ABSTRACT
The objective of this study was to examine the impact of
interest rate deregulation on savings mobilization in the Nigerian Economy,
using a time series annual data of \980-2008. The central focus of this work is
to investigate whether deregulated interest rate mobilizes savings as against
the Pre-SAP era which was a fixed rate policy. The study made use of secondary
data derived from Central Bank of Nigeria, using time series annual data for a
period of 28 years. We employ both descriptive and econometric techniques to
analyze our model which comprises of six variables based on the theoretical
underpinning. at the of the study, it was revealed that deregulated interest
rate policy in Nigeria since 1987 had positive impact on the level of savings mobilized as against the PRE-SAP
era which shows an insignificant or stagnant effect on savings mobilized in the
economy. Base on this result, the question is how is the savings mobilized does
not have effect on the real sector of the economy or was it that, the fund was
not channeled into the productive sectors or no macroeconomic environment to
enhance the funds for economic growth and development? Finally, the study
recommended to the policy makers that the problem of economic recession is not
deregulated interest rate policy but rather on the part of the government in
providing the macroeconomic environment such constant Power Supply, Good
network, political stability, security and others, arc determinants of
investment, economic growth and development .and not only deregulated interest
rate policy.
TABLE OF CONTENTS
Title page
Certification
Dedication
Acknowledgement.
Abstract
Table of Contents
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CHAPTER ONE - INTRODUCTION
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1.1
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Background of the Study
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1.2
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Statement of the Problem
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1.3
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Objectives of the Study
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1.4
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Research Hypothesis
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1.5
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Research Methodology
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1.6
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Significance of the Study
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1.7
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Scope and limitation of the Study
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l.8
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Plan or the Study
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References
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CHAPTER TWO: LITERATURE REVIEW AND THEORETICAL FRAMEWORK
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2.1
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Introduction
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2.2
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Conceptual Definition
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2.2.1
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Interest Rate
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2.2.2
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The Nature and Function of Interest Rate
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2.3
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Challenges of Savings and Mobilization
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2.4
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Rationale or Deregulation Interest Rate
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2.5
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Interest Rate Management in Nigeria
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2.5.1 Interest Rate
Management Prior to SAP
2.5.2 Interest Rate
Management since 1986 to Date
2;6 Trends
Analysis of Interest Rate Policies and Economic
Growth Rate in Nigeria.
2.7 The
Determinants of Savings
2.8 Saving
Mobilization and Management in Nigeria
2.8.1 Formal
Institution Framework
2.8.2 Strategies
for Savings Mobilization and Management in Nigeria
2.9 Literature
Review
2. 10 Theoretical
Framework References
CHAPTER THREE
- RESEARCH METHODOLOGY
3.1 Introduction
3.2 Sources of
Data
3.3 Model
Specification
3.4 Apriori
Expectations
3.5 Techniques
of Analysis
3.5.1 The Concept
of Unit Root
3.5.2 Co-integration
Test and Error Correction Model (ECM) References
CHAPTER FOUR -
DATA PRESENTATION AND
EMPIRICAL ANALYSIS
4.1 Introduction
4.2 Presentation
of Data
4.3 Descriptive
Analysis of data Presentation
4.3.1 A Descriptive
Diagnosis of the Model
4.4 Economic
Analysis of the Model
4.5 Correlation
Result
4.6 Time Series
Properties
4.6.1 Unit Root
Analysis
4.7 Granger
Causality Test
4.8 Presentation of Parsimonious Regression Result
4.9 Summary of
Findings
References
CHAPTER FIVE - SUMMARY, RECOMMENDATIONS AND
CONCLUSION
5.1 Summary of Findings
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5.2
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Conclusion
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5.3
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Recommendations
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Bibliography
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Appendices
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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Interest rate is a vital tool of
macroeconomic management for the government of any country in the world. The
level of interest rate in any economy especially the Nigerian economy is
crucial in view of its role in controlling inflation, inducing savings which
can be channeled to investment and thereby increasing employment output, and
efficient financial resource utilization. The 1960s to mid-1980s witnessed the
administration of low interest rates which was intended to encourage investment
( Ajakaiyc Olu and Ayodele, 1994).
