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UGWU, BLESSING
PG/M.Sc/10/54938
IMPACT OF INTEREST RATE LIBERALISATION ON SELECTED MACROCONOMIC
INDICATORS IN NIGERIA
Faculty of Business Administration
Banking & Finance
Chukwueloka.O. Uzowulu
Digitally Signed by: Content manager’s Name
DN : CN = Webmaster’s name
O= University of Nigeria, Nsukka
OU = Innovation Centre
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IMPACT OF INTEREST RATE LIBERALISATION ON SELECTED
MACROCONOMIC INDICATORS IN NIGERIA
BY
UGWU, BLESSING
PG/M.Sc/10/54938
BEING AN M.SC DISSERTATION PRESENTED TO THE
DEPARTMENT OF BANKING AND FINANCE FACULTY OF
BUSINESS ADMINISTRATION
UNIVERSITY OF NIGERIA, ENUGU CAMPUS
IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE
AWARD OF MASTER IN SCIENCE DEGREE IN BANKING AND
FINANCE
SUPERVISOR: PROF: CHUKE NWUDE
3
SEPTEMBER, 2015
APPROVAL PAGE
This is to certify that Ugwu Blessing a Postgraduate Student of the Department
of Banking and finance with registration Number PG/M.Sc/10/54938 has
satisfactorily completed the requirement for the Award of Master in Science
(M.Sc) Degree in Banking and Finance.
Prof: Chuke Nwude ......................... ...........................
Supervisor Signature Date
Prof. Chuke Nwude ......................... ...........................
Signature Date
Head, Department of Banking and Finance
4
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CERTIFICATION PAGE
This is to certify that this dissertation by Ugwu, Blessing with Registration
Number PG/M.Sc/10/54938 submitted to Department of Banking and Finance
is the original and has not been submitted in full for the award of any Diploma
or Degree in this University.
................................. ...................................
Ugwu Blessing Date
Student
PG/M.Sc/10/54938
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DEDICATION
This research work is dedicated to Almighty God the author and finisher of our
faith
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ACKNOWLEDGEMENTS
I am grateful to my supervisor, Prof Chuke Nwude for his support and guidance
throughout this study. I appreciate the knowledge I gained from him in the
course of this study. I acknowledge also the effort of my lecturers Dr. Austine
Ujunwa, Prof. J.U.J Onwumere for their assistance and encouragement in
various ways.
I am indebted to my lovely husband Mr Ifeanyi Onyeke for his tireless effort
and for his financial and moral support. I also acknowledge my children
Nneoma, Ugonna ,Tobenna and little Mmesoma for their endurance even when
I keep late night due to the study exigencies
I cannot forget my mother and sisters who never stopped showing concern and
for their understanding.
I reorganise the input of my friends Mr Norbert, Okpara, Lizy and Rose
Finally, I acknowledge all sources of information used in this study
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ABSTRACT
This research examines the impact of interest rate liberalisation on selected
macro-economic indicators in Nigeria. Employing ex-post factor design and
using GDP per capita as growth indicator, Total Financial Savings (TFS) as a
proxy for savings and Credit to Private Sector as a proxy for investment. The
research established a negative relationship between interest rate liberalisation
on economic growth, savings and investment which were represented by indices
calculated using ordinary Least Square. This research finds that interest rate
liberalisation have negative and insignificant effect on economic growth,
savings and investment in Nigeria. This supports the numerous past studies
which have reported negative results regarding the effects of interest rate
liberalisation on economic growth. The research concludes that interest rate
liberalisation have negative and insignificant effect on credit to private sector,
saving and economic growth in Nigeria.
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TABLE OF CONTENTS
Title Page i
Certification Page ii
Dedication iii
Acknowledgments iv
Abstract v
Table of Contents vi
Lists of Tables vii
Lists of Figures viii
CHAPER ONE: INTRODUCTION
1.1 Background of the Study 1
1.2 Statement of the Problem 3
1.3 Objective of the Study 4
1.4 Research Questions 4
1.5 Hypotheses of the Study 4
1.6 Scope of the Study 5
1.7 Significance of the Study 5
References 7
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.0 Theoretical Review 8
2.1 A Review of the Different Interest Rate Regimes on the Performance
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of Nigeria Economy 8
2.2 Interest Rate Liberalization on Savings 9
2.3 Interest Rate Liberalization on Investment 11
2.4 Interest Rate Liberalization on Economic Growth 12
2.5 Interest Rate Liberalisation and Access to Credit and
Financial Service 14
2.6 Review of Investment Behaviours in Nigeria pre and post
Financial Liberalisation 15
2.7 Review of performance of Nigerian Economy Pre and post
Financial Liberalisation 17
2.8 Interest Rate Changes and distribution of Income 19
2.8.1 Interest Rate Liberalisation and poverty channel of influence 20
2.8.2 Interest Rate Deregulation and the Monetary Transition-
Mechanism 21
2.8.3 Interest Rate Liberalisation and Financial Deepening 22
2.8.4 Interest Rate Liberalisation and Bank Credit Growth 23
2.8.5 Interest Rate Liberalisation and Domestic Financial System
Efficiency 23
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2.8.6 Interest Rate Liberalisation and Reduction in Financial Constraints 25
2.8.7 Financial Liberalisation and Interest Rate Risk Management 26
2..8.8 Behaviour of Bank lending and Deposit Rates after the Reform 27
2.9 Determinant of Economic Growth in Nigeria 27
2.9.1 Gross Domestic Product per Capital Growth rate (GDPPCGR) 28
2.9.2 ii Credit to private Sector 28
2.9.4 Overview of interest Rate Liberalization Policy in Nigeria 28
2.9.5 Trend Analysis of Interest Rates policies and Economic Growth
Rates in Nigeria 29
2.9.6 Impact of Interest Rate Liberalisation on the
Financial System 30
2.9.7 A Brief Review of Interest Rate Reforms in Nigeria 31
2.9.8 The Impact of Interest Rate Liberalisation on Nigerian Economy 32
2.10 Empirical Review 33
2.10.1 Mckinnon-Shaw Analysis 33
2.10.2 The Post-Keynesians Theory 35
2.10.3 Proponent of Mckinnon-Shaw Hypothesis 35
2.10.4 Summary of Review of Related Literature 36
References 38
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CHAPTER THREE
3.1 Research Design 44
3.2 Nature and Sources of Date 44
3.3 Populations 44
3.4 Description of Research Variable 44
3.4.1 Dependent Variable 45
3.4.2 Independent Variable 47
3.5 Technique for Analysis 47
3.6 Model Specification 47
References 49
CHAPTER FOUR: DATA PRESENTATION, ANALYSIS
AND INTERPRETATION
4.1 Data Presentation 52
4.2 Descriptive Statistics of the Employed Variables 57
4.3 Discussion of Research Findings 63
References 68
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION
AND RECOMMENDATIONS
5.1 Summary of Findings 69
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5.2 Conclusion 70
5.3 Recommendations 70
Bibliography 71
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LISTS OF TABLES
Table 4.1; Annualized Values of Interest Rate Liberalisation,
Macroeconomic Variables and Financial Deepening 1987-2013 52
Table 4.2: Descriptive Statistics of the Employed Variables 57
Table 4.3.1: Regression Results of Hypothesis one 60
Table 4.3.2: Regression Results of Hypothesis two 61
Table 4.3.3: Regression Results of Hypothesis Three 62
Table 4.4: Summary of Regression Result 64
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LISTS OF FIGURES
Fig: 4.1.1: Graphical Presentation of Real Lending Rate of Interest
(RLR) 1987-2013 54
Fig 4.1.2: Graphical Presentation of Real Deposit Rate of Interest (RDR)
1987-2013 55
Fig .4.1.3: Graphical Presentation of Total Financial Savings (TFS)
1987-2013 55
Fig. 4.1.4: Graphical Presentation of Credit to Private Sector (CPS)
1987-2013 56
Fig. 4.1.5: Graphical Presentation of GDP per capita 1987-2013 57
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THE IMPACT OF INTEREST RATE LIBERALISATION ON
SELECTED MACROECONOMIC INDICATORS IN NIGERIA
BY
UGWU BLESSING N.
PG/M.Sc/ 10/54938
DEPARTMENT AND BANKING AND FINANCE
FACULTY OF BUSINESS ADMINISTRATION
UNIVERSITY OF NIGERIA
ENUGU CAMPUS
17
SEPTEMBER, 2015
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CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Interest rate liberalisation can be viewed as a policy response encompassing a package of
measures to remove all undesirable state imposed constraints on the free working of the
financial market. The measure includes the removal of interest rate ceilings, loosening of
deposit and credit control (Killick and Martin 1990). Schmidt Hebbel and Serven (2002)
observe that interest rate liberalization grants market forces a dominant role in setting
financial assets prices and returns, allocating credit and developing a wider array of financial
instruments and intermediaries. Bandiera et-al (2000) notes that the wave of liberalization in
many developing countries in the1980 was characterised by more attention given to market
forces in allocating credit through market determined interest rate. The financial liberalisation
hypothesis holds that allowing the market to determine real interest rates would mobilise
savings and increase deposit (Fry1997). Several authors suggest that financial liberalisation
spurs GDP growth by fostering productivity growth, not only by raising the funds available
for capital accumulation. Theoretical research by Acemoglu and Zilibotti (1997), Soyibo
(1992) and Aghion et-al (2005) among others show that financial liberalisation may relieve
risky innovators from credit constraints, thereby fostering economic growth through
technological change.
According to McKinnon (1973) and Shaw (1973) financial repression largely manifested
through indiscriminate distortion of prices including interest rate, has tended to reduce the
real rate of growth. Undoubtedly, government’s past efforts to promote economic
development by controlling interest rates and securing ‘‘inexpensive’’ funding for their own
activities have undermined financial development (Demetriades and Luitel 1997). Prior to
August 1987, interest rate in Nigeria was generally fixed by the Central Bank of Nigeria with
periodic adjustments depending on the government’s sectoral priorities (Uchendu 1993).
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The Nigerian economy witnessed such financial repression in the early 80s. The pre
liberalization period was associated with administrative control of interest rate. In such an
environment, retail lending and deposit rates were set below their market clearing levels
(Scholnick 1999). Okpara (2010) is of the opinion that retail interest rigidity is caused by
either market concentration or size of the customer base. This low or negative interest rate
discourages savings mobilization and channelling of the mobilized savings through the
financial system (Obamuyi 2009). According to McKinnon (1973) and Shaw (1973) financial
repression by forcing financial institution to pay low and often negative real interest rate
reduces private financial savings thereby decreasing the resources available to finance capital
projects. Funds were inadequate as there was a general lull in the economy. Monetary and
credit aggregates moved rather sluggishly. Consequently, there was a persistent pressure on
the financial sector which in turn necessitated a liberalization of interest rate. (Ogwuma 1993
and Ojo 1993).
In response to these developments, government liberalized interest rate in August 1987 as
part of the structural adjustment programme (SAP) policy package (IKhide and Alawode,
2001). The official position then was that interest rate liberalization would among other
things achieve efficiency in the financial sector by increasing the levels of savings and hence
investment and ultimately leading to economic growth as well as bringing inflation down.
Liberalizing interest rate is an attempt to deepen the financial market and widen the range of
financial instrument offered (Gibson and Tsakalotos 1994). McKinnon (1973) and Shaw
(1973) argue that interest rate liberalization is likely to lead to an increase in positive real
interest rate. This tends to suggest a positive correlation between the overall financial depth
and growth in GDP.
Accordingly, a policy that aims at increasing financial depth through expansion of interest
bearing instruments would help maximize economic growth via increased availability of
credit to finance investment. This imply that positive real interest rates, by promoting
financial deepening helps to raise the level of investment hence, domestic capital formation.
In theory, the premise underlying the preposition that interest rate liberalization (a major
component of financial development) promotes growth is fairly straightforward. Given that
investment is a primary determinant (factor) of growth, for investment to take place, firms
(investors) and savers must be given incentives.
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Moreover, savings have to be channeld to investors. Interest rate liberalization ensures that
this takes place efficiently (efficient financial intermediation). As interest rate rises, the
quality of investment is enhanced, since financial repression is often associated with
mediocre quality investment. In addition, investment quality rises, since higher deposit rates
increase the supply of funds.
However, in a policy reversal, the government in January, 1994 outrightly introduced some
measures of regulation into interest rate management owing to wide variation and
unnecessarily high rates under the complete deregulation of interest rates ( Bakare 2011). By
re imposing controls on interest rate, maximum spread between deposit and lending rate were
imposed. In the light of this, deposit rate was once again set at 12-15 % per annum while
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 until it was lifted in October, 1996. The lifting remained in force in 1997 thus enabling
the pursuit of a flexible interest rate regime in which bank deposit and lending rates were
largely determined by the forces of demand and supply of fund (Omole and Folokun 1999).
In view of the perceived benefits of liberalized interest rate, Van WijinBergan (1983b) and
Taylor (1983) contrast their model to those of McKinnon- Shaw’s hypothesis. Using Tobin’s
portfolio framework for household, household choice of investment includes time deposit,
loan to businesses through the informal sector and gold or currency. They argue that in
response to increase in interest rate on deposits, household will substitute these for gold or
cash and loan in the informal sector.
Van Wijnbergan (1983a) expresses his view that the outcome of McKinnon- Kapur model
depends crucially on one implicit assumption on asset market structure. He further argued
that it is not at all obvious that bank deposit are close substitute to cash, gold, inventories and
other commodities but rather to loan extended to the informal sector. So many people have
conducted research on interest rate liberalisation in Nigeria but their studies were limited to
its effect on economic growth. The main objective of this study was to determine empirically
the impact of interest rate liberalisation on selected micro-economic indicators in Nigeria.
1.2 Statement of the Problem
In view of the perceived benefit of liberalized interest rate, evidence in Nigeria suggests that
neither the domestic savings nor investment has significantly increased since the introduction
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of the reform programme. The domestic economy has failed to experience impressive
performance. (Akpan 2004) and (Bakare 2011).
The criticism has been that interest rate liberalization in Nigeria is capable of discouraging
savings and retarding growth (Ojo 1976). In view of the empirical link between savings,
investment and economic growth, Van Wijnbergan, (1983a) contracts his hypothesis to those
of McKinnon (1973) and Kapur (1976). He argues that the existence of informal credit
market can reverse the effect of increase in interest rates on the total amount of savings. The
effect of an increase in deposit rate on the amount of loanable funds depends on whether
household substitute one of informal market loan or cash to increase their holdings for time
deposits. If time deposits are closer substitutes for informal market loans than for cash, then
the supply of funds could fall given that banks are subject to reserve requirement and
informal markets are not. He expresses his view that the outcome of McKinnon- Kapur
depends crucially on one implicit assumption on asset market structure.
With these features, the hope of achieving a sustainable economic growth through interest
rate liberalization continues to diminish. The purpose of this research is to empirically
investigate and provide an insight into the impact of interest rate liberalisation on Savings,
Investment and Economic growth in Nigeria.
1.3 Objectives of the Study.
The general objective of this study is to investigate the impact of interest rate liberalization
on selected macroeconomic indicators in Nigeria. However, the specific objectives are to
investigate the effect of interest rate liberalisation on
1. Savings.
2. Investment
3. Economic growth
1.4 Research Questions
The questions that arise for which this study provided answers were:
1. How does interest rate liberalization have positive and significant effect on savings in
Nigeria?
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2. How does interest rate liberalization have positive and significant effect on investment in
Nigeria?
3. How does interest rate liberalization have positive and significant effect on economic
growth in Nigeria?
1.5 Hypotheses of the Study.
The following hypothetical statements arise in this research. These are;
1. Interest rate liberalisation does not have positive and significant effect on savings in
Nigeria.
