TABLE OF CONTENTS
Title Page(s)
Title page
Certification
Dedication
Acknowledgement
Table of Contents
Abstract
Preface
CHAPTER ONE
1.0 INTRODUCTION
1.1 Background
of the study
1.2 Statement of
the problem
1.3 Objectives
of the study
1.4 Statement of
the hypotheses
1.5 Research
Method
1.6 Source of
data
1.7 Scope of the
study
1.8 Significance
of the study
1.9 Structure of
the study
CHAPTER TWO
2.0 LITERATURE
REVIEW
2.1 Introduction
2.1.1 Interest Rate
Regulation
2.1.2 The case for
Regulation
2.1.3 Interest Rate
Deregulation
2.1.4 The case for
Deregulation
2.1.5 Financial
Sector Reform and Outcome in Nigeria
2.1.6 Challenges of
Deregulation to Financial Operators in
Nigeria
2.1.7 Empirical
Literatures
2.2 Theories
Interest Rate
2.2.1 The Classical
Theory of Interest Rate
2.2.2 The Keynesian
Theory of Interest Rate
2.2.3 The Loanable
Funds Theory of Interest Rate
2.2.4 The
Neoclassical Theory of Interest Rate
2.2.5 The Hicksian
IS-LM Framework
CHAPTER THREE
3.0 RESEARCH
METHOD
3.1 Introduction
3.2 Theoretical
Framework
3.3 Model
Specification
3.4 A-Priori
Expectation
3.5 Identification
of Variables
3.6 Estimation
Technique
3.7 Restatement
of the Hypothesis
3.8 Test of
Significance of the Parameter estimates
3.8.1 Standard
Error Test
3.8.2 F-Test
3.9 Sources of
Data
CHAPTER FOUR
4.0 DATA
PRESENTATION AND ANALYSIS OF EMPIRICAL FINDINGS
4.1 Introduction
4.2 Data
Presentation
4.3 Estimated
Result
4.4 Interpretation
of Result
4.5 Test of
Statistical Significance of the Estimated Parameters
4.5.1 Standard
Error Test
4.5.2 F-Test
4.6 Summary of
Empirical Findings
CHAPTER FIVE
5.0 SUMMARY,
RECOMMENDATION AND CONCLUSION
5.1 Summary
5.2 Conclusion
5.3 Recommendation
Bibliography
Appendixes
ABSTRACT
The banking sector is quite key to
economic growth. More key is the cost of banking as it determines mobilization
of savings, level of investment and hence industrial growth. Meanwhile, what is
referred to as cost of banking is the interest rate. The nature of interest
rate just like any typical price - mechanism is important to economic
efficiency, effectiveness and equity. The wide spread notion is that market and
price deregulation is a precondition to economic efficiency and prosperity. But
market failure in the form of externalities has often proved to be a challenge
in less developed countries. Here the researcher has examined empirically the
impact of interest rate deregulation regime on the Nigerian economy's real
sector; Nigeria being a less- developed country. To do this, qualitative
techniques were used in the form of reviewing various relevant literatures and
theoretical positions of past researchers and economists of note. Quantitative
techniques were not left out. Secondary data were deployed in the form of
time-series sample and a model was specified and estimated in the form of ordinary least square (OLS) multiple
equation with G.D.P as dependent variable and deposit- rate and lending rate as
the independent variables. To evaluate the integrity of the process, the
following test procedures were carried out including coefficient of
determination (R2), standard error test of significance and test of
significance (F-test). From the output of the process, appropriate analysis,
presentation and interpretations were made. The work was concluded with a general summary, conclusion and
recommendations made.
PREFACE
Here in this study, the deregulated
interest rates were examined in relation to the real or industrial sector of
the economy.
Given this, it should be expected
that in a deregulated financial sector:' there should be variegated interest
rates that differ from one bank to the other. Contrary to this, the interest
rates used in this study as stated in 4.2 (Data presentation) were the
industry's averages sourced from the CBN and NBS which, given the nature of
keen competition in the banking industry, represent the deregulated interest
rates as any significant deviation either from the industry's averages or from
that of any service provider, the sensitive elasticity implications of this
would mean a substitution effect in line with the laws of demand and supply. Hence, we benefitted from the statistical knowledge of
measures of central tendencies and that of dispersion when applied with
economic bias to the financial banking sector. Close to this, is that the econometric study
did not use the interest rate spread rather made use of differentiated interest
rates. Hence, we have the savings rate and the lending rate as the independent
variables of a multiple econometric model used.
As to the dependent variable used in
this econometric study, the G.D.P was used preferably because it was capturing
in terms of national output. And this formed the basis why the model estimate
was adjudged well fit as stated under 4.4 (Interpretation
of results). This is because the coefficient of multiple determination (R2) and the
adjusted coefficient of multiple determination (R2) both 0.602 and 0.567 respectively as stated in 4.3
(Estimated results) were used as yardsticks though they were not too strong correlation coefficients with 0.398 and 0.433
stochastic error elements. Considering that the Nigerian economy has been
dependent on the oil revenue up to the tune of 80% of the G.D.P hence the
determined relation coefficients could be assumed impressive in the light elf
the ideal that the industrial sector should be the engine room of the economy.
