistic, a measure of the overall significance of the regression model shows that the explanatory variables (INR and EXR) are collectively significant at 1% level. Based on the findings, it was found out that Interest rate has a negative and significant effect on borrowing ability of bank customers in Nigeria. Also Exchange rate has a positive and significant effect on the borrowing ability of bank customers. The study therefore concludes that interest rate has a significant effect on borrowing ability of bank customers in Nigeria. The study recommended that the government should aim at creating a macroeconomic environment that will reduce the volatile exchange rate in Nigeria so that the borrowing ability of bank customers can increase. And Government should use monetary policy to regulate increase in interest rate by commercial banks through Central bank so that the central bank will reduce borrowing rate to the commercial which the commercial bank can in turn reduce the borrowing rate (interest rate) to their customers.
Key words: Interest rate, exchange rate, borrowing ability
TABLE
OF CONTENTS
Title page i
Certification ii
Declaration iii
Dedication iv
Acknowledgements v
Table of contents vi
List of tables ix
List of figures x
Abstract xi
CHAPTER ONE
INTRODUCTION 1
1.1 Background to the Study 1
1.2 Statement of the Problem 3
1.3 Objectives of the Study 3
1.4 Research Question 3
1.5 Research Hypothesis 4
1.6 Scope of the Study: 4
1.7 Significance of the Study 4
1.8 Definition of terms 5
CHAPTER TWO
REVIEW OF RELATED LITERATURE 7
2.1 Conceptual Framework 7
2.1.1 The concepts of interest rate and
Borrowing 7
2.1.2 Compound Interest Rate 8
2.1.3 Interest Rates 8
2.1.4 Effects of Interest Rate Policies
on the Nigerian Economy 9
2.1.6
Factors Which Causes Variations in the Interest Rate Structure 10
2.1.6.1 Rate of Inflation 10
2.1.6.2 The Fluctuation of the
Supply of and Demand for Fund 10
2.1.6.3 Government Intervention 11
2.2 Theoretical Framework 11
2.2.1 Theories of interest Rate 11
2.2.2 The Classical Theory of Interest Rate 11
2.2.3 The Neo-Classical or the Loanable Funds
Theory of Interest Rate 12
2.2.4 Keynes Liquidity Preference 13
2.2.5 The General Equilibrium Approach (Modern) 15
2.3 Theoretical Framework 16
2.4 Gap in Literature 21
CHAPTER THREE
RESEARCH METHODOLOGY 22
3.1 Research Design 22
3.2 Area of Study 22
3.3 Nature and Source of Data 22
3.4 Model Specification 22
3.5 Technique for Analysis 23
3.6 Sources of Data 24
3.7 Evaluation Based on Statistical Criteria 24
CHAPTER FOUR
PRESENTATION OF DATA, ANALYSIS AND DISCUSSION 26
4.1 Presentation of Data 26
4.2
Descriptive Statistic 27
4.3
Analysis of Data and Discussion of Findings 27
4.3.1 Regression Analysis 27
4.3.2 Hypotheses Testing 28
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND
RECOMMENDATIONS 30
5.1 Summary of Findings 30
5.2 Conclusion 30
5.3
Recommendations 31
REFERENCES
APPENDIX
LIST OF TABLES
Table 4.1: Dataset used for the analysis (2000-2017) 26
Table 4.2: Descriptive Statistics 27
Table 4.3: Regression Results (dependent
variable; CBL) 27
LIST OF FIGURES
Figure
1: Loanable funds theory: shift in demand 14
Figure
2: Liquidity preference curve and money supply 15
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Interest rate is the price paid for the use of money. It is the
opportunity cost of borrowing money from a lender to finance an investment
project. It can also be seen as the return being
paid to the provider of financial resources, for growing fund for
future consumption (Oteng Evans, 2014).
Interest rates are normally expressed as u percentage rate. The
volatile nature of interest is determined by many factors, which include taxes,
risk of investment, inflationary expectations, liquidity preference, market
imperfections in an economy etc. Banks arc given the primary responsibility of
financial intermediation in order to make fund available for economic agents.
Banks as financial intermediaries move fund (Hassan, Olanrewaju Makinde, 2016).
Financial intermediaries from surplus sectors/units of the economy to deficit
sectors/units by accepting deposits and channelling them into lending
activities. The extent to which this could be done depend upon the rate of
interest and level of development of financial sector as well as the saving
habit of the people in the country (Bernhardscn, 2009).
Interest rate is the return or yield on equity or the opportunity
cost of deferring current consumption in the future. Some examples of interest
rate include lending rate and
the discount rate. Interest rate is determined by the force of demand and
supply of capital. Hence,
interest level is arrived at by the intersection between savings and investment (Luckett, 2014).
In Nigeria, interest rate policy is among the emerging issue in
current economic policy as regard to the role it is expected to play in the
deregulated economy in inducing savings which can be channeled to investment
and thereby increasing employment, output and efficient financial
resources utilization. The administration of low
interest rate which was intended to encourage investment was witnessed in the
1950s to mid-1960s.
According to Adebiyi (2014), the major factor that determines
investment is interest rate and this is influenced by savings. Interest rate
favours the investors when the interest rate is low. Interest rate favours
savers when the rate is high, savings were looked upon as beneficial both for
the individual and the society at large. When savings increase, investment also
increases, Investment is very essential for the economic development of an
economy (Adebiyi, 2014). Reduced interest rate, increased savings and
investments, leads to increased employment rate. which will in turn increase
demand, prices, profit and production expansion. This expansion if properly
utilized will lead to economic development of a country (Shaw, 2013).
