INTEREST RATE AS A DETERMINING FACTOR IN THE GROWTH OF SAVINGS AND INVESTMENT IN NIGERIA:
(A CASE STUDY OF UNION BANK OF NIGERIA PLC.)
ABSTRACT
The introduction of interest rate was first abolished during the medieval time and was legal in 1545 by King Henry VIII who abolished the usury laws and was later condemned.  The central Bank of Nigeria later introduced interest rate deregulation into the monetary system, which was a part of the structural adjustment program (SAP) announced by the Head of State in July 1986.  Interest rate world over, is the price of capital and constitute a return on capital for the lender or saver and ca therefore be used for several purposes including the reduction of inflation, promotion of capital flow and discouragement of capital flight.With the deregulation of interest rates and the attendant competition on rate paid for deposits banks can now offer any rate to their customers within the range prescribed by the Central Bank of Nigeria.This will help increase the growth of savings and investment or the freedom could also lead to increase in the cost of fund.  In the economy, the higher cost of fund that will result may further stifle recuperating industries whose problems of low capacity utilization have been attributed to the high cost of borrowing.  This will be particularly harsh on many small-scale operators.It will be slated here that this study was made based on the major objectives of this project, which are;
(1)    To determine the effect of interest on savings and investment.
(2)   And to look into the policies in the country with a view to identifying their shortcomings and through its findings proffer some practical guide, which can be employed to accelerate the growth of saving and investment in Nigeria.
In chapter one, we are trying to explain the origin of interest rate, the objectives, the significance of interest rate on savings and investment, the scope of the study and finally the hypothesis, which will prove that interest rate really has an effect on savings and investment.
In chapter two, quite a lot was revealed because this is the body of the project.  Various theories were proved to show that interest has an effect on savings and investment like the Keynes modern classical theory.  This chapter was is also talking on how the central bank helps in the development of interest rate structure in Nigeria and the various policies that the Central Bank introduced to help in regulation of interest rate.
Chapter three is going to talk on the methodology, the type of data, research design and how the data will be analyzed, the type of data used is secondary data based on the documents available in the CBN and financial yearbook for various years.
The data also is from commercial bank deposit liabilities as well as their loan and advance.
In chapter four, we are going to analyze using regression analysis to see whether or not there is relationship between interest rate and loans and advances and between deposit and interest rate, then we test the hypothesis.
The final chapter comprised of the summary of findings, recommendations and conclusion.
As I said earlier, that this research work has been carried out on the objective of establishing a relationship between three variables; interest rate savings and investment.
In summary, we found out that the deregulation led to an increase in deposits and loans and advances than the regulated policy of interest rate.  It was also found out that while savers reacted positively whenever the rate of interest rises, the borrowers reacted negatively when the rate of interest rises.
The following recommendations have been made to enable government use the interest rate as a weapon on the accelerating the growth at savings and investment.
Finally, government should review all the interest rate policies since their inception of banking business in Nigeria till date.  There is the need to encourage activities in manufacturing firms so as to increase the quantity of goods produced.
In order to conclude this project, we started by saying that interest rate is one of the various instruments of monetary policy used by the central bank to ensure the realization of objectives like, low inflation, full employment, balance of payment equilibrium and a satisfactory rate of growth of real income.  And that interest rate has also been identified as a factor that determines the level of savings and investment.
