University of Nigeria Research Publications

OKPO, Charles. Chinedu

Aut

hor

PG/MBA93/18053

Title

An Econometric Analysis of the Effects of Changing Interest Rate Regime on the

Profitability of Banks in Nigeria

Facu

lty

Business Administration

D

epar

tmen

t

Banking and Finance

Dat

e

September, 1995

Sign

atur

e

C E R T I F I C A T I O N

ADFIT N I STRATI ON I N RANKING AND FINANCE.

TI-ITS I)ISSEIII .ITATION IS AN J9lBODIMEM'T OF O R I G I N 4 L WOlilZ, ADJD J-!AS

NOT DEEN SUBM1:TTED I N PAR1.P O R FOR ANY O'TI-IER DIPLOMA O R DEGREE

OF TTIIS UNIVERSITY.

iii.

T H I S P R O J E C T

D E D I C A T I O N

IS SOLELY 1)EDICATED TO MY PAREIJTS

MR. & MRS A.0. OKYO, MY ELIIEST BROTHt'X, M l i 3i1'AN:; OKIQ

ANU T O MY BROTHERS A N D S I S T E i i ! ; WHORE ~,NCOUiZi\GUll<N'r AND .

SUPPORT I N EIANY WAYS M A D E T t l I S WORK POSSIJ3LE.

iv.

ABSTRACT

I n t e r e s t r a t e has commonly been defined as t h e p r i ce

f o r credi t . Among the various instruments of monetary and

f inanc ia l policy, i n t e r e s t r a t e appem-s t o be t h e most

s ens i t i ve and c r i t i c a l as regards i t s L ~ p mopriate l e v e l -.

~ n d d i r ea t ion i n a developing economy l i k e Nigeria. Recent

year8 i n t e r e s t r a t e s s t ruc tu re which the banks a re mxde t o work

with are bein@ a l t e r e d and these freqrient a1terab;iono a f fec t0

banks' p o o f i t a b i l i t y performance.

An econometric study of the e f f ec t of c h a n g i n ~ i n t e r e s t

r a t e regime on banks' p r o f i e a b i l i t y has been conducted using

t h e ordinary l e a s t square (OLS) method and a general econometric

model. The r e s u l t i n g regression equations were analysed i n

l i n e with establishod economic .apriori c r i t e r i a , s t n t i s t i c a l

t e s t s of s ignif icance, econometric t e s t f o r the presence of

atttooorrelation und the F s t a t i s t i c f o r the hypothesis

test ing.

The r e s u l t of t h i s s tudy showed t j a t banks p r o f i t a b i l i t y

performance i n Nigeria i s s ign i f i can t ly influenced by the

changes i n i n t d r e s t rates .

On t h i s premise, i t i s recomnrended t m t i n t e r e s t r a t e s

need t o be restructured i n Nigeria s o that the gap between

the m i n i m u m lending r a t e and the maximdm lendine; r a t e should

be narrowed. T h i s exist ing gap ~ l l o w s easy and hidden

sh i f t ing of credi t by the banks t o the maximum prime since they

are out t o maximize prof i t , Also a consistent optimal

combination of policy measures fincluding in te res t r a t e s

pol ic ies) i s required t o deal ,!!with negative p r o f i t a b i l i t y

performance of banks i n Nigeria,

My profound grati tude goes t o D r . J. Ii. 1;;zeanyagu

(my projsot Supervisor) fo r h i s ccMinua1 guidance from the

beginning to the end of t h i s project; my Head of 1;epartmont

(former Dean of ~ a c u l t y ) , Professor Fa 0, Okafor and a l l t h o

leoturers i n the Department of Banking and Finance, University

of Nigeria, ~ n u g u Campus, f o r t h e i r incessant guide throughout

my post @aduate career i n the University,

1 have the s i n w l a r honour t o express my deep aprmeciate

and thanks t o M r . Ph i l ip Ugwu fo r h i s unreserved and re l en t l e s s

assistanoe i n the econometrio aspect of t h i s study) Mrs M.N

Agu Principal system Scient i s t , computing Centre, University of

Nigeria Nsukka, f o r the wonderful computing assf atance d v e n

and M r . Kingsley N. Anyanwu f o r h i s immense financial-

afieistance a l l through t h i s post graduate programme,

Finally, my thanks go t o my brother8 and s i s t e r s and t o

my mother, Mrs Mary Okpo fo r t h e i r patience, inspirat ion, '

financial. support and encoura~ement i n the o r i t i c a l process of ,>,'.' 6'.

e F o q u i r i n g education. To them I extend my f ra te rna l gratidhade, . To al l of you and many others . . too numerous t o mention,

s

I owe much appreciation.

TIZ1!LE OF CONTENT

7*2 Statement of problem .....mm.I.mm..... ,a . 4

I ObJective of the study m m ~ m m . m m m o m e e m m . . m m ~ 5

2.5 REVIEW of Recent I n t e r e s t Hate Policy,. ' , .

26

2.6, Effoct~ of I n t e r e s t Rate Changes on Th~,d::s'

CHAPTER TIIREE 1 RESEAIICH METHODOLOGY

3.2 T r e ~ t m e n t of data ........................,... 41

3.3 Methodolow .................................... 41

....................... 3m4 Procedure for est imation 42

. . %L

3. I Equations ofAmodel. incorporating both

Linear and Log-linear Equations me.......... *.46

3.5.2 A l t e m ~ t i ~ e Banks' p r o f i t a ! ) i l i t y Model ...... 4 47

3r5r3 Wm5.c model .................e............... 47 .................. 3.6 Model Evaluation Yeohni7ues 47

4.1 .Pr e sen tn t ion of Hegression Results ............. 49

h.2 EconomiclA p r i o r i t c r i t e r i a ..................... 52

4 S t a t i s t i c n l Testa of Signific:mce .............. 56 4.4 Econornetr5.c Test f o r t h e presence of

Autocorrelation ..............m... ..w ......... 59

............................. 4.5 Test of, Hypothesis 63

..................... 5.1 Summary and cor~cluoion ,,.. 69

Appendix

.

\ I CIiWJ?ER ONE

1 I I INTRCDUCTION

I /

I 11.1 RACKGROUNU OF THE; STUDY (I

) In te res t r a t e i s a tool fof monetary and credi t control and

as suoh it operates primarily on t r e cost o r pr ice of credit .

It is a pr ice f o r obtaining loanable funds, and a re turn

f o r foregoing l iquidi ty . For these rdasons, i n t e r e s t r a t e s

have an important a l locat ive influence on the leve l and

direat ion of economiu ac t iv i t i e s , By alao affect ing the

v i t a l operating cost of businesa, changes i n i n t e r e s t r a t e s

can also exert a s ignif icant impact on the love1 of investment.

Moreover, as a re turn t o savera, i n t e r e s t r a t e s can a l so exer t

an equally s ignif icant impact on the d is t r ibut ion of income

between present and future consumption.

It is not surprising then to note t h a t monetaq au thor i t i e s

a t taoh so much importance t o the ~ t r u c t u r e ~ l e v e l and. change6

i n i n t e r e s t r a t e s because of i ts verf important influence

i n the economy. In te res t r a t e s effect on my ciconomic

variable, thdrefore beoomes an appealing area of study.

Banking i n Nigeria dates t o 1892 with the establishment I of African Banking corgtn?ation , m d a host of others which

were la ' ter established. The need t o control the banking

a o t i v i t i e s arose because of the fraudulent and ine f f i c i en t

pmot ices i n the use of resources which were believed to

be contram t o public intereat , That marked the end of

2.

t h e f ree banking e ra and t h e beginning of t o t n l l y new

e r a where t h e c e n t r a l Bank of Nigeria intervened through

vnrioue c r e d i t gu ide l ines and s e c t o r i a l a l loca t ions . Tho

Central Bank through i t s guide l ines r e g u l a t e s t h e supply,

cos t and a v a i l a b i l i t y of c r e d i t by a l l banks.

~ i g e d a has s i n c e indpendence i n 1960 l i v e d under- t h e

monetar i s t i d e a t h a t t i g h t money economic p o l i c y i s the

answer t o her economic problems e s p e c i a l l y in f l a t eoh .

Over the pe r iod 1978 - 1984$ depos i t r a t e s were s p e c i f i e d

and lendihg r a t e s were imposedb2 The major proidem howover

was not t h a t t h e r a t e s were fixed. but t h a t they were maintained

a t l e v e l s unrpla ted t o mnrke* conditions.

c r e d i t # operapions were t i b h t l y regimented on var ious brays.

Non-discriminating (uniform) c r e d i t c e i l i n g s were imposed on

banks* s p e c i f i a percentage t a r g e t s were s e t f o r credit

a l l o c a t i o n i n r e l a t i o n t o s e c t o r s of a c t i v i t y , i n ~ a l a t i o n

t o olaaaos of borrowers and i n r e l a t i o n t o matu r i ty pattc:rns.

The low bank r a t e s a f f e c t e d banking opera t i ;ms i n two ways,

First, low depos i t r a t e s co4trained the savings mobi l i sa t ion

s.j_'fM?t;n of' be~~ico, Secondly, t h e low lending r a t e reduced

accessibility t o bank c r e d i t , The monetary and c r e d i t p o l i c i e s

between 1984 and 1985 were a n t i - i n f l a t i o n a r y and s t imula t ive of

economic development, T h i s r e s u l t e d i n economic &o gnatf on * L

and unemp~oyment ,

The Babangida administrat ion then s o r t t o put an end

t o this s i tua t ion , This urge t o res t ruc ture t he economy

gave b i r t h t o an economic programae known as the s t r u c t u r a l

Adjustment Programme (SAP), The s t r u c t u r a l Addustment

Programme was a very mador i n i t i a t i v e a t res t ruc tur ing and

red i rec t ing the Nigerian economy, The Programme was based

on the three key pol icy planks,3 namely, derugulation,

iYiiversification of t h e export base and t h e curtailment of

government d i r e c t involvemeht i n business through the process

of p r ive t i s a t i on and co@mercialisation,

There have therefore been c a l l s f o r t he berepplation

of the bankinc system espec ia l ly i n t he n r e a of i n t e r e s t r a t e s

char*ged and paid fo r bank services, T h i s was believed would

a t t r a c t more deposi ts fromi members of t he public. Since

banks would o f f e r higher i n t e r e s t r a t e s and then make it

poseible f o r banks t o meet the c r ed i t needs of t h e i r customcrs.

Bascd'.on these and other considerations, i n t e r e s t r a t e s were

deregulated i n July 1987, Since then banks h:we enjoyed a

l a rge measure of d i s c ~ e t i o n i n the pr ic ing of deposi ts and b

loans i n s p i t e of l imited r e s t r i c t i o n s reintroduced i n 199,

In this project work therefore, the resexrcher ttanta

t o estimate the e r fec t s changes i n i n t e r e s t r a t e s a t n c t u r e

could have on commercial banks' p r o f i t a b i l i t y i n Nigeria.

The i n t e r e s t r a t e s s t ructure t o be analysed i n this work

include the oavingo r a t e , minimum Redj.6count Rate, Lending

Rate and T r e a s u r y Bills and c e r t i f i c a t e issue rates.

Tbia kind of analysis i s necessary fo r the purpo~o of

marketing f inancial services, modifying t h e f inancial system

and dovicing economic reforms generally.