More, it has been observed over the years that the ability of an
economy to produce depends largely on the availability of resources in the
economy. For emerging economies like Nigeria, production could be seen as a
vital process that protects the economy against economic embarrassments like
recession. Nigeria has over the years concentrated her production in the oil
and gas sector neglecting other key sectors like agriculture, tourism and
mining. This act has boxed Nigeria to the corner where we are today (economic
recession). The ability and capacity to increase the level of production of
quality service and tangible goods is pertinent to the growth of any economy
(Adofu, 2010). Economic growth can therefore be viewed as an increase in the
Gross Domestic Product (GDP) of a particular country, lunation and Interest
rate are essential macroeconomic variables capable of changing, transforming
and redirecting the growth pattern of a country's economy (Abiodun, 2012).
Abebiyi (2014) opined that the
desire of any economy is to have a sustained economic growth but this macroeconomic
objective cannot be achieved in the face of hash and precious interest rates.
To Okpe (2013), inflation rates and high interest rates arc major drawbacks of
economic growth in emerging economies like that of Nigeria. The National Bureau
of Statistics in Nigeria realised a statement in the 2nd quarter of
2017 that Nigeria has witnessed an increase in economic growth of about 0.055%
but how much of this growth is felt by an average Nigerian in the face of high
inflation and interest rates is already a puzzle.
1.2
Statement of the Problem
High interest rate in the economy seems to be the major problem of
bank customers in terms of raising capital fund and this has made it difficult
for them to make investment due to lack of capital fund. When bank customers
are unable to borrow funds to invest in their business due to high interest rate, they suffer a lot due to
insufficient funds to engage in the production of
goods and services which leads to the shortage of such goods and services which
in turn affects the entire economy.
It is against this backdrop that this study intends to examine the
effect of interest rates on the borrowing ability of bank customers.
1.3 Objectives of the Study
The main objective of the study is to examine the effect of
interest rate on the borrowing ability of bank customers.
The specific objectives includes: -
i.
To examine
the effect of interest rate on the borrowing ability of bank customers.
ii.
To ascertain
the effects of exchange rate on the borrowing ability of bank customers.
1.4 Research Question
The following research questions
are to be answered in this study.
i.
To what
extent does interest rate influence the borrowing ability of bank customers ?
ii.
How does
exchange rate affect the borrowing ability of bank customers?
1.5 Research Hypothesis
Below are the research hypotheses to be tested.
Ho1: Interest rate has no significant effect on the borrowing ability
of bank customers..
Ho2: Exchange rate does not have significant effect on the borrowing
ability of bank customers.
1.6 Scope of the Study:
The study is concerned with examining the effect of interest rate
on borrowing ability of bank customers.
The study will be limited to interest rate and its effect on the
borrowing ability of bank customers.
This study will be a macro level analysis which will involve time
series elements, thus the econometric analysis of the effect of interest rate
on the borrowing ability of bank customers will be based on the Nigeria economy
for the period 2000-2017. These years are chosen owing to the availability of
time series data for the variable of interest indicator,
1.7 Significance of the Study
The importance of a study on
interest rate on borrowing ability of customers in Nigeria cannot be played
down, given the fact as it has a long-run effect on deciding whether bank
customer deposits in banks or not and all of these will have effect on the
nation's economic development. Most oftentimes banks usually crave for
customers' deposits of fund into their Proceeding of the First banks, part of the ways they attract
deposits is by offering high interest rate to depositors; so doing a study on
this area will be of great benefits to both that bank and the depositors alike.
Furthermore, any study that would help to bring to the fore the impact of
interest rate on bank deposits in Nigeria should be considered as apt and very
significant. This is the purpose of this
study.
This study will be significance to the following group in the
society:
1.
This research
will be of immense benefit to policy makers in Nigeria. Government agencies
should try and reduce the rate at which borrows are been charged. Attention
will also be drawn to the impact of bank customers in enhancing economic
growth.
2.
Another group
of people who will benefit from this study is the bank management, directors
and shareholders which-have interest on bank profits, to know the impacts of
commercial bank customers.
3.
This research
will contribute to the existing body of knowledge. The recommendations of the
study will go a long way in adding to existing body of literature available in
this area.
1.8 Definition of terms
Interest rate: An interest
rate is the percent of principal charged by the lender for the use of its
money. The principal is the amount of money lent. Banks pay you an interest rate
on deposits because they borrow that money from you.
Anyone can lend money and
charge interest, but it's usually banks. They use the deposits from savings or
checking accounts to fund loans. They pay interest rates to convince people to
make deposits. Banks charge borrowers a little higher interest rate than they
pay depositors so they can profit. At the same time banks compete with each
other for depositors and borrowers. That
competition keeps interest rates in a narrow range.
Financial institutions: Is a company engaged in the business of dealing with monetary
transactions, such as deposits, loans, investments and currency exchange.
Borrowing: Receiving
something: of value in exchange for an obligation to pay back something of usually
greater value at a particular time in the future.
Bank lending: In finance, a loan, is the
lending of money from one individual, organisation or entity to another
individual, organization or entity. Typical bank lending surveys include
questions about the number of loans made, the interest rates on loans, demand
for new
loans, default rates,
differences between commercial
and retail lending,
and information on a bank's existing loan and financial portfolios.
Interest: The price
paid for obtaining, or price receive for providing, money or good in a credit
transaction, calculated as a fraction of the amount or value of what was
borrowed
Banking: Banking is
defined as accepting' for the purpose of lending or investment or deposit of
money from the public repayable on demand or withdraw able by cheque, draft or
order.
Bank Customer: A customer
is a person who has some sort of account, either deposit or current account,
with the banker.
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