Also, the data used was
a time-series data. Furthermore, it is worth saying that the time frame used 1985
- 2010 covered the years of deregulation in the banking industry. Financial
deregulation came with the Babaginda-led administration with his romance with
the Breton-woods orgariization in the mid 1980s as stated in chapter
one. Since then deregulation has been the rule rather than the exception
considering deregulation as not total absence of regulation.
In conclusion, what had been done
with this preface is to state the basic underlying assumptions that are
inherent in the data used and the rationale underpinning the interpretation of
the estimated result. In short, attempt has been made at the characterization
of the data presentation and interpretation used as guidance for the users and
readers of the study, in order not to be considered far-fetched and bogus,
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
It is widely recognized that the banking industry by the
nature of its activities is among the most heavily regulated sector in both the
developed and developing economies. As financial .intermediaries, banks assist
in channeling funds from surplus economic units to
deficit ones: to facilitate business transactions and economic development generally.
Interest rate charges by banks were
regulated to encourage savings mobilization and ensure
adequate investment for rapid economic growth. The existence of market
imperfections and externalities in financial markets especially in developing
countries has often induced official intervention not only to boost investment,
but also to redirect credit allocation within the economy.
The deregulation of interest rate in
the banking industry involves, the systematic removal of regulatory controls,
structures and operational, guidelines which may be considered inhibitive of
orderly growth, competitive and efficient allocation of resources in the'
banking industry.
Financial markets are one of the
first sectors of the economy to be subjected to deregulation. The campaign for
deregulation of financial markets has been vigorously undertaken in many
developed economies. In the recent times, a number of third world countries
with heavy debt burdens and dwindling foreign earnings had also adopted
policies designed to deregulate their economies particularly the financial
markets sub-sector.
Thus has virtually been
-carried out as part of comprehensive Structural Adjustment Programme (SAP)
aimed at ensuring that market forces are assigned greater roles in the
allocation of the scare financial resources.
Nigeria as part of the Structural
Adjustment Programme (SAP) has commenced the deregulation of its financial
system. It was introduced into the Nigerian economy in 1986 during the General
Babangida regime. The programme started most earnestly with the liberalization
of interest rates trade and exchange rate and the deregulation of the bank
interest rate policy.
Prior to the introduction of SAP, the
banking system was subjected to strict administrative control and the economy
was, characterized by serious structural distortions caused by the oil commodity
(crude oil) which constituted over 90% of the country's
foreign exchange earnings and over 80% of total government revenue. There was
an import syndrome which resulted in a high dependence on imports for both
consumer and producer goods.
To reverse this trend,
stringent exchange control and import restriction
measures including comprehensive import licensing policy were adopted. But as
this crisis persisted, it became evident that the ad-hoc policies of the past
could not bring about the desired change in the economy so, a comprehensive
Structural Adjustment of the economy was called for. Hence, the structural
programme in July 1986.
The overall aim of Structural Adjustment Programme (SAP)
was to eliminate the observed distortions in the Nigerian economy. Specifically;
its objectives are:
i. To restructure and diversify
the productive base of the economy in order to reduce dependence on the oil
sector and Imports;
ii. To lay basis for sustainable
non-inflationary or minimal inflationary growth;
iii. To achieve fiscal and balance
of payment viability over the period; and
iv. To improve the sector's-
efficiency and intensify the growth potential of the private sector.
With the introduction of Structural
Adjustment Programme (SAP) into the Nigerian economy, a great deal of interest
has been shown in the activities and developments within the banking system.
A central component of the SAP was
the restructuring of the national financial system by relaxing some regulations
considered inimical for the expansion of the system. The Central Bank of
Nigeria (CBN) was established in 1959 to supervise banks and prevent
large-scale bank failures. Since inception, the CBN has played major roles in
laying the foundation for the establishment of the Nigerian Deposit Insurance
Corporation (NDIC) in 1988.
Banks are very important In the
economic development of any nation. The banking system as noted by Schumpter
(1934) is regarded as a key agent of the process of development.
Interest rates were generally fixed by the Central Bank of Nigeria (CBN) within
the period white adjustment depends on government sectoral priority till the
third quarter of 1986. Thereafter, active interest rate policy started when banks
were allowed to negotiate the interests on time deposits.
A further deregulation
of interest rates occurred in August 1987 when the Minimum Rediscount Rate (MRR) was increased. Also in 1988, the
Minimum Rediscount Rate (MRR) was adjusted upwards. The rate of interest
increase was moderate in 1990 as commercial and merchant banks liquidity
position improved.