1.2 GTATI3Ml;JYT OF PII013&EM

In te res t i s a pr ice f o r a service and must be determined

i n a broad sense by the dmand and supply f o r the service. 4

In te res t

, 5 funds,

r a t o has also been defined a s tho pr ice a t which

money a r e made o r a price fo r obtaining 1.onnable

Again it can be seen as the r a t e a t which the

sourees of capi ta l i s remunerated,

A cursory analysis of recent years i n t e r e s t r a t e

pol ic ies tends t o reveal changes and adjustments in the in te res t a

r a t e refglations which banks and simalar financial i n s t i t u t i o n s

were mad4 t o work with. 6

How hao t h i s frequent change affected banks' p r o f j f - ~ l b i l i t y ab

goals and how huve they been %o adjust t o t h i . cons twt A

no doubt

t o Operate

under such s i t u a t i o n of unpred ic tab i l i ty ,

The above problem inheren t i n our na t ion ' s i n t e r e s t

r a t e p o l i c i e s and i t s e f f e c t s on banks p r o f i t a b i l i t y would

be anaapsed i n t h i s study,

1.3 OBJKCTIVi.. OF THE STUUY a

Taking cogninance of t h e problems ident i f ied ,&tudy of

t h e econometric impl ica t ions o f ahnnging i n t e r e s t r a t e s on

p r o f i t a b i l i t y of banks i n Nigeria i s c a r r i e d out. The s tudy

w i l l seek t o achieve t h e followin:.: object ives:

(a) To determine t h e e f f e c t of changes i n i n t e r e s t r a t e s

on banks p r o f i t a b i l i t y ,

(b) To e s t a b l i s h k t h e t r end of change i n b a a p r o f i t a b i l i t y

leve ls .

( c ) To determine t h e r e l a t i o n s h i p between i n t e r e s t r a t e s

and p r o % i t s of banks,

(d) To i n f e r about t h e growth and prospects of t h e banks

f ~ i v e n a e r t a i n i n t e r e s t r a t e p o l i c i e s i n t h e future.

(e) 'Po make recommendations on how t h e problems a s s o c i a t e d

with v a r i a t i o n s i n i n t e r e s t r a t e s could be solved f o r

bot tor p r o f i t a b l e perfoquance o $ banbe. = .- - - -- -.---_-. ,

The following hypotheses a r e t e s t e d i n the course of

this resea rch work,

i+ Banks' p r o f i t a b i l i t y a s measured by t o t a l a s a e t s i s

not inf luenced by changes i n var ious i n t e r e s t r a t e s f f

i , ~ Hot bl a b2 = b3 rn W - 0 ii+ Changes , i n bankst p r o f i t a b i l i t y is no t explained by

*

chances i n t h e independent vnr iablea such as minimum

Rediscount Hate, Deposit Rate and Savings Hate.

iii. Changing i n t e r e o t r a t e regime has no e f f e c t on banks

p r o f i t a b i l i t y as measured by i t s t o t a l lonns and

Advances,

i,e Hor bl - b2 a 0

The-research was c a r r i e d out on t h e eoonnmetric a n a l y s i s

of t h e e f f e c t changing i n t e r e s t r ~ t e s have on p r o : f i t n b i l i t y

of banks i n Nigeria. b

To accomplish t h i s , r e l evan t d a t a were obtained from

both primary and secondary sources. The s tudy however,

depended more on secondary sources which cons't^i'tU:ted t h e review of

r e l e v a n t l i t e r a t u r e on t h e subject . F inanc ia l and non-financial

newspapers and journals , unpuBEtahed mate r i a l s , f inance '

and economic textbooks a s wel l as annual r e p o r t s and accounts

of some commercial banks f o r t h e r e l evan t per iod were consulted,

This was made p o s s i b l e through contac ts with t h e fo l lowine

i n s t i t u t i o m and bodie a.

i. Univers i ty of Nigeria, Enugu Campus L ib ra ry

ii. Researoh Dcpartmentfiibrary of t h e Cent ra l Bank of

Nigoria, Enugu Office,

iii. Some banks off ices /branches

iv. National Librarg , Enugu Off ice

' V. Enugu S t a t e Universi ty of Science and Technology, L ib ra ry

Enurn.

M n ~ l l y , t h e d a t a c o l l e c t e d were compiled and analysed

eaonometrically and f indings from them were noted. I n t h e

analysis, t a b l e s were used t o show t h e i n t e r c u t r a t e s of t h e

corresponding years, So from t h e f indings , recommendations

were made and conclusiona drawn.

1.6 SIGlJIkICRNUE OF THE STUDY

VFrm t h e foregoing, i t i s apparent t h a t t h e r e was

enough reason t o warrant a s tudy t h a t would f i n d out t h e

e f f e c t of i n t e r e s t r a t e chnngee on banks p r o f i t a b i l i t y .

The e f f e c t t h i s changing i n t e r e s t r a t e p o 1 i ~ : i e s have on

banks p r o f i t a b i l i t y would be e s t ab l i shed and used t o i n f e r

i n t o t h e fu tu re , " a l l t h ings bein8 equal".

The f l n g i n g s of t h i s s tudy w i l l be s i g n i f i c a n t t o

o the r r e sea rcher s , bankers, bowrowers and t h e government,

(a) GTUDJ3NTS

This s tudy w i l l se rve a s a secondary data t o r smnrch

s tuden t s w i w would benef i t from t h e f indings of ,t;ld.a r?7?'-i rch

work a s i t would no doubt [{et then informed about t+e

i n f luence of i n t e r e s t r a t e on banks' p r o f i t a b i l i t g which i a

i t 8 key d e t n m i n ~ f a c t o r ,

( b ) GOVERNPI&NI'

Being t h e maker and d i r e c t o r of t h i s pol icy , t h e

consequences of t h i s phonommal chnnge of i n t e r e s t r a t e

p o l i c i e s as would be outained and t h e redomnendations would

serve a s a v i t a l i n f o r l ~ i a t i ~ n t o her t o know a c t u a l l y whether

it i s achievinp; her a i m of t ak ing t h i s measure,

(c ) BANKS

The banks being t h e e x e m t o r s of t h e p o l i c y woulc€ no

doubt by t h e f i n d i n g s of t h i s work uee t h e degree t o which

t h e i r p r o g i t a b l e pe r fo rm~nce i s dependent on t h e i n t e r e s t

r a t e s p o l i c i e s enunciated by t h e government, The

recommendations of t h i s s tudy would equa l ly he lp them i n

fo recas t ing t h e i r probable l e v e l of p r o f i t a b l e performance

givon a d i r e c t i o n a l change i n . i n t e r e s t rate,

This s tudy covers a period of twenty three yeh3:s; t h a t

i s between 1971 t o l 993 and only i n v e s t i g a t e s the er:ououdxf c

e f f e c t of i n t d r e s t r a t e changes on banks prof :L i;;\i>li.!.i tg in

Nigeria. This is with p a r t i c u l a r a t t e n t i o n 4x1 Lt?l\(lP11~ rc~i;cn on

loans and advances, m i n i m u m Rediscount Rate, Tre i lowg ZIil!.a/

C e r t i f i c a t e s r a t e a and Deposit r a t e s .

The study 18 not intended t o i n v e s t i g a t e i n t o t h e banks'

management and admin i s t r a t ive a c t i v i t i e s ,

Notoably, f i n a n c i a l c o n s t r n i n t s cons t i tu ted some problems

f o r t h e r e semxhcr as proJect of t h i ~ type roquires adequate

funds ainct? t h e researcher would have t o visit many banks,

%!his 'study was equal ly l i ln i tad by thd var ious l i n i t a t i o n s

of f i n a n c i a l a n a l y s i s based on the da ta uged b e l a y h i s t o r i c ~ l

estimate? gathered.

REFEIIENCES

1, Oladele Olashore (1986)Ml>eregulating t h e Nigerian

Banking %&ernu Busineas Times. October P.ll

2. Francis 0.OKafor (19%) t t Implicat ione of Deregulation

of t h e f i n a n c i a l syatem on Financia l in termedia t ion by

Banksw paper de l ive red a t t h e Annual Banking Seminar

of-tho Chartered I n s t i t u t e of Bankers of Nigeria a t t h e

Nike Lake Resort Hotel, Enugu 17 - 21 October, P, 4

3, I b i d Pa5

4, Aboyade (1980) In te rg ra ted Economics - A Sturig af Ijeb'elcpinp;

Economiee (Nigeria , Univers i ty P ress Lt;d lbariauj P, LCf;C,

5, S t o n i e r and Hague, (1980) A textbook of Economic Theorf

(..Bs R~blishsrs) P. 68,

CIUPTEH TWO

LITNIATURE REVIEW

Thia chapter examined various l i t e r a t u r e s on i n t e r e a t r a t e s

and banks p r o f i t a b i l i t y which a r e r e l e v m t t o t h i s utudy,

l i t e r a t ~ e by both l o c a l and fo re ign R U ~ ~ O ~ S were re-viewed.

There are var ious l i t e r a t u r e s and papers published on i n t e r e s t

r a t e s ae w e l l as banks p r o f i t a b i l i t y which a r e enough t o

a t t r a c t a t t e n t i o n , I r o n i a a l l y , none of auch p u b l 5 . c ~ t i o m have t h e

subjec t of t h i s s tudy i n i t s content , e spec ia l lg as it r e l e t e s

t o t h e eoonometric a n a l y s i s of the e f f e c t o f ir.tt.elyer;b r a t e

changes on banks p r o f i t a b i l i t y I n Nigelsia.

I n t e r e n t r a t e s have been defined by d i f f e r e n t econoiniste;

t h e commonest one which i s used by most economists being tho

d e f i n i t i o n which says t h a t " i n t e r e s t r a t e i s t h e price of

credi t t t . I

The s t r u c t u r e of i n t e r e s t r a t e was examined by (Okigbo,

1 9 8 1 ) ~ He def ined t h e r a t e of i n t e r e s t as "a p r i c e paid

by those who purchaae money and s ince t h e category of

purchases vary, and the purpose f o r which t h e y borrow vary

also, t h e r e i s always a t any p o i n t i n time a v a r i e t y of i n t e r e s t

r a t e s f o r df f f e r e n t k inds

In a r e l a t e d view, Adekanye defined i n t e r e s t r a t e as T

' the of using ~ & e o n e e l s d ' s i ~ n e y , or viewed from the lenderah p o i n t of view, as the price chr'rged fo r e1lowj.w souec;l>.r eli;a to use your moneyttS

Money is demanded f o r d i f f e r e n t purposes and t h e condi t ion

on whiah i t i s offered determines t h e p r i c e f o r it. That

i e why we have d i f f e r e n t i n t e r e s t rates, The r a t e s may change

depending on circumstances i n t h e market f o r the- p a r t i c u l a r

s e t of f i n a n c i a l instruments and t h e a c t i o n of the Cent ra l

Bank of Nigeria, whose main duty is t o con t rb l i n t e r e s t rates

through c r e d i t guide l ines and i n t e r e s t r a t e c e i l i n ~ s ,

However i n at tempting t o d e f i n e i n t e r e s t r a t e a d i s t i n c t i o n

has t o be made between the d i f f e r e n t kinds of i n t e r e s t r a t e s

and t h e y are t h e r e a l i n t e r e s t r a t e and t h e nominal i n t e r e s t

r a t e which i s a l s o termed t h e market r a t e of i n t e r e s t .

According t o t h e c l a s s i c a l economists, "market r a t e of i n t e r e s t

i s t h e p r i a e t h a t i s paid f o r t h e use of savings of o t h e r

psoplew.4 A more complicated d e f i n i t i o n of market r a t e of

i n t e r e s t was a l s o given by t h e same c l a s s of economists,

I n t h e i r own words, market r a t e of i n t e r e s t 98 t h a t r a t e

whioh Olears t h e bond market and t h e same r a t e equates savings

and inves-t;mont, t h u s ensuring t h e equa l i ty between t h e

nat-1 real r a t e and money r a t e of i n t e r e s t M , 5

The keyneoians i n t h e i r own m a l y s i s of what r a t e

of i n t e r e s t , i s , s t a t e d t h a t the r a t e of i n t e r e s t i s not t h e

p r i c e which br ings i n t o equi l ibr ium t h e demand f o r resource

t o i n v e s t with &he read iness t o a b s t a i n from presen t

consumption but t h a t i t is " the p r i c e which e q u l i b r a t e s t h e

d e s i r e t o hold wealth i n t h e form of cash with t h e a v a i l a b l e

quan t i ty of cashtt, 6

I n t e r e s t r a t e can be defined as t h e reward f o r t h r i f t i n

abs ta in ing from consumption today, Another very simple

d e f i n i t i o n of i n t e r e s t r a t e being t h e p r i c e f o r the l u r e of

money, Real i n t e r e s t i s t h e nominal r a t e minus t h e r a t e

of i n f l a t i o n . I n t e r e s t r a t e can be viewed as instrument f o r

e f f e c t i v e mobi l iza t ion of saving, as i n t h e case of depos i t

r a t e o r r e a l i s t i c r a t e s on monetary savings such as time and

savings depos i t s , claims on Financia l i n s t i t u t i o n s and govor-

nment s e c u r i t i e s .

