Financial system has long been recognized
to play an important role in economic development. The benefit derivable from a
healthy and developed financial system relates to savings mobilization and
efficient financial intermediation roles. In terms of financial intermediation
between savers (lenders) and borrowers such benefits include; spreading risk, reduction
of transaction and search costs. Financial institutions create liquidity in the
economy by borrowing short-term and lending long-term. These financial
intermediaries bring the benefit of asset diversification to the economy. They
mobilize savings from atomized individuals for investment thereby solving the
problem of indivisibility in financial transactions. Consequently, mobilized
savings are invested in the most productive ventures irrespective of the
source. The extent to which this could be done depends on the level of
development in the financial sector as well as the savings habit of the
populace. Based on these expectations, Nigeria has implemented financial
liberalization under different financial structures and macroeconomic
conditions. The availability of investible funds is therefore regarded as a
necessary starting point for all investments in the economy which will
eventually translate into economic growth and development (Uremadu, 2006, cited
in Olayemi & Michael, 2013).
Mckinnon and Shaw (1973 cited in
Onwumere, et al, 2012), attributed financial repression as the cause of the
unsatisfactory growth performance of developing countries. They argued further
that financial repression arises mostly when a country imposes ceilings on
nominal deposit and lending interest rate at a low level relative to
inflation. Savings represent that part
or portion of disposable income not spent on current consumption. It comprises
of time deposits in bank and the various forms of equities. According to the
Keynesian economics, savings is the amount left over when the cost of a
person’s consumer expenditure is subtracted from the amount of disposable
income that he or she earns in a given period of time.
Institution in the financial sector
like the deposit money banks (DMBs) or commercial banks mobilize savings
deposit on which they pay certain interest. Interest rate is an important
economic price, this is because of its diverse role in the economy, whether
seen from the point of view of cost of capital or from the perspective of
opportunity cost of funds, it has a fundamental implication for the economy.
Interest rate on savings account are
part of what makes funds available in the bank rather than at home more
reasonable. If one saves money in the bank account, it normally earns some form
of benefits depending on how long the money is saved in the bank. Those direct
benefits or returns which the money earns while it was in the bank account are
referred to as interest rate. Interest
rate is regarded as the payment for use of capital or money. Keynes regarded
interest rate as a purely monetary phenomenon, payment for the use of money. It
is the reward for parting with the liquidity of money. Thus it is a premium
which is offered to wealth holders to induce them to part with their cash. When
people abstain from consumption they save and interest rate becomes the reward
for saving. Conceptually, interest rate can be seen as the reward for saving.
Interest rate increase savings when
cost of capital and availability of credit are influenced, if interest rate is
administratively determined it is known as fixed interest rate and floating if
determined by market forces. To effectively mobilize savings in an economy, the
deposit rate (interest rate) must be relatively high and inflation rate
stabilized to ensure a high positive real interest rate which motivates
investors to save from their disposable income. In Nigeria, the problem of mobilizing
savings has been the bane of economic growth and development.
the oil shock in Nigeria
and in the early 1990’s savings mobilization has been declining (chete, 1999 in Olayemi &
Michael, 2013). However this trend
conceals a large and increasing dispersion of saving rate, particularly among
developing countries. The large heterogeneity in savings behaviour is
associated to country and time differences in levels of development, growth
performance, and fiscal & financial policies.
The interest rate reform policy
under financial sector liberalization was needed to remedy the problems caused
by the financial repressive policies. Since the introduction of financial
liberalization concept in the 1970s, many countries such as Angola, Burundi,
Congo, Cote d’lvoire, Gambia, Chana, Kenya, Madagascar, Malawi, Mozambique,
Nigeria, Rwanda, Tanzania, Zambia, Zimbabwe, India, China, Turkey, etc. have
made attempts at liberalizing their
financial sectors by deregulating interest rates, eliminating or
reducing credit controls, allowing free entry into the banking sectors, giving
autonomy to commercial banks, permitting private ownership of banks and
liberalizing international capital flows. Odhiambo (2009) posits that of these
six dimensions of financial liberalization, interest rate liberalization seems
to have been the main centre of attention. In Nigeria, financial sector reforms
began with the deregulation of interest rate in august 1987 (Olayemi &
Micheal, 2013). Prior to this period, in the early 1980s the financial system
operated under financial regulation and interest rates were said to be
repressed (fixed) by the central bank of Nigeria (CBN) on the basis of policy
decisions. The major objectives during this period were; to obtain optimum resources
allocation to promote orderly growth in the financial market and facilitate
flow of credit to the preferred sectors- agriculture, manufacturing etc,
(Soludo, 2008). During the era of fixed interest rates, real interest rates
were generally negative. It lead to financial disintermediation, leading to low
level of savings, and resulting to low level of direct investment & low level of growth.