2. Interest rate liberalisation does not have positive and significant effect on investment in
Nigeria
3. Interest rate liberaliation does not have positive and significant effect on economic
growth in Nigeria.
1.6 Scope of the Study.
This study used data from 1987– 2013.This is to ensure that all the various interest rate
liberalization policies implemented toward the attainment of full financial liberalization status
are taken into account for Nigeria. This also help to solve the problem of quantification of the
effect of interest rate liberalization which is usually one of the problems associated with
empirical studies in this era (Caprio, et-al. 2001, Leaven 2003.)
1.7 Significance of the Study.
So far in Nigeria, studies conducted on interest rate liberalisation is only limited to its effect
on economic growth .This research seeks to empirically investigate and provide an insight
into the impact of interest rate liberalisation on selected macroeconomics indicators in
Nigeria
This research will be of immence significance to the following groups. These groups are:
1 Policy makers. This is important because the behaviour of interest rate to a large
extent determines the investment activities and hence economic growth of a country.
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The findings will guide the policy makers in designing and implementing financial
policy that will enhance private and public investment friendly interest rate which is
crucial for economic growth.
2 Academia. The empirical finding to date about the effects of interest rate
liberalization and economic growth in Nigeria has been inconclusive. The result of
this work may act as the spring board for other researchers to do more empirical
studies on the impact of interest rate liberalization on economic growth in Nigeria.
3 General Public. The general public may also find the result of the work interesting
and possibly extend their frontiers of knowledge of interest rate liberalization and
investment nexus.
REFERENCES.
Acemoglu, D. And Zilibotti, F. (1997), “Was Prometheus Unbound by Chance? Risk,
Diversification, and Growth,” Journal of Political Economics, Vol.104 (4) 709-756
Aghion, P., Howitt, P and Mayer-Foulkes, D. (2005), “The Effect of Financial Liberalisation
on Convergence,” Theory and Evidence: Quarterly Journal of Economics,
Vol.120:173-222.
Akpan B. D. (2004), Financial Liberalisation and Endogenous Growth: The Case study of
Nigeria.
Bakare, A.S. (2011), Financial Sector Reforms and Domestic Savings in Nigeria: An
Econometric Assessment.
Bandiera, O. G., Caprio, P. and Schiantarll, F. (2000), ‘‘Does Financial Reform Raise or
Reduce Savings?,” Economic, Statistics, and Financial Reviews, 31(1): 34-52.
Capiro,G., Honoham, P.and Stiglitz, J. E.(2001).Financial Liberalisation: How Far? How
Fast. Cambridge: Cambridge University Press
Dematriades, P.O. and Luintel, K.R. (1997), “An Investigation of the Relationship between
Interest Rate and Economic Growth in Nigeria” Journal of Economic and
International Finance Vol.’ (1):093-098.
Fry, M. J. (1997). “In Favour of Financial Liberalisation” Economic Journal, Vol. (107) 754-
770.
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Gibson, H. D. and Tsakalotos, E. (1994), ‘‘The Scope and Limits of Financial Liberalization
in Developing Countries: A critical surveying’’, Journal of Economic and
Financial Reviews, 31(1): 34-52.
Ikhide, S.I. and Alawode, A.A. (2001), ‘‘Financial Sector Reforms, Macroeconomic
Instability and Economic Liberalization: The Evidence from Nigeria”, AERC,
Research Paper 112.
Kapur, B.K. (1976), “Alternative Stabilisation Policies for Less Developed Economies”
Journal of Political Economy Vol. 84(4) 777-795.
Killick, T.And Martan, M. (1990), “Financial Policies in the Adaptive Economy”.ODI
working paper 35.
Laeven, L. (2003), ‘‘Does Financial Liberalization Reduce Financial Constraint?’’, Financial
Management, 32(1)5-34.
McKinnon, R. I. (1973), Money and Capital in Economic Development. Washington, DC:
The Brooking Institution.
Mckinnon, R.I. (1988), ‘‘Financial Liberalization and Economic Development” A Re-
assessment of Interest rate Policies in Asia and North America”, International
Centre for Economic Growth Occasional Paper 6.
Obamuyi, T.M. (2009), ‘‘An Investigation of the Relationship Between Interest Rate
and Economic Growth in Nigeria’’ Journal of Economic and International Finance
Vol. 1: 093-098
Ogwuma, P.A. (1993), “Recent Development in the Nigerian Financial Services Industry
Problems and Challenges’, An Address at Annual Dinner of the Chartered Institute
of Bankers of Nigeria, Lagos.
Ojo , M.O. (1993) “A Review and Appraisal of Nigerian’s Experience with Financial Sector
Reform”, Occasional Paper 8 CBN Research Department, Lagos.
Ojo, J. (1976), The Nigerian Financial System; University of Wales: Press Cardiff.
Okpara,G. C. (2010), “The Effect of Financial Liberalisation on Selected Macroeconomic
Variables: Lesson from Nigeria” The International Journal of Applied Economics
and Finance. 4(2): 53-61.
Omole, D. A. and Falokun, G.O. (1999), ‘‘The Impact of Interest Rate Liberalization on the
Corporate Financial Strategies of Quoted Companies in Nigeria”, African
Economic Research Consortium Research Paper 88.
Schmidt- Hebbel, K. And Serven, L. (2002), “Financial Liberalisation, Savings and Growth”
Paper presented at the Ban co de Mexico conference on Macroeconomics
Stability, Financial Market and Economics Development. Nov. 12-13.
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Scholnick, B. (1999), “Retail Interest Rate Rigidity After Financial Liberalisation”
CanadianJournal of Economics Vol . 29: 433-38
Shaw, E. S. (1973), Financial Deepening in Economic Development. New York: Oxford
University Press.
Soyibo, A. and Adekanye F. (1992a), ‘‘Financial System Regulation, Deregulation and
Savings Mobilization in Nigeria’’, African Economic Research Consortium
Research Paper II,
Taylor, L. (1983), Structuralist Macroeconomics: Applicable Models for Third World, New
York: Basic books.
Uchendu, A. D. (1993), ‘‘Interest Rate Policy, Savings and Investment in Nigeria’’ Economic
and Financial Reviews, 31(1): 34-52.
Van, W. S. (1983a), ‘‘Interest Rate Management in Developing Countries”, Journal of
Monetary Economics, 12: 443-52.
Van, W. S. (1983b), “Credit Policy, Inflation and Growth in a Financially Repressed
Economy” Journal of Developmental Economics Vol. 13 No 1-2:45-66.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.0 Theoretical Review
2.1 A Review of the Different Interest Rate Regimes on the Performance of Nigerian
Economy.
The practice of interest rate policy in Nigeria according to Soyibo and Adekanye (2006) were
classified into five periods. These periods
i. Strict control Regime (1980-1983)
ii. Less-strict control Regime (1984-1985)
iii. Moderate control Regime (1986)
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iv. Relaxed Control Regime (1987-1993)
v. Re-imposed control Regime (1994-1995)
The first two regimes and the fifth regime can be considered as a period of financial
repression. These periods were characterised by a high regulated monetary policy
environment in which policies of directed credits, interest rate ceilings and restrictive
monetary expansion were the rule rather than the exception. Under the policies of directed
credit, the economy was broadly classified into two: preferred and less preferred sectors. The
preferred sectors had access to a greater proportion of the total credit portfolio as well as
lower rate of interest.
The other two regimes of moderate and relaxed control can be categorised into a period of
financial liberalisation. Banks became free to charge savings and lending rate as they thought
appropriate and the period of directed credits was relaxed to the extent that there were only
two sectors giving some degree of preference; manufacturing and agriculture. However, this
preferential treatment lacked the kind of strings attached to those that existed during the era
of financial repression. Entry for new banks was liberalised among other complementary
policies expected to promote competition in banking practices. A new institutional
framework in banking operation of financial system was put in place entailing the
promulgation of new financial system act and regulation. The belief that the downward trend
of the naira exchange is propelled by the policy of economic liberalisation has led to a change
in policy stance. Further, the antecedent high inflationary rate that enveloped the economy
during the period of liberalisation made the policy makers to be sceptical about the
effectiveness of financial liberalisation to induce savings and investment. Hence, there was a
change in policy to strict control of interest rate in 1994.
During the strict control regime, interest rate policy in Nigeria delt mainly on the use of
controls to stabilise the economy and influence the pattern of savings, investment and
domestic capital mobilisation. For a considerable part of the period, the use of fixed regulated
interest rates was dominant. There were only marginal adjustments as at when deemed
appropriate by the monetary authorities.
2.2 Interest Rate Liberalization on Savings
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The McKinnon – Shaw hypothesis argues that financial repression stifles savings. Therefore,
only financial liberalization will lead to higher investment and ultimately to accelerate
economic growth in the economy. Interest rate can be viewed as the cost of borrowing money
or as the opportunity cost of lending money for a period of time. The real interest rate, the
rate adjusted for anticipated inflation is thus vital for the supply and demand of financial
resources. The hypothesis further asserts that higher real interest rate also help to direct the
funds to the most productive enterprises and facilitate technological innovation leading to
economic growth.
It maintains that by paying a rate of interest on final assets that is significantly above the
marginal efficiency of investment in existing technologies, one can induce some
entrepreneurs to disinvest from inferior processes to improved technology and increase scale
in other high yielding enterprises (McKinnon 1973). The release of resources from inferior
means of production is as important as generating net new savings. Savings provides the
resources for investment in physical capital. Hence, it is an important determinant of
economic growth. Increased savings are also beneficial in reducing foreign dependence and
insulating the economy from external shocks (McKinnon 1973). Niel and Roberts (2005) in
their work provided an extensive review of the literature on financial liberalisation and
investment starting with a review of (McKinnon- Shaw 1973) treaties. According to them,
modern literature on financial liberalisation-investment nexus commenced with the serminal
work of McKinnon-Shaw. They analysed the benefit of if not only eliminating financial
repression, but at least reducing it on domestic financial system within developing countries.
Their analysis sometimes referred to as complementally Hypothesis concluded that
alleviating financial restriction in such countries (mainly by allowing market forces to real
interest rates) can exert a positive effect on growth rates as interest rates rise towards their
competitive market equilibrium. According to this tradition, artificial ceilings of interest rates
reduce savings, capital accumulation and discourage the efficient allocation of resources.
Another effect of financial repression to which original hypothesis made only scant reference,
stemmed from the implicit “credit rationing” effect which result from the consequences of
government intervention in money and credit market in developing countries. Given that real
interest rates are prevented from adjusting to clear the market, other “non-market” forms of
clearing have to take place. These include various forms of “queuing” arrangements to
“ration” the available credit such as auctions, quantitative restriction (for examples quotas),
as well as different types of “bidding” system which themselves may be open to nepotism or
28
even outright corrupt practices. In essence, these manifestation of financial repression mean
that not only is the quantity of savings low, or at the very least irregular; it also means that the
level of activity which does occur is of very poor quality. This is really what the term
financial repression entails. If the real interest is not allowed to clear money and credit
market, both the overall level as well as the quality of savings will be repressed.
The early hypothesis of McKinnon and Shaw assumed that liberalisation, which would be
associated with higher real interest rates stimulate savings. The underlying assumption is, of
course, that saving is responsive to interest rates. The higher saving rates would finance a
higher level of investment, leading to growth. Therefore, according to this view, we should
expect to see higher savings rates as well as higher levels of investment and growth following
interest rate liberalisation.
Real per capita which is computed as real GDP divided by the total population, is usually
used to indicate the size of individual income and rate of economic development of a country.
In theory, given the marginal propensity to save, the higher the income, the higher the amount
of income saved. It is therefore plausible to use it as an independent variable to investigate
the effect of interest rate liberalization on savings. It is argued that as the number of bank
branches increases, the banks are able to mobilise more deposits and therefore the increased
number of bank branch is viewed as having positive effect on the total deposit mobilization
and hence total savings (Shrestha and Chowdhury 2007). There is no reason to expect a
linear and positive relationship between proliferation and increased financial savings. Branch
proliferation and increased financial intermediation have their uses when economies develop
and become more complex. But they are not virtues in themselves (ibid). In all economies,
the value of proliferation depends on its ability to increase savings or deposits mobilization,
ease transaction, facilitate investment and direct financial resources to the projects that yields
the best social returns and ultimately leads to economic growth.
2.3 Interest Rate Liberalization on Investment
Theoretically, investment decisions are based on marginal benefit versus marginal cost
process and it is determined by the expected rate of return on the investment and the interest
rate that must be paid to the lender of the financial resources. An investment is therefore
made if the expected rate of return is higher than the interest rate. This would suggest that
there is an inverse relationship between the interest rate on lending and the expected rate of
29
return on one hand and the quality or level of investment demanded. Jorgenson (1963) show
the increase in interest rate by raising the cost of capital.
Furthermore investigating interest rate and investment determinants in Nigeria reveals that
variation in interest rate and higher rate on interest rate have a negative and significant
influence on investment decisions and demand for credit have negative influence on interest
rate in the short run as well as in the long run.
Much of the literatures on financial liberalisation have focused on the question on whether it
has a positive “quantity effect” as manifested in higher levels of savings and investment. One
theoretical argument in the favour of such a quantity effect, going back to McKinnon (1973)
and Shaw (1973), Is that higher interest rates that follows the removal of interest ceilings will
generate higher savings and in turn higher investment. Higher rates of return may also result
from better insurance against future risk, which, as Obstfild (1994) argues may induce a shift
towards higher-return projects. A positive quantity effect on investment may be expected
because increased competition between banks can lead firms to internalised external effect in
investment. Firdu and John (2003) provided an excellent review on some empirical literature
on financial liberalisation-investment nexus. According to them, the broad empirical
literature varies greatly in terms of both approach and countries coverage. The McKinnon-
Shaw hypothesis literally spawned hundreds of such empirical studies across many different
contexts, Countries and time periods. The empirical literature, in general, suggest that
financial liberalisation, investment, savings and real interest leads to economic growth.
Laeven (2003) in a recent study finds evidence for the hypothesis that financial liberalisation
reduces financial constraints of firms. His study is on information from 13 developing
Countries. Similarly, positive effects of financial liberalisation and reduction in financial
constraint are found among others, by Koo and Shin (2004) for Korea, Harris, Schiantarelli
and Siregar (1994) for Indonesia ,Guncavdi, Bleaney and McKay (1998) for Turkey Gelos
and Werner (2002) for Mexico. At the same time, however, studies by Jaramillo,
Schiantarelli and Weiss (1996) on Ecuador Hermes and Lensink (2005) find much less
supportive evidence for the positive effect of financial liberalisation on reducing financial
constraints. All studies mentioned here use firm level panel data.
Other studies have used cross-country panel data. Nazmi (2005) uses data for five Latin
America Countries and finds evidence that deregulation of financial markets increases
30
investment and growth. Other cross –countries analysis are less positive about the effect of
liberalisation. Bonfiglioli (2005), using information for 93 Countries, shows that financial
liberalisation only affect capital accumulation. Bandiera et-al. (2000) looks at the impact of
financial liberalisation on savings based on information from eight developing countries over
a 25- year period. The savings rate actually fails rather than increase, after financial
liberalisation.
Leaven (2003) finds evidence that liberalisation improves the efficiency of stock markets.
Since it increases the liquidity of these markets. Moreover, foreign banks entry improves the
efficiency of domestic banks. Both of these effects in turn help to increase economic growth.