A decrease i n t h e market r a t e of i n t e r e s t discourages

savings and inc reases demand f o r goods and s e r v i c e s s i n c e

savors would now r a t h e r c o n s b e more than keeping t h e i r funds

i n t h e bank with ve ry low i n t e r e s t r a t e s , Banks r a i s e t h e i r

lending i n t e r e s t r a t e s when they a r e threa tened with solvency, 1 i . ,

I n Vaxt.Fenstrrrmaker8 (1969) a n a l y s i s of i n t e r e s t r a t e ,

he m i d t h a t " i n t e r e s t r a t e s a r e t h e most s i w f i c a n t and

pervasive p r i c e s i n t h e e ~ o n o r n y ~ ~ , ~ To b u s h e s s firms, they b

r ep resen t one of t h e c o s t s of opernt ions and o f new investment.

On t h e . supply s i d e , i n t e r e s t r a t e s s i g n i f i c a n t l y in f luence

t h e flow of anvings a t any given l e v e l of income.

On theee premises, i t can be s u c c i n t l y s t a t e d t h a t i f

money is loaned o r inves ted , t h e owner of t h a t money w i l l

expeat a ze tu rn f o r having foregone an a l t e r n q t i v o use of these

funds. T h i s r e t u r n i e genera l ly i n t h e form of i n t e r e s t , which

w i l l accumulate a t r e g u l a r i n t e r v a l s , u s u a l l y on an annual

baaie*

2.2 DEVELOWENT OP INTEREST RATES I N NIGFlRIA , -

The Centra l Bank of Nigeria s ince it s t a r t e d opera t ions

i n July 195gr has been exerc is ing t h e powers conferred on i t

by i ts enabling Act, t h e Central Bank of Nigeria Act 1951)

(as m e n d e d ) . This has provided a considerable‘ a b i l i t y f o r

t h e dikscretionary o o n t r o l of t h e f i n a n c i a l and economic system

of t h e nation, One of t h e inetruments s t a t u t W l y a v a i l a b l e

t o t h e Cent ra l Bank of Nigeria was t h e r e g u l a t i o n of t h e

na t ions i n t e r e s t r a t e s t r u c t u r e ,

A t th.e beginning of every f i s c a l year , i n i t s annual

m o ~ ~ e c a r y p o l i c y c i r c u l a r s , i s sued t o a l l commercial m d

Merchant Banks, t h e y e a r ' s i n t e r e s t rates are s t a t e , The

r a t e s of I n t e r e s t aormally r e f l e c t t h e na tu re of monetary

po l ioy intemled t o be p u r ~ u e d b y t h e monetary a u t h o ~ i t i e s

and the love1 and direct ion of the economic ac.t;ivities

forelooked. 'Phe ra t e s of i n t e r e s t f o r varioun deposit/loan

categories and the Central Bank's discount r a t e otherwise

called the Central Bank of Nigeria minimum Rediscount Rate

(MRR) f r o m which other banks take t h e i r h e are s ta ted f o r

each f i s c a l yeas,

I n March, 1970, the Central Bank of Nigeria assumed

i n a s t r i c t l y formal manner, t h e mantle of control and

regulation of the s t ructure of i n t e r e s t by prescribing f o r

the first time the minimum and maldmum rates on advances and

i n t e r e s t bearLng deposits. 8

T h i s regulation oontinued u n t i l J a y 31, 1987 when

the ammendment t o bhe Central Bank of Nigeria's monetary

polioy c i roular 180, 21 diverted the control on r a t e s from

the Oentrel Bank effect ive from August 1st 1987.~ This

deregulation measure, the monetary au thor i t ies believe

would create an optimally e f f i c i en t a l locat ion and mmagernent

of soarce resources i n the economy. These r a t e s t h a t w i l l

emerge, w i l l . r e f l e c t the r e l a t ive scarc i ty and efficiency of

f inancial resources i n different uses, a s only e f f i c i e n t

investbra w i l l now successfully compete f o r these resources,

The monetary au thor i t ies opined t h a t the resu l tan t prohibit ive b

cost of cap i t a l w i l l have t h e e f fec t of channelling economic

resources from the hess e f f i c i e n t t o more productive sector

of the eoonomy.

16. . .

Infaot, before the i n t e r e s t r a t e d4!&eegul,ation became

eifect ive, i t was aubdected t o widespread controversy. The

arguernep* wtls on i t s potent ia ls i n helping t o channel the

eoonomglcbadk on t o a path of sustainable s tab le g~owth. Some

welcamtsd the view while others opposed it.

!those who proposed it, viewed it from the determined

economi~ eqvironment of Nigeria hence these analysts 8aw

i n t e r e s t , r a t e deregulation aa a good and needed,economio

development. While the opponait~ of t h i s measure viewed

i t from i t s e f fec t s on the m a l l scale operations. I,

%he introduction of a f l ex ib le i n t e r e s t r a t e r e g h e

made.the bank8 t o fix t h e i r individual pdme r a t e s t o r e f l e c t

t h e i r individual assessment of the market, The poliay i n

addition r d s e d the rediscount r a t e t o 15% (from 11% i n

Januarg 1987) intimating, as it were an era of higher cost of

funds t o enterprises, The l i q u i d i t r r a t i o was raised from

, 2% tt;b 3096 thus causing fur ther squeeze of credits. Rate on

treasury b i l l s was raised too. h

m e was a good policy from the point of view of bankers;

there ha& been increased deposit and greator freedom of

banks t o determine the e f f i c i en t al location of c red i t s

eepecially t o thosd areas hi ther to regarded as the pregemed

17.

seators of the economy from the stand point of monetarg

poliqr. But the general effect of the policy on the economy

has been varfously assessed, The manufacturers Association

of Nigeria (M.A.N) and others i n the private seator aomplained I

bit ter ly, not against i n t ereet r a t e d e r e e a t i o n , but a&ainst

the raiefng of the off ib ia l rediscount and treasury Bills

rates. !these reference ra tes had consequently

lending r a t e t o about Wb whioh was considered

a depressed economy.

raised the

too high fo r

As a ' resu l t of t h i s in teres t ra te deregulatf on in te res t

r a tes roee t o an mprecedented high level8 by 1993. The I '

interbank ra te ' had become distorted and highly volatile.

hverage"&nterbank c a l l ra tes which closed a t 46.0 per cent 1 , I ,

i n Deaember, 1993, fluctuated widely between 60 and 120

par. cent i n the oourse of 199 3.'' Prime lending ra tes ranged ( n r l .

from 26 60'6Q per uent fo r uommercial and 42 t o 80 per crent

f o r me~ohant Banks. ' Such high ra tes were adjudged t o be bound ' f - ,

t o diimotlrage investment, especially i n the d i rec t ly prduct ive

sectors of 'hhe ecohomy. Therefore t o address the ident if ied I

aauses ,,of , u g h and unstable b. terest rates, and ensure a more

investor-Q?iendly regime, the maximum lending ra te inclusive

of all eh842ges was pegged a t 21 per cent #ex? annum, fo r the

1994 fisoal year, I1

3n coaclusion, however, the trend of i n t e r e s t r a t e s

development i n Nigeria a s portrayed above could be said t o

be i n two stages, the regulated i n t e r e s t r a t e s t ructure and the . .

deregvlated i n t e r e s t r a t e structure,

2.3 RELATIONSHIP BETWEI-,W INTEREST RATES AND 8hVIMGS

The ma3or reason given by the monetarg au thor i t ies f o r

deregulating the i n t e r e s t r a t e s payable on s a v i n y o r '

chargeable on loans and advances were t o encourage savings

and reverse the negative r e a l r a t e of i n t e r e s t on bank

investments.

Opfnioxm of f inancial experts were divided on the

efficaay of i n t e r e s t r a t e i n generating greater cavings.

I n this regard, views of prominent au thor i t ies among them

w i l l be e x ~ n e d .

Aacording t o ~ o ~ l a d a ~ , ' ~ by sacr i f ic ing immediate

enjoyment, household might save t o earn interest . Higher

r a t e s of i n t e r e s t wbuld provide greater ,;incentive t o invest

o r save, Other families might sacr i f ice more oZ the present

t o ensure a br ighter fubure. The market he added ensures

tha t peGsona who did not use t h e i r claim on production for

current consumption would t r ans fe r those r igh t s t o someone

e lse i n re turn for in t e res t , The higher the i n t e r e s t r a t e

the la rgar the funds tha t w i l l be caved and vice-versa,

Another impoftant discussion on the re la t ionship between

i n t e r e s t r a t e and savings was tha t given by M c ~ M o ~ . 13

According t o him if the current r e a l r a t e is W j , by consuming

jiif1.00 worth of r ea l goods and services one year from today,

thus, the higher t h e current r a t e , the greater the opportunity

cost of present a s opposed to future consumption, A s a

r e s u l t , a r e l a t i v e des i r ab i l i ty of savings out of present

income i o enhanced,

Anderson l4 notes tha t the c l a s s i ca l theory of the

r a b of intdreot was a s t r a igh t forwqrd supply and demand

analysis with the demand for capi ta l being on i ts

marginal r e v h u e production and the supply and demand analysis

with the demand f o r capi ta l being determined by the l eve l of

savings, He fur ther s ta ted tha t the supply of hoanable funds

would depend upon the leve l of savings wbich was thought

t o vary d i rec t ly wi th the r a t e of interest . An increase i n

the reward ( in te res t ) , he reaaoned, i s expected t o increase

satrings a s people w i l l aave m c r e i n order to earn the additional

r a t e s of i n t e r e s t and also'because those who h i ther to saw b

savings a t the former r a t e a s :PPlprofitable w i l l now be induced

t o save because of the high i n t e r e s t r a t e t o be earned, ' I n

ef fea t , aa i n t e r e s t r a t e r i s e s , savings a l so r i ses ,

I n tho same vein, ~ a r v e d ) s ta ted t h a t if the r a t e

of i n t e r e s t on bank s a v i n ~ s accounts and other investments

was high, then, people would snve more and of course low

r a t e of i n t e r e s t would reduce the incentive t o save and so

cause an increase i n consumption,

The above were c l a s s i ca l views on the re la t ionship

between savings and i n t e r e s t ra te , Perhgpe, most Nigerian

f inancial experts who were advocatds of i n t e r e s t r a t e

deregulation baaed t h e i r argument on the c l a s s i ca l view, t h a t

savlngs are i n t e r e s t e lns t ic , s t ress ing t h a t high i n t e r e s t

r a t e s w i l l encourage savines,

Thie view was opposed by the proponents of the Keynesian.

For tho c lass ica l group as s ta ted e a r l i e r i n t e r e s t r a t e

i s astrong deSerminant of the l eve l of savings and investments

i n the eoonomy,

Conversely, the Keynesian group, represented by

~ a k a r t n e ~ ' ~ stressed t h a t savings and investment a r e done

by d i f fe rent people and f o r dif ferent reasons. Households

are the majolr sources of savings, People save for future b

retirement, a home building, car, college education and

maw other things, The decision t o save fo r more depends on

income than on the i n t e r e s t r a t e , if business outlook i s

poor, l i t t l e investment w i l l be undertaken even a t low

ra te s he added,

6tanleYq7 i n h i s calculation of Savinge f o r retirement

argued t ha t even small var ia t ions i n the e f fec t are compounded

over along periods. A s a r e su l t , he added., we a re incl ined '

t o oonclude that i n t e r e s t r a t e changes a re potent ia l ly

important factors affect ing some saving decisions, He

fur ther divided the e f fec t of i n t e r e s t r a t e on savings according .

t o the use t o which the savings is t o be put. and the time

period over which the effect a re being compound^.