The advent of the structural
adjustment programme in the third quarter of 1986 ushered in an era of dynamic
interest rate regime where interest rates were more influenced by market
forces. This shift de-emphasized direct investment stimulation through low
interest rates and encouraged savings mobilization by decontrolling interest
rates (Essien and Oniwioduokit, 1997). Such liberalization represents a policy
response, encompassing a package of measures to remove all undesirable state imposed
constraints on the free working of the financial markets. The measures include
the removal of interest rate ceiling, and the loosening of deposit and credit
controls (Uremadu,S.O.:2006 ).The mobilized fund was intended for investment,
Undoubtedly, government's past
efforts to promote economic development by controlling interest rates and
securing "inexpensive" funding for their own activities have
undermined development. More importantly, financial repression has retarded the
development process as envisaged by Shaw (1973).
Interest rate can be defined as the return or
yield on equity, or opportunity cost of deferring current consumption into the
future. Nominal and real interest rates are considered in the general concept
of interest rates. Nominal rate is the observed and recorded rate in the
economy which incorporates monetary effects. While real interest rate is the rate that
brings equilibrium in the primary market for new asset and the secondary market
where old assets are traded. The concept of real' interest Tate was developed
by Irving Fisher when he tried to establish the trade-offs between consumption today and
that in the future.
In the Nigerian context, the
liberalization of interest rates is at the core, of the adjustment programme
introduced in 1986 by the Nigeria government. Prior to that period, the
Nigerian economy particularly the financial sector, was highly regulated, and this
ultimately led to a high level of financial repression. From 1986 by through the third quarter of 1987, witnessed the administration of low interest rates.
(Olu Ajakaye, Ayodele F. Odusola 1994).
In practice, Savings and time deposit
grew over the years in response to the interest
rate incentives. The deregulation of interest rate in 1987 must have encouraged financial savings as reflected by the
sharp rise in financial ratio from 17.H percent in 1986 to 26.85 percent in 1987 (Uchendu 1993).
However, there are several obstacles
to the mobilization of financial savings in developing countries that interest
rate needs to tackle in order to be effective in savings mobilization and also
'in mobilization domestic recourses. First, formal institutions in rural areas,
such as unit area banks and commercial bank branches, have no strong incentives
for savings mobilization. Secondly, the real rate of interest on deposit has
been relatively low and sometimes negative as a result of financial depression.
Thirdly, there were inadequate
facilitates in rural areas for effective saving mobilization (Adedoyin Soyinbo
and Kolawole Olayiwola, 2000).
The foregoing points to a basic, fact
that interest rate is expected to play central role in savings mobilization. It
is in this context that the impact of interest rate deregulation policy on
savings mobilization is a key policy target in the practice of financial
reforms around the world (Meshach Aziakpono, 1997).
1.2 STATEMENT OF THE PROBLEM
The issue of the persistent low level
of economic development in Nigeria has been a matter of concern to many
analysts. It has been argued that this is the outcome of capital shortage
(Molho, L.E 1986). It has also been contended that the fragmented state of domestic
savings and interest rate regulation are key bottlenecks to self-sustainable
development in Nigeria (Ahmed, M.K 1993).
This study will examine the impact of
'interest rate deregulation on savings mobilization with a view to assessing
whether it actually led to growth in the Nigerian economy. Developed countries
like the G7 economics, the Asian tigers had exhibited the effectiveness of
savings mobilizations towards the growth and development of their economics, through
this they have investment in facilities that yield future returns and also lead
to increase in their reserves and through these countries, i.e developed
counties, can finance capital project which thus lead to increase in the social
and economic welfare of the entire citizenry.
Therefore the impact of interest rate
deregulation on savings mobilization in the Nigerian economy is questionable
and sustainable, inspire of different interest rate reforms; Nigerian economy
had not really benefited the gains of these policy.
Based on the recent bank expansion,
the recapitalization process and other CBN regulatory measures, a number of
policy issues and questions readily come to mind. Although a vast empirical
literature has shed light on various aspects of saving behaviour, several
crucial questions remain unanswered with regards to the relevance of policies
in raising the saving rate vis-a-vis the non-policy determinants of saving from
the perspective of policies, there is need to know the following salient
questions:
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What is the magnitude and direction of these macroeconomic variables on
saving?
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How effective is the macroeconomic stability and higher income growth in raising
the saving rate?
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What is the effectiveness of financial development in raising private saving?
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Is there a role for fiscal policy in increasing national saving?