2.4 Interest Rate Liberalization on Economic Growth
The gist of McKinnon-Shaw is that interest rate liberalization promotes savings and
investment and ultimately leads to increase in economic growth. They argue that real interest
rates influence economic growth through effect on savings and investment. Lanye and
Saracoglu (1983) using a simple aggregate production function framework shows that interest
rate liberalization can alter the rate through three main channels as
i. Increase in investment resulting from the increase savings rate.
ii. Improvement in the financial intermediation
iii. Improvement in the efficiency of capital stock
Thus, the endogenous growth literature implies that a well functioning financial system may
have positive effect on growth through investment. A well developed financial system may
lead to an improved ability assess investment project for sustainable economic performance
Hansson and Jonung (1997) but underdeveloped financial system can make countries more
crisis-prone (Byagwati 1998 and Calvo et-al, 1993).
Since the model of McKinnon (1973) and Shaw (1973) introduced financial development as a
process and strategy to achievin faster economic growth. They claim that liberalisation from
restrictions such as interest rate ceiling, high reserve requirement and selective credit
programmes, facilitate economic development. They argue that higher interest rate resulting
from interest rate liberalisation induce household to increase savings and stimulate financial
intermediation, thereby, increasing the supply of credit to the private sector. This in turn will
31
stimulate investment and economic growth. In addition, positive real interest rate leads to
more efficient credit allocation which provides an additional impact on growth. Most studies
that have sought to examine empirically the relationship between interest rate liberalisation
and economic growth have done so by examining the components of the transmission
mechanism through which mechanism will growth be affected? This research focused on the
linkage between real interest rates and savings, between the availability of credit and
investment and between the real interest and the productivity of investment. Arestis (2005)
provided yet another financial liberalisation development which is related to the emergence
of the “new growth” theory (i.e., the endogenous growth model).
According to Arestis (2005) this development incorporate the role of financial system within
the frame work of new growth theory, with financial intermediation considered as an
endogenous process. A two-way casual relationship between the financial intermediation and
growth is thought to exist. The growth process encouraged higher participation in the
financial markets, thereby, facilitating the establishment and promotion of financial
intermediaries. This latter enables a more efficient allocation of fund for investment project,
which promote investment itself and enhance growth (greenwood and Jovanovic 1990).
Furthermore, in such models, financial development can affect growth not only by raising the
saving rate but also by raising the amount of savings channelled to investment and /or raising
social marginal productivity of capital. With few exceptions (for example, Easterly 2001 the
endogenous growth literature view government intervention in the system as distotionary and
predicts that it has a negative effect on the equilibrium in growth rate. Increasing taxes on
financial intermediaries is seen as equivalent to taxes on investment activity, which lowers
the equilibrium growth rate. Imposing credit ceilings reduces individual incentives to invest
in innovative activity, which retards the growth of the economy (King and Levine 1993b).
While some show that savings is responsive to changes in the rate of interest (Boskin 1978
and Fry, 1978) .The conventional explanation of this is that an increase in the rate of interest
will generate offsetting substitution and income effects. Nonetheless several studies have
found a positive and significant relationship between real deposit rate and the rate of
economic growth. (Lanyi and Saracoglu 1883, Celb, 1989, and World Bank 2001). These
studies also suggest that average ratio and incremental out-put capital ratio tend to be higher
in a countries with positive real interest rates.
32
On the basis of this cross section analysis, King and Levine (1993a) also claim to have found
evidence of a positive relationship between interest rate liberalisation and economic growth.
They construe financial indicators-the ratio of broad money to GDP’ the ratio of domestic
assets of domestic bank to these of central banks, the ratio of credit to private to domestic
credit and the ratio of credit to the private sector to DGP-and four growth indicators-the
growth in real GDP per capita, the growth in the capital stock, a proxy for productivity
improvement, and the ratio of domestic investment to GDP. They then go on to discover that
each financial indicator is positively and significantly associated with each growth indicator.
2.5 Interest Rate Liberalisation and Access to Credit and Financial Services.
Interest rate liberalisation process may have some profound effects on the availability of
credit and financial services. The proponents of financial liberalisation argue that it leads to
financial deepening and better access to credit for previously marginalised borrowers and
savers. A rise in the real interest rate increases savings in the bank deposits thereby allowing
banks to supply more loans. Furthermore, the removal of barriers to entry increases
competition among the provider of financial intermediation and banks to extend their services
to traditionally excluded section of the population. This opens up new financial options for
savers and borrowers.
Bayoumi (1993) finds out that saving function of households in the United Kingdom changed
noticeably as a result of widespread domestic financial deregulation. Removal of control on
interest rates and credit along with easing of financial sector entry restriction resulted in
increase financial depth as entry into the financial sector went up and a wider variety of
financial products became available for the majority of the population. It is a long held view
of the orthodoxy of the 1970s and early 1980s that liberalising financial markets would
encourage better savings mobilisation and greater allocative efficiency of capital, as
suggested by McKinnon-Shaw hypothesis (McKinnon 1973 Shaw 1973). Following this
view, there is a wide spread perception based on a fairly large body of scholarly work that
financial liberalisation promotes financial development, and the deepening of the system
subsequently stimulate economic growth. As stressed by Leaven, (1979), financial system
can affect growth through the channel of capital accumulation and the rate of technological
innovation.
33
The former effect is achieved either by altering of savings rate or by reallocating funds
among competing uses of capital. In addition to this deepening of the domestic financial
system, external opening is expected to fill the “savings gap” of a capital-scared country
thanks to the net inflow of capital, or simply provide access to international credit market by
private agents. The disciplinary effect of international capital market is also mentioned as
another factor that contributes to a better allocation of credit. These reform policies expected
to generate financial systems are expected to contribute to capital accumulation mainly
through better access to credit. These reform policies are expected to generate financial
deepening, reduce agency costs and asymmetric information, and eliminating rent seeking. In
turn, these achievements are expected to boost private investment and promote economic
growth in the long run.
2.6 Review of Investment Behaviours in Nigeria Pre and Post Financial
Liberalisation.
According to Busari (2007) at the end of 1960, gross capital formation (GCF) in Nigeria
stood at 258.2 million Naira of which the private sector accounted for 135.2 million naira or
about 52.0 percent of total gross capital formation. By 1963, out of the total GCF of 354
million Naira, the private sector accounted for about 227.2 million or 64.0 percent of total.
Within this period, the role of public sector in economic activities was minimal. This was a
carryover effect of the colonial era where the government concentrated more on governance
and security. According to Busari (2007), real GDP which stood at 1962.6 million Naira in
1960 raised to 2243.o million Naira in 1963 which represents an increase of over 14.0
percent. Over the year, a key factor to the erratic economic performance of the Nigerian
economy had been the behaviour of aggregate investment expenditure. In the early 1970s, the
positive external shocks in the form of increased oil prices generated massive savings and
created investment booms (Ikhide 1994). Investment expenditure when measured in current
prices increased at an annual average rate of 55.0 percent between 1970 and 1975.
Continuing, Busari (2007) observed that in the early 1960s, the government encouraged
domestic banks to give a larger proportion of their credit to indigenous firms. Hitherto, credit
to firms was largely externally financed. It was in 1963 that the government itself expanded
rapidly its domestic credit. Between 1963 and 1966, nominal GDP rose from 2745.8 million
Naira to 3033.8 million Naira (at 1962 factor cost). The evidence shows that the real GDP
grew by about 8.0 percent between 1960 and 1966, the economic and political climates were
34
quite stable, calculable and, hence favourable to growth and capital formation. Between 1967
and 1970, investment and growth data on Nigeria were quite unreliable because of the civil
war. For instance, data reported for 1967-69 did not include the Eastern region of the country.
Reported series for real GDP and GCF all declined. However, the private sector still averaged
over 60 percent in investment expenditure over this period.
According to Omoruyi (1995) many significant events before 1985 affected the economy and
most especially investment spending, none more important than the management of oil
revenues. The positive oil shocks of 1973/74 multiplied the terms of trade more than five
times between 1973-81 (World Bank, 1993).The spending of the oil revenue drove real per
capita income in 1987 prices up from 1,300 Naira in 1972 to nearly 2,900 Naira in 1980 (in
current US$ of the time, from US$ 280 to US$ 1,100).The positive oil shocks generated
massive savings and created investment booms. Investment expenditure when measured in
current prices increased at the annual rate of 53.0 percent between 1970 to 1975 periods but
the highest rate of growth was attained between 1974 and 1975 when capital formation
reached a peak growth rate of 74.1 percent within a single year. The oil windfalls of the
1970s changed the sectoral composition of the GCF in favour of the government.
Government increased participation in the economy was based on the belief that the
industrialisation is the engine of economic growth, and Key to transforming the traditional
economy. The view was made possible because government was the major beneficiary of the
windfall.
Since 1974, the public sector had been controlling a higher proportion of GCF. By 1976, the
public sector controlled more than three times the share of private sector. As a share of the
GDP, the private sector contributed less than an average of 3.0 percent in the 1980s. The
contribution even grew worse as the private sector could only contribute a paltry 0.2 percent
of the GDP in 1993 in terms of investment-GDP ratio.
Most of the public sector investment had taken place in the industrial core project (ICP) like
iron and steel plants, fertilizer plants, liquefied Natural Gas (LNG) and other projects like the
earlier and construction had attained a share of 72.7 percent of the GCF with a value of
4976.6 million Naira in 1984.This large shared was explained by the fact that there was the
need for an extensive reconstruction of the facilities damaged by civil war and the
implementation of the highways. This fall in oil revenue between 1980 and 1986 left the
economy with a highly capital intensive production structure that cannot pay for new, higher
35
level of imports, Misallocation of resources in agriculture also included the construction, but
not completion, of huge irrigation dams, which drew capital into agriculture, but produced
few production benefits. In response to these distortion domestic terms of trade, the
government engaged in fertiliser and interest rate subsides. Market interest rates were pegged
below their equilibrium rates. With further collapse in oil prices in 1986, the government
adopted a far reaching economic reform programme which combine exchange rate and trade
policy reform aimed at revitalising the non oil economy with stabilisation policies designed
to restore price stability and balance of payments equilibrium ( Emenuga 1996; Uchendu
1993).Given the increasing share of public capital formation in total GCF, the reform were
designed to emphasize downsizing the public sector and improving the efficiency of public
asset management. Import licenses and the agriculture marketing board were eliminated,
price controls were lifted, and the deregulation of the financial system was initiated. The
restructuring of domestic production and the liberalisation of the incentive regime led to a
resurgence of agriculture and manufacturing, hence, real GDP started an upward journey
again. The average nominal tariff level was lowered from 33 to 23 percent, and the tariff
structure was simplified. Most prices within the economy were decontrolled. The immediate
effect of these reforms was to restore the incentive to export and increase the profitability of
private investment. Remarkable increases were recorded in investment (though largely
public) in the last decade following the inauguration of an enabling environment. For
instance, in 1988, the federal Government issued an industrial policy statement outlying,
among other things, a major liberalisation of the rules governing foreign participation in new
enterprises in Nigeria with up to 100 percent permitted in most manufacturing activities.
Besides, the industrial development coordinating committee (IDCC), an inter-ministerial
body, was set up to become a one-stop approach centre for new venture in order to reduce
delay in receiving approvals for establishing an industry. According to Omoruyi (1995), the
high inflation, high interest rates and persistent depreciation of Naira exchange rate in the last
few years could be described as having constituted serious disincentive to new private
investment and to the attainment of the main goal of financial liberalisation which is to
increase investment funding for real sector of the economy.
2.7 Review of Performance of Nigerian Economy Pre and Post Financial
Liberalisation.
36
As remarked by Ikhide and Alawode (2005) Nigeria did not have a stable macroeconomic
environment before and during the implementation of SAP. The terms of trade deteriorated
for most of the period between 1970 and 1985. The consumer price index (CPI) growth rate
was on the average 17.1 percent between 1980-1985 and though this fell to about 5.0 percent
for 1986 and 1987, it again stated to rise from 1988, peaking at 4.5 percent in 1989. It has
remained consistently high in the 1990s reaching an all time high of 54.7 percent in 1994.
According to Ikhide and Alawode (2005), the current account reported a surplus between
1989-93 after a fairly long period of deficit between 1981- 1988 (there was a moderate
surplus in 1984 and due to the austerity measure embarked upon by the military
administration). Domestic savings as a ratio of GDP, which stood at an average of 27.7
percent between 1970 and 1981, started to fall in 1981. Between 1981 and 1986, it stood at
13.8 percent. The investment ratio has followed the same pattern although reporting slightly
lower figure. Fiscal deficit has been chronic and is financed almost exclusively by borrowing
from the banking system.
Moreover, the performance of major monetary and financial ratio did not show any
appreciable improvement during the period under review. For example, total loan and
advances measured as a ratio of GDP decline from 25.6 percent in 1986 to 14.3 percent in
1990. The aggregate domestic credit to GDP ratio which peaked at 50.3 percent in 1986 had
halved at 24.5 percent in 1993 with credit to government commanding a larger proportion.
Credit to the domestic economy (net) grew by 13.4 percent as at end of December 2009 but
was lower than the indicative benchmark of 51.4 percent for the year. Moreover, credit to the
private sector declined by 4.1 percent as at end of 2009. Net credit to the Federal Government
rose by 25.9 percent in 2009 compared with 22.2 percent at the end of 2008.Overall, the
Federal Government remained a net creditor to the banking system in 2009 as in previous
year.
Again the financial deepening index of MS2/GDP moved from 35.9 in 1986 down to 24.2 in
1992 and increased to 29.7 by 1994. This declined further to 15.3 by 1997 before rising to
32.0 by 2004.The aggregate moved down to 18.0 by 2005 and up again to 29.7 by 2007. The
trend above clearly shows that the financial deepening index did not experience any dramatic
change during a positive effect on financial deepening in Nigeria.
Theoretically, it is expected that a high level of financial deepening should sustain and
provide basis for moderate lending rates in any economy. Curiously, the prime lending rates
37
had remained very high. The major reason for this according to Nzotta (2004) includes
technical insolvency and presence of weak banks, the underdeveloped nature of the financial
system. The lack of interest elasticity, unresponsiveness of the rates to changes in business
cycle and the huge fiscal deficit by the sector over the years. The ratio of currency outside
banks to money supply progressively declined between 1997 and 2009. The ratio moved from
30.4 in 1979 down to 15.2 in 2007. This shows a higher level of banking habit in the country.
The decline had been more pronounced between 2005 and 2007 following the increased use
of Automated Teller Machine (ATMs) and plastic money in the country.
It is evident that there is relatively a low level of deepening of the financial market in Nigeria
during the period under review. Ikhide and Alawode (2005) remarked that much of the
difficulty in achieving the objectives of SAP and its major component- financial liberalisation
resulted largely from the failure to achieve fiscal balance and the consequent reliance on
borrowing from the Central Bank to finance the fiscal deficits. This adversely affected the
foreign exchange, money and goods and negated the expected role of markets in allocating
resources efficiently. The extent to which open market operation in government bill can help
to successfully manage the excess liquidity in the system which is created by government
borrowing from the Central Bank is one that should be of some interest given the enormity of
this problem in the attainment of stabilization goals in the economy.
2.8 Interest Rate Changes and Distribution of Income
The financial liberalisation thesis does not pay much attention to distributional effects of
changes in interest rates. As a result, the contributions initiated on this issue have been rather
small both theoretical and quantitative. Fry (1995) surveys the limited work that have been
conducted on this issue, to conclude that “financial liberalisation and freeing of credit
markets improves income distribution and decreases industrial concentration, due to widened
access to finance and decreased degree of credit market segmentation. This benefits small
firm because it avoids subsidising priority sector, which leads to market segmentation, an
obvious characteristics of financial repression.