Edith and ~ e ~ n ' ~ noted i n a re la ted discussion on

i n t e r e s t r a t e and Afridan countries tha t there has been

muah discussion about the e f fec t of r a t e s of i n t e r e s t on the

willingness of person and of ins t i tu t ions t o save, The

argument has been tha t high r a t e s of in te reot will encourage

savinf~s since there i a a high reward i n the form of i n t e r e s t

income from lending mane@ i n the money markets, They argued

tha t those who, i n order t o accumulate a par t icu lar sum,

may save . l e s s ,with higher i n t e r e s t r a t e than w i t h a low

one since' ein&lar i n i t i a l sums, whether f o r buying land o r

a buainess or for t h e i r old age may save l e s s with a high

i n t e r e s t r a t e than with a low one since anal1 i n i t i a l

sum w i l l , over time accummulate t o a higher t o t a l i t y of

both cap i t a l and in te res t .

~ n d e r s o n ' ~ , gave some reasons why the demand supply

analysis of the r a t e of i n t e r e s t i s not now regarded as the

sa t i s fac tory explanation of i n t e r e s t raters because of a

number of ,.fiJeobtneimea.One reason is t h a t the sqpply of

loanable funds is not a function of the r a t e of i n t e r e s t

alone. People's savings, he said, a r e unlikely t o bo affected

t o a m e a t extent by the r a t e of interest . Generally

speaking, people save not t o earn r a t e of i n t e r e s t but t o

satisfy precautionary motivd. So savings are nr.9 i n t e r e s t

has followed the c lass ica l theory group who

hold the d e w t ha t the manipulation of i n t e r e s t r a t e s has

the e f f e c t of increasing deposit mobilisation. This waa w h y

t he country*^ monetary authori ty has over the yeam unleashed

and effected a number of changes on the nation's i n t e r e s t

r a t e p r i o r t o the d e r e g u l ~ t i o n of i n t e r e s t rate i n the

August 1987.

8.4 MNK POI~TFOLIO BEHRVIOUR

Banke, being essent ia l ly dealers i n money, derive t h e i r

fund8 f r o m dif ferent eouroes and a lso employ these funds

i n the different ventures. These a re referred t o a s bank

asaet and l i a b i l i t y portfolioa.

Bank receive time and demand deposits from the publio

a t an i n t e r e s t r a t e a d lend out t o the d e f i c i t units a t an

i n t e r e s t rnte too. I n so doing, they ac t a s internodiar ies

between the surplus uni t and the d e f i c i t unit. They however

d i f f e r fram money lenders i n t- he sense tha- t t h e i r money

dealings are l a rge ly based on the money it receives from i ts

depositors whilo the money lenders deal i n i s money belongine

personally t o them, The funds derived from the d i f f e ren t

uourues donsti tute the l i a b i l i t i e s of a bank. The e f fo r t of

a commercial bank t o maximise i t s t o t a l net earnings by

employing its depositors funds creates the d i f f c u l t problem

of asse t management, because these depositors money are

withdrawable on demand subject t o tho banksf rules. It is

therefore obvious t h a t a bank w i l l create a d i v e r s i f i ed asset-

por t fol io consisting of d i f fe rent asse ts of wryin:; maturity

pa t te rn t h a t w i l l match the seveval and varied sources of

gupply of i ts funds, p r o f i t a b i l i t a of the bank, l i q u i d i t y

and solvency have to be ensured i n the process of asse t

management says Vaish ( 1980)

N W w o (1980) i n h i s a n a l y s i s of souraes of bank

funds maintained t h a t banks obtain^ k l +:heir funds from 20 two m d n m u r o e s - c a p i t a l and o t h e r i s deuosJ,,&

Bank a s s e t s l i k e t h e l i a b i l i t i e s a r e all well planned.

I n p&a~$ng,b t h e bank p u t s a l o t i n t o oonoiderqtion. For

ins tance , f t cons iders i t s ob l iga t ions t o both its depos i toro

a s well as shareholders. Another important f a c t o r which

i s put; i n t o cons idera t ion i s t h e m ~ r k e t environment, Others U. , . . .

i nc lude : the opera t ive monetary p o l i c y o r guide l ines a t any \,,..,.

point $n ,time, s i n c e theae determine i n t h e f i n a l a n a l y s i s

whether,:or n o t and t o what ext;ent a bank i n v e n t s in a

p a r t i c u l a r a s s e t , t h e goale and ob jec t ives as w e l l as t h e

o p e r a t i o n a l philosophy of the bank which determines t h e

orientation of t h e banks, which economio s e c t o r s it favours

moat id terns of i t s lending and f i n a l l y t h e aoonomio

environment which asks such ques t ions as what is t h a bad

debt experience$ Ie the ena i roment dominated by s e r v i c e

establ ishments of manufacturing opera t ions o r s a l a r i e d s taff

Qyoting Nwankwo (1980) t t 9 r m d l y b4aK.assets can be

c l a s s i f i e d i n t o two main categories , One is l i q u i d a s s e t s

a n s e t s inc lude cash i n hand and a t bank, b i l l s discounted

and money a t c a l l , They se rve two main funct ions ; one i s

t o meet depos i to r s and l enders cash needs and the o t h e r i a t o

enable t h e banks t o e f f e c t t h e i r c l e a r i n g s a t t h e Cent ra l

Bank, Hard a s s e t s were def ined by Nwankwo (1980) as

%weotment s vbj. ch banks make p r i n c i p a l l y t o meet t h e

ob l iga t ions of p r o f i t ~ b i a i t y owed t o t h e shareholders. tt 22

They are usua l ly made up of investments, loans and advances,

Basical ly , t h e r e a r e two approaches t o t h e bank fund

u t i l i z a t i o n and t h e y a r e t h e pooled-funds apyroach and

t h e a a s o t s a l l o c a t i o n approqch,

Vaish ( 1 9 8 0 ) ~ ~ i n endorsing h i s views s a i d t h a t he

bel ieved t h a t commercial banks employ t h e i r funds i n

c r e a t i n ~ d i f f e r e n t types of a s s e t s - aosor ted a s s e t s comprising

of d i f f e r e n t loans , s e c u r i t i e s , bui ldings, debentmes, gold

and many o t h e r s r e g a r d l e s s of t h e nourcen of supply of

t h e i r funds.

The aecond approach t o banks fund u t i l i z a t i o n i s t h e

a s s o t s a l l o c a t i o n approach. This approach s t r e s s e s t h a t

*investments made i n d i f f e r e n t types of a s s e t s have t o be

r e l a t e d t o t h e d i f f e r e n t sources from which funds a r e der ived

by t h e banksw, 24

The two approachesikhave been subjected t o n l o t of

cr i t ic ism.s by many.

2.5 R;:VIJ?W OF RLCENT INTEREST RATE POLICY

!Pho obJect ive8 of i n t e r e s t r a t e p o l i c y i n Nigeria

a r e normally embedded i n the broad ob jec t ives of monetary

and c r e d i t pol icy , namely

f . Moderation of i n f l ~ t i o n ;

if, reduct ion of pressure on balance of payments and

exahange r a t e and enhancement of external reserves ;

iii. Opemtion of c..&'l'i&b'c f i n a n c i a l system; and

iv. inciucament of inmearted f i n a n c i a l scv inss , investment,

employment and growth.

I n 'l990, t h e s t imula t ion of savings and investment

was s t a t e d as one of t h e objec t ive8 of i n t e r e s t r a t e p o l i c y

i n t h e monetary and cr3i.t p o l i c y guidelines. The o b j e c t i v e s

are inten&clatoct s o t h a t p o l i c y measures appl ied t o achiege

one go&. w i l l d o f i n i t e l y a f f e a t ' t h e outcome o f t h e o t h e r s

i n t h e process of r e s t o r i n g i n t e r n a l and e x t e r n a l economic

equilibrium. Thus, moderation bf i n f l a t i o n a f f e c t s t h e b

r e a l i n t e r e a t r a t e s and t h e money s tock which has p u r s u i t of

appropr ia t e i n t e r e s t r a t e p o l i c y w i l l improve t h e e f f i c i e n t

opera t ion of t h e f i n a n c i a l mrmket w i t h consequent e f f e c t

on savings mobi l iza t ion , inveotnent , employment and growth.

Noting the existence of these in texucla t ionships , this

study foouses on how the in te rea t r a t e policy a f f e c t s banks

p r o f i t a b i l i t y i n Nigeria while taking other fac tors as given,

In te res t r a t e s were generally fixed by the cent ra l

Bank of Nigeria wi th periodic adjustment depevlding on

government's oectoral p r i o r i t y till the t h i r d quafter of

1986. Thereafter, active i n t e r e s t r a t e policy s t a r t ed when

banka were allowed t o negotiate the i n t e r e s t on time deposits.

S t p t i n g i n J ~ n u a r y 1.1987, the Central Bank of Nigeria set

the minimum i n t e r e s t r a t e level8 fo r savings a t 11.0 per cent

and tiin8 deposit r a t e a t 72.0 per cent, while banka negotiated

higher r a t e s w i t h t h e i r customers. A fur ther deregulation

of in torea t r a t e s occured i n August 1987 when tne mi.nimum

rediscount r a t e (MRR) was increased from 11.0 per cent t o

15.0 por cent. Other classes of in t e res t r a t e s a l so followed

i n response. However, t h o M R t i was reduced i n December, from

'l5.0 per cent t o 12.75 per cent. In 1988, Savings r a t e s

were ad3uated from t h e 1987 range of 9.5 - 15.0 per cent t o

11.0 - 12.5 per cent. Simil.~rl,y, coninrsraial bmks lending

r a t e s were adjusted downwards.

A t the b e d m i n ~ . , of 1989, the m i n i m u m Redisccunt iiate

wao adjusted upwnrde t o 13.25 per cent. Other ra teo on

savinga and time d e p o s i t s a l s o i n c r e ~ s e d , The withdrawal

of g o v e m e n t depos i t s from cominercial and Merdhmt bank

accounta t o c e n t r a l Bank reduced t h e i r l i q u i d i t y and f u r t h e r

increased depos i t and lending r a t e s as well as inter-bank

r a t e s & 9hs upward t r e n d continued as savings and prime

l e i n d i n ~ r a t e s reached 13.1 and 22,6 per cent respect ive ly ,

This r e s u l t e d i n a 9.5 percentage p o i n t apread betv~eon t h e

savings and prime lending r a t e s . The high spreau between

t h e savings and prime lending r a t e s prompted t h e c e n t r a l Bank

t o fix t h e apread at 7.5 percentage po in t s , while t h a t of

t h e prime and t h e h ighes t lending r a t e s were not t o exceed

4 peroontuge points ,

S imi lar ly , inter-bank rate was s e t a t l e a s t I percentage

p o i n t below t h e prime lending r a t e f o r each bank. Also,

i s s u e r a t e s for treasury b E l l s and c e r t i f i c a t e s r o s e t o

C17*5 percemt 17.5 i 48.5 gBkaeqB. r e spec t ive ly , from 12.25

and - 12.75 - 13.25 p e r cent, The Cl3N also f ixed t h e EIHH

a t 78.75 per cent which was I p e r c e n t n ~ e point above t h e

t r e a s u r y h i l l r a t e . These po l i cy neasure :nar 1 owed t h e spread

betwoen t h o commercial banks ::tr-azage savlnhs and lending r a t e s

by 0.5 pcrgentageo point^, 3erchant banks l end inz and time

deposit' s$ii;os alga rose t o tho ranges of Zj.1 - 29.8 g e r cent

and 22.5 - 27.2 pox cent, rcapect ivoly.

