1.0 BACKGROUND OF THE STUDY
The term interest can simply be define
as the cost of using someone else money or viewed from the under point
of view, as the price charged for allowing one to use someone else
money. The role of interest is the reward for parting with liquid for a
specific period of time.
The Nigerian Banking sector is among the
most heavily regulated sector of the Nigerian economy. The special
interest of government in the banking sector is due to its relevance in
the provision of credit facilities of industries and most importantly
the provision of soft loan for small scale businesses for development of
economy in the country. As financial intermediary, banks help in
channeling founds from surplus economics regions to the deficit one’s on
order to facilitate business transaction and economic development in
general. The real sectors economics are not left out in benefit found
from the surplus spenders in the economy.
Anyonwu (1997) opined that, commercial
banks encourage savings. Since investments are made out of savings, the
establishment of commercial banks especially in the rural makes savings
possible home economic development is accelerated.
Bearing in mind that funds are owned by
other people (the investing public / depositor) the banking ethic
demands that such funds should be efficiently and effectively managed in
order to build and maintain the confidence of depositor investors in
the banking system and also uphold the competence and continued
soundness of the banking system to reduce drastically the risk or
possibility of bank failure or distress.
The government most of ten may think its
necessary to intervene in the operation of the banking system with the
intention of correcting the short comings of the price fixing mechanism
to ensure that what is commercially rational for an individual bank is
appropriately rational for all socially interest rate charged by banks
could be regulated to encouraged saving mobilization, ensure and faster
adequate investment for rapid growth and development, bearing in mind
the view of Goldsmith (1969) that the financial super structure of an
economy accelerates the migration of funds to the best user i.e. to the
place in the economic system where the funds yield the highest social
The opinion of Greenwood and Jovanoric
(1990) clearly approximate the view of Goldsmith (1990). They stated
that financial intermediation promotes growth because it allows a higher
rate of return to be earned on capital and growth in turn provides
means to implement costly financial structure.
According to Akiri and Adofu (2007), the
exisitence of externalities and imperfection in the financial markets
of most developing economics has often called for intervention by the
government through its appropriate agent (the central Bank in the case
of Nigeria) to encourage investment and to re-channel credit to those
economic unity with high social race of returns but low commercial rate
Under the deregulated interest rate
system, the market forces of demand and supply plays a very prominent
role in the determination of interest i.e to arrive at a suitable
interest role on both deposit and loans.
Interest rate being cost of money, the
government by deregulation interest intends to stop central on credit
expansion by banks. If the cost of money is high, the business sector
would not borrow and when they don’t borrow, it will go long way to
reduce the inflationary tendencies associated with excess liquidity.
This study attempts to find the probate effect of bank interest rate deregulation on economic growth in Nigeria.
1.2 STATEMENT OF PROBLEM
Generally, banking industry operate on a
profit base mobilizing fund from surplus sectors and lending it to into
deficit sector in which interest rate is being charged on both the bank
usually paid sector but charges higher interest when they want to lend
it into deficit sector in order to make profit for banks to fulfill
this, care must be taken in lending in order to safeguard the
profitability of such banks.
1.3 OBJECTIVE OF THE STUDY
The study attempt to makes in-dept
analysis of the effect of bank interest rate deregulation on the
economic growth in Nigeria and thereby assess the effect of the charges
in interests rates on saving through the structure and growth of bank
deposit implication on the economic growth.
1.4 STATEMENT OF HYPOTHESIS
At the end of this research work, the following opinion will be tested.
1. Hi: The high interest rate induces savings in banks
Ho: The high interest rate does not induces saving in banks
2. Hi: The high bank interest rates discourage customers from borrowing
Ho: The high bank interest rate does not discourage customers from borrowing.
This study will help the bank to know
whether they should be more committed to increasing there changes on
rate of interest and to know whether this will increase there customer
patronage good will and profitability. To proffer policies, to determine
the effect of lending policies on economy of Nigeria, to know the need
for partial equilibrium analysis of bank deposit management to assess
the effect of the changes in interest on saving through the implication
of threat on the economy.
1.5 SIGNIFICANT OF THE STUDY
The researcher therefore, that by
studying the pricing decision, it will be of benefit to the economy and
individual alike, it will be of benefit to the economy in the sense that
it will as to determine approximation compensation for labour used in
This study will equally enable firms to
known how consumer perceive products, the reasons for the high and low
price. In addition, the study will serve as reference point for future
researchers relevance area.
1.6 DELIMITATION OF THE STUDY
It is highly imperative to state
categorically that this study paves way for others to further studies
into areas that are not adequately covered by this researcher. Also
there is room for further research into area cover by the researcher.
1.7 LIMITATION OF THE STUDY
Apart from the fact the writers intend
to have detailed study of the above mentioned target area, writer is
limited to these areas because of the following reason:
1. Time: - It
is indeed pathetic that the researcher have a very limited time to carry
out the research therefore, the writer needs to manage the source that
is available in order to finish the research within the allocated time.
2. Financial Constraint:
- The researcher would have loved to moved wider but this is not
possible due to limited amount of money the researcher have, the
researcher spirit all he could to make this work successful.
3. Inadequate date:
- This research work will be limited to the volume of information
acquired through materials like national dailies, periodic journals,
text books, internet materials and write – up on related subject.
4. Uncooperative Attitude of Respondents: - As
it unduly know that banks are often busy. So questionnaire
administrations were not answered very well because majority of the
staff were occupied with the customers. This constraint might be regard
as that of non-response during peak periods.
1.8 DEFINITION OF TERMS
Interest Rate: - An
interest rate is the rate at which interest is paid by a borrower for
the use of money that they borrow from a bank as loan or overdraft etc.
Deregulation: - Is the
removal or simplification of government rules and regulations that
constraints the operation of bank on interest rate for loan given.
Lending: - Is concerned with granting of credit facilities to customers.
Normal Interest Rate: - This is the interest on the face value or coupon rate in the case of loans floated as securities.
Real Interest Rate: - This is the interest adjusted for the effect of inflation. Real interest is only used in performance assessment.
Prime Lending Rate: -
This is the rate banks lend to their first class loan risk customers.
For other customers the lending rate will be higher, the difference
representing a premium for risk under taken by the lender.
Interest rate Spread: - This is the differences between lending rate and borrowing rate.
Borrowing Rate: - Borrowing rate to a banker’s customer the “borrowing rate” i.e. bank’s lending rate.