IMPLICATION OF INTEREST RATE ON BANK LENDING IN NIGERIA A CASE STUDY OF FIRST BANK
TABLE OF CONTENTS
Table of contents
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study
1.2 Statement of the Problem
1.3 Research Question
1.4 Objective of Study
1.5 Statement of hypotheses
1.6 Significance of study
1.7 Scope of the study
1.8 Definition of Terms
CHAPTER TWO: LITERATURE REVIEW
2.0 Literature Review
2.1 Conceptual Framework
2.2 Theoretical framework
2.3 Empirical Framework
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Study design
3.2 Sources of data
3.3 Population of the study
3.4 Method of data Presentation
3.5 Model Specification
3.6 Model Estimation
3.7 Variable Description
3.8 Sources of data collection
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
4.1 Empirical Result
4.2 Interpretation of Result
CHAPTER FIVE SUMMARY, CONCLUSION AND RECOMMENDATION
The study aimed to test the effectiveness of the interest rate on bank lending behaviours and how it affects the lending behaviour of first bank in Nigeria. The model used is estimated using first bank loan and advancement (LOA) and other determinants or variable such as their volume of deposit (Vd) Interest (lending) rate (Ir) between the period of 2006 – 2013. the model hypothesis shows that there is functional relationship between the dependent variable and the independent variables. From the regression analysis, the model was found to be significant and its estimators turned out as expected and it was discovered that bank deposit have the greatest impact on their lending behaviour. The study then suggests that bank should focus on mobilizing more deposits as this will enhance their lending performance and should formulate critical, realistic and comprehensive strategies and financial plan.
1.1 Background to the Study
One of the most regulated sectors in the Nigerian economy is unarguably the banking industry. The reason includes the use of intervention by authorities to short comings of the price fixing mechanism in the capitalist system to ensure what is commercially rational for an industrial bank, approximate social rationality. In the determination of interest rate it banks and their customers are free to negotiate to arrive at the suitable interest rate on both loans and advances. Despite the regulation, a number of challenges still arose. The approach to banking was the use of direct control by the central bank. The degree of compliance varied among banks. At times, withdrawal of privilege or facilities was the case with banks that failed for comply, for example most banks defaulted on ceilings imposed credit expansion and allocation on sectional basis Ewert, R. (2000).
Interest rates are defined as the rental payment for the use of credit by borrowers and return for parting with liquidity by lenders, (Ewert, R. (2000). Like other prices, interest rates perform a rational function by allocating limited supply of credit among the many competing demands. In the (1987) budget announcement of the then president, General Ibrahim Babangida, it was observed that the pegging of interest rate contrary to expectation, commercial banks encourage savings and since investments are made out of savings, the establishment of commercial especially in rural areas makes savings possible, hence economic development is accelerated (Anyanwu 1997).
Socially, interest rate charged by banks could be regulated to encourage savings mobilization, ensure and foster adequate investment for rapid growth and development, bearing in mind the view of (Goldsmith 1969) that the financial superstructure of an economy, accelerates economic performance to the extent that it facilitate the migration of funds to the funds yield the highest social return.
Interest rates play important role in controlling major macroeconomic variables. The primary role of interest rate is to help in the mobilization of financial resources and to ensure efficient utilization of resources for the promotion of economic growth and development (CBN 1970).
However, they are various states of interest rates in the financial system. They are generally classified into two categories: Deposit and lending rates. Deposits rate are paid to savings and time deposits of different maturities, while lending rates are interest rates charged on loans to customers and they vary according to cost of loanable funds and lending margins.
A number of factors influence the behaviour of interest rates in an economy. Prominent among these are the volume of savings, inflation, investment, government spending, monetary policy and taxation constitute the major source (supply) of credit while investment represents the major demand for credit. Therefore, the level of savings partly determines the level of interest rates. For instance, a decrease in the accumulation of loanable funds (savings) is bound to exert an upward pressure on interest rates, just as the reverse situation would tend to have a moderating effect. Usually, when the structures of interest rate are changed, the resulting relative rates of return will induce shift in the assets portfolio of both banks and the non-banks public institutions. Hence, the direction and magnitude of changes in the market interest rates are of primary importance to economic agents and the policy makers.
Consequently, the Nigerian Economy has been highly prone to interest rate volatility and fragility (CBN, 2000). Interest rates of all instruments have experienced very volatile movements. Inconsistencies have been the order of the day (Adewunmi, 1997)
Lending which may be on short, medium or long-term basis is one of the services that commercial banks do render to their customers. In other words, banks do grant loans and advances to individuals, business organizations as well as government in order to enable them embark on investment and development activities as a mean of aiding their growth in particular or contributing toward the economic development of a country in general.
Commercial banks are the most important savings, mobilization and financial resource allocation institutions. Consequently, these roles make them an important phenomenon in economic growth and development. In performing this role, it must be realized that banks have the potential, scope and prospects for mobilizing financial resources and allocating them to productive investments. Therefore, no matter the sources of the generation of income or the economic policies of the country, commercial banks would be interested in giving out loans and advances to their numerous customers bearing in mind, the three principles guiding their operations which are, profitability, liquidity and solvency.
However, commercial banks decisions to lend out loans are influenced by a lot of factors such as the prevailing interest rate, the volume of deposits, the level of their domestic and foreign investment, banks liquidity ratio, prestige and public recognition to mention a few.
Lending practices in the world could be traced to the period of industrial revolution which increase the pace of commercial and production activities thereby bringing about the need for large capital outlays for projects Many captains of industry at this period were unable to meet up with the sudden upturn in the financial requirements and therefore turn to the banks for assistance. However, the emergence of banks in Nigeria in 1872 with the establishment of the African Banks Corporation (ABC) and later appearance of other banks in the scene during the colonial era witnessed the beginning of banks lending practice in Nigeria. Though, the lending practices of the then colonial banks were biased and discriminatory and could not be said to be a good lending practice as only the expatriates were given loans and advances. This among other reasons led to the establishment of indigenous banks in Nigeria.
Prior to the advent of Structural Adjustment Programme (SAP) in the country in 1986, the lending practices of banks were strictly regulated under the close surveillance of the banks supervisory bodies. The SAP period brought about some relaxation of the stringent rules guiding banking practices. The Bank and Other Financial Act Amendment (BOFIA) 1998, requires banks to report large borrowing to the CBN. The CBN also require that their total value of a loan credit facility or any other liability in respect of a borrower, at any time, should not exceed 20% of the shareholders funds unimpaired by losses in the case of commercial banks.1.2 Statement of the problem
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