The r a t e of increaae i n i n t e r e s t r a t e s moddrated i n

1990 a s commercial and merchant banlco l i qu id i ty posit ion

improved, Phis was re f lec ted i n commercinl bank8 savings r a t e s

which moved from 17.2 per cent i n January t o 17.95 percent

i n November of the srme year. Both the average prime and

m a x i m u m lending r a t c s declined from 26.1 t o 24,9 per aent

and 30.5 t o 26 per cent respectively. Nerciiant banks r a t e s

a l so showed a downward trend,

The 1991 policy stance was retrogressive a s maximum

lending r a t e was cupped a t 21 per cent while savings r a t e

was allowed a minimum leve l of 13.5 per cent. As a r e s u l t

the year's prime lending r a t e f o r commercial anhmerchant

banks avevaged 20.04 and 20.84 per cent, respectively. Also

commeroial banks' savings r a t e ranged between 13.88 and 13.96

per cent. between January and December,

I&' p o l t ~ y reversal , the 1991 i n t e r e s t r a t e cei l ings

and f loors were removed i n the 1992 monetary and credi t policy

.guidelines, The naximum spread between banks average cost

of funds and the i r lending r a t e s were revised upwards from

4 t o 5 por cent, The removal of i n t e r e s t za te cei l ings , coupled

with l iqukdi ty management by the central Bmk i n response t o

the exchange r a t e deregulation, resulted i n high i n t e r e s t

ra tes , Commercial banks savings and prime lend in^ r a t e s

averaeed 16.3 and 26.9 per cent i n A p r i l while t h e i r m n l d m u m

lending r a t e and t h a t of merchant banks recorded 28.8

and 33.20 p e r cent respect ive ly . Mercqant banks a l s o recorded

t h e h ighes t depos i t r a t e of 45.0 percent on their 7 days t ime

dopoai t during the month.

2.6 EFlGCTS OP INTJSLST RATE CHANGFS ON J3AIJK'S PROFITAUIZI'PY

There are a number of government r egu la t ions which m i l i t n t e

aga ins t bank p r o f i t a b i l i t y . The resea rch s tudy conducted

by J. Ayo Akingbade i n d i c a t e s t h a t many banks conaid-er t h e

i n t e r e s t r a t e s t r u c t u r e and c e r t a i n a spec t s of t h e count ry ' s

monetary* f i s c a l and income p o l i c i e s as being obs t ruc t ive

t o profi t -making or p r o . f i t a b i l i t y i n i t s long term conotation, I

Accroding t o h i q i n t h e last few years , t h e discomforting

t rend d i sua In ib le from annual r e p b r t s of some Nigerian

ammerc ia l banks bL toward3 aont inuing dec l ine i n p rof i t .

Aocodinp; t o Mallam M. ~ a ~ a t u - l l e e n , ~ ~ he a s s e r t s t h a t

i n t e r e s t and exchange r a t e s have become very v o l a t i l e s i n c e

they were dere~;u la ted . According t o him, i n t h e absence

of r i s k management veh ic les such a s swaps and opt ions, high

v o l a t i l i t y cou)d be ex t rene ly des t ruc t ive ,

Again, concluding on tho ga ins of dereculati id economy, b

M a l l a m Me ~ a ~ a t u - ~ e e d 7 observed t h a t bankine, i n a d c r e ~ u l o t e d

environment w i l l be a l o t of fun. Competition w i l l be

incense. It w i l l be the s u r v i v a l of t h e f i t t e s t ,

T e c h n i c d competence and professional ism w i l l be d.em.nded as

by bank c u s t o m e r s ~ mat ter of r igh t .

Before derogulnt ion, t h e primary p r a c t i c e was t h a t

aommercial banks o b t a i n t h e i r funds t.rm r?.op@r;i!; r:; f ' x ~ m

cubtomers who a r e paid i n t e r e s t k a t a s f ixed by thz tZ;uves~uent.

These funds a re i n t u r n employed i n Loans and advances a s

we21 as s e c u r i t i e s , These c o n s t i t u t e t h e banks asset porWol5.0.

For banks theref a re t o ~ n ~ l r e ,p-rl~f itrj, the :i nqi:r?_rl!~f; .~'r:~-ngeZ

on loans scthoul.? 5e s u f f i i e n t t o c;oT.ror t h 5 c o s t c;f:.sbtsining the

f u n d . $ krb.ic,h w e m m d e n ~ ? ~ i l . a b l s t a t h e publit: :ir: %ha form

of loab.8n

With derogulotion of i n t s r e s t r a t e which e n t a i l e d t h e

dis.mnt-loment of all goversning i a w s and adlain-istrative c o n t r o l s

governing t h e interesi3 r a t e changed and paid by bunks and

al lowing thc: market f o r c e s of supply and derr?:~cd. !so tiot;emi.ne

more r e a l i s t i c i n t e r e s t ratee.

I J h i l e t he actual p r o f i t margin of commercial banks p.rSor

t a deregulation could not be determined, t h e appreciable

increa~o in. an set^ and l i a b i l i t i e s , loans anci advances, lend

credence t o the i r tendency t o advance more furlds and accept;

depos i t s a t i v i b u t a b l e t o t h e r e l a t i v e l y h igh interes-b r a t e s

thereby fincreasing t h e i r pnof i t s ,

A number of f a c t o r s , both e n d ~ g e ~ l o u s as well as exosewus

inf luence the p r o f i t a b i l i t y performance of banks.

Writing on bank asset and l i a b i l i t y umagamc%, G.O.

~ w a n k w o ~ ~ remarked that t h i s r e q u i r e s fo r i t s suaosssful

execut ion an i d e n t i f i c a t i o n of t h e key decision areas t h a t

impinge on p r o f i t a b i l i t y , s u c h as CAP aanazemcnt, liquidity

and cos t c o n t r c l c stc.

Accorclixl~; t o j i - ro , i t a l z o req\ti.ser. ;!n sna?.yfl;f.s of ? h a hnl?k:in.g

aud ~colao~mlc eriv5,rzrwnc?.nt t o 5.dc':nt;i-fy op~o.'-";ux6 ti E. E m d t h m ~ t B,

deci..,:ic;no ba&ed bg mn.p;.age.c)ent ~txgs~* icac ,c~ nn.3 ~ ~ j i i z e r . i a n t ,

c o n ~ i s t z n t v i t h t h e overn l l ab jec t ivo of _n-Afif; nmxLd.zci.tFo!;,

w i t h i n t i l e constrni.n.t;s cf 1.3.quJ.d;.tw, . q ~ h r ~ 3 i q ~ g ;nil r~~.;r,ulz%i);"~'

rdquiromonta.

I n an extcnoivo s.tuciy on performance i i l %!la b .?nk in~ ~ o c t , o r ,

which oo-~erctd twenty-f oar ilimnkn, FnmL AdolmnyeP9 rensrked

that ssvsral ' factors influence banks perf ormancc? and tk: st3

l i q u i d i t y , eff iciency, loan

sources, revenue app l i ca t ion , branch l oca t ion , bank size,

l i a b i l i t y match, r e g u l a t i o n and national economic vur iables , b

Wxiting fu r the r , he noted t h a t the well known porfonnmce

measures. fncludod tba net income before taxes, total nssotn,

t o t a l opera t ing expenses, t o t a l depos i t s , opera t ing income

h e

In his bank management l e c t u r e , F.0 Okafol? remarked t h a t

bank performance i s no t J u s t only a funu t ion o f t h e va lue

of t h e aooets but a l s o inc ludes the o t r u c t u r o of t h e a s se t s .

Other ;..factors t h a t have bearing he said are. t h e orv vice

r a t e , a o d a s i o n a , comrnisoion on turnover, f o r e i g n oxchange

r a t e etc.

Most s t u d i e s have depended heav i ly on f i n a n c i a l r a t i o s

f o r asseszing t h e s igxdficance of such broad f a c t o r s as

c a p i t a l inadequang, managerial e f f i c i ency , a s s e t q u a l i t y and

1iquidii ;y as determinants of bank perfomawe. In a d d i t i o n t o

these, some i n d i c e s have a l s o been adopted t o i n v o 3 t i p t e the

e f f e c t of economic and doil~oqruphic condi t ions on bank

performance. Furthermore, more recen t ly , there have been

at tempts that have shown market information such c?a bond and

stock p r i c o s of quoted b m k u as important i n d i c a t b r s of b a r k

perfornence.

Most of thetle i d e n t i f i e d f a c t o r s cm be c l a s s i f i e d a n

ei thar endogenous o r exogenous factors. T h i ~ impl ies that

f i n a n c i a l condi t ion of banka could be doterminod by e i t h e r

f a c t o r s d d e r o r ou t s ide i ts c o n t r o l o r b a t t e r sti l l , as

a uombination of both.

Also, conclusion about whioh fac tors o r group of

facctors are tho most important f o r predict ing bauk performaace

sre:lnot l4nanimoue. It doee seem twit the identified

significan* fao tors pary with the economy, and thus the

o o o n d o env&z?oment, the seleated accounting, oconamic3

demopaphia or market indices, Somo s imi la r i t i e s can, however

be observed. I n general, the conclusion has been t h a t those

fac tors critical t o a bank's perfommoe are endogenous t o

the bank. llhia i s perhapa due t o the fact tha t ,Suoh exogenous

factors, more often than not, a f fec t a l l &sting banks,

Quite a l o t 3ave been writton on i n t e r e s t rates by

various author i t ies , thooris ts and economiats as regards its

nature, detenuinants and rela t ionship wi th a t her macro eoonor.de

variables but none has appraised i t as i t conaerns ito econo-

metria e f fec t s on p ro f i t ab i l i ty of bank8 i n IJigcl?ih.

The theor i t i ca l basis f o r the use of in t e rea t r a t e

polioy i n s%imulating investaent islnformed by the Keynesian

investment theory and by the Mckinnonshaw (1973) Sa-s and , .

investment hypotheses, The Keynesian theory implies that b

low interoet as a uomponent of cost of hmd, encourages

borrowing for investment. On the other hand, Mokinnon and

and Ghaw view, adminiatered low in te res t rate aa detrimental t o

inoreased eav ing~ and hence investments demand.

Gxeene and Villanueva (1991)30 entimated the offecta

of different macro eaonomict varinbles and policies, including

in te res t rates on privatreinveatment on a group of developing

coun&ride. %heir resul ts show that pri-te invesbent -GDP

r a t i o i a poai-Wely related t o rea l Gross Demestic produet

mwth, level of per capita GDP and the r a t e of publia sector

invechent, while rea l in teres t rate , domeetio inf lat ion,

debt-service ra t io , and r a t i o of debt t o GDP negatively

affeoted private investment ratio,

I n an effort t o examine the responee of investment

t o i d e r e a t r a t e a h n g e s during s tabi l iaat ion p~ogrammes,

Hall ( 1 9 n ) ~ ' disauesed the view that s t a b i l i ~ a t i o n policiea

affeot; eho*term in teres t ratee whi le long-term rates are

more responsive t o investmenta.

Balassa (79891~~ as well ae Arrieta ( 1 9 ~ ) 3 3 extensively

. reviewed the l i t e ra tu re on the effects of in teres t r a tes

on saving8 i n developing countries, including time se r ies

studies on India, Balasm aon~luded by observing that even though most of the studies indicated positive rela%ionship

between in te res t r a t e and eav ing~ , they were incobalitsive

on 'whether eavinea i a significantly affected by mov merits i n

in te res t rates , apparently as a resul t of data measurement

and exclusion of appropr ia te l a g s ' t ~ u ~ t u r e ,

M u (19881% reviewed t h e determinants ond s t r u c t u r e

of i n t e r e s t r u t e s i n Nigeria and nobed the ex i s t ence of very

low nominal anci negubive r e a l i n t e r e s t r a t e s dur ing most of

tihe review period (1970 - 85). He demonstrated the nemti;ative

e f f e c t of low r e u l i n b e r e s t r a t e s on savings and investment

using t h e usual Mckinnon f i n a n c i a l regresas ion diagram,

His main conclusion was t h a t the r e l a t i o n s h i p between r e u l

i n t e r u s t r a t e s and savings is inconclusive,

Based on the above premises, and l o t s of o t ~ . e r views,

there then arose t h e need f o r u study on the eccnometric

a n a l y s i s of t h e e f f e c t s chcnging i n t e r e s t r a t e s regime

has on the p r o f i t a b i l i t y of barika i n Nigsria, hence t h i s

37. I

# \

REPEFUNCES ?. !

