1.1 Background to the Study
plays a very important and positive role for progress and prosperity of any
country. Many countries rely on investment to solve their economic problem such
as poverty, unemployment etc (Muhammad and Mohammed 2004).
rate on the other hand is the price paid for the use of money. It is the
opportunity cost of borrowing money from a lender to finance investment
project. It can also be seen as the return being paid to the provider of financial
resources, for using the fund for future consumption (Sleka, 2004). Interest
rates are normally expressed as a percentage rate. The volatile nature of
interest is determined by many factors, which include taxes, risk of
investment, inflationary expectations, liquidity preference, market
imperfections in an economy etc.
are given the primary responsibility of financial intermediation in order to
make fund available for economic agents. Banks as financial intermediaries move
fund from surplus sector/units of the economy to deficit sector/units by
accepting deposits and channeling them into lending activities (Afolabi, 2003).
The extent to which this could be done depend upon the rate of interest and
level of development of financial sector as well as the saving habit of the
people in the country.
the availability of investible funds is therefore regarded as a necessary
starting part for all investment in the economy which will eventually translate
to economic growth and development (Uremadu, 2006).
already discussed so far, it is quite clear that an understanding of the nature
of interest rate behavior is critical and crucial in designing policies to
promote savings, investment and growth. It is pertinent to note that this
research attempts to investigate and ascertain the effect of interest rate on
investment and money demand in Nigeria.
Statement of the Problem
financial systems of most developing countries (like Nigeria) have come under
stress as a result of the economic shocks. The financial repression largely
manifested through indiscriminate distortions of financial prices including
interest rates, has tended to reduce the real rate of growth and the real size
of financial system, more importantly, financial repression has (retarded)
delayed development process as envisage by Shaw (1973). This led to
insufficient availability of investible funds, which is regarded as a necessary
starting point for all investment in an economy. This decline in investment as
a result of decline in the external resource transfer since 1982 has been especially
sharp in the highly indebted countries, and has been accompanied by a slowdown
in growth in all Least Developed Countries (LDCs) Cole and Obstraid (2005).
Both public and private investment rate have fallen, although the latter more
drastically than the former. The observed reduction in investment in LDCS seems
to be the result of several factors. First, the lower availability of foreign
savings has not been matched by a corresponding increase in domestic savings.
Secondly, the determinating of fiscal conditions due to the cut of foreign
lending to the rise in domestic interest rate and the acceleration in inflation
forced a contraction in public investment. Thirdly, the increase in
macroeconomic instability associated with external shocks and the difficulties
of domestic government to stabilize the economic has hampered private
the debt at hand has discouraged investment, through its implied credit
constraints in international capital markets (Omole and Falokun, 1999).
investment ratio and level are problems; first of all, because investment
matters for growth. Secondly, because low investment increases vulnerably in
the economy (Niambon and Oshikoya, 2001). The main challenge that Nigeria is
facing is to make policies that will help revive and raise investment in the
country in order to stimulate and sustain economic growth.
problem of volatility of interest rates affects personal investments and
governmental decision making of any nation, Nigeria cannot be an exception as
affirmed by Schwartzman (1992) that the movement of interest rates in one
direction or another is influenced by a multitude of factors, including
economic, inflationary, monetary, fiscal, global, and political factors.
The rate of interest paid by banks
to depositors is on the high, investors can not patronize the banks the more
and fewer investors invests on the capital market. This leads to decrease in
money demand and capital investment in the economy.
above identified problems can be summarized as follows;
High Interest rate which affects
Interest rate has lowered the demand for
money in Nigeria
Objective of the Study
aim of this research project is to examine the effect of interest rate on
investment and money demand, while the specific objectives are:
To determine the impact of interest rate
on investment decision in Nigeria.
To empirically investigate, the effect
of interest rate on demand for money in Nigeria.
1.4 Research Questions
order to achieve the purpose of this research study, the study will attempt to
provide answers to the following research questions in order to arrive at a logical conclusion:
What is the impact of interest rate on investment
decision in Nigeria?
To what extent does interest rate
affect money demand in Nigeria?
Statement of Hypotheses
on the above stated research objectives, the following hypotheses were
Interest rate does not have significant impact on investment decision.
Interest rate has significant impact on investment decision.
There is no significant relationship between Interest rate and money demand.
There is significant relationship between Interest rate and money demand.
Significance of the Study
work is mainly for academic purpose. However, it will be of great importance to
researchers who would want to embark on any research on interest rate and
this piece of research work would go a very long way in assisting any person or
organizations in making investment decisions in Nigeria.
Scope of the Study
study focuses on the effect of interest rate on investment and demand for money
in Nigeria. The population of this research covers the entire country as
secondary data was used. The study area of this research is Nigeria. Data were
gathered from Central Bank of Nigeria (CBN) and Federal Office of Statistics
(FOS). The research last for an academic session.
1.8 Limitations of the Study
the assertion that every pros have some cons, this study cannot be exception.
Some hitches and setback are foreseen. First among the list is data
unavailability. For this reason, investment variable would be provided by Gross
Fixed Capital Formation (AFCF).
time and financial construct cannot be left out in the list setback and
cost of sourcing materials from the internet is exorbitant because of epileptic
and erratic power supply of the Power Holding Company of Nigeria (PHCN). Thus,
the cyber café power their systems with power generating sets which increases
their cost of production which they eventually pass to us (the consumers of
all these hitches and setbacks mentioned above, this research work would have
been a perfect work.
1.9 Operationalization of Variables
MD = ba + b1INF
+ b2 INTR + b3 INV + µ
Y = b0 + b1X1
+ b2 X2 + b3 X3 + µ
Where MD = Real money demand.
INF = Inflation rate.
INTR = Interest rate and
bo, b1, b2
and b3 are coefficients
INV = b0 + b1 INTR
+ b2 INF + b3 GDP + EXTR + µ
Y = b0 + b1x1
+ b2 x2 + b3 x3 + b4 x4 + µ
Where INV = investment
INTR = Interest Rate
GDP = Gross Domestic Product
EXTR = Exchange Rate
And b0, b1, b2, b3 and b4 are coefficients.
1.10 Definition of Terms
Interest Rate: It
is the opportunity cost of borrowing money from a lender to finance investment
a monetary asset purchased with the idea that the asset will provide income in
the future or appreciate and be sold at a higher price
for Money: Is the desired holding
of financial assets in the form of money
Economic Growth: An
increase in the capacity of an economy to produce
goods and services, compared from one period of time to another.
Financial Market: is
a market in which people and entities can trade financial
securities, commodities, and other fungible items of value at low transaction
costs and at prices that reflect supply and demand.