Household, Government and Financial Sectors. The extent to which the household sector is
affected by interest changes depends crucially on the size of their debt/asset ratio. The higher
the ratio , the more adversely the household is affected from an increase in the rate of
interest rate. The wealthy receive a larger proportion of their income from interest payments
38
but then, can also maintain a larger debt/asset too. Similar redisbutional effect of increase in
interest rate applies in the case of government sector. To the extent that their debt/asset ratio
incorporate a substantial of foreign debt. Global increase in interest rate can have serious
redistributional effect across countries. This analysis clearly corroborates Keynes’s (1973)
argument that increase in interest enhance the degree of income inequality substantially. The
inequality suggest that monetary policy that aims to sustain high level of interest rate entails a
certain degree of high level of moral responsibility about it .This has been argued in the case
of developing economies where in the addition to redistributional issues; there is also in many
cases, the awkward problem of external debt which implies redistributional effect across
countries. It is also the case that with financial liberalisation, higher income groups are in a
better position than lower income groups. This analysis cannot be exaggerated Arestis and
Demetriades (1995). It is also this reason that we would support interest rate policies that
aims at a stable and permanent low level of interest rate.
2.8.1 Interest Rate Liberalisation and Poverty Channel of Influence
The proponents have argued that interest rate liberalisation mobilises savings and allocates
capital to more productive uses. Both of which help to increase the amount of physical capital
and its productivity. Interest rate liberalisation therefore increases economic growth which
reduces poverty. Fry (1995) when surveying the limited work on this issue concludes that
financial repression and ensuing credit rationing worsen income distribution and increases
industrial concentration (p.205). By implication, then, interest rate liberalisation and the
ensuing freeing of credit markets improve increase income distribution and poverty.
Nonetheless, one would expect that economic and institutional changes brought about by
financial liberalisation package to have a more complex effect on the living condition of the
poor than merely through the presumed growth channel and the simplistic summarised by
Fry, (1995).
Broadly, there are two ways in which economic growth can benefit the poor Klasen (2001).
First, there are direct benefit in which economic growth favours the sectors and regions
where the poor exist and the factors of production that the poor own. There are also indirect
benefit that operates through redistributive policies, especially taxes, transfer and government
spending. Economics growth can provide opportunities for redistributing the gain from
growth. Growth can generate the fiscal resources to expand investments in the assets of the
poor or to expand transfers and safety nets for the poor. The second channel proposed in
39
Arestis and Caner (2004) concentrates on the possible changes in poverty caused by better
access to credit and financial services that financial liberalisation is expected to yield
A liberalisation program increases the financial resources available to the previously
disadvantaged sectors and that poverty problem is lack of consumption smoothening
mechanism, there is room for interest liberalisation to help to alleviate poverty. The main
conclusion reached in Arestic and Caner (2004) is that there is still no clear understanding of
the mechanisms underlying the way moving from financial repression to a liberalised regime
influences different segment of the population and, in particular, the poor. A liberalisation
policies without taking any measure to protect the initially disadvantaged groups of the
population from potential losses can worsen the living condition of these groups
Empirical evidence on the relationship between economic growth and poverty has one clear
message: as countries get richer, on average the incidence of income poverty fails.
Furthermore, the poor in developing countries share in the gain from aggregate expansion and
in the losses from aggregate concentration (Ravallion 2001, World Bank 2000 Beck, et-al,
2007) Although in general, growth reduces poverty, Some attempts to measure the effects of
interest rate liberalisation on poverty econometrically have been based on the assumption that
there is only an indirect effect via growth, i.e., the trickle-down effect (Jalilian and
Kirkpatrick 2002). A noteworthy study that attempts to link the financial liberalisation and
poverty econometrically in a direct way is the one by Honohan (2004). It concludes that “A
ten percentage point (increase) in the ratio of the private to GDP should (even in the mean
income level) reduce poverty ratio by 2.5 to 3 percentage points” (p.10).
2.8.2 Interest Rate Deregulation and the Monetary Transmition- Mechanism
Prior to the commencement of the economic liberalisation programme, direct control of
monitory management was adopted by Central Bank of Nigeria. Like other LDCs. The
motive for this is not far- fetched. Most of them are rooted in the market failure paradigm.
There was need to channel cheap credit towards the sector in the economy that believed to be
at the forefront of development. At independence, it was felt that the existing financial
institution could not adequately support the process of industrialisation and agricultural
modernisation that was needed to moved the economy into the forefront of development.
Existing financial institution were foreign firms owned and local farmers and entrepreneurs
had difficulties borrowing from them. The informal financial sector provided the loan they
40
were capable of at high interest rates. There were few sources of equity or long term finance
to long term borrowers. On this part, creditors actually demonstrated reluctant to provide long
term funds for investment for a number of reasons. Investment was considered risky,
production was in new sector and used technological unfamiliar to the work force. Both
suspect as natural calamity and fluctuating commodity prices could affect the incomes of
farmers and hence their ability to repay loans. Add to this uncertainty in government policies,
volatile inflation, government borrowing which crowded firms out of the financial markets,
uncertainty about borrower’s prospect and it is obvious why creditors will not be willing to
provide long-term funds under such circumstances ( Ikhide and Alawode 2005).
The way monetary policy is conducted has a direct impact on the financial sector. After the
full liberalisation of the interest and elimination of credit ceilings, the monetary policy stance
has been changed from direct to indirect .Under the indirect control on the price or interest as
well as on the volume of the loan on the commercial banks. Market behaviour is aligned
through the use of indirect monetary policy instruments such as bank rate, cash reserve
requirement and open market operations. The reform of the institutional context of monetary
policy implementation primarily involved increase independence from the central bank and a
switch from direct instruments of monetary control (e.g. interest rate controls, bank-by-bank,
credit ceiling, statutory liquidity ratios, statutory liquidity ratios, directed credits bank-by-
bank rediscount quotas ) to indirect instruments (e.g., reserve requirement, rediscount and
Lombard window, public sector deposits, credit auctions, primary and secondary market sales
of bills, foreign exchange swaps and outright sales and purchases) .
The main idea here is for central banks to stimulate the growth of money market and money
market instruments with a view to enhancing market-orientedness policy environment. In
general terms, this would imply the central bank to cease direct controls with a view to
controlling the path of broad money aggregate and move towards controlling from its own
balance sheet through market-oriented instruments. Most notably open market operations .No
doubt this alters monetary policy implementation substantially. Free interest rates rapidly
reduce reserve requirements and eliminate directed credit schemes while stabilising the price
level, say in the context of a strong disinflation
2.8.3 Interest Rate Liberalisation and Financial Deepening
41
Hermes and Lensink (2005) find that when financial markets are liberalised, they become
more active in introducing new financial instruments and reducing overhead cost by
improving bank and risk management. Greenwood and Jovanovic (1990) introduce a model
that show that financial intermediaries can identify investment and profitable projects better
than individuals which itself leads to higher returns and promote growth. Robinson (1952),
Lucas (1988) and Stern (1989) argue that interest rate liberalisation is the reason behind
increase of fund in the markets, which helps to improve the functioning of financial system
and leads to financial deepening. Financial deepening helps financial intermediaries to
channel their funds to the best projects. This is also expected to lead to an improvement in
quality, quantity and efficiency of financial intermediary services as argued by Ang (2008).
Positive real interest rates resulting from financial liberalisation is supposed to lead to
financial deepening (or higher level of intermediation).
2.8.4 Interest Rate Liberalisation and Bank Credit Growth
In developing countries, interest rate liberalisation often changes significantly the sectoral
allocation of credit, typically, the shares of service sector, consumer loans and property.
Related credit tends to increase at the expense of industry. Atiyas and Hanson (1994) found
evidence that in Korea, credit flows moved from light industrial manufacturing to service
utilities and construction after deregulation had occurred. While McKnnon (1973)
highlighted that with financial liberalisation that aims at increase in interest, came a general
surge in bank lending and greater banking exposure to the real estate sector.
2.8.5 Interest Rate Liberalization and Domestic Financial System Efficiency.
The responsibility of credit market in terms of increasing their size after liberalisation is not
the only way that financial activities can be affected by liberalisation. In addition, as pointed
by Galindo, Schiantarelli and Weiss (2001) liberalisation can also increase the allocative
efficiency of credit as well as reduces agency cost in the security market. Beyond
contributing to development in the financial system, liberalisation has some impact on growth
presumably; such impact can be through the improvement in the efficiency of credit
allocation. Even if system reached full liberalisation, the impact of liberalisation on domestic
credit market growth can be null if rules and institution that support creditor right are not put
in place. Instead of lending to financial institution via deposit, potential investor engaged in
relatively low yielding direct investment. Because of low level of interest rates, borrowers
42
would favour capital intensive projects. Finally, the pool of potential borrowers is dominated
by entrepreneurs who posses low yielding projects. Umoh (1995) argues that capital
formation frame work occurs within the financial system where financial institution performs
the intermediation functions. Moreover, financial system reforms are motivated by the desire
to improve the efficiency and stability of the financial structure. In most cases, such reforms
aim to ensuring that market forces perform greater roles in the allocation of resources.
Umoh (1995) further identifies the objectives of financial reforms as improvement in the
efficiency of resource allocation through the market systems. In addition to the
aforementioned, there should be a greater domestic savings mobilisation for investment and
growth using market-determined interest rates. Financial reforms are based on laying a
foundation for sustainable non-inflationary or minimal inflationary growth.
In a similar analogy, Demetriades and Luintal (1996), Fry (1997), King and Levine (1993),
Omole and Falokun (1999). Ikhide and Alawode (2001), Levine (1997),Claessens and
Klingebiel (2001) among other financial researchers agree that financial repression inhabits
financial deepening by depressing real rates of interest. Demetriades and Liuintel (1996)
argue that deficiency of financial savings is associated with rationing of credit in favour of
priority sectors in developing countries.
The basic functions of a financial system are Firstly, to provide an efficient payment
mechanism for the whole economy and secondly, intermediating between lenders and
borrowers .These basic functions is the domain of the banking institution. Banks together
with the other financial intermediaries play a major role in facilitating the overall functioning
of the economy. In almost all developing economies like Nigeria, banks are the major
suppliers of credit to finance productive investments and other debt financed activities. For
most banks, including Nigerian banks, margin is the main sources of their profit (Cheah
1994; Memmel 2008). Prior to the introduction of Structural Adjustment Programme (SAP),
in Nigeria in 1986, the Nigeria financial sector was characterised by rigid exchange and
interest rate controls, mandatory sectoral allocation of banks credit and quantitative ceiling in
bank’s credit to the private sector, all of which engendered distortions and inefficiencies that
resulted to low investment. Funds were inadequate, the Nigerian currency was overvalued
and the monetary and credit aggregate moved rather sluggishly that the economy was
engulfed with a general lull Okpara (2010).
43
In a fully liberalised environment, competition should reduced spreads and enhanced banks
performance and efficiency. With reference to the intermediation function, this means
narrowing the margin between what they can pay for financial resources (the deposit rate)
and what they earn on them (the loan rate). The difference between the deposit rate and the
loan rate is referred to as the interest spread (or the interest margin) .The ability of the banks
to reduce their lending margin without crippling the system’s financial health is an indicator
of the efficiency of the banking system (Lin 1990). Hence, interest rate margin can be
regarded as an indicator of the banks efficiency in financial intermediation.
2.8.6 Interest Rate Liberalisation and Reduction in Financial Constraints.
From the theoretical perspective, financing constraints may arise if there are financial
frictions. Under the Modigliani and Miller theorem (1958) without capital structure, a firm’s
capital is irrelevant to its uses. In this case, internal and external funds are perfect substitutes
and firm’s investment decision is independence from its financing decision. With financial
friction, however, the cost of internal and external finance will diverge. Financial friction
leads to a link between the cost of external financing and firm investment. Within the neo-
classical investment model, with financial frictions, an increase in net worth independent of
changes in investment opportunity leads to greater investment for firm facing high financial
frictions and has no effect on investment for firm facing negligible financial frictions. Firms
facing high financial friction are thus expected to face financing constraints.
The main objectives of financial deregulation that aims at increasing interest rates should be
to increase the supply and improve the allocation of funds for investment. McKinnon (1973)
and Shaw (1973) study the effect of interest rate a key component of financial reform on the
supply of house hold savings. They argue that interest rate liberalisation is likely to leads to
an increase in interest rates, as higher interest rate on deposit is likely to encourage savings.
This study leads to two major conclusions. Firstly they assert that implementing market
doctrine and fair competition in a free financial market will increase interest on deposit which
leads to higher savings rates this in turn increase the amount of funds available for
investment. It also causes an increase in capital inflows to support increase in the amount of
44
funds available needed for investment and growth .Competition places force on fund supply
especially on lending rates demanded for loans.
This will reduce the cost of capital, and will increase investment and economic growth.
Given the prevalent interest rates restriction, informal financial markets emerge and
intensified as an escape route from the highly repressed exchange and interest rates that
dominated formal financial sector. In the strict sense, however, there are no organised
association worth mentioning, for example the ISUSU market in Nigeria. The informal
financial groups were themselves segmented and included activities like savings and credit.
They are subjected to highly covariant risk given that their members are engaged in similar
economic activities and are in the same income brackets. The groups are highly localised and
intended on the basis of personal knowledge.
Consequently, the ability of these groups to expand and effectively execute financial
intermediaries is constrained. The informal savings and credit arrangement ranges from local
money lenders and rotating credit cooperation to community savings and loans association.
The resources mobilised tends to benefit only the members of the group. The access to credit
is relatively higher in the IMM than in the FFS. In the IMM, credit risk is minimised because
the market are localised and have a comparative advantage in information collection at
reasonable cost than the FFS. It would appear then that the thriving informal sector is only
exploiting the structural deficiencies that are prevalent in the formal financial system.
A large premium prevails in the rates of these two financial markets which may reflect the
high cost of intermediation predomination in the informal market. Inefficient intermediation
and imperfect arbitrage between the formal and informal sectors. Such a situation could also
support that the informal sector may not be an effective conduct through which large-scale
but long-term savings can be mobilised. In brief, the informal sector only expands in order to
supplement the overall intermediation in the economy following the financial repression that
prevailed. The restricted access to credit in the informal system appears to be one major
reasons why the informal money market have continue to be attractive,
2.8.7 Financial Liberalisation and Interest Rate Risk Management.
The experiences of many countries that have undertaking the interest rate liberalisation show
that the transition process from rigid interest to a system of more flexible and market-
determined rates can be traumatic if not properly managed. African banks avoid the risks
45
inherent in maturity-transformation by reverting to a pure brokerage function. In developed
countries, sophisticated techniques have been created through which the risk inherent in the
maturity transition can be minimised, such as duration analysis. In this regards, a bank’s
exposure to changes in interest rates is describes as its duration gap. It can be measured either
(1) in terms of its impact on the market value of the bank (2) The net interest income a bank
earns over a specified time period and (3) The impact of changes in interest rates on the
amount of a bank ‘capital. The objective of interest rate management in Nigeria include the
moderation of inflation, reduction of pressure on balance of payment position stability in
exchange rate, stimulation of savings and investment and promotion of macroeconomic and
financial sector stability.
2.8.8 Behaviour of Bank Lending and Deposit Rates after the Reform
After the reform periods, deposit and lending rates were allowed to be determined by market
forces and the interest rates actually increased as envisaged. The nominal lending and deposit
rates rose from 9.5% to 12% in 1986 to 14% to 19.2% respectively in 1987 as a result of
interest rate reform. By 1990, the deposit and lending rates have risen to 18.8% and 27.7%
respectively. The government intervened in 1991 and pegged the deposit and lending rates to
14 and 21% respectively. Unfortunately, between 1977 and 2006, the lending rate did not
show a significant trend in reduction with an average of 22% despite the declining deposit
rate averaging 5%.