I 'I, Thdas MI Harris Leskey and illohn I. Booman, (1976)

&pent Iesues in Monctsry Theory and Pol* (U.S.A, A.H.PI Publishing; ~orporation). P.362

2. P.NeC Okigbo (1981) 9he structure of 5ntoront rate4 d d a ' o anoncia1 System Gtructxrc end Growth. .(London,

Group) P. 67.

3. Fed , Adekanye (1986) I n t e r e s t Ratesl; I-- The XJ.ement~___o_f_ _of Banking , i n Nigeria (Lagoa, F & H ?ubliahorp LM) 3rd. E b Pe 89.

4. Sirneon Ibu Ajay;i. and Oladeji 0. 030 (1981) Money and Btd&jg (London, George Allen and IJnion Xltd), Pa 148.

5. Xbid P* q49

7. J. Varr E'eatermaker (1969) Readings i n Financial Markets twd. Xn~titu.tionsL X~ewyork, Meredith ~orporat i on) Y.218.

9, ttMon.etary and credit Guidelines Puulioation of Central M k of Nigeriaw 1987 and l988.

% Centraz Bank of Nigeria, monetary, ~ ~ t x l i i ; and Boroim Bscohango/ Trade Guideline for 19% - Macal year. No. 28,

p.4

13. Mddnnon E, G a t (1977), Money, the price level and L~tsrest Rates - An Introduotion t o mouctarg tho or^ New Jersey, Prent ice Hall Inc.) Fpr 71 - 15.

14, Anderson F. Dnvid (1980). Xntenqdiate E~onomics for West African ondo don, M c m i l l a a Publ-ishing Conptilly)-*let Ed.

pa3570 n

15. Barvey C &@eq l977) Mecr.0 Eoonom~cs for ALfrica (London, (Ieinemann Eubliohers) 1st; Ed, pb s,

16. Garkartnsy Jane8 Da and Riahard (1973) Studies i n Econonioa -- m b l i c Choice (New York, Aaademia PEG-&) 2nd Ed, P. 167.

17. s t a n l e y M. Beneon (1975) Sntroduction t o Monetary Economii (New Ywk, Harper and Row)Pg. 74 - 75,

18. W t h H, Whethain and Jean I, Gnrrie (A981) ,The .~cou6aics of African Countries (London, Cambridge)

9. 77.

19. Anderson, op a i t P, 26

20. G. 0. Nwankwo (19843) .The Nigerian Financial Systeq (&ondon, Maamillan Yubliahers I ~ t d ) P. 55.

21. Xbid P a 58

22. Xbid P, 60

23. Mac VaSsb (1980) Money, Banking and Ip$ernational Trade (India, Vikae Publishing Ltd) P. 253

25. Ayo 5. Akingb~de (1965) Corporate Stratem (New York nograwbil~i P.23.

26. Mallam M. Hayatu-Deen (1392) til>eregulation and the Eeonomyw Businem . ..Concord 21 July, 2.25.

27. Malhn M, Hayatu-Desn (1992) ",Gains of Deremlated Eoonamyn Buoiness Times 20, July, P.2

28. G. 0. Nmnkwo (1991) Bank Managements Principlas and Practicg (Nigeria t Malthouse Press Ltd Ikeja) 1st Ed. Pw 42.

29. F d Adekanye ('l992) "mnkingr Improfring performance in .the Banking Seatortt Businsas Tirnea I 5 June, P.5

30. Greens, Joshua and Delanb Villanuera (1991) ''Private Xnvostment in Developing Oountriest- An Bnpirical Anal.ysisw f M F Stqff P8pers Vol. 38, No. 1 Maroh, P. 33 - B,

and the Effects of stabilization policiestt BrooMn~ raper8 pn honomic A c t i v i t ~ Yo1 1 , Pp 61 - 103

32. Balasaa, Bela (1989) "The effects of In teres t Rates on Savings i n Devalopjng CountriesM World Rnnk norking Paper No. 56, Septmbm,

33. Arrieta, M. Gonzales (1988) flInterect Rates, Saving and G~owth in Less Developed countries$ An Asao~sment

of recent h t p i r i c n l Resn~rch t1 World Development,

Vole 16, NO. 5 13' 589 - 605.

CH4PThII TI-1R.m

RE:; E4llCH Ml~TII03)OLOGY

3.1 SOURCES Ol? DA!ilA

For t h e purpose of t h i s study, d a t a were obtained

from varztoue aources; e s p e c i a l l y from secondary sources,

The d a t a f o r t h i s work were got from Central 13ank of

Nigeria annual r e p o r t s , banking j ournals and Magazines,

Cent ra l Bank of Nigeria S t a t i s t i c a l b u l l e t i n s , Cent ra l Hank

. of Nizer ia f i n a n c i a l Reviews, review of r e l e v a n t textl)ooks,

newspapers, ' , Journal and o t h e r r e l a t e d ' l i t e r a t u r e s .

3, 2 TREA'I'PIENT OF DATA

The essence of d a t a c o l l e c t i o n is not f o r an end i n

i t s e l f bu t t o serve as a means;toan end, To a t t a i n t h i s end,

t h e data s o collected have t o b e t r e a t e d edonametr$cally

and ahalyeed f o r any conclusion t o be drawn out of it. I

yn this a n a l y s i s of da ta , numerical d a t a were f i r s t ' .. / r

1

pressnted i n a t a b u l a r form, These t a b l e s were then

i n t e r p r e t e d and analysed, From t h e ana lys i s , i n fe rences were

'drawn;

3.3 METHODOLOGY

3n this work, t h e econometric jcechnique ie employed as

t h e r e l evan t method of study, This i s because it enables

u s ' t o obt -dn t h e parameter estidaates of t h e p r o f i t a b i l i t y

model, The knowledge of t h e numerical value of t h e

c o e f f i c i e n t s of t h e v a d a b l e s i n t h e model w i l l be important

f o r p a l i c y formulation, Using t h i s technique provides an

empir ica l t e s t i n g of t h e t h e o r e t i c a l p o s t u l a t i o n t h a t t h e

p r a f i t a b i l i t y of banks which can be empi r i ca l ly approximated

by such v a r i a b l e s as t o t a l a s s e t s , t o t a l depos i t s , l o a n s and

advances is i n f 1 1 . 1 enced by: ; :a l te rna t ing i n t e r e s t r a t e regime.

In t h e same vein, t h e a b i l i t y t o provide a p r e c i s e

p r e d i c t i o n of econorni.~ magnitude LigLiy reoommends t h i s

method over o t h e r r e sea rch methods, For ins t ance , t h e

s s t ima ted p r o f i t a b i l i t y model w i l l be a b l e t o provide

approximately what t h e value of t h e t o t a l p r o f i t a b i l i t y w i l l

be, given t h e va lues of t h e explanatory var iables , In a

nu t she l l , s i n c e t h i s s tudy is on t h e q u a n t i t a t i v e es t imat ion

of t h e p r o f i t a b i l i t y of banks i n Nigeria, t h e econometric

tedhnique i s t h e most appropr ia te because i t d e a l s with t h e

measurement of economic re l a t ionsh ips ,

3.4 PROCEDURE FOR ESTIMATION

A l o t of s t u d i e s on q u a n t i t a t i v e r e sea rah show t h a t

va r ious es t imat ion methods l i k e 2 s t a g e l e a s t square (2.:LS),

3 s t age l 'east square (3~LS)and maximum l ike l ihood method

c o u l d , b e uaed t o ob ta in e s t ima tes of t h e parametars of

e o o n d c r e l a t i o n s h i p , However, t h e v a l i d i t y of t h e r e s u l t s

d i f f e r from one method t o t h e other ,

However, t h e ord inary l e a s t squares method (oLs) i s

employed as t h e es t imat ion technique f o r bu i ld ing t h e

p r o f i t a b i l i t y of banks model f o r Nigeria, This method

possess t h e d e s i r a b l e p ~ o p e r t y of best , l i n e a r , dmbaisedness,

minimum variance and s f f i c i ency , Its mechanisms a r e r e l a t i v e l y

easy t o understand,

3 5 MODEL SPECIFICATION

A thorough grasp of eoonomic theory r e v e a l s t h a t many

v a r i a b l e s a f f e c t banks p r o f i t a b i l i t y , However, In t h i s

study, only those v a r i a b l e s t h a t ard amenable t o quak i f i ca t ion

would be u t i l i s e d f o r t h e bui ld ing of t h e banks p r o f i t a b i l i t y

model f o r Nigeria, Therefore, dunmy v a r i a b l e s such as managerial . - \

eff ic ienoy, asset qua l i ty , branch loca t ion , r egu la t ion and

economfo envhronnent would not be included i n our model.

Hence, we proceed w i t h the assumption t h a t banksb p r o f i t a b i l i t y

as measured by t o t a l a s s e t s (TA), t o t a l d e p o s i t ('ID), Loans

- and advances (LAD) is a funct ion of r a t e s of i n t e r e s t (i),

such as d n b u m Redisoount Hate (MRR), Treasury Bill Hate

(TEIR), Deposit Rate (DR), l ending Rate (LR).

The j u s t i f i c a t i o n f o r i n t e r e s t r a t e s (i) der ives from

t h e e,oonomio theory which p o s t u l a t e s t h a t banks p r o f i t a b i l i t y depends among o t h e r th ings on t h e r a t e s of i n t e r e s t p r e v a i l i n g

The minimum Rediscount Rate (MRR) determines t h e c o s t

a t which oommercial banks can borrow from t h e Cent ra l

Bank as "Lender of l a o t r e so r t t t . This, while holding o t h e r

v a r i a b l e s cons tant , i a expected to l .have a negat ive r e l a t i o n s h i p

with bankst p r o f i t a b i l i t y .

The t r e a s u r y b i l l which is a n IOU'issued by t h e Federal

~overnment of Nigeria f o r s h o r t pe r iods of about t h r e e months

pqua3ly has bear ing on the banks' p r o f i t a b i l i t y . Because

of t h l ! imandatory 10% requi red f o r banks t o keep i n t h e form

of treasury b i l l s , i t c o a s t i t u t e s a g rea t p o r t i o n of banks'

g ross earnings. I n o t h e r words, t r e a s u r y b i l l s r a t e h a s p o s i t i v e

r e l a t i o n s h i p w i t h banks p r o f i t a b i l i t y .

The depooit r a t e r e f e r s t o t h e r a t e s o f i n t e r e s t p a i d

t o depositors on t ime and savings depos i t and t h i s has an

i n v e r s e r e l a t i o n s h i p on banke' p r o f i t a b i l i t y .

The lending r a t e i s t h e r a t e which banks aharge &heir

borrowhg customers on loans and advances and t h i s i a t h e

major source of income t o t h e banks. There is a p o s i t i v e

relationship between t h e lending r a t e s and bankeg p r o f i t a b i l i t y .

S p e c i f i c a l l y , t h e fol lowing equat ions w i l l be s t a t e d

t o enable us eva lua te t h e impaut of changing i n t e r e s t r a t e s

on banks p r o f i t a b i l i t y ,

1, 'PA r f (MHR, TBR, DR,LR,U)

2. TD a g @lRR,DR, SR, U)

3. UP) = &(MRR,LR,U)

where

MRR

Totq l Asse ts

To ta l Deposit

Loans and Advances

Minimum Rediscount Rate

Treasury B i l l s Hate

Deposit Rate

Lending Rate

Savings Rate

fdh& P funct ions t h a t l i n k t h e independent v a r i a b l e s

MRR, !PBR,l)H, LH, SR) t o t h e dependent var iablo.

U r S t o i c h a s t i c e r r o r term

The banks* p r o f i t a b i l i t y model can a l s o be specified

i n an a l t e r n a t i v e manner incorpora t ing t h e p i n s frm f o r c i ~ m

exchange t ransac t ions . This i s because banks' p r o f i t a b i l i t y

i s n o t on ly explained by t h e i n t e r e s t r n t e s a s income from

foreign. exchange a c t i v i t i e s equal ly contr ibutes .

Symbolically, t h i s a l t e r n a t i v e model can be m i t t e n thus:

'PA P f (TCR, fx)

where,

TCR = Treasurg C e r t i f i c a t e Rate of 2 yea r ma tu r i ty

fx = Average foreignemhange ra te .