TABLE OF CONTENTS
CHAPTER ONE
1.1              INTRODUCTION                            
1.2              STATEMENT OF THE PROBLEM            
1.3              OBJECTIVE OF THE STUDY                                                        
1.4              SIGNIFICANCE OF THE STUDY             
1.5              RESEARCH HYPOTHESES                                               
1.6              SCOPE OF STUDY                                                  
1.7              DEFINITIONS OF TERMS                                     
REFERENCES                        
CHAPTER TWO
LITERATURE REVIEW                                                     
2.1              THEORIES OF INTEREST RATE                                      
2.1.1                    THE CLASSICAL THEORY OF INTEREST RATE   
2.1.2                    KEYNESIAN THEORY OF THE INTEREST RATE
2.1.3                    THE GENERAL EQUILIBRIUM APPROACH (MODERN)
2.2              FACTORS WHICH CAUSE VARIATION IN THE INTEREST RATE STRUCTURE                                     
2.3              THE CONCEPT OF SAVINGS AND INVESTMENT
2.4              FACTORS WHICH INFLUENCE SAVINGS AND INVESTMENT
2.5               THE INTEREST RATE DETERMINES LEVEL OF SAVINGS AND INVESTMENT                        
2.6              THE SUPPLY OF SAVINGS                                                          
2.7              THE PROBLEM OF BANK LENDING AND DEPOSIT IN Nigeria
2.8              EFFECTS OF INTEREST RATE POLICIES ON NIGERIAN ECONOMY                                                                   
CHAPTER THREE
3.1              RESEARCH METHODOLOGY                 
3.2              RESEARCH DESIGN                                                         
3.3              TYPES OF DATA                                                                
3.4              SOURCES OF DATA                                                          
3.5              METHOD OF DATA ANALYSIS                                      
CHAPTER FOUR
4.1              DATA ANALYSIS AND FINDINGS                                
4.2              DETERMINATION OF THE EFFECT OF INTEREST RATE ON LOANS AND ADVANCES                                              
4.3              INTERPRETATION OF ANALYSIS                                             
4.4              DETERMINATION OF THE EFFECT OF INTEREST RATE ON DEPOSITS                                                              
4.5              TESTING AND INTERPRETATION OF HYPOTHESIS59
CHAPTER FIVE
5.1              SUMMARY                                                  
5.2              RECOMMENDATIONS                                          
5.3              CONCLUSION                                                                                
5.4              SUGGESTIONS                                                                    BIBLIOGRAPHY                                        
APPENDIX                                                                                       
QUESTIONNAIRE                                                  
 
CHAPTER ONE
INTRODUCTION
Interest is the reward that accrues to people who provide the fund with which capital goods are bought.  Interest can also be defined as the payment made to a lender by a borrower for the use of a sum of money for certain period of time.  The charging of interest on loan was initially abolished during medieval days, both was later legalized by King Henry VIII in 1545 when he abolished the usury laws in it was condemned.  These usury laws were established during the medieval time when the payment of interest rate was strongly condemned and termed usury.  During that time it was believed that loan was an aid to an individual or neighbour who is distressed, for such reason, they felt charging of interest on loan was not proper.
Interest rate deregulation was later introduced into the monetary system by Central Bank of Nigeria, which was part of the Structural Adjustment Program (SAP), which was introduced in July 1986 by the head of state then.
Interest can also be said to be the charge assessed for the use of money.  It can also be seen as “the payment made to owners of capital fund which they are ready to put at the disposal of others; thus, interest rate is like a price which bring into equilibrium the demand for resources to invest with the readiness to establish from present consumption.  Interest rate is determined by the force of demand ad supply of capital and for the condition that demand and supply of fund are equal.
Hence, interest level is arrived at by the intersection between savings and investment.
Savings is defined as that portion of income after tax, which is not spent on consumption goods.  Savings can also be seen as that part of income, which is not devoted to the purchase of household items and firm.
Investment on the other hand can be defined as the expenditure of funds lending to the creation of net additions to the stock of physical capital; it is done almost exclusively by firms.  Interest rate favours the investors when the interest rate is low.  The major factor that determines investment is interest rate and this is influenced by savings.  The investors will also be favoured when the marginal efficiency of capital is high.  Marginal efficiency is defined as the expected rate of returns from additional unit of capital asset.  It refers to the expected rate of profit per year on real investment of the most efficient type, it depends upon the entrepreneur expectation of future return.  However, there will be no investment of profit expectation which are not very bright, this is the reason why investment falls to a low level during a depression despite all the encouragement to stimulate private investment.
Interest rate favours savers when the rate is high, savings were looked upon as beneficial both for the individual and the society at large.  Thus, an increase in savings will ultimately lead to an increase in savings of the community.  It was due to this effect that the classists believed in thriftiness.  They were of the view that an individual saving was a great private as well as social virtue.
The Keynes were at a different view, which they advocate that individual savings is a social virtue but rather supported the view that individual savings is greatly a social vice.  Increase savings on the part of individuals will result in a general curtailment in the expenditure.  When savings increase, investment is very essential for the economic development of an economy.  With increase investment, employment is bound to increase which will in turn increase demand, prices, profit and more production expansion.  This expansion if properly utilized will lead to economic development of a country.
Investment results as a consequence of capital accumulation, which in turn depends upon savings.  Savings by profit earners and their conversion into investment was the main actor responsible for the economic development of Great Britain in the 19th century.
The realization of the role of interest rate in the attainment of monetary policy objectives, the central bank of Nigeria decided to have a uniform rate of interest on loan for all the commercial banks in Nigeria, as contained in its credit guidance of 1969.
