IMPACT OF INTEREST RATE POLICY ON INVESTMENT IN THE NIGERIA ECONOMY

CHAPTER ONE

  INTRODUCTION

1.1   BACKGROUND OF THE STUDY

Interest rate policy in Nigeria is a major instrument of monetary policy with regard to the role it play in the mobilization of financial resources with the aim to promote economic development and growth. Interest rate due to it importance in the financial sector of the economy can be a major tool in promoting growth and development of the economy.

        Prior to August 1986 interest rate in Nigeria  was generally fixed by the Central Bank of Nigeria with periodic adjustments depending on the government sectoral priorities (Ucendu 1993).        On 31 July , 1987, however the Central Bank of Nigeria announced the deregulation of interest rate, that is abolished (with effect from 1 August 1987) all control on SAP during the Ibrahim Babangida regime, stated that interest rate became market driven that is, hence be determined by the forces of demand and supply.

        Again, it also focuses on trade liberalization in order to stimulate exports and correct price distortions, the need for financial liberalization was also realized. The steps that were taken in this regard were interest rate deregulation, introduction of an auction market for treasury bills, the identification of insolvent bank for restructing, the introduction of  more stringent prudential guideline  for Bnaks, increase in banks minimum capital requirement and up grading and standardization of accounting  procedures. Not all of these measures were implemented simultaneously however, interest rate deregulation was the first step.

        However, in a policy reversal, the government in January 1994 out rightly introduced some measure of regulation of interest rate management. It was claimed that there were it wide variations and unnecessarily high rate under the complete deregulation of interest rate immediately, deposit were once again set at 12% - 15% per annum, while a ceiling of 21% per annum was fixed for lending.

        The cap on interest rate introduced in 1994 was retained in 1995 with a minor modification to allow for flexibility. The cap stayed in place lifting remained in force in 1997, thus enabling the pursuit of flexible interest rate regime in which bank deposit and lending rate were largely determine by the forces of supply and demand for fund.

        Since 2004, the monetary policy committee of the central bank in Nigeria has been meeting to deliberate and if possible fix the monetary policy rate depending on the performance of the economy (CBN website). In 2004, the lending rate was 20% while the minimum rediscount rate (MRR) was 15% the time deposit rate for the same period was 10.8% while saving rate was 4.9% (NDIC 2002 Annual Report).

        The adoption of the two interest rate regime in Nigeria provides a case study for Keynesian investment theory as well as Mckinnon and Shaw hypothesis. Hence, many reason abound while people and interest, these include the direction of interest rate, the expected rate of return from such investment etc.

                This work will focus on the understanding and identification of the relationship that exist between the interest rate, saving and investment the Keynesian theory implies that low interest rate as a determinant to increase investment demand.

1.2   STATEMENT OF THE PROBLEMS.

        The financial system of most developed countries like Nigeria came under stress as a result of the economic stock of the 198os. Additionally, financial repression, largely manifested through indiscriminate distortions of financial prices including interest rate, has tended to reduce the reat of growth and the size of financial system relative to non-financial magnitudes more importantly financial  repression has retarded the development process as envisage by Shaw.

        In this research work certain problem will be encountered among which are:

i       Is there any effect which interest rate policy has on investment?

ii      Has interest rate policy made any Significant impact on the level of investment?

iii     To what extent  has the variation of interest rate in   Nigeria over the year been a problem to investment?

1.3   OBJECTIVE OF THE STUDY

        The major objective of this study is to determine the impact of interest rate policy on investment in the Nigeria economy, in order to achieve the above goal, this study has the following as its specific objectives?

i       To critically examine the effect of interest rate policy on investment in Nigeria economy.

ii      To ascertain how other variables such as consumption, Saving, Exchange rate as well as gross domestic product (GDP), that is the level of income affect investment in Nigeria.

iii     To examine the impact of interest rate policy on Nigeria prior to interest rate regulation in 1980.

iv     To make appropriate policy recommendation based on the findings.

1.4   RESEARCH QUESTION

                In this work the following questions shall be looked into.

i       Is there any relationship between interest rate policy and investment in Nigeria economy?

ii      How can we identify the types of relationship between interest rate policy and investment in Nigeria?

iii     How do we examine the relationship between government development, investment and interest rate?

iv     Is there any relationship between interest rate and  gross Domestic Product (GDP) in the Nigeria economy?

1.5   RESEARCH HYPOTHESIS

                In view of the objectives of the study, the research hypothesis will be tested as follows:

Ho:   there is no positive relationship between the interest rate and investment in the Nigeria economy.

        Hi:    there is a positive relationship between interest rate and investment in the Nigeria economy.

1.6   SIGNIFICATANT OF THE STUDY

This study is very vital because Nigeria economy over the years have been faced with problem of appropriate interest rate policy that could efficiently sustain investment and enhance economic growth and development.

        Again, this project is meant to find the various kind of interest rate polices that have been used over the year and how it have been able to affect the rate of investment positively or negatively.

1.7   SCOPE AND LIMITATIONS OF THE STUDY.

      This study will look on the effect of interest rate policy on the level of investment in the Nigeria economy during the period of 1981-2009.

                This study has the intention of looking into how Nigeria could solve her numerous macro economic problems and achieve full economic growth and development by increasing the level and rate of investment. This work  also intend to bring out the best interest rate policy that would suit and enhance Nigeria  Public investment.

        In the other hand, the researcher has so many limitations and problems against this work. One of them is finance. A work of this nature require huge amount of money. The researcher has to travel to many places like banks, example central bank of Nigeria and many  other financial institutions to collect data and materials for this work.

        Another limitation is the refusal of top government and bank of officials. Working in the selected financial institutions billed for this work to grant the researcher audience and give him the relevant information, materials and data he need for this work.