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What is the impact of interest rate on total savings?
1.3 OBJECTIVES OF THE STUDY
The main objective of this research
work will be to examine the efficacy of interest rate deregulation on savings
mobilization in the Nigerian economy. In
line with the above objective, the specific
objectives include:
·
To evaluate the correlation which exists between savings, investment and growth
as established in the previous literature.
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To carry out an analysis of the sources and trend of savings in Nigeria.
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To compare the differences between interest rate regulated and deregulated
system vis-a-vis their impact on savings mobilization in Nigeria.
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To evaluate the role of life-cycle hypotheses as a study of savings
behaviour in a peculiar economies like Nigeria, where all other determinants of
savings arc existing or not.
1.4 RESEARCH
HYPOTHESIS
In
the course of assessing the impact of interest rate deregulation on savings
mobilization in Nigeria, the statement of hypothesis follows:
Ho:
Interest rate deregulation does not have
any impact on savings mobilization in Nigeria.
H1: Interest rate deregulation has a
significant impact on savings mobilization in Nigeria.
1.5 RESEARCH METHODOLOGY
The research work made
use of both descriptive and econometric analyses. The descriptive approach of
trend analysis was used to determine the relationship between interest rates
and saving mobilization behaviour in Nigeria. Following the framework analysis of
life cycle hypothesis Model and McKinnon Shaw hypothesis (1973). The specification of
the relationship between interest rates and saving; mobilization is modified and
expanded to include the ratio of broad money Supply to GDP (which captures the effect of
financial deepening), Domestic savings GDP ratio and shift in financial policy
from regulation to deregulation of Interest.
The
model for this study is specified as:
PSR
= F(INT, FB, DFD, DSG, FPS)
PSRt
= α0 + α1 INTt
+ α2 FBt + α3 DFD + α4 DSG + α5 FSP + U
Where
al >0,a2>0, α3>0,α4>0,a5>0
PRS = private saving rate
INT = deposit interest rate
FB = Fiscal balance
DFD= degree of financial deepening
DSG = Ratio of gross national saving to GDP, and
FPS = dummy variable to capture the shift in financial policy
from regulation to deregulation of
interest rate
U = Stochastic variable
The saving equation was estimated using annual data for the
period 1980-2003.
The estimate period
was determined largely by the availability of adequate data of all
variable.
1.6 SIGNIFICANCE OF THE STUDY
The justification of this study addresses the fact that
the low level of savings in the Nigerian economy limits the investment rate on
which economic growth depends on. Thus a holistic approach to mobilizing savings within interest
rate is a major policy strategy that makes
study relevant.
This study also provides policy implications as it relates
to the link between interest rate deregulation and savings mobilization in the
Nigeria economy from literature and the development experiences of the Asian tiger domestic
savings is an important and major source of finance for investment. There is
therefore the need to examine the importance of deregulation policy on savings
in order to proffer solution to the low level of savings in the Nigeria
economy.
1.7 SCOPE AND LIMITATION OF THE
STUDY
The role of savings in the economy
growth of any country cannot be overemphasized. Therefore, the .purpose of
this study is to focus on the understanding of the nature of aggregate national
savings behaviour as critical in designing policies to promote savings,
investment and growth (Umoh, 2003). Thus, the scope of this research work is to
investigate the impact of deregulated interest rate on savings mobilization in
Nigeria using time series data covering
1980-2009 periods.
However, some limitations will be
experienced in the course of this research work like lack of availability of
appropriate data and relevant information is the financial constraint, in terms
of fund to carry out an appropriate work and more so, the time constraint to
execute the work is costly. Although, none of these constraints anticipated
would limit the potency and accuracy of futurable outcome for prediction.
1.8 PLAN OF THE STUDY
In order to justify further the
critical important of deregulated interest rate on savings mobilization in
Nigeria, the research work is arranged in five chapters as explained sequentially
below.
Chapter one includes background of
the study, statement of the problem, hypothesis statement, model specification,
significance of the study and scope and limit of the study.
Chapter two addresses the theoretical
under pinning and the literature review of the subject matter,
Chapter three gives an insight into
methodology including sources of data, Models specification and economic frame
work..
Chapter Four produces the empirical
results and interpretation of the results for discussion of the findings
Chapter Five ends with provision of
summary, recommendation and conclusion of the research work.
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