The credit guidance of the Central Bank of Nigeria was later changed in 1987.  it introduced an interest rate policy based on free market forces in view of the effort of government to deregulate the economy in the wake of the second-tier foreign exchange market.  This interest rate deregulation is a system where the forces of demand and supply determine the prevailing interest rate.  This implies that there is no fixed rate to be charged by the bank on their loans and advances and no given rates to be paid to depositors.
There are three main approaches in economics to the determination of interest rates.  There theories vary in their views on interest rate, although there are some similarities among them, these theories include the following:
(1)               The classical theory of interest (loanable fund)
(2)               The liquidity reference theory (Keynesian Approach)
(3)               The general equilibrium approach (modern).
An overview of these theories of interest rate reveals that interest rate can influence the growth of savings and investment in an economy, the understanding of the nature, meaning and role of interest rate in the same economy is crucial, in a nutshell, interest rate is a given prominent position as a catalyst for growth in the economy and particularly a factor in determining the growth of savings and investment.
1.2              STATEMENT OF THE PROBLEM
Interest rate is regarded as the price that brings demand and supply of investible funds into equilibrium.  The classical theory of interest believed that interest rate brings about equilibrium in savings and investment for example, the higher the interest rate the more people will be willing to save.  While investment falls because cost of investment is high, but if it is low many will invest while savings will fall.  The problem now is, will interest rate be increased so that savings will increase or to reduce so as to increase investment or will they be in equilibrium?
In view of the above, interest is assigned a very prominent role in the growth of any economy.  The introduction of deregulation in interest rate policy is prime facie prove of an interest problem in the administration of interest rate policy.  The aim is to mobilize savings and encourage investment in the economy, with a view to ensuring that the stability and healthy economic growth.
This research work is however, carried out to show that interest is a determining factor in the growth of savings and investment through the analysis of empirical evidence.
1.3              OBJECTIVE OF THE STUDY
The main objective of this research includes the following:
(1)                                To determine the effect of interest rate on savings and investment in Nigeria.
(2)                                To determine how savings and investment can affect the economy.
(3)                                To determine how savings can affect the demand for money and supply of money.
(4)                                To look into the interest rate policies in the country with a view to identifying their shortcomings and through its findings proffer some practical guide, which could be employed to accelerate the growth of savings and investment.
(5)                                To show the impact of investment in the development of the bank and the economy.
(6)                                To determine how investment can increase productivity and increase national income.
(7)                                To determine the effect of interest rate on the earnings performance of Union Bank of Nigeria plc.
1.4              SIGNIFICANCE OF THE STUDY
The deterioration of the Nigeria economy calls for a scrutinisation of the economic policies.  This Nigeria like all other developing countries is faced with the problem of choosing the most appropriate policies, which will be employed to attain economic growth.  An identification of the factors, which influence economic becomes necessary, the level of investment being a major influence of economic growth lead us to the study of interest rate which is one of the factors influencing investment as well as savings (which provides funds for investment).
In order to avoid decisional myopia there is a need for efficient and proper economic planning.  The need for undertaking this study stems from the important role the rate of interest plays in determining the growth of savings and investment.  This shall be of immense benefit to commercial banks in general,  the CBN, the general economy and to future researchers in the field of interest rate.
1.5              HYPOTHESES
The following hypotheses have been formulated based on the objectives of study and the statement of problem as stated above.
Thus, we state the null hypotheses and the alternative hypotheses:
H0:       Interest rate has no effect on savings
H1:       Interest rate has an effect on savings
H0:       Interest rate has no effect on investment
H2:       Interest rate has an effect on investment.
1.6              SCOPE OF THE STUDY
In order to carry out a comprehensive and meaningful research work on the critical review of interest rate as a determining factor in the growth of savings and investments in Nigeria.  This work was based mainly on Central Bank of Nigeria (CBN), which regulates the employment of interest rate, savings and investment and on the Union Bank of Nigeria plc.
Data used covers a period of seven years (1994 – 2001) so that the effect of interest rate on savings and investment can be compared using the interest policies.
1.7              DEFINITION OF TERMS
M.E.C.            Marginal Efficiency of Capital is used to measure the rate of return on investment.
C.B.N.             Central Bank of Nigeria, which is the apex et al bank in Nigeria.
DEREGULATION: This is the system where the forces of demand and supply determine the prevailing rate of interest.
LIQUIDITY: This is the policy Central Bank uses to control inflation in the economy.  It also used to control the money supply by the monetary authorities, in order to achieve the stated or desired goals.