Another p o s s i b l e moddl s p e c i f i c a t i o n about t h e

p r o f i t a b i l i t y of banks could be done us ing t h e dynamic' models.

This model i s g e n e r a l l y based on t h e p rah i se t h a t cu r ren t

decision.^ a r e inf luenced by p a s t behaviour (Kubursi; 1974a91)~

Thus t h e dynamic banks' p r o f i t a b i l i t y model could be represented

a*,

n t h e lagged var iable .

3.5.l E(&JATIONS. OF THE MGI)EL, INCORPORATIlNG BOTH LINEAH AND LOG-LINEAR E:;UATIONS

It may s u f f i c e t o note t h a t t h i s s tudy sugl;esta a

l i n e a r model, bu t s i n c e the mathemati oal. fqm of t h e model

cannot be s p e c i f i e d i n a p r i o r i manner, t h i s s tudy would

explore both t h e l i n e a r and log- l inear forms. The l o & l i n e a r

equat ions provide d i r e c t l y t h e dee;ree of r6spoosiveness

of t h e est3mated va r i ab les ,

A m a + blMRR + b2 TBR + b3 DR + WLR

LnTA u a + blLnMRH + b2LnTBR + b3LnDR + WLnLI?

TD 1 a + blMRR + B2DR + b3SR

LnTD = a + blLnMRR + b2LnllH + b3LnSR

LAD u a + blMRR + b2LR

LnLAD u a + blLnMRR + b2LnLR

7. TA = a + blTCR + b2fx

8. LnTA - a + blLnTCH + b2Lnfx

The regression re su l t s will be evaluetl:d based on the

s t a t i s t ~ c a l ~ a i a b i l i t y of the estimates of the pauaametera

of the mddel. T h i s c r i t e r i a makes use of the correlat ion

coeff ic ient and the standard e r ro r tes t .

A high value of $he square of the correla t ion coeff ic ient

suggest t h e degree of the t o t a l var ia t ion of the banks

p r o f i t a b i l i t y variable being ezplained by the changes i n the

value of the explanatory variables.

I

While the I n r g e r t h e s tandard e r r o r , t h e l e s s r e l i a b l e

i s t h e r e s u l t . However, an es t i~ f l a t e t h a t i s s t a t i s t i c a l l y

s i g n i f i c a n t bu t t h e o r e t i c a l l y implausible may be r e j e c t e d

on t h e wounds of t h e a p r i o r i t h e o r e t i c a l economic

c r i t e r i a ,

Again t h e econometric c r i t e r i a w i l l be used t o judge

t h e r e l i a b i l i t y and e f f i c i e n c y of t h e est imated r e s u l t s ,

These c r i t e r i a w i l l be employed sys temat ica l ly i n

dec id ing whether t o accept ' g r e j s c t t h e e s t ima tes of t h e

banks p r u f i t a b i l i t y model,

Table 3.1 shows t h e d a t a used f o r t h e r eg ress ion

equations.

C1lAJ.T :;.R FOUR

DA.T.A PRESEN'mrl'ION AN]! ANALYSIS

4, I P R I ~ S W I ' A T I O N OF REGRESSION RESULTS

Detai led r e s u l t of t h e estimated eqnat ion a re presented

i n t a b l e s 4.1, 4.2 and 4.3. The values of t h e t - ' a t z t i s t i c s

have been ca lcula ted and are p u t down i n pa r sn thes i s below

t h e estimated parameters t o which they correspond. The t-

va lues help t o determine t h e desree of confictencc i n t h e

va l j .d i ty of t h e es t imates , R~~ i s t h e correc ted c o e f f i c i e n t

of determinat ion ~ d j u s t e d f o r t h e degrees of freedom. It 2 ira q b e t t e r goodness-of-fit measwe than R . R, t h e

coef f i c i c n t of corrclxit ion, ineasureR t h e d e f ~ r o e of a s s o c i a t i o n

of t h e rogrensors taken both singly and j o in t ly . 3 ' -ntat is t ics

t e s t s t h o o v e r a l l s igni f icaneeof t h o r e g r e s s o r s on t h e

dependent var iables . The Durbin-Watson stF3tisti.c t e a t o f o r

s e r i a l c o t r e l a t i o n o r t~u tocorse la t ion ,

, , , I..

DATA USED FOE

L0.4i:S Ai:: ADVANSZS

LAD

050 -62

075 094

1.9 2.12

3.07 4-11

4.62 6.33 8 . . 10.28 11,'lO 13. w 12-17 1 5.70 17. 53 20.04 22-22 26.08 31.76 41 58 49-25

cm S5 CBN CEI? AI?XJ~L REPORTS

-- -

EQUATION

TABLE 4-1 . . .-. , . ./

MRR - -3.23

(1.33)

-0.68

(C.41)

5.77'

(3.56:

-0.43

(9.43:

1 *oo

(I .42:

20 66

(2028

DEPENDENT

ALTERNA'.. I n MODEL I

TCR -

;NT VARI . .. . . .

MRR R~

1 e o o

ECONOMIC 'A rnQRI1 CRITERIA

Unclor t h i s heading, t h e _resul ts o f our r eg ress ion

equations w i l l be aaelyspd bosed on whether they s a t i s f i e d t h e

r e s t r i c t i o n s placed on them i n terms of t h e s i g n s and magnitude

o f t h e p ~ r s m e t e r estimate.

Ln equat ions (I), (2) and (4). t h e parameter est imate

of t h e v m i a b l e minimum rediscount r a t e (MRR) t o a reasonable

e x t a n t confomed t o our expected sign, It turned up negat ive

i n d i o a t i n g t h a t an improvelnent i n banks' prof i tabCki ty 6s

represented by i t s To ta l Asset base (TA) requi re0 a s ign i f i can t

reduction iu t h e minimum rediscount r a t d , The impact of t h i s

s x p h r a t o q v a r i a b l e on the dependent v a r i a b l e s of To ta l Asset

. (U) Tota l Deposit (TD) and loans and Advances (LAD) i s

r&markable,. For ins t ance , i n equation (I), t h e res:>onsiveness

s:C l i~nk6 p o f i t a b i l i t y on changes i n lninimum r e d i s i o u n t r a t e

(iwdi) is fsii1-y h i g h , An i n v e s t i g a t i o n of t a b l e 4.1 shows t h a t

3 ??; incraurru i n t h L s in ter :eet r a t e policy w i l l au tomat ica l ly

l o a d ' to a jr,2yb decline i n bank~l p r o f i t a b i l i t y and v ice versa,

'The log-l inear e q ~ a t i o n 2 however d id no t provide nuoh impr..ovement

t o this rosult. S imi lar ly , i n equat ion (4), t h e independent t

v a r i a b l e MRR a l s o s a t i s f i e d the a i g e b r a i c sign expected,

Banks p r o f i t a b i l i t y a s .geauured by t o t a l D e p o ~ i t s has an

inverse r e l a t i o n s h i p w i t h t h e independent va r i ab le , MRR.

O u r empir ica l r e s u l t shows t h a t i f tho monetary a u t h m i t i o s

change , t h e MRR by I%, banks p r o f i t a b i l i t y t-611 change

negatilttaly by 0.43%. From t h i s we can fie4uce t h a t baiiks

p r o f i t a b i l i t , ~ (us ing To ta l Deposit aa proxy) f a i n e l a s t i c - with r e spec t t o minimum Rediscount Rate.

A c a r e f u l examination of t a b l e 4.1, a l s o r e v e a l s

I . t h a t t h e v a r i a b l e minimum Rediscount Rate f e l l s h o r t of

o& expected s i g n s i n equat ions (3) . (5) and (6). It

turned up with p o s i t i v e c o e f f i c i e n t s ; meanin:; t h a t banks

p r o f i t a b i l i t y can bo increased i n t h e f a c e of r i s i n g

m i d m u m rediscount rate, We can a t t r i b u t e t h i s s u r p r i s i n g

r e s u l t t o t h e f a c t t h a t banks p r o f i t a b i l i t y i~ inf luenced

by mult i -var iate f a c t o r s and as such could have a f f e c t e d t h e

sign of our parameter estimate.

The expected r e l a t i o n s h i p between t h e explanatory

v a r i a b l e s , Treasury B i l l s Rate Deposit r a t e and Lending

r a t e with t h e dependent v a r i a b l e was cs tab l i shed i n equat ion

1. Their .bpaot on " ~ k s p r o f i t a b i l i t y i s given by t h e

v a l u e ~ of t h e i r c o e f f i c i e n t s and they range from -3.23 t o

9.95. I n f a c t , t h e regresnion r e s u l t as shown i n equation

(1) impl ies t h a t an inczease of 1% i n t h e discount r a t e

of t r e a s u r y b i l l s by the Central Bank w i l l l ead t o a 9.95%

increment i n banks p r o f i t a b i l i t y . Also a r i s i n g lending

r a t e as suggested by t h e r e s u l t w i l l improve the p r o f i t a b i l i t y

f i g e e by 4.1%, While t h e depos i t r a t e w i t h inverse

r e l q t i o n s h i p would reduce banks p r o f i t a b i l i t y i f it i s increased,

This is i n agreement w i t h the b e l i e f t h a t banks o r d i n a r i l y

would no t want t o pay high i n t e r e s t on loans, The r e s u l t

of t h e log- l inear equation (2) did not provide any

s i g n i f i c a n t improvement and as such will. mot be reported,

The remaining independent; vtariables, savings r a t e and

lending sate i s i n l i n e with our t h e o r i t i c a l a p r i o r i

expeolsations i n equat ions ( 3 ) and (5)r However, they f e l l

s h o r t of t h e expected s igns when t h e log- l inear rc&ession

model wqs used i n equations (4) and (6). Our emp%&ical

r e s u l t , confirmed t h e t h e o r i t i c a l p o s t u l a t i o n t h a t a high

savings r a t e w i l l rdduce banks p r o f i t a b i l i t y appreciably,

Also, t h e p o s i t i v e r e l a t i o n s h i p between lending r a t e and

t h e dependent v a r i a b l e loans and Advances, i s i n support

w i t h t h e genera l agreement t h a t a r i s i n g lending r a t e enhonaes

banks p o f i t a b i l i t y rer&ormance,

I n t h e a l t e r n a t i v e model, our emptr ical study revealed

t h a t banks p r o f i t n b i l i t y performance i s not only inf luenced a l s o by

by i n a e r e s t r a t e p o l i c i e a butLthe changing fo re ign exchange

r a t e - y e m e . The impact of t h e fo re ign exchance v a r i a b l e

i s very hi[:h on banks p r o f i t a b i l i t y i n equat ion (7?. The

log- l inear equat ion (8) a l s o i n d i c a t e s a moderately ::igh

responsiveness of t h e dependent v a r i a b l e t o changes i n the

independent va r i ab le . Also t h e t r e a s u r y c e r t i f i c a t e v a r i a b l e

turned up w i t h a f a i r l y h i g h coe f f i e i en t . 'Pile e l m t i c i t y

of banks p r o f i t a b i l i t y w i t h r e spec t t o t h i u v a r i a b l e i s 1.74 -- ,

p e r cent i f t h e discount raLe on t r e a s u r y c e r t i f i c a t e inc rdases

by 1%.

f ina l ly , t h e r e s u l t of our c!ynamic model is q u i t e

r evea l iug as t h e speed of adjustment of Ghe dependent

v a r i a b l e on i t s lagzed va lue and the long-term z l a s t i c i t y

can be ca lcu la ted from it. The long-term e l a n i c i t y eot imates

i s derived from our p re fe r red dynamic equation (10) by

d iv id ing t h e estimated parameters by I minus t h e estimated

c o e f f i c i e n t of t h e lageed dependent var iable . The long-

t e r n e l a s t i c i t y e s t i m ~ t e s a r e 2.30 f o r miuimum Rediscount

Hate, 1.m f o r t r e n s u r y b i l l s r a t e s , 0.33 f o r Deposit Rate

and 1,W f o r lending r a t e , I n f a c t I ninus t h e est imated

'' c o e f f i c i e n t of t h e lagged dependent vnria!)le i s the est imate

of the spoed of adjustment doef f i c i en t , I n t h i s equation,

t h e speed of response of banks p r o f i t a b i l i t y t o a l l t h e

independont v a r i a b l e is not very high, It i s ubout 0,46.

