1.1 BACKGROUND OF THE STUDY
The Central Bank of Nigeria's responsible for implementing monetary
policy, regulating and supervising banks, and operating the payments
system. With these responsibilities come the authority to raise and
lower national interest rates in the banking industry. Interest rate
movements help balance inflation and keep the economy stable. When the
economy slows and inflation is high, the CBN raises interest rates to
change consumer behavior
Interest has been variously defined both by conventional economists
and Islamic economists. In conventional economic interest rate refers to
that surplus income that is positive which a lender receives from the
borrower over and above, the principal amount, as a reward for waiting
or parting with the liquid part of his capital for a specified period of
Given the prominent role of the banking sector in the euro area’s
financial system, it is of significantimportance for the ECB to monitor
the degree of competitive behaviour in the euro area bankingmarket. A
more competitive banking market is expected to drive down bank loan
rates, adding to thewelfare of households and enterprises. Further, in a
more competitive market, changes in the ECB’smain policy rates
supposedly will be more effectively passed through to bank interest
This study extends the existing empirical evidence, which suggests
that the degree of bank competitionmay have a significant effect on both
the level of bank rates and on the pass-through of market rates tobank
interest rates. Understanding this pass-through mechanism is crucial for
central banks. However,most studies that analyse the relationship
between competition and banks’ pricing behaviour apply aconcentration
index such as the Herfindahl-Hirschman index (HHI) as a measure of
competition. Wequestion the suitability of such indices as measures to
capture competition. Where the traditionalinterpretation is that
concentration erodes competition, concentration and competition may
insteadincrease simultaneously when competition forces consolidation.
For example, in a market whereinefficient firms are taken over by
efficient companies, competition may strengthen, while themarket’s
concentration increases at the same time. In addition, the HHI suffers
from a seriousweakness in that it does not distinguish between small and
large countries. In small countries, theconcentration ratio is likely
to be higher, precisely because the economy is small.
The main contribution of this paper is that it applies a new measure
for competition, called the Booneindicator (see also Boone, 2001; Bikker
and Van Leuvensteijn, 2008; Van Leuvensteijn et al., 2007).The basic
notion underlying this indicator is that in a competitive market, more
efficient companies arelikely to gain market share. Hence, the stronger
the impact of efficiency on market shares is, thestronger is
competition. Further, by analyzing how this efficiency-market share
relationship changesover time, this approach provides a measure which
can be employed to assess how changes incompetition affect the cost of
borrowing for both households and enterprises, and how it affects
thepass-through of policy rates into loan and deposit rates.Our study
contributes also to the pass-through literature in the sense that it
applies a newly-constructeddata set on bank interest rates for eight
euro area countries covering the January 1994 to March 2006period.
This paper uses interest rate data that cover a longer period and
that are based on more harmonized principles than those used by previous
pass-through studies for the euro area. We find that
strongercompetition implies significantly lower interest rate spreads
for most loan market products, as weexpected. Using an error correction
model (ECM) approach to measure the effect of competition on
thepass-through of market rates to bank interest rates, we likewise find
that banks tend to price their loansmore in accordance with the market
in countries where competitive pressures are stronger.
Furthermore, where loan market competition is stronger, we observe
larger spreads between bank andmarket interest rates (that is, lower
bank interest rates) on current account and time deposits. Lowertime
deposit rates in countries with stronger bank competition are confirmed
by the ECM estimates.Apparently, the competitive pressure is heavier in
the loan market than in the deposit markets, so thatbanks under
competition compensate for their reduction in loan market income by
lowering theirdeposit rates. Furthermore, in more competitive markets,
bank interest rates appear to respond morestrongly and sometime more
rapidly to changes in market interest rates.