2.9 Determinant of Economic Growth in Nigeria;
2.9.1 Gross Domestic Product Per Capita Growth Rate (GDPPCGR)
GDP per capita is often considered as an indicator of a country’s standard of living. In
economics theory, GDP per capita is related to national account. “Gross” means that the GDP
measures production regardless of the various uses to which the production can be put.
Production can be used for immediate consumption, for investment in new fixed assets.
“Domestic” means that GDP measures production that takes place within the country’s
46
borders. GDP per capita can be calculated as GDP/Total population. To get the growth rate=
GDP Per Capita t2-GPD per Capita t1.Where t2=base year and t1= current year.
GDPt1
In an expenditure-method equation, the export minus import terms is necessary in order to nil
out expenditure on things not produced in the country “imports” and index to a large extent
determine the real GDP per capita.
GDP growth rate indicates how much a country’s production has increased or decreased
compared to the previous year. While gross domestic product is the value of goods and
services produced in a country over a specified period. It equals the total income of everyone
in the economy, and the total expenditure on the economy’s output of goods and services .
Real GDP growth rate for year n = E (real GDP in year n) – (real GDP in year n-1) / (real
GDP in year n-1). Another thing that it may be desirable to account for is population growth.
If a country’s GDP doubles over a certain period, but its population tripled, the increased in
GDP may not mean that the standard of living increased for the country’s residence. The
average person in the country is producing less than he was before.
2.9.2 ii Credit to Private Sector
This is a primary indicator of financial sector development. This is equal to the value of
credit by financial intermediary to the private sector divided by GDP. This measure includes
all the credit issued to the private sector by all the financial institutions in addition to the
traditional depository money banks. This measure isolate credit issued to the private sector as
opposed to credits issued to government and public enterprises and concentrates on credits
issued by intermediaries other than central banks. Credit to private sector basically gives the
degree of financial intermediation and measures the financial resources provided to the
private sector through, loans, purchase of non-equity securities, and trade credits.
2.9.3 iii Savings Rate .Savings rate refers to the percentage of gross domestic product (GDP)
savings by household in a country. As the household savings is the main source of
government borrowing to fund public services. The national savings rate varies among
countries and is influence by various factors such as retirement age, borrowing constraints,
income distribution, demography and welfare states. For example, a country that pays
retirement pensions generally from tax levied on people of working age will have lower
47
national savings rate compared to country where people have save to personally provide for
their retirement. In theory, aggregate savings is a function of real GDP per capita, real deposit
rate and average population density per bank branch (Shrestha and Chowdhury 2007). This
has been included to capture bank’s branch proliferation. Savings provides the resources for
investment in physical capital hence, it is an importance determinant of economic growth.
Increased savings are also beneficial in reducing foreign dependence and insulating the
economy from external shocks (McKinnon, 1973).
2.9.4 Overview of Interest Rate Liberalization Policy in Nigeria.
The structural adjustment programme (SAP) was adopted in 1986 against the background of
international oil market crashes and the resultant deteriorating economic condition in the
country. It was design to achieve fiscal balance and balance of payment viability by altering
and restructuring the production and consumption patterns of the economy, eliminating price
distortion reducing the heavy dependence on crude oil exports and consumer goods imports,
enhancing the non – oil export base and achieving sustainable growth. Other aims were to
rationalise the growth potentials of the private sector. The main strategies of this programme
were the deregulation of external trade and payments arrangements, the adoption of a market
determined exchange rate for the naira, Substantial reduction on complex and administrative
controls and more reliance on market forces as a major determinant of economic activities
(Adebiyi 2005). With the switch to indirect instrument came the change of the goal of
monetary policy to the reduction of inflation. This change was prompted by the belief that
monetary policy has only temporal effects on real variables and long run effects on prices.
Empirical evidence over the years has shown that low inflation is a pre requisite for economic
growth. Given the high levels of inflation in the country at the time especially after the
implementation of the reform policy, there was need to bring inflation under control before a
sustained path to growth could be attained. Using the implementation policy in line with the
IMF financial programming framework, control of growth in money supply becomes a very
important in the fight against rampant inflation. Targets were set each year for growth in
broad money and inflation rate. The implementation of the policy has involved monitoring
the deviation of growth in money from target. Controlling the growth in money supply
proved to be a difficult task especially in the years just after financial deregulation (Adebiyi
2005 )
48
2.9.5 Trend Analysis of Interest Rates Policies and Economic Growth Rates in
Nigeria.
Interest rates policy in Nigeria is discussed along the dividing period of pre- reform (1970-
1986) and post – reform (1987 - 2006) periods. In order to compare the structure of interest
rates between the sub- periods, the paper combined deposit rate, lending rate and minimum
rediscount rate to see how the correlation among there three variables process set
The pre- reform period (1970-1986) is considered as a financial repression and was
characterised by a policies of direct credits, interest rate ceiling and restrictive monetary
Policy. Expansion was the rule rather than the exception (Soyibo and Olayiwola 2000).
Although, the interest rate policy instruments remained fixed, there were marginal increases.
For instance, the deposit rate was increased from 3% in 1975 to 9.5% in 1986 while the
lending rate rose from 9 to 12% within the same period.
For the reform period, deposit and lending rates were allowed to be determined by the market
forces and the interest rates actually increased as envisaged. The normal deposit and lending
rates rose from 9.5% to 12% in 1986 and 14% and 19.2% respectively in 1987 as a result of
the interest rate reform in Nigeria. By 1990, the deposit and lending rates have risen from
18.8% and 27.7% respectively. Unfortunately, between 1997 and 2006, the lending rate did
not show a significant trend in reduction, with an average of 22% despites the declining
deposit rate averaging 5%.
The implication of the ‘‘tunnel- like’’ structure of interest rate and low deposit rates are that
savings will likely to be discourage and this negatively affect fund mobilization by the banks.
This will in turn affects the amount of funds available for investment with retarded influence
on economic growth. On the other hand, the high lending rate is detrimental to production,
investment and hence economic growth. As Soyibo and Olayiwola (2000) observe, borrowers
with worthwhile investments may be discouraged from seeking loans and the quantity of the
mix of applicants could change adversely. Again, high lending interest rates could create
moral hazard where loan seekers borrow to escape bankruptcy rather than invest or finance
working capital. Generally, the behaviour of the interest rate structure is such that there is a
wide spread margin between deposit and lending rates which may encourage speculative
financial transaction. The real GDP growth rate which was 5.7% in 1990 increased to 11% in
1974 but become mostly negative during the pre reform period. Until 1985, when a positive
49
real GDP growth rate of 9.4% was achieved interestingly, this show that the introduction of
reform in 1987 brought a positive change in real GDP growth rate to a peak of 10% in 1988
with real GDP growth rate of 4.9% in 2006. The country requires an average annual GDP
growth rate of 7% in order to meet the United Nation’s Millennium Development Goals
(MDGS) of halving poverty by 2015.
Although, the GDP growth rate has been very low thereafter, it has maintained a positive
stand since the introduction of interest rate liberalization. Thus, it is clear that implementing
interest rate liberalization has contributed to economic growth in Nigeria.
2.9.6 The Impact of Interest Rate Liberalization on the Financial System.
The impact of interest rate liberalisation particularly a rise in deposit rate alters the
composition of assets in the financial portfolio of households. Savings are likely to be held in
favour of financial flows (FFs) assets to the extent that financial flows are necessary
ingredients in economic growth. The non household / non-bank private sector ought to
benefit through increased access to bank credit. Liberalization also improves the net worth of
borrowers who have likely been paying high premiums to obtain credit in the informal sector.
The ability of the formal financial system to accommodates these potential clients therefore
become an issue in the short run since failure to do so might result in lower investment and
excess liquidity in the banking system.
Interest rate liberalization requires pre- condition that fiscal discipline on the government
prevails. Accommodation of fiscal deficits by the banking system therefore ought to be
reduced in order to crowd in the private sector. To this end, we shall investigate whether this
was the experience in Nigeria following interest rate liberalization.
There is however, a critical issue at hand. Most rural households in Nigeria keep their wealth
in the form of livestock (which in addition is a sign of social standing) land and commodity
stocks (inflationary hedges). Have the real deposit rates in Nigeria has risen enough to
encourage rural households to substitute their wealth for time deposit? Or how informed are
they about banking? These are some of the fundamentals that cannot captured quantitatively
and are only captured in the wealth portfolios of households
2.9.7 A Brief Review of Interest Rate Reforms in Nigeria
50
For more than two decades after independence, the Nigerian financial system was repressed,
as evidenced by ceiling on interest rates and credit expansion, selective credit policies, high
reserve requirements, and on entry into the banking industry. This situation inhibited the
functioning of the financial system and especially constrained its ability to mobilize savings
and facilitate productive investment (Ikhide and Alawode, 2005). In January 1987, a partial
deregulation of interest was attempted, but by August, all rates became market determined.
The CBN adopted the system of fixing only its minimum rediscount rate to indicate the desire
direction of interest rate changes. Interest rate liberalisation was aimed at enhancing the
ability of banks to charge market-based loan rates and also guarantee the efficient allocation
of scarce resources. In 1989, banks were to be negotiated between banks and their customers.
Interest rates were deregulated in stages. According to Oresotu (1995) retail lending rates
were reviewed upwards and the minimum rediscount rate (MRR) was also allowed to change.
As observed by Aziakpano and Babatokpe - Obasi (2003), the MRR was fixed at 15 percent
in December 1987. Subsequent to the initial measure of interest rate deregulation, the spread
between deposit and lending rates began to widen for example, in 1989, average saving rate
was at 16.4 percent while prime –lending rate was at 26.8 percent representing a spread of
about 10.4 percent. The monetary authorities intervened by limiting the spread between
deposit and lending rates.
Following the prolong use of the direct controls, the pervasive government intervention in the
financial system and the resultant stifling of competition and resources misallocation, a
comprehensive economic restruction programme was embarked upon in 1986 with increased
reliance on market forces. In line with this orientation, financial sector reform were initiated
to enhanced competition, reduce distortion in investment decision and evolve a sound and
more efficient financial system. The reforms which focused on structural changes, monetary
policy, interest rate administration and foreign exchange management, encompass both
financial market liberalisation and institutional building in the financial sector. The broad
objective of the financial sector reforms include:
Removal of control on interest rates to increase the level of savings and improve
allocation efficiency,
Elimination of non- price rationing of credit to reduce miss-directed credit and increase
competition.
51
Adoption of indirect monetary management in the place of the imposition of credit ceiling
on individual banks.
Enhancing of institutional structure and supervision.
Strengthening the money and capital market through policy changes and distress
resolution measure.
Improving the linkage between formal and informal sectors
The reform of the financial structure led to changes in Nigerian‘s financial sector in an
attempt to foster competition. Strengthen the supervisory role of the regulatory authorities
and streamline the relationship between public and financial sector of the economy. To foster
competition, new financial institutions were given licenses. For example Oresotu (1992)
notes that 79 new banks with 824 nationwide branches began operation between 1986 and
1991.Odife (1988) contains a more comprehensive account of the motivation and design of
the structural adjustment programme in Nigeria.
The power of the central bank of Nigeria was enlarged via two new decrees: The central bank
of Nigeria decrees no 24 and the bank and other financial institution decree no 25 (BOFID).
The new law facilitated the introduction of new financial instruments for the purpose of
enhancing the ability of the CBN to manage the monetary system. Moreover, interest rate
deregulation de-emphasised the use of credit allocation and control reserve requirement
(Nnanna 2001).
2.9.8 The Impact of Interest Rate Liberalization on Nigerian Economy
Free interest rate rapidly reduce reserve requirement and eliminate directed credit schemes
while stabilizing the price level, say in the context of a strong disinflation programme.
Investment and growth would pick up either because of a “complimentarily effect” that is the
need to accumulate funds to undertake lumpy investment would make money and capital
complementary (rather than substitutes) or because of a “credit availability effect” that is,
increase saving in to the banking system would increase investments through enhanced credit
availability Agonor and Monties, (1996 pp 474). In essence, to achieve all this real interest
rates must be kept positive by way of freeing interest rates while stabilizing the price level.
Positive real interest rates resulting from financial liberalization is supposed to lead to
financial deepening (or a higher level of intermediation) as demand for money, defines
52
savings and term deposit as well as checking accounts and currency increase as a proportion
of National income, which in turn is supposed to promote economic growth.
2.10 Empirical Review
2.10.1 McKinnon– Shaw Analysis.
The McKinnon and Shaw models discuss the way in which repressed finance takes the form
of interest rate ceiling and subsequent compound economic instability. They argued that in a
developing economy, distortions of financial prices such as interest rates reduces the real rate
of growth and size of the financial system in relation to the non financial systems. Increase in
the real deposit rate therefore increases savings and rations out low- yielding investment
since these are no longer profitable at higher interest rates. Thus, they postulate that the real
rate of deposit to the savers is the key to higher levels of investments and greater investment
efficiency. This also leads to financial deepening since it encourages the growth of financial
assets and liabilities.
As institutional development is encouraged within the financial system, individual borrowers
and savers are tempted to switch from the informal to the formal financial sector thereby
integrating the two sectors. There is also an attraction to shift from inflationary hedges and
foreign currency denominated financial assets to acquisition of domestic formal financial
assets which eventually increases the range of financial instruments available. This
subsequently transforms the narrow inefficient and fragmented financial system into a larger,
complete and efficient capital market which in turn encourages economic development. They
postulate interdependences to exist among savings, investment and long-run economic
growth with the key link being the deposit rate.
Augmenting the potential contribution of real positive interest rate in mobilizing saving,
requires the reforms of the financial sector. The arguments in favour of such reforms are well
discussed in (Pagano 1993). We sum them up as the capability of the formal financial system
to increase the share of total financial savings intermediated to investment and to improve the
average return in investment for the projects they financed.
The positive link between higher finance, savings and growth depend largely on how the
transformation of resources into investment takes place within financial sector. The foregoing
arguments in favour of raising the real deposit rate have been subjected to a lot of criticism
53
with the major ones coming from the neo-structuralist e.g. Buffie (1984) argue that the key
institutional characteristics of the Informal Money Market (IMM) were missing from the
arguments. Hence, if the IMM are to be taken into account, the effect of interest rate
liberalization would largely depend on the degree of substitution between the assets in
household portfolio that is between lending to the IMM and lending to the banking sector via
deposit holding foreign currency denominated financial assets and inflationary hedges.
Against this background, the structuralists argue that their analysis of the developing
economies provides a much more appropriate description of the institutional characteristics of
the financial structure than the McKinnon- Shaw analysis (see for example, Van.Wijnberger
1983).
The argument is that effects of interest rate liberalization is crucially dependent on whether
bank deposit are close substitutes for unproductive assets (such as cash gold, foreign bonds
and community stocks) or close substitutes for unproductive assets such as IMM. The extent
that interest rate liberalization attracts resources from the IMM, have contractionary effects
on the output in the economy .The persistent loss in output will depend on the intermediary
rate of commercial banks with the influx of time deposit mobilised through increased deposit
rates. If credit ceiling prevent the passing through of these deposits into bank loans, than
substantial and persistent loss in output and decreased in investment will dominate. In case
formal financial intermediaries are inefficient, the intermediation of these mobilised
resources will be further weakened.
Raising the real deposit rate results in higher loan rates and the two major problems
associated with higher loan rates are summarised in (Stieglitz and Weiss 1981). They argue
that higher loan rates increases the adverse incentive problem given that firms are tempted to
switch to more risky projects. Thus, the banking system may find that raising the loan rate
increases the overall riskiness of their portfolio of assets. The second problem is the adverse
selection effect. The loan market is distinct from all other types of commodities since it is
characterised by heterogeneity of products with varying probabilities of default. The lender is
unable to ascertain in prior which borrower is going to default hence using the loan rate as a
screening device might attract bad risks. In such a situation, borrowers who are willing to pay
high loan rates are likely to be less concerned about the prospects of repayment.