Funds were inadequate as there was a general lull in the economy, monetary and
credit aggregates moved rather sluggishly. Consequently, there was a persistent
pressure on the financial sector, which in turn necessitated a liberalization
of the financial system. The resulting low or negative interest rate caused by
financial repression discouraged savings mobilization and channelling of the
mobilized savings through the financial system. This has a negative impact on
the quantity and quality of investment and hence economic growth. Therefore,
the expectation of interest rate reform was that it would encourage savings and
make loanable funds available to the banking institutions.
in a dramatic 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 unnecessarily high interest rates’
under the complete deregulation of interest rates (CBN, 2010). Banks were
allowed to determine deposit and lending rate according to market forces
through negotiations with their customers (Soludo, 2008; Nwachukwu &
Odigie, 2009). Interest rate rose following the deregulation of the financial
sector (Soludo, 2008). What is unclear however is whether there is a strong
response in savings as a result of the rising interest rate? These among others
spur the interest of the researcher in the relationship that exists between
interest rate & saving in Nigeria.
two decades ago, Nigerian economy witnessed the introduction of Structural
Adjustment Program (SAP) which shifted emphasis from public sector to private
sector. The goal was to, among other things, encourage private domestic
savings, private domestic investment and capital formation in order to enhance
economic growth and development, but unfortunately, the level of funds mobilization
by banks through the use of interest rate is quite low or has not been very
effective due to a number of reasons; according to Nnanna, et al (2004) is the
attitude of banks towards small savers.
The major function of interest rate in Nigeria and indeed other countries
of the world is to ensure a rate of interest capable of inducing savings
mobilization in the economy. The use of interest rates as stimulants in savings
mobilization has not been very effective in Nigeria. The argument put forwards
as the cause is that financial sector is weak. For this reason, people prefer
their money outside the banking system, which many believe is shallow and prone
to distress. The reason why saving is not responsive to interest rates as
highlighted by Acha (2011) are; lack of confidence in the banking system; low
income and preference for cash. In the
same vein, Ostry and Reinhart (1995) identified the reason to; lack of
sophistication in domestic financial market; proportion of the population
living or near subsistence income level and liquidity constraints. The
situation in Nigeria
mirrors the reasons given above. There are few banks and are mostly located in
urban areas and there is little scope for true market determination of interest
rate. Available data has it that about 61 per cent of Nigeria lives
below poverty line, earning less than 1 dollar per day. Interest rate is of no
consequences to this category of people as they can barely subsist let alone
save. Despite the policy measures put in place-recapitalization of commercial
banks, the various poverty eradication programmes and policies, etc. a robust
financial system is still not in sight as most people still do not have
confidence in the banks. Besides, even those who seem to fully utilize the services
of the financial sector are not finding it so easy this is because of the
tedious nature of the banking process and inefficiency in the banking system
coupled with inept corruption which has continued to mar success that may have
been recorded. Hence, Nigeria
banks have continued to toll towards distress to extent that some banks had to
be rescued even. The macro-economic
policy formulation challenge confronting many developing countries today is how
to achieve single digit inflation, manageable trade and balance of payments
deficits and higher savings and investments rates to finance long term economic
growth. This problem has become more complex in today’s world. In view of the
stated research problem, the study broadly aimed at examining how to mobilize
savings through real interest rate in Nigeria as a means towards
achieving wider goal of economic development.
v To what extent does interest rate impacted on
savings in Nigeria?
v Is there any causal relationship between interest
rate and savings in Nigeria?
v To what extent does long-run relationship exist
between interest rate and savings in Nigeria?
The broad objective of the study is
to empirically investigate the relationship between interest rate and savings
Specifically the objectives of this study include to:
v evaluate the impact of interest rate on savings
v determine the causal relationship between
interest rate and savings in Nigeria.
v examine the long-run relationship between
interest rate and savings in Nigeria.
Interest rate has no significant impact on savings in Nigeria.
Interest rate has no causal relationship with savings in Nigeria.
Interest rate has no long-run relationship with savings in Nigeria.
In analysing the relationship
existing between interest rate and savings, it will enhance our knowledge in
understanding the level at which interest rate affect savings in Nigeria. The
study is of great importance to policy makers, as findings base on the study
will serve as a guide to making appropriate policy decisions. It is also of great
importance to the government (CBN), business firms, investors, and households.
The household stands to benefit from improved and robust financial system.
Finally, the study will serve as an indispensable tool for students, the
general public and should serve as a library resource for future researchers.
The study shall concern itself with
the investigation of the relationship between interest rate and savings in Nigeria and
shall cover a sample period of 1980-2013.
In the course of
carrying out this study, the researcher encountered some challenges.
is the major obstacle faced by researchers, access to good and qualitative
materials are readily available to the researcher but at an exorbitant cost.
access: due to network fluctuation & failure, researcher finds it so
difficult to get access to more materials.
of data: most of the information used is obtained basically from the Central
Bank of Nigeria (CBN) and most time it is difficult to get adequate information
from the financial institutions.
In spite of the above mentioned constraint, the researcher put in
adequate effort to ensure that the result will be relevant and also serves the
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