1.2 STATEMENT OF PROBLEM
The fundamental problem of any government vogue is its economic or
otherwise its implementation. a number of government monetary policy
instruments have been designed and applied in Nigeria in the hope of
achieving the desired result of stable price level, low level of
unemployment, efficient banking system etc. but the applications of
direct monetary instruments have not bring forth the desired objectives
stated above hence, left the government without any other alternative
than to turn to the direct monetary instrument. Therefore, the problem
under study is the impact of rising interest rate on manufacturing
sector. One of the principal function of the central bank of Nigeria
(CBN) is to formulate and execute monetary policy to promote stability
and soundfinancial system in Nigeria.Monetary policy was adopted when
strategy shifted to demand management containing inflation preseure,
balance of payment, imbalance and high deflect in the federal budget and
the effect on the growth in money supply. Consistent with the monetary
targeting problems of the Central Bank of Nigeria (CBN) focuses on
liquidity management to achieve the objective by maintaining price and
macro economic stability.Despite all these efforts that put are in place
by Central Bank of Nigeria, the problem of monetary management have
persisted and the main constraints continue to be the ineffective
control and the uncertainty created by fiscal operation.
1.3 OBJECTIVE OF THE STUDY
Ø To identify if loan interest rates are lower, and deposit interest
rates higher, in more competitive loan markets than in less competitive
Ø To assess long-run loan and deposit interest rate responses to
corresponding market rates are stronger in more competitive loan markets
than in less competitive loan markets
Ø To identify bank interest rates in more competitive markets adjust
faster to changes in market interest rates than in less competitive
1.4 RESEARCH QUESTION
i. How does interest rates are lower, and deposit
interest rates higher, in more competitive loan markets than in less
competitive loan markets?
ii. How does long-run loan and deposit interest rate
responses to corresponding market rates are stronger in more competitive
loan markets than in less competitive loan markets?
iii. Is bank interest rates in more competitive markets adjust
faster to changes in market interest rates than in less competitive
1.5 SIGNIFICANCE OF THE STUDY
However, the research study will assist the economic to derive
possible solution to the problem e.g. inflation using policies measures
as adopted by the monetary authorities. Further, the research, x-rays
that types of monetary policy measure which can be use to combat the
problem of unstable economic and as a result will be a kind of it may be
concerning of their field of study.
Government will benefit immensely on the research work as the research have put it down.
1.6 SCOPE OF THE STUDY
This project covers the impact of rising interest rate on
manufacturing. A general overview of monetary policy and inflation in
the Nigerian economy is the foundation upon which the project is
1.7 LIMITATION OF THE STUDY
However, study of this nature is known to be subject to a number of
problems or constrains, which are peculiar to the Nigerian society such
as financial constraints.
This research work was not an exception the problem of visiting the
Central Bank of Nigerian and some other places for data collection
involved spending a lot of money or transport expenses.
Hence, the predicament of the overage students can therefore be imagined.
Furthermore, the issue of office protocols time limit, secrecy
inadequate research materials also were some setbacks to the researchers
in carrying out this research.
1.8 DEFINITION OF TERMS
The author considers it necessary to define the following terms as applied within the context of this project.
Asset portfolio: Arrangement of bank assets on order of its
liquidity and profitability.
Advances: These are monies lent by a bank generally in
the form of an overdraft on a current account and also by means of a loan or personal loan.
Affidavit form: This is a written statement used as a legal
Bank credit: Credit created by a bank increasing the size of
the account of a depositor e.g. when making an advance.
Branch banking: the typical commercial bank in most
countries is a very large institution with a large number of branches.
C.O.T: Commission on turn over or cost of
transaction, this is normally charged on the total of debt turn over of current account.
C.O.F.O: Certificate of occupancy
Cash ratio: This is the ratio of cash to demand deposit
usually calculated on percentage.
Clean lending: Loan and advance granted without any
Collateral security: properties perhaps in the firming deeds to
a house or stock and shares deposited with a creditors to guarantee that a loan will be repaid.
Demand deposit: this is the total amount of money deposited
with the bank.
Deed of release: this is the document usually signed by
customers when any property held by bank is returned.
Equitable mortgage: Property pledged to the bank as security
without legal backing.