2.10.2 The Post- Keynesians Theory.
54
The post-Keynesians e.g. Buckett and Dutt (1991) argue that interest rate liberalization
through raising the real deposit rate may lead to a fall in output and growth and subsequently
to financial instability. A rise in the real deposit rate increases the supply of deposit and
hence, loans. With the marginal propensity to save increasing, consequently, aggregate
demand and supply will fall, with profit and investment also falling in the long run. If
accelerator affects of investment are also introduced, then the fall in output and growth will
be greater.
From the foregoing, it would appear that simultaneous role of interest rates in raising both
savings and investment remains at best controversial. Economist theory suggest a positive
correlation among savings, investment and a raising real deposit rate particular in the
immediate post financial repression era. Umo (1981) and Ballasa (1989) are of the opinion
that low incomes, high and skewed patterns of consumption, and positive real deposit rates
may not necessarily raise the savings level in African countries. Other factors such as shallow
financial depth, culture, education and huge government budget deficits limit the extent to
which domestic savings can be raised.
Despite such shortcomings, it is still believe that positive real interest rates tend to make
savers prefer financial to non financial forms of savings. This tends to suggest a positive
correlation between the overall financial depth and growth in GDP. Accordingly, a policy
that would help to maximize growth via increased availability of credit to finance investment.
This implies that positive real interest rates by promoting financial deepening help to raise the
level o f investment hence domestic capital formation.
[
2.10.3 Proponent of McKinnon-Shaw hypothesis.
The main proponents of McKinnon-Shaw hypothesis are Kapur, (1976), Mathiewson ,(1980),
and Among others, Kapur, (1977) for example examines the impact of interest rate
liberalization in the economy as characterised by underutilised fixed capital and surplus
labour. He argues that the real supply of credit affect capital accumulation through its role as
the sole source of finance for working capital requirement. The real credit supply is
determined by the demand for broad money which itself is a function of inflation and the
deposit rate of interest. A rise in the deposit rate works more indirectly on the supply of
credits and hence the supply of banks deposits increase. This allows banks to give more
55
credits. Mathiewson, (1980) model is similar to that of Kapur, (1976) with the only difference
being that bank credits finances are not only net additions to working capital but also to fixed
assets. In both Kapur, (1976) and Mathiewson, (1980) Increased growth is the result of an
increased in the quantity of investment. While in McKinnon and Shaw’s, growth is as a result
of increase in the quality and quantity of investment (Gibson and Tsakalotos 1994).
2.10.4 Summary of Review of Related Literature
According to McKinnon (1973) and Shaw (1973) interest rate liberalisation spurs economic
growth through the efficiency of the financial sector. They are of the view that increase in
savings, increase in financial deepening and increase in investment are some of the long-term
impact of interest rate liberalisation policies. As McKinnon and Shaw‘s hypothesis is made
up of two unique relationship, i.e., the interest rate effect on savings and the effect on
investment via savings .Several studies have assessed the impact of interest rate liberalisation
on savings, investment and growth in the economy, McKinnon (1973) and Shaw (1973) put
forth that liberalisation leads to a more efficient allocation of resources, higher levels of
investment and economic growth. They argue that higher interest rates brought about by
liberalisation would stimulate savings which in turn would lead to a higher level of
investment and economic growth.
Theoretical study by Acemoglu, et-al (2005) and Aghion, et-al (2005a, b) showed that
financial development that aims at increase in real interest may relieve risky innovator from
credit constraints thereby fostering growth through technological change. Degregorio and
Guidotti (1995) suggest that the relationship between real interest rate and economic growth
might resemble an inverted U-curve. Very low (and negative) real interest rates tend to cause
financial disintermediation and hence to reduce growth. However, the World Bank report
show a positive and significant cross-section relationship between average growth and real
interest rates over the period of 1965-1985. The analysis also indicates that a real deposit rate
has a statistically significant impact on economic growth in Nigeria. Thus, a high deposit rate
of interest encourages savings and economic growth.
According to the financial liberalisation theory, financial repression through interest rate
ceiling keeps interest rate low and this discourages savings with the consequence that the
quality of investment is stifled. The quality of investment is also low because the projects that
will be undertaking under the regime of repression will have a low rate of return. With
56
financial liberalisation, interest rate deregulation means that interest rate will raise thereby
increasing savings and also investment. The increased investment results in the rationing out
of low yielding projects and the subsequent undertaking of high-yielding projects,
The quality of investment rises and this will ultimately increase economic growth. McKinnon
and Shaw therefore advocated the liberalisation of such repressed financial systems so as to
promote economic growth.
57
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CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Research Design
The research design adopted in this research is ex-post factor design. Since this research is
focus on interest rate liberalization on selected macro-economic indicators, it relied on
historical data. The data used was generated from CBN Statistical Bulletin between 1987-
2013.The Ordinary Least Square (OLS) was used to test the three hypotheses formulated in
the study.The rationale for employing this technique was based on the argument that the use
of OLS regression is a linear function that gives a specific and accurate result corresponding
to the true value while other techniques tend to give generalized result which may limit the
likely generated results (Onwumere 2009).These were bound to test approach that was
developed to investigate the effect of interest rate liberalization on savings, investment and
64
ultimately economic growth in an attempt to establish a relationship between interest rate
liberalization these macroeconomic variables
3.2 Nature and Sources of Data.
The issue of data is at the very centre of research. The nature of data for any study depends
entirely on the objectives of the research and the type of research undertaking (Onwumere
2005). Since this study focuses on interest rate liberalization on macro-economic indicators
from (1987-2013) which is a period of 27 years, secondary data was used. The sources of
data include Central Bank of Nigeria’s bulletin and Nigeria Bureau of Statistics. (NBS)
3.3 Population
Population refers to any well defined class of people, organisation, etc that satisfies a study,
objective or sphere of interest. Ikeagwu (1998) advised that it is important in any study to
first and foremost, determine the group of persons or things to study. In line with this the
population of this study includes GDP from 1987-2013, Savings rate from 1987-2013 and
investment from 1987-2013
3.4 Description of Research Variable
Variables in this study comprised of both dependent and independent variables.
3.4.1 Dependent Variables
i. Total Financial Savings: (proxy by savings) is the savings on the part of the government
and on the part of private individual less total consumption. Maintenance of economic
stability depends on whether total demands on the credit and capital market can be
substantially limited to the supply of savings. Savings rate refers to the percentage increase or
decrease of savings to gross domestic product (GDP) by household in a country. As the
household savings is the main source of government borrowing to fund public services. The
national savings rate varies among countries and is influence by various factors such as
retirement age, borrowing constraints, income distribution, demography and welfare states.
For example, a country that pays retirement pensions generally from tax levied on people of
65
working age will have lower national savings rate compared to country where people have
save to personally provide for their retirement. In theory, aggregate savings is a function of
real GDP per capita, real deposit rate and average population density per bank branch
Shrestha and Chowdhury (2007). This has been included to capture bank’s branch
proliferation. Savings provides the resources for investment in physical capital hence, it is an
importance determinant of economic growth. Increased savings are also beneficial in
reducing foreign dependence and insulating the economy from external shocks (McKinnon,
1988a). Following Shrestha and Chowdhury (2007) real GDP per capita, real deposit rate and
average population density per bank branch are the determinant of total financial savings. In
line with Shrestha and Chowdhury (2007), this research will adopt total financial savings as a
proxy for savings.
ii. Investment: (proxy by the volume of credit to the private sector). This is the ratio of total
credit extended to the private sector by the financial intermediaries to the GDP. It refers to
financial resources provided to the private sector such as through loans, purchase of non
equity securities and other account receivables that establish a claim for repayment.These
claims exclude credit to pudlic enterprises, government and government egencies. Credit to
private sector is expressed as a function of savings, real lending rate, real refinance rate and
real cost of borrowing from the central bank. It measures the levels of activities and
efficiency of the financial intermediation. An increase in the financial resources, especially
credit to private sector is expected to increase private sector efficiency and production and
consequently, lead to economic growth.Micknnon (1988b)
The domestic credit to private sector (% of GDP) in Nigeria was last reported at 21.93%
according to World Bank report published in 2001. Theoretically, Investment decisions are
based on marginal benefit versus marginal cost. It is determined by the expected rate of return
on the investment and the interest rate that must be paid to the lender of financial resources.
An investment is therefore made if the expected return is higher than the interest rate. This
would suggest that there is an inverse relationship between the interest rate on lending and
quantity or level of investment demanded Jorgenson (1963). Credit to private sector is
expressed as a function of savings, real lending rate, real refinance rate and real borrowing
from the Central Bank. This suggests that investment is determined by savings and the real
returns available on other assets.
66
Following Shrestha and Chowdhury (2007), total financial savings, real bank lending rate,
real refinance rate and real borrowing from the central bank are the determinant of credit to
private sector. In line with the work of Shrestha and Chowdhury (2007), this research will
adopt volume of credit to private sector as proxy for investment.
Gross Domestic Product Per Capita (GDPPC)
GDP per capita (proxies by the productivity of the Nigeria Economy) is often considered as
an indicator of a country’s standard of living. Under economics theory, GDP per capita is
related to National account. Real GDP is a macroeconomics measure of the value of the
economic output adjusted for price change (i.e inflation or deflation) i.e, nominal GDP-
inflation. GDP growth rate measures the increase in the value of goods and services produced
by an economy. Economic growth rate is calculated in real terms or inflation adjusted terms
“Gross” means that the GDP measures production regardless of the various uses to which the
production can be put Production can be used for immediate consumption or for investment
in new fixed assets. “Domestic” means that GDP measures production that takes place with
in the country’s borders. GDP Per Capita can be calculated as GDP/Total population. To get
the growth rate = GDPt2 – GDPt1 Where t1=base year and t2= current year.
GDPt1
In an expenditure-method equation, the export minus import term is necessary in order to null
out expenditure on things not produced in the country “imports” and index to a large extent
determine the real GDP Per Capita. Following Albu (2006), Levine (1993) and Yougbara
(2006) this research will adopt Gross Domestic Product per Capita as proxy for productivity
of the Nigeria Economy.
3.4.2 Independent Variable
Interest Rate: Interest rate is the cost of borrowing money, or conversely the income earned
from lending money. Interest rates are expressed as percentage of the principal. Similarly, an
institution such as bank pays interest as the percentage of the total amount deposited. Interest
rate is not only charged on the loans but also on the mortgages, credit cards and unpaid bill.
The real interest rate which measured the purchasing power of interest receipts is calculated
67
by adjusting the nominal rate charged to take inflation in to account. If inflation in the
economy has been 10% in the year, then the N110 in the account at the end of the year buys
the same amount as the N100 did a year ago. The real interest rate in this case is zero.
Real Interest = 1 + Nominal Interest
1 + Interest rate
Interest rate is one of the economy’s single strongest influences. They facilitate the formation
of capital and have a profound effect on everything from individual investment decision to
job creation, monetary policy and corporate profit. Interest rate is the main determinant of
investment on a macroeconomic scale. The current thought is that if interest increases across
the board, then investment decreases causing a fall in national income. However, the Austrian
school of economics sees higher rates as leading to greater investment in order to earn the
interest to pay the depositors. Higher rates encourage more savings and thus more investment
and more jobs to increase production and profits. A Government institution, usually a Central
Bank can lend money to financial institution to influence their rates as the main tool of
monetary policy. Usually, Central Bank lends money at a higher rate to generate most of their
profit by altering interest rates. The government institution is able to affect the interest rates
faced by who wants to borrow money for economic investment. Investment changes rapidly
in response to change in interest rates and total output. In line with fisher (1930), this research
will adopt real lending rate and real refinance rate as a proxy for interest rate
3.5 Technique for Analysis
As specified in the model, the study used the Ordinary Least Square (OLS) Regression
estimation to determine the impact of interest rate liberalization on the selected macro-economic
variables in Nigeria. The Ordinary Least Square (OLS) was used to test the three hypotheses
formulated in the study. The rationale for employing this technique was based on the
argument that the use of OLS regression is a linear function that gives a specific and accurate
result corresponding to the true value while other techniques tend to give generalized result
which may limit the likely generated results (Onwumere, 2005).These was bound to test
approach that was developed to investigate the effect of interest rate liberalization on savings,
investment and ultimately on economic growth. Total financial savings (TFS) was used as a
proxy for savings, credit to private sector as a proxy for investment and productivity of the
Nigerian economy as a proxy for Gross Domestic Product per capita respectively (Shresth
68
and Chowdhury, 2007). The first model was used to test the impact of interest rate
liberalisation on savings. The second model was used to test the impact of interest rate
liberalisation on investment. The third model was used to test the impact of interest rate
liberalisation on economic growth.
3.6 Model Specification
For hypothesis one which states that interest rate liberalisation does not have positive and
significant impact on savings.
TFSt=αo+β1RLRt + β 2RDRt +ut ....................................................................................... (i)
Where = TFSt =Total Financing Savings, RLRt = Real Lending Rate of Interest, RDRt=
Real Deposit Rate of Interest, αo =Constant parameter, ẞ= Regression Coefficient and ut=
Error Term
For hypothesis two which states that interest rate liberalisation does not have positive and
significant impact on investment.
CPSt=αo+ β 1RLRt + β 2RDRt +ut..................................................................................................................(ii)
Where = CPSt = Credit to Private Sector, RLRt = Real Lending Rate of Interest, RDRt= Real
Deposit Rate of Interest, αo =Constant parameter, ẞ= Regression Coefficient and ut= error
term.
For hypothesis three which states that interest rate liberalizing interest rate does not positively
and significantly impact on economic growth in Nigeria.
RGDPt = αo+ β 1RLRt + β 2RDRt +ut..........................................................................................................(iii)
Where = RGDPt = Real GDP, RLRt = Real Lending Rate of Interest, RDRt= Real Deposit
Rate of Interest, αo =Constant parameter, ẞ= Regression Coefficient and ut= error term.
REFERENCES
69
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70
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS.
4.1 Data Presentation
Data used in this study are those deemed necessary for analyses of the various objectives
formulated in this study. The interest rate liberalisation used in this study was decomposed
into real lending rate and real deposit rate. While macroeconomic variables employed are
total financial savings, investment proxies by credit to private sector and GDP per capita
rowth rate. The annualized values of these set of data are as shown in the table below:
Table 4.1: Annualized Values of Interest Rate Liberalisation, Macroeconomic Variables
and Financial Deepening 1987 – 2013.