In 1992, the maximum spread between banks average cost
of funds and their lending rates revised upwards. The increase in' banks
interest rate was as a result of total deregulation of interest in the year
budget. In 1993, the market interest rate continued on
an upward trend during the year.
In view of the foregoing, this paper examines the impact
of interest rate deregulation regime on the real sector of the Nigeria economy
(1985-2010)
1.2 STATEMENT OF THE PROBLEM
Within the general framework of
deregulating the economy in 1986 to enhance competition and efficient
allocation of resources, the Central Bank of Nigeria (CBN) introduced a market
based interest rate policy in August, 1987. The decision was not without
controversy. While it was gen3rally agreed that low interest rates did not
encourage savings, it was feared that high interest rates which were likely to
accompany deregulation might retard investment. The deregulation of interest
rates allowed banks to determine their deposit and lending rates according to
rnar.eet conditions through negotiations with their customers.
Interest rates movement can have
significant effects on the other macroeconomic variables. The increased
interest rate will encourage savings to earn higher returns. Whereas, interest payments form a significant
portion of production costs. Increased interest rate could result in reduced
investments, output and employment in the sector of the economy.
Higher interest rates could result in
the deterioration of the current account position of the balance of payment
arising from increased cap ital inflows
from abroad, pressures on the domestic currency and reduced demand for locally
produced goods and services. Both output and employment for the domestic
economy would be adversely affected.
Higher interest rates can also result
in increased higher national debt and a source of more domestic pressures
depending on the method of financing new fiscal deficits.
On the whole, higher interest rates
will tend to reduce aggregate demand, output and employment, while reduced interest rates will tend to have
opportunity effects. But in the conduct of monetary policies, these tendencies
are not taken in isolation.
However, in a free market
(deregulated) environment, the interest rate is a potent tool for
the policy makers. If it is regarded as a target policy all the indicators
closely related to it should be manipulated appropriately to achieve the
target.
If on the other hand, it is regarded
as indicator policy, it only shows the extent to which the authority has been
able to attain the appropriate intermediate objectives. Even as an indicator,
there must be an acceptable level of the selected interest rate which is linked
to the appropriate intermediate goals.
1.3 OBJECTIVES OF THE STUDY
The broad objective of this study is
to examine the impact of interest rate deregulation on the real sector of the
Nigerian economy. The specific objectives include:
i. To show the nature and effect
of deregulation' on the banking system.
ii. To show the role of the
banking system in economic growth and development.
iii. To analyze some of the
challenges of deregulation in the economy. and
iv. To make policy recommendations based
on the findings of the study.
1.4 STATEMENT OF THE HYPOTHESIS
The hypotheses for this study are
stated as follows:
Ho: Interest rate
deregulation does not have any significant impact on the real sector of the
Nigerian economy.
Hi: Interest rate deregulation has
significant impact on the real sector of the Nigerian economy.
1.5 RESEARCH METHOD
In order to examine the impact of
interest rate deregulation regime on the real sector of the Nigerian economy, the multiple regression of the Ordinary Least Squares (OLS)
estimation technique would be used. Primary and secondary interest rates would
be regressed on the Gross Domestic Product (GDP) which is used as the proxy for the real sector of
the Nigeria economy within the period 1986-2010.
1.6 SOURCESOFDATA
Secondary data to be used in this
study shall be, sourced from the publication of the Central Bank of Nigeria (CBN) and the National Bureau of
Statistics (NBS) formerly Federal Office of Statistic (FOS).
1.7 SCOPE OF THE STUDY
This work aims basically at
evaluating the impact of interest rate deregulation on the real sector of the
Nigeria economy from 1985 to 2010. It will have to acknowledge the different
views shared by various economic schools of thought on interest rate. The research
work will examine deregulation as a concept and how the interest operates
within an economy. Also, the analysis of this study is going to span the years
of deregulation in Nigeria.
1.8 SIGNIFICANCE OF THE STUDY
Various views exist on regulation and
deregulation interest rate regimes and its impact on the real sector of an
economy. Since 1986 when the deregulation on interest' has been given the
attention, it is necessary to investigate the outcomes of the exercise so far.
Moreover, the era of deregulation has been for over two decades
now, hence, this study is worthwhile and feasible.
It would be of importance as its
findings shall be useful to research students, business executives, professionals
and policymakers in general.
1.9 STRUCTURE
OF THE STUDY
This research work shall; be
presented in five chapters.
Chapter 1 is the introduction. It
contains the background of the study, objectives of the study, hypothesis of
the study, scope and the plan of the study.
Chapter 2 shall contain the review of
relevant literature to the study.
Chapter 3 shall contain the research
method.
Chapter 4 will contain the estimated
results, empirical analysis and interpretation of the results. Chapter 5 shall
conclude the research work. It will Include the summary, recommendations and
conclusion for the study.
Login To Comment