IMPACT OF INTEREST RATES ON SAVINGS AND INVESTMENT IN NIGERIA
ABSTRACT
In this study, an attempt is made to investigate the interest rates and its savings and investment determination implications in Nigeria. The investigation covers the period 1980-2010 and employs the Ordinary Least Squares technique of estimation in obtaining the empirical analysis. A theoretical analysis was first undertaken to explain the relationship between changes in interest rate and investment determination with explanatory variables affecting both interest rate changes and investment followed by an empirical analysis that discussed estimation results.
Specifically, the results from the empirical analysis show that variation in interest rate played a negative and highly significant in savings decision in the economy. In other word, it has negative impact on savings decision; interest rate does not have any significant impact on investment decisions in the country. Investment is made outside of consideration for the returns on investment; the level of income played a positive and a highly significant role in both savings and investment decisions in Nigeria.
The study recommends among others that Interest rate reform should be a component of the broad package aimed at facilitating financial inter-mediation and monetary management as well as enhancing economic growth in developing countries. However, in high inflation countries like Nigeria, a strong and credible stabilization programme and an equally strong set of prudential guide lines are generally the best initial policy measures.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1 Background to Study
1.2 Statement of Research Problem
1.3 Objective of the Study
1.4 Statement of Hypotheses
1.5 Significance of the Study
1.6 Scope Of The Study
1.7 Limitation of the Study
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction
2.2 What Is Interest Rate?
2.3 Keynes’ Liquidity Preference Theory of Interest
2.4 Demand For Money
2.5 Determination of the Rate of Interest
2.6 Criticisms
2.7 Term Structure Of Interest Rate
2.8 Types of Yield Curve
2.9 Theory of Term Structure Of Interest Rate
2.10 Evidence of Interest Rate And Investment Around
The World
2.11 Theoretical Framework
CHAPTER THREE: METHODOLOGY OF THE STUDY
3.1 Introduction
3.2 Sources of Data
3.3 Model Specification
3.4 Method of Data Analysis
CHAPTER FOUR: ANALYSIS OF DATA
4.1 Introduction
4.2 Econometric Analysis
CHAPTER FIVE: SUMMARY, RECOMMENDATION AND CONCLUSION
5.1 Summary of Findings
5.2 Recommendations
5.3 Conclusion
Bibliography
Appendix
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO STUDY
In Nigeria, interest rate policy is among the emerging issue in current economy savings which 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.
In the third quarter (3/4) of 1986, Structural Adjustment Programme (SAP) by the then head of state General (RTD) Ibrahim Gbadamosi Babangida this programme ushered in an area when fixed how interest rate was gradually, replaced by a deregulated interest rate regime where rates were more influenced or determined by the market force. The policy shift de-emphasized direct investment stimulation through the low interest rates. The mobilized fund was intended for investment.
In Nigeria, the pursuit of the two interest rate regime provide a case study for Keynesian interest rate investment relationship and the McKinnon Shaw interest rate saving and investment hypothesis. Several reason has been given as to why people invest and save. Some of these reasons are: the direction of interest rate, the return that is expected from such an investment, the interest accrues to savers and some other developmental resources. It is obvious that the higher the rate of interest the lower the level of investment and also the lower the rate of interest, the higher the level of investment.
However, this study focuses on the relationship between interest rate, saving and investment. McKinnon and Shaw (2002) conclude that higher interest rate reduce saving which can be utilized in investment therefore, the two transmission channeled through which interest rate affect investment, this relate to interest rate as a cost of fund (capital). Also interest rate encourages financial savings which can be invested (self-finance) or lent out to borrow as loan (external finance).
1.2 STATEMENT OF RESEARCH PROBLEM
The upsurge in real interest rate observed world wide in the early 1980’s raised a wide spread concern about their possible detrimental economic effects. Numerous studies were carried out to measure the impact of high interest on key economy variables such as growth of output, investment factor productivity observed in several cross – country studies World Bank (1989) and Galbis (1992) that countries with high real interest rate generally intended to exhibit faster output growth but not higher investment, encourage a more efficient allocation of resources which raises overall productivity y such that the net impact on growth is positive while other studies e.g (Khatkhate, 1998) have questioned the empirical robustness of these finings. A basic lesson from the study shows that higher interest rate on investment and growth mainly depends on what caused interest rate to rise in the first place.
In Nigeria, interest rate was extensively high prior to the adoption of SAP in 1986. The economic rational behind this extensive control of interest rate and other elements of financial market have been motivated by a variety of factors including the desire to influence the flow of credit to preferred sectors of the economy and the concern that market determines interest rate could result in a serious imperfection in lending rate that would increase the rate cost of capital and thereby discourage investment.
Moreover, such high normal investment rate would also increase in cost of servicing the public debt. Thus, interest rate policy should be used in increase the availability of credit in order to encourage the accumulation of domestic financials assets of offering holders of these assets sufficiently attractive rates. The deregulation of interest of interest rate during the SAP period seems to be justified by this consideration.
The market determined interest rate is meant to mobilize financial savings and efficient channeling of such savings into productive investment. The deregulation which resulted in concurrent increase in interest rate and savings into productive investment issues and focus of this study remain the key. The study will try to determine;
i) The impact of interest rate on saving and investment in Nigeria.
ii) Whether the savings generated during this period was transformed into real investment in Nigeria.
1.3 OBJECTIVE OF THE STUDY
The objectives of this study are to:
i) determine the impact of interest rate on savings and investment in Nigeria.
ii) examine whether the savings generated during this period was transformed into real investment in Nigeria.
1.4 STATEMENT OF HYPOTHESES
The hypotheses to be tested in this study are;
i) Interest rate has positive impact on savings in Nigeria.
ii) Interest rates positively affect the level of investment in the Nigerian economy.
1.6 SIGNIFICANCE OF THE STUDY
The importance of interest on savings and investment in the Nigeria economy cannot be over emphasized.
Hence this study will be useful to bankers and policy markets in making decision ion how to influence banking sector development by benefiting from the outcome of globalization. Student in Nigeria and other developing countries intending to broaden their knowledge about the hexes of interest rates and its impact on savings and investment within the context of the Nigerian economy.
1.6 SCOPE OF THE STUDY
This study focuses on the impact of interest rate on savings and investment in Nigeria relevant date will be sourced from the Central Bank of Nigeria statistical Bulleting and the Nigerian Stock Exchange covering the period 1980 to 2010.
1.7 LIMITATION OF THE STUDY
This study is constrained by a lot of factors such as getting relevant data, the time spent on sorting and organizing the work, combined with normal academic activities and other logistic.