YEAR RLR% NLR-I
RDR% NDR-I
NLR% RLR+I
NDR% RLR+I
GDP per Capital Prices
TFS Nm
CPS Nm
I GDPGR Prices GDPt2 – GDPt1 GDPt1
1987 7.81 4.31 17.51 14.01 2.325617 18.68 21.08 9.7 0.2922
71
1988 -44.71 -46.71 16.49 14.49 3.0799 23.25 27.33 61.2 0.3243
1989 -17.87 -28.27 26.83 16.43 4.343979 23.8 30.4 44.7 0.4104
1990 21.89 15.19 25.49 18.79 5.219351 29.65 33.55 3.6 0.2002
1991 -2.95 -8.67 20.05 14.33 5.857305 37.74 41.35 23.0 0.1222
1992 -19 -32.7 29.80 15.50 9.144346 55.12 58.12 48.8 0.5611
1993 -42.94 -44.6 18.36 16.70 11.07848 85.03 127.12 61.3 0.2115
1994 -55.76 -63.26 21.04 13.54 13.84912 110.97 143.42 76.8 0.2580
1995 -31.41 -38.98 20.06 12.60 27.99575 108.49 180 51.6 1.0215
1996 5.42 -2.62 19.72 11.68 37.78782 134.5 238.6 14.3 0.7079
1997 3.33 -5.42 13.53 4.78 38.2067 177.65 316.21 10.2 0.0111
1998 6.38 -6.42 18.28 5.48 35.40985 200.07 351.96 11.9 0.3733
1999 21.1 5.11 21.30 5.31 40.41957 277.67 431.17 0.2 0.1415
2000 3.45 -9.24 17.95 5.26 56.43889 385.19 530.37 14.5 1.3963
2001 1.8 -11 18.30 5.50 56.24463 488.05 764.96 16.5 0.0034
2002 12.68 -8.02 24.88 4.18 60.40882 592.09 930.49 12.2 0.0740
2003 -3.1 -19.7 20.70 4.10 74.76145 655.74 1,096.54 23.8 0.2376
2004 9.17 -5.82 19.17 4.18 83.74911 797.52 1,421.66 10.0 0.1202
2005 6.38 -7.74 17.98 3.86 104.3605 1,316.96 1,838.39 11.6 0.2461
2006 8.71 -5.41 17.21 3.09 129.0516 1,739.64 2,290.62 8.5 0.2366
2007 10.37 -3.02 16.97 3.58 139.7559 2,693.55 3,668.66 8.6 0.0829
2008 0.08 -12.22 15.81 2.88 159.9769 4,118.17 6,920.50 15.1 0.1447
2009 5.06 -11.25 18.96 2.65 158.8855 5,763.51 9,110.86 13.9 0.0062
2010 5.79 -9.59 16.02 2.21 333.6275 5,954.26 10,157.02 11.8 0.9401
2011 5.72 -8.89 16.02 1.41 371.8381 6,531.91 10,660.07 10.3 0.0865
2012 4.79 -10.3 16.79 1.70 403.9869 8,062.90 14,649.28 12.0 0.1928
2013 8.77 -2.42 12.79 5.8 481.8790 8,656.12 15,751.84 8.0 0.2570
Source: Central Bank of Nigeria Statistical Bulletin 2014.
KEY
RLR = Real Lending Rate
RDR = Real Deposite Rate
NLR = Norminal Lending Rate
LDR = Norminal Doposite Rate
I = Inflation
CPS = Credit to Private Sector
72
GDPGR = Gross Domestic Product Growth Rate
data presented in table 4.1 above and fig. 4.1.1 below showed that real lending rate was
7.81% as at 1987 but dropped to negative value of -44.71% and -17.87% in 1988 and 1989
respectively following the high rate of inflation as at that period. Real lending rate augmented
to 21.89% in 1990 but dropped in 1991, 1992, 1993, 1994 and 1995 with respective negative
value of -2.95%, -19%, -42.94%, -55.76%, -31.41% as a result of high inflation rate and other
market factors as at the period. This is in line with observations of Omoruyi (1995), that high
inflation and persistent depreciation of Naira exchange rate in the last few years could be
described as having constituted serious disincentive to new private investment and to the
attainment of the main goal of financial liberalisation which is to increase investment funding
for real sector of the economy.Real lending rate apparentlyrecorded positive value of 5.42%,
3.33%, 6.38%, 21.1%, 3.45%, 1.8% and 12.68% as at 1996, 1997, 1998, 1999, 2000, 2001,
and 2002 respectively. This is an indication of improvement in the economy with drastic
regulation of consumer price index and other policy measures. In 2003 real lending rate
dropped again to -3.1%, the rest of the period revealed drastic improvementsuch as 9.17% in
2004, 6.38% in 2005, 8.17% in 2006, 10.37% in 2007, 0.08% in 2008, 5.06% in 2009, 5.7%
in 2010, 5.72% in 2011, 4.79% in 2012 and 8.77% in 2013. Given the average value of
6.48%, this is an indication of significant improvement and development in the financial
sectors.
Fig. 4.1.1: Graphical Presentation of Real Lending Rate of Interest (RLR) 1987 – 2013
73
Central Bank of Nigeria Statistical Blletin 2014
Evidence in table 4.1 above and fig. 4.1.2 below showed that real deposit rate was at positive
value of 4.31% in 1987 but decreased to negative value of -46.71% in 1988 and -28.27% in
1989 as a result of high rate of inflation. This improved to positive rate of 15.19% in 1990 but
subsequent dropped to maximum of -63.26% and minimum of -2.42% between 1994 and
2013. Apparently, it is expected that a high level of financial deepening should sustain and
provide basis for moderate deposit rates in an economy but high level of inflation and other
decaying factors that hinder efficient intermediation functions contribute to the droped in the
value.Curiously, the inflation rates had remained very high resulting to high market risk.The
major reason for this according to Nzotta (2004) includes technical insolvency and the
underdeveloped nature of the financial system and also lack of interest elasticity,
unresponsiveness of the rates to changes in business cycle and the huge fiscal deficit by the
sector over the years. Real deposit rate recorded a significant rate of 15.19% in 1990 but
dropped significantlyfor the rest of the period with negative value with exception of 1999
with positive value of 5.11%. It is evident that there is relatively a low level of deepening of
the financial market in Nigeria during the period under review
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Fig. 4.1.2: Graphical Presentation of Real Deposit Rate of Interest (RDR) 1987 – 2013
Central Bank of Nigeria Statistical Bulletin 2014
The data as presented in table 4.1 above and fig. 4.1.3 below revealed a continuous increase
in total financial savings with 24.46% increased in 1988 but increase rate in 1989 was not
significant compare to previous year growth rate. In 1990 the growth rate showed 24.58%
improvement indicating high investment opportunity as a motivator to investors’ willingness
to save and 1991 recorded 27.28%. The subsequent years also recorded high significant
growth. Drastic increases were observed from 2005 which can be attributed to Banks
consolidation exercise that strengthen the intermediation functions of commercial Banks and
other specialised financial institutions.
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Fig. 4.1.3: Graphical Presentation of Total Financial Savings (TFS) 1987 – 2013
Central Bank of Nigeria Statistical Bulletin 2014
Like total financial savings recorded above, table 4.1 above showed significant increase in
credit to private sector with indication of upward sloping curve as showed in fig. 4.1.4 below.
This showed percentage increase of 29.65 as at inception date of the period of the study and
37.42 percent as at the end of the period of the study. The chart in fig. 4.1.4 below showed a
flat upward sloping curve from 1987 to 1999, while the subsequent years exhibited higher
upward slope curve. This significant increase growth rate in credit to private sector is
attributed to dividend of democratic government that started as at 1999 till date.
Fig. 4.1.4: Graphical Presentation of Credit to Private Sector (CPS) 1987 – 2013
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Central Bank of Nigeria Statistical Bulletin 2014
GDP per capita the major dependent variable being the major macroeconomic indicator as
presented in table 4.1 above and fig. 4.1.5 below showed the value of 2.33 in 1987, which
remained at increase rate from 1989 to 1997 with respective value of 3.08 and38.21.
Subsequently, this dropped to 35.41 in 1998 and pick up again to 40.42 and 56.44 in 1999
and 2000 respectively, but exhibited decrease rate of 56.24 in 2001. Table 4.1 and fig. 4.1.5
however, revealed that GDP per capita pick up to increasing rate in 2002, 2003, 2004, 2005,
2006, 2007 and 2008 with the value of 60.41, 74.76, 83.75, 104.36, 129.05, 139.76 and
159.98 respectively. This indicator dropped to 158.89 in 2009 but the decrease rate was at
minimal rate compare to increase rate as recorded so far. The subsequent years recorded
upward slope but not drastically as observed from the inception periodof the study such as
333.63, 371.83, 403.99 and 481.88 in 2010, 2011, 2012 and 2013 respectively.
Fig. 4.1.5: Graphical Presentation of GDP per Capita 1987 – 2013
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Central Bank Nigeria Statistical Bulletin 2014
Table 4.2: Descriptive Statistics of the Employed Variables
RLR RDR TFS CPS
GDP_PER_
CAPITA
Mean -2.557037 -13.98741 1816.231 3029.317 105.5438
Median 5.060000 -8.890000 385.1900 530.3700 56.24463
Maximum 21.89000 15.19000 8656.125 15751.84 481.8800
Minimum -55.76000 -63.26000 18.68000 21.08000 2.325617
Std. Dev. 19.80975 17.60255 2725.905 4764.605 134.7057
Skewness -1.410711 -1.171878 1.427528 1.579096 1.622746
Kurtosis 4.020251 3.959388 3.542841 4.108160 4.445494
Jarque-Bera 10.12650 7.215324 9.501778 12.60247 14.20050
Probability 0.006325 0.027115 0.008644 0.001834 0.000825
Sum -69.04000 -377.6600 49038.23 81791.57 2849.684
Sum Sq. Dev. 10203.08 8056.095 1.93E+08 5.90E+08 471786.2
Observations 27 27 27 27 27
Source: Descriptive Statistics Results using E-View 7.0
The presentation of data in table 4.2 revealed the mean, median, maximum, minimum,
standard deviation among other descriptive statistics for the variables employed in the study.
Real lending rate recorded average of -2.56 within the period of study as revealed in table
4.2, while the median observed the value of 5.06. The real lending rate within the period was
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78
highest in 1990 when the real interest rate was 21.89 while the year with least real lending
rate of interest was in the period of 1994 when the real lending rate of interest was at -
55.76%. As indicated by the skewness of real lending rate of interest, there was a negative
skewness indicating that the degree of departure from the mean of the distribution is negative
revealing there was fluctuations in real lending rate of interest within the period of study.
Though the result of Kurtosis which was 4.02> 3 indicated that the degree of peakedness
within the period of study were normally distributed as most of the values were not moving
away from the mean.
Consistent with real lending rate, real deposit rate of interest within the period of study
recorded mean of -13.99while median revealed the value of -8.89% rate of interest. The result
however, as observed in the mean showed that for every N100 deposit -13.99% will be
earned on such deposit after adjusting for inflation but without adjustment for other market
risk. The real deposit within the period observed maximum of 15.19% in 1990 and minimum
of -63.26 in 1994 attributed to high rate of inflation within the period. The indication from the
skewness of real deposit rate of interest showed there is negative skewness which is evidence
that the degree of departure from the mean of the distribution is negative revealing there was
fluctuations in real deposit rate of interest within the period of study. The result of Kurtosis of
3.96 greater than 3 (3.96> 3) indicated that the degree of peakedness within the period of
study were normally distributed as most of the values were not moving away from the mean.
Total financial savings indicated recorded average of 1816.23. This is an indication that for
every Naira earned income during the period of study, average savings was N1816.23 while
the median was N385.19 compares to maximum of N8656.12 as established in 2013 and
minimum of N18.67630 as established.This is an evidence of high variation of total financial
savings in the economy as well as high fluctuation in consumer price index and consumption
rate. As recorded by the skewness of total financial savings, there was a positive skewness of
the total financial savings indicating that the degree of departure from the mean of the
distribution is positive reveal that overall there was a consistent increase in total financial
savings from 1987 to 2013. Apparently the indication by Kurtosis which was 3.54> 3
indicates that the degree of peakedness within the period of this study were normally
distributed as most of the values were moving in the same direction with the mean.
The mean value of credit to private sector within the period of study was N3029.32 while the
median value was N530.37. Credit to private sector was highest in 2013 when the value was
79
N15,751.84 while the year with least quantum value of credit to private sector was in 1987
when the value was N21.08. The results of credit to private sector is an indication of high
increase from the year of the inception of the study to the end of the study as evidently
revealed in table 4.1 and upward slope of the curve in fig. 4.1.4 above. As observed in
skewness of credit to private sector, the positive value as recorded is an indication that the
degree of departure from the mean of the distribution is positive emphasising that the overall
there was a consistent increase in credit to private sector from 1987 to 2013. Though as
indicated by the Kurtosis which was observed as 4.11> 3 indicates the degree of peakedness
within the period of this study were normally distributed as most of the value were not
moving away from the mean.
GDP per capita as indicated in table 4.2 above had mean of 105.54 within the period of study
while median value was 56.24. The growth rate was highest in 2013 when GDP per capita
grew at 481.88 from the preceding year while the least growth rate was observed in 1987
when GDP per capita recorded 2.33. As indicated by the skewness of GDP per capita, there
was a positive skewness of GDP per capita indicating that the degress of departure from the
mean of the distribution is positive which shows that overall there as a consistent increase in
GDP per capita from 1987 to 2013. However the value as indicated by the Kurtosis was 4.45
which is greater than 3 (4.45> 3) showed that the degree of peakedness within the period of
this study were normally distributed as most of the value were not moving away from the
mean. It can be deduce from the results so far that rate of growth and development in the
financial sector is not encouraging enough attributed to poor intermediation functions of
banks and other financial institutions as well as untapped financial derivatives in the financial
markets. The results revealed in table 4.2 above were statistically significant with p-value less
than 5% level of significant.
4.2.1 Test of Hypothesis One
The hypothesis is restated in null and alternate forms as follows
Ho: Interest rate liberalization does not have positive and significant impact on savings in
Nigeria.
H1: Interest rate liberalization have positive and significant impact on savings in Nigeria.
80
Table 4.3.1. Regression results of Hypothesis One
Dependent Variable: TFS
Method: Least Squares
Date: 08/13/14 Time: 07:08
Sample: 1 27
Included observations: 27 Variable Coefficient Std. Error t-Statistic Prob. C -229.9630 1606.583 -0.143138 0.8874
RLR 197.1846 115.0521 1.713873 0.0994
RDR -182.3356 129.4785 -1.408230 0.1719 R-squared 0.151719 Mean dependent var 1816.231
Adjusted R-squared 0.081029 S.D. dependent var 2725.905
S.E. of regression 2613.134 Akaike info criterion 18.67893
Sum squared resid 1.64E+08 Schwarz criterion 18.82291
Log likelihood -249.1655 Hannan-Quinn criter. 18.72174
F-statistic 2.146251 Durbin-Watson stat 0.182569
Prob(F-statistic) 0.138829
Source: Regression Analysis Results using E-View 7.0
Note: (1) Regression significant at 5% level of significance.
(2) The Larger the value of t (t > P-value) the stronger the evidence that the coefficient is significant.
(3) The closer the value of R is to one (1), the stronger the agreement.
The above table 4.3.1 revealed intercept (constant) of -229.96 indicating that when there is no
change in regressor total financial savings decreased to 229.96 units. The result is statistically
insignificant therein p-value greater than 0.05 level of significant. The coefficient of 197.18
for real lending rate showed that a unit increase in real lending rate resulted to 197.18 units
increase in total financial savings holding other variables constant. The results as revealed is
statistically insignificant therein p-value of 0.099 greater than 0.05 level of significant.
Unlike real lending rate, real deposit rate observed unexpected resulted with coefficient of -
182.34. This implies that 1 unit change in real deposit rate resulted to 182.34units decrease in
total financial savings holding other variables constant. This is statistically insignificant with
p-value of 0.172 greater than 0.05 level of significant. The coefficient of determination
measuring the goodness of fit indicated 0.1517, which implies that 15.17% of variation of
total financial savings was explained by the observed variables while the remaining 84.83%
was explained by the other factors not specified in the model. Adjusted R-Squared revealing
adjusted coefficient of determination showed that the parameter was adjusted to 8.10.
81
Decision Rule
The outcome showed positive and insignificant results using real lending rate as a proxy for
interest rate liberalisation, but negative and insignificant result using real deposit rate as a
measure for interest rate liberalisation. Therefore, we reject alternative hypothesis thereby
accept null hypothesis since the results of the measures of interest rate liberalition are
statistically insignificant. The study thus concludes that interest rate liberalisation have not
significantly impact on savings in Nigeria within the period of study.
4.2.2 Test of Hypothesis Two
The hypothesis is restated in null and alternate forms as follows
H0: Interest rate liberalizing does not have positive and significant impact on investment in
Nigeria.
H1: Interest rate liberalisation have positive and significant impact on investment in Nigeria.
TABLE 4.3.2 Regression results of Hypothesis Two
Dependent Variable: CPS
Method: Least Squares
Date: 10/11/15 Time: 07:10
Sample: 1 27
Included observations: 27 Variable Coefficient Std. Error t-Statistic Prob. C -307.3801 2834.270 -0.108451 0.9145
RLR 323.4845 202.9703 1.593753 0.1241
RDR -297.6863 228.4209 -1.303236 0.2049 R-squared 0.135861 Mean dependent var 3029.317
Adjusted R-squared 0.063849 S.D. dependent var 4764.605
S.E. of regression 4609.989 Akaike info criterion 19.81428
Sum squared resid 5.10E+08 Schwarz criterion 19.95826
Log likelihood -264.4927 Hannan-Quinn criter. 19.85709
F-statistic 1.886650 Durbin-Watson stat 0.186934
Prob(F-statistic) 0.173382
Source: Regression Analysis Results using E-View 7.0
Note: (1) Regression significant at 5% level of significance.
(2) The Larger the value of t (t > P-value) the stronger the evidence that the coefficient is significant.
(3) The closer the value of R is to one (1), the stronger the agreement.
82
The intercept of -307.38 recorded in table 4.3.2 implies that at zero change in explanatory
variables credit to private sector decrease to 307.38 within the period of study. The evidence
is statistically insignificant therein p-value of 0.91greater than 0.05 level of significant. The
coefficient of 323.48 for real lending rate of interest revealed expected result in respect to
direction. Evidently, 1 unit increase in real lending rate attributed to 323.48 units increase in
credit to private sector within the period of study holding other variables constant. The result
is statistically insignificantly therein p-value of 0.12 greater than 0.05 level of significant.
Unlike real lending rate, real deposit rate recorded unexpected result in both direction and
magnitude as evidently revealed with coefficient of -297.69. This implies that a unit change
in real deposit rate holding other variables constant resulted to 297.69 decreases in credit to
private sector within the period of study. The outcome is statistically insignificant with p-
value of 0.20 greater than 0.05 level of significant.
The coefficient of determination indicated as R-Squared in table 4.3.2 revealed the goodness
of fit of the specified model is 0.1359, which implies that 13.59% of the variation in the
dependent variable (credit to private sector) was explained by the model while the remaining
86.41% is attributed to other factors not specified in the adopted model. Adjusted R-Squared
indicating adjusted coefficient of determination of the adopted model revealed as 6.38%
within the period of study.
Decision Rule.
The evidence from the results showed that real lending rate of interest had positive but
insignificant impact on credit to private sector, while real deposit rate of interest had negative
and insignificant impact on credit to private sector. We reject alternative hypothesis and
accept null hypothesis, since the outcome of the two measures of interest rate liberalisation
are statistically insignificant.The study thereby concludes that interest rate liberalisation have
positive and insignificant impact on investment in Nigeria within the period of study.
Test of Hypothesis Three
The hypothesis is restated in null and alternate forms as follows,
H0: Interest rate liberalisation does not have positive and significant impact on economic
growth in Nigeria.
83
H1: Interest rate liberalizing has positive and significant impact on economic
growth in Nigeria.
TABLE 4.3.3 Regression Results of Hypothesis Three
Dependent Variable: GDP_PER_CAPITA
Method: Least Squares
Date: 10/11/15 Time: 07:12
Sample: 1 27
Included observations: 27 Variable Coefficient Std. Error t-Statistic Prob. C 3.025678 78.30206 0.038641 0.9695
RLR 10.12073 5.607438 1.804876 0.0837
RDR -9.179488 6.310559 -1.454624 0.1587 R-squared 0.174856 Mean dependent var 105.5438
Adjusted R-squared 0.106094 S.D. dependent var 134.7057
S.E. of regression 127.3596 Akaike info criterion 12.63635
Sum squared resid 389291.4 Schwarz criterion 12.78033
Log likelihood -167.5907 Hannan-Quinn criter. 12.67916
F-statistic 2.542920 Durbin-Watson stat 0.284073
Prob(F-statistic) 0.099622
Source: Regression Analysis Results using E-View 7.0
Note: (1) Regression significant at 5% level of significance.
(2) The Larger the value of t (t > P-value) the stronger the evidence that the coefficient is significant.
(3) The closer the value of R is to one (1), the stronger the agreement.
In table 4.3.3, the constant of -3.03 showed that where there was no change in regressor GDP
per capita decreased to 3.03. The result is still statistically insignificant therein p-value of
0.97 greater than 0.05 level of significant. The coefficient of real lending rate revealed
expected result in terms of direction with value of 10.12, which implies that 1 time increase
in real lending rate led to 10.12 times increased in GDP per capita holding other variables
constant. Evidently the result is statistically insignificant therein p-value of 0.08 greater than
0.05 level of significant. Real deposit rate revealed coefficient of -9.18, therefore a unit
change in real deposit rate resulted to 9.18decreases in GDP per capita holding other
84
variables constant. The result recorded insignificant result therein p-value of 0.16greater than
0.05 level of significant. The coefficient of determination (R-Squared = 0.1748) measuring
the goodness of the fit or regression line showed that 17.48% change in GDP per capita was
explained by the specified model, while the remaining 82.32% variation in GDP per capita
was as a result of other factors not included in the specified model. Adjusting the value of R-
Squared the result revealed 10.61% variation in the dependent variable (economic growth in
Nigeria).
Decision Rule
The results revealed that impact of real lending rate of interest had positive but insignificant
impact on economic growth in Nigeria, while real deposit rate of interest had negative and
insignificant impact oneconomic growth in Nigeria. We accept null hypothesis and reject
alternative hypothesis, since the results of the adopted measures of interest rate liberation are
statistically insignificant.The study thereby concludes that interest rate liberalisation has not
contributed significantly to the economic growth in Nigeria within the period of study.
4.3 Discussion of Research Findings
Interest rate liberalisation can be viewed as a policy response, encompassing a package of
measures to remove all undesirable state imposed constraints on the free working of the
financial market. Bandiera et-al (1999) notes that the wave of liberalization in many
developing countries in the 80s was characterised by more attention given to market forces in
allocating credit through market determined interest rate.The real interest rate, the rate
adjusted for anticipated inflation is thus vital for the supply and demand of financial
resources. McKinnon(1973) and Shaw (1973) assert that higher real interest rate also help to
direct the funds to the most productive enterprises and facilitate technological innovation
leading to economic growth.It maintains that by paying a rate of interest on financial assets
that is significantly above the marginal efficiency of investment in existing technologies, one
can induce some entrepreneurs to disinvest from inferior processes to improved technology
and increase scale in other high yielding enterprises. The release of resources from inferior
means of production is as important as generating net new savings. Savings provides the
resources for investment in physical capital. The higher saving rates would finance a higher
level of investment, leading to growth. Therefore, according to this view, we should expect to
85
see higher savings rates as well as higher levels of investment and growth following interest
rate liberalisation.
The results from the hypotheses tested are used to compare with the objectives of this study
in this section. The p-values for the coefficients (ẞ) demonstrate if the regression is
significantly linear or not. At the confidence level of 5%, or 0.05, p-value must be less than
that to make the coefficient significant. The results of the three tested hypotheses are
presented in table 4.4 below. Evidently, there exists strong indication from the results which
was in line to the achievement of the objectives originally established for the study.
Table 4.4: Summary of Regression Result
Var. Coeff. t-Stat Stand.
Error Prob. R2
Adjusted
R2
F-
Stat. DW
Hyp. 1 RLR 197.185 1.714 115.052 0.099
0.152 0.081 2.146 0.183 RDR -182.336 -1.408 129.479 0.172
Hyp. 2 RLR 323.485 1.594 202.970 0.124
0.136 0.064 1.887 0.187 RDR -297.686 -1.303 228.421 0.205
Hyp. 3 RLR 10.121 1.805 5.607 0.084
0.175 0.106 2.543 0.284 RDR -9.179 -1.455 6.311 0.159
Source: Regression Analysis Results using E-View 7.0
Note: (1) Regression significant at 5% level of significance.
(2) The Larger the value of t (t > P-value) the stronger the evidence that the coefficient is significant.
(3) The closer the value of R is to one (1), the stronger the agreement.
86
4.3.1 Objective One: Investigate the effect of interest rate liberalization on savings
The regression estimate as revealed in table 4.4 showed the impact of interest rate
liberalisation on total financial savings employing real lending rate of interest as the
independent variable was found positive but insignificant, established that this objective has
been attained. The result of real deposit rate of interest adopted also as the independent
variable established inconsistent result as it was found to be negative and insignificant.
Apparently, considering the two measures of interest rate liberalisation, the results from this
hypothesis evidently provide that interest liberalisation has not significantly contribute to the
level of savings in Nigeria within the period of study. The outcome is consistent with the
findings of Bandiera et-al. (2000) studying the impact of financial liberalisation on savings
based on information from eight developing countries over a 25- year period. The savings
rate actually falls rather than increase, after financial liberalisation.
The finding is not in line with the view of McKinnon(1973) and Shaw (1973) that higher
interest rate resulting from interest rate liberalisation induce household to increase savings
and stimulate financial intermediation. In the same view, the removal of barriers to entry has
not induced competition among the provider of financial intermediation and motivate banks
to extend their services to traditionally excluded section of the population. This opens up new
financial options for savers and borrowers. Another study by Mcknnion (1973) using a simple
aggregate production function framework shows that interest rate liberalization can alter the
rate through three main channels as: increase in investment resulting from the increase
savings rate; improvement in the financial intermediation; and improvement in the efficiency
of capital stock. Bayoumi (1993) finds out that saving function of households in the United
Kingdom changed noticeably as a result of widespread domestic financial deregulation.
Removal of control on interest rates and credit along with easing of financial sector entry
restriction resulted in increase financial depth as entry into the financial sector went up and a
wider variety of financial products became available for the majority of the population.
4.3.2 Objective Two: Investigate the effect of interest rate liberalization on investment.
The regression model adopted for measuring impact of interest rate liberalisation on
investment, showed that liberalised rate of interest have not significantly impact on
investment using real lending rate of interest and real deposit rate as proxies for interest rate
87
liberalisation. This established that this objective has been reached.(Lanyi and Saracoglu
1983) The insignificant outcome as established in the tested hypothesis is not in consonance
with the findings of investigating interest rate and investment determinants in Nigeria.Other
studies have used cross-country panel data. For example, Nazmi (2005) uses data for five
Latin America Countries and finds evidence that deregulation of financial markets increases
investment and growth Bayoumi (1993) finds out that saving function of households in the
United Kingdom changed noticeably as a result of widespread domestic financial
deregulation. Removal of control on interest rates and credit along with easing of financial
sector entry restriction resulted in increase financial depth as entry into the financial sector
went up and a wider variety of financial products became available for the majority of the
population.According Okpara (2004) to it is evident that there is relatively a low level of
deepening of the financial market in Nigeria.
4.3.3 Objective Three: Investigate the Effect of Interest Rate Liberalization on
Economic Growth.
The results showed that impact of interest rate liberalisation on economic growth in Nigeria
was positive but statistically insignificant, established that this objective has been achieved.
The findings evidently did not proof significantly that there is correlation between interest
rate liberalisation and economic growth in Nigeria within the period of study. Accordingly,
this portrays counter argument that interest rate liberalisation policy would help to maximize
growth via increased availability of credit to finance investment. This implies that it is not
statistically proofed that positive real interest rates by promoting financial deepening help to
raise the level o f investment hence domestic capital formation. Tornell, Westerman, and
Martinez (2004) present evidence for the idea that financial liberalisation in the short term
leads to financial fragility, but in the longer term contributes positively to economic growth.
Several studies have found significant relationship between real deposit rate and the rate of
economic growth (Lanyi and Saracoglu1883; World Bank 2001) among others. These
studies also suggest that average ratio and incremental out-put capital ratio tend to be higher
in countries with positive real interest rates.
On the basis of this cross section analysis, King and Levine (1993) also claim to have found
evidence of a positive relationship between interest rate liberalisation and economic growth.
They construe financial indicators-the ratio of broad money to GDP, the ratio of domestic
assets of domestic bank to these of central banks, the ratio of credit to private to domestic
88
credit and the ratio of credit to the private sector to DGP-and four growth indicators-the
growth in real GDP per capita, the growth in the capital stock, a proxy for productivity
improvement, and the ratio of domestic investment to GDP. They then go on to discover that
each financial indicator is positively and significantly associated with each growth indicator.
Degregorio and Guidotti (1995) cited in Oosterban el-al, (2000) suggest that the relationship
between real interest rate and economic growth might resemble an inverted U-curve. Very
low (and negative) real interest rates tend to cause financial disintermediation and hence to
reduce growth. However, the World Bank report shows a positive and significant cross
section relationship between average growth and real interest rates over the period of 1965-
1985.
89
REFERENCES
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90
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION
5.1 Summary of Findings
Interest rate liberalisation can be viewed as a policy response, encompassing a package of
measures to remove all undesirable state imposed constraints on the free working of the
financial market. Bandiera et-al (2000) notes that the wave of liberalization in many
developing countries in the 1980’s was characterised by more attention given to market
forces in allocating credit through market determined interest rate.The real interest rate, the
rate adjusted for anticipated inflation is thus vital for the supply and demand of financial
resources. McKinnon(1973) and Shaw (1973) assert that higher real interest rate also help to
direct the funds to the most productive enterprises and facilitate technological innovation
leading to economic growth.It maintains that by paying a rate of interest on final assets that is
significantly above the marginal efficiency of investment in existing technologies, one can
induce some entrepreneurs to disinvest from inferior processes to improved technology and
increase scale in other high yielding enterprises. The release of resources from inferior means
of production is as important as generating net new savings. Savings provides the resources
for investment in physical capital. The higher saving rates would finance a higher level of
investment, leading to growth. Therefore, according to this view, we should expect to see
higher savings rates as well as higher levels of investment and growth following interest rate
liberalisation.
The Principal Findings from this study are as follows
1. Interest rate liberalisation has insignificantly contributed to the level of savings in Nigeria
within the period under review.
2. Interest rate liberalisation has insignificantly contributed to the level of investment in
Nigeria within the period of study.
3 Interest rate liberalisation has insignificantly contributed to economic growth in Nigeria
within the period under review.
91
5.2 Conclusion
This research examines the relationship between interest rate liberalisation policies on
selected macro economic indicators in Nigeria. Employing ex-post factor research design
and using GDP per capita as growth indicator, credit to private sector as a proxy for
inveatment and total financial savings as a proxy for savings. This research established a
negative relationship between Interest rate Liberalisation on these macroeconomic indicators
under review which is represented by an index calculated using Ordinary Least Squares. This
supports the numerous past studies which have reported their various findings on the negative
effects of interest rate liberalisation on macroeconomic indicators in Nigeria. This research
concludes that interest rate liberalisation polices together with increase in credit to private
sector, increase in savings and increase in gross domestic product per capita have not
significantly contributed to economic growth in Nigeria.
5.3 Recommendations
The policy implication arising from the empirical findings is that interest rate liberalisation
policies has not been supportive to these macroeconomic indicators under review therefor,
more needed to be done by the authorities in Nigeria to realise its full potential . This can be
done by:
1 Increasing financial deepening and removal of bottlenecks in the financial sector
of the economy.
2 By improving the effectiveness of the credit to private sector
3 By adopting stringent accounting standard
4 By adopting proper legal framework to help shape the financial deepening
process.
92
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