From t h e above economic a p r i o r i c r i t e r i a , it is evident

t h a t most of tho explanatory va r i ab les confhned t o t h e o r i t i c a l

a s se r t ions , The re lo r e , our parameter est imates c:m be s a i d

t o be s b t i s f a c t o r y and a s Such po l i cy p r e d i c t i o n can be based

on these e s t i m t e s .

4.3 STA?IS!?ICAL TESTS OF SIGNIFICANCE,

Here we w i l l be concsrned w i t h whether our par 'meter

e s t ima tes m e s t a t i s t i c a l l y s i g n i f i c a n t , The s ign i f i cance

of t h e ind iv idua l explnnatory . . var iab les z ro t e s t e d

us ing t h e t - t e s t a t Y3/C l e v e l of s igni f icance , This is done

by compadng t h e t - r a t i o , t* w i t h t h e theolbiticnl. t - r a t i o ,

t 0.025 whiuh h a s degrees of freedom n-k, The: observed

t - r a t i o f a r each parameter es t imate i s t h e r e s u l t of d iv id ing

t h a t es t imate by i t s standard e r r o r A b

b

(where t h e n i s t h e number of observat ions and IS i s t h e

number of independent va r i ab les ) ,

The n u l l hypothesis i n each equation i s s t a t e d a s f o l l i ~ w s

Hot bl a 0

and t h e a l t e r n a t i v e hypothesis i s

Hlr bl 3/ 0

I n t h i s study, our decision r u l e w i l l be based on t h e fol lowing

(a) If t* 7 t.O.25, r e j e c t 'io ie b l i s not zero

and accept t h a t t h e explanatory v a r i a b l e in f luences t h e

r e g r e s s anB' s i g n i f i c a n t l y ,

(b) If t* 4 t 0.025, we accept Ho which s t a t e s t h a t b l i s not

s t a t i s l i o a l l y d i f f e r e n t fronl zero and t h e i l t h regression

does no t inf luence t h e regremand sf@fi&nt ly .

The above dec is ion r u l e can be pe r fomed i n an npprbximnte

way by aimple inspect ion , That i s i f t h e observed t* i s g r e a t e r

than 2 (or smal ler than -2), we r e j e c t tilt n ~ l l hypottlesis,

I f , on t h e o t h e r hand, t h e observed t Y 5.s smaller tlmn 2

(but greater than -2), we acczpt t h e n u l l hypothesis,

Following t h e abovd decis ion r u l e , our parameter

e s t ima tes i n t a b l e s 4.1, 4-2 and 4.3 with a s t e r i c k s are those

ones t h a t passed t h e t - t e s t a t 5% l e v e l of s i g i n i f i c a n c e of

R 2-tai led t e s t , The minimum %diocount Rate var i : t t~ le

appeared mostly s t a t i s t i c a l l y i n s i g n i f i c a n t i n most of t h e

equations. However, t h i s does no t render t h e equat ions

u n o s t i ~ f n c t o r y because of t h e high va lues of t h c ad jus ted

c o e f f i c i e n t of d e t c l ~ u i n a t i o n recorded i n those equat ions w i t h

parameter estimate,

For ins t ance , no-t;withstsndi ng t h e i n u i z i n i f i c : m t estimates

of lending r a t e , minimum rediscount r a t e and t r e a s u r y b i l l s

r a t e i n equhtion ( 2 ) , t h d adjusted coe f f i c5en t of dc tcrn ina t ion , -2

i s 0.W. T h i s means t h a t t h e independent w r i n b l e s expla ins

84% of t h e changes i n tha dependent varinbleg,

None of t h e explanatory vnr iablos i n equst ion (q) -2

appc:ared s t a t i s t i c a l 1 ; y s i g n i f i c a n t even tirough t h e 1: i s as

high as %%. This could have a r i s o n because of e r r o r s i n

t h e d a t a o r because loans and a d v ~ n c e s have scmc otiler v a r i a b l e s

in f luenc ing it,

Also depos i t r a t e va r i ab le appeared s tat is t ; ical . ly

insj ,gniRicant i n slrnovt a l l t h e equations where it was included,

However, t h i s does rAot v i t i k b i t s importacce as an

m l a n a t o r y v a r i a b l e of bank p r o f i t a b i l i t y . A s shown i n

equat ions (I), ( 3 ) and('r), t he R-* i s between 0.85 t o 0.96.

Final ly , our dynamic model provides a remarkable

improvewont t o t h e previous spec i f ica t ion . I n both t h e

l i n e a r and log- l inear equations (9) a n d ( l o ) , almost a l l t h e

explanatory v a r i a b l e s passed t h e 1;-test and as such a r e

adjudged s t a t i ~ t i c a l l y s i g n i f i c a n t ,

I n summary, t h e empirical r e s u l t confirms t h i ~ t most of

t h e variables inc leded i n the bank p r o f i t a b i l . i t g model s ~ t i s f i e d

t h o s t n t i s t i c a l c r i t e r i a as conducted using t he t - t e s t ,

4,4 ECONOMETRIC TEST FOR THE PRESENCE CIE' AUTUGOIIIIELATION

In order t o confirm t h o r e l i a b i l i t y and e f f i c i e n c y of

our parameter estimate, we have t o i n v e s t i f ~ a t e whether, some

of t h e asswapt-ions of the econometric method employed a r e

v io la ted . I n t h i s connection, the resenech w i l l proceed t o

t e s t for! t h e presence of au tocor re l~a t ion (that; i s t h e *lat ion

of t h e assumption t h a t the random vur inble U sre l , ternyorally

independent) using t h e Durbin-Watson t e s t ,

The tes t may be oublined as follower-

The nul l hypothesis

Hot = 0

i e the U1s re not uutocorellatedl tes ted against the

altsrnutxive hypo-tbesia 3

HI: p # 0

i e the U1s a r e autocorrelated.

The Durbin-d~ltson s t u t i s i t i c is computod using the

formula.

The values of d* f o r our respective equations have

been calculated by the computer. ide w i l l therefore compare

the empirical d* value with the dL and du i n the h b i n -

Wutson t a b l e s , and with t h e i r transforma (4 - dL) and (4 --. du) . The comparison us in^ dL and du investigates

the poss ib i l i ty of posit ive i3.~'l-ocorrelution, while com+rison

with (4 - dL) and (4 - du) invostigutes the y o s s i b i l i ~ y of 4

negative uutocoxrelatllon. ,Koutsoyiannis (1977)

O u r dec i s ion r u l e w i l l proceed as fol lowst

If d* 4 d l we r e j e c t t h e n u l l hypothesis of no

au tocor re la t ion and accept t h a t t h e r e i a p o s i t i v e au

c o r r e l a t i o n of first order,

If d* > ( 4 - dl) we r e j e c t t h e a u l l hypothesis of

no au tocor re ln t ion and accept t h a t t h e r e i s n e p t i v e

a u t o c o r r e l a t i o n of the first order.

If du 4 d* < (4 - du), we accept t i m n u l l hyposhesis

o f no autocorre lq t ion ,

I f dL 4. d* 4 du o r if ( 4 - du) L d* 4 (4 - du t h e t e s t i s inconclusive.

The r e s u l t s of t h e test based on the above dec ia ion

ruhd an8 presen t i n t a b l e 4.4. From t h e r e s u l t , equat ions

( 5 ) and (6) c l e a r l y show a remarkable absence of au tocorre la t ion ,

while t h e r e s u l t s of (I), (3), (9) and (10) appeared

. inconolusive. The presenceoof au tocor re la t ion i n equat ions

(2)* (4), (7) and (8) i s an * d n d i c a t i o n of s e r i a l c o r r c l q t i o n

and as such renders t h e i r parameter es t imates unreal iable .

The o t h e p equat ions mentioned e a r l i e r s a t i s f i e d t h e econometric

c r i t e r i a and a r e considered r e l i a b l e and e f f i c i e n t .

whore:

THEOHICIXCAL D-W LIMITS R'i' yO/o I TEST

(4 - du) 1 RESULT

0 e99

1 ,O8

1 ,O8

1.17

1 .I7

1.17

1.17

0.90

0.90

INC - PA - EA . I

INC

PA

INC

PA

NA

PA

1'A

INC

INC

Inconclusive

Positive Autocorrelation

No Autocorrelation

4.5 TEST OF HYPO'.I. I IESIS

The first, second and t h i r d hypothesis of t h i s r e senrcb

w i l l be t e s t e d using our p re fe r red equat ions ( 9 ) , ( 3 ) and

(5). This i s because they s a t i s f i e d both our s ta t is t ical

and econometrio c r i t e r i a ' t o a m e a t extent ,

We w i l l use t h e '2" s t ~ t i s t i c which i s aimed a t f ind ing

out whether tho explanatory v a r i a b l e s do a c t u a l l y have

any s i g n i f i c a n t inf luenoe on t h e dependent var iable ,

The F* r a t i o i s compated a s A -

However, t h e F* r a t i o of t h e rdgress ion equat ions computed

by t h e aomputer w i l l be used f o r t h e t e s t , The t e s t w i l l

proceed by comparing F* w i t h t h e t h e o r i t i o a l F a t Yj4 l e v e l t

of s i g n i f i c a n c e w i t h V1 - K - 1 and q2 - N-I( def;rees of

freedom,

where; K P number of b s inc luding t h e i n t e r c e p t , bo

N P number of 09servat ions i n t h e sample

Our dec t s ion r u l e i s basod on t h e following condi t ions t

(a) If F* 7 I?, we r e j e c t t h e n u l l hypothesis and accept

t h a t t h e r eg ress ion i s s i g n i f i c a n t ; t h a t i s n o t a l l

bs a r e zero.

(b) If F* C F, we accept t h e n u l l hypothesis which says

t h a t a l l t h e t r u e parameters a r e zero and th-nt t h e r e

is no l i n e a r r e l a t i o n s h i p between t h e depcndcnt v a r i a b l o

and t h e regressors .

HYYOTIIESIS ONE

Now, we t e s t t h e n u l l hypothesis which s t a t e s t h a t Banks'

p r o f i t a b i l i t y as 'measured by i t s t o t a l a s s e t s (Dl) i s no t

inf luenced by ohanges i n var ious i n t e r e s t r a t e s (minimum

rediscount r a t e , t r e a a u r y b i l l r a t e , depos i t r a t e , lending

r a t e and lagged dependant va r i ab le )

Using equat ion (9 ) , t h e empir ical F* i s 9R8.48,

And t h e value o f . t h e o r i t i c a 1 IF1 at 5% l e v e l of signiSioance

with V l 5 and V2 P 17 degrees of freedom i s 2.81.

Since, 928.48 7 2.81 (F* 7 F) we conclude t h a t

banks p x o f i t a b i l i t y a s measured by i t s t o t a l a s s e t (w) i s

strongly influenced by changes i n various in te res t rates.

I n tes t ing the second hypothesis which s t a t e s tha t

changes i n banksu p r o f i t a b i l i t y i s not explained by changes

i n the independent variables (minimum rediscount r a t e , Deposit

r a t e and Savines r a t e )

We compare the computed F* of equation (3) which i s 42.54

with 'Fa from the table a t 5% l eve l of significance, with

V1 = 3 and V 2 P I 9 degrees of freedom whose value is 333.

Hence, 42,p 7 3.13 ( i e F* > F), T h i s enables u s t o r e j e c t

the n u l l hypothesis and accept tha t changes i n banksg

pae f i t ab i l i ty i s explained by changes i n t he independent

variables ( tha t is in te res t ra tes )&

HYPOTIIESIS THREE

Finally, the th i rd hypothesis which s t a t e s tha t changing

i n t e r e s t r a t e regime has no effect on banks p r o f i t a b i l i t y

a s measured by i t s t o t a l loans and Advances,

1108 b'l = b2 = 0

i s evaluated by camparing t h e empir ical F* of equat ion

(5) which is 102.40 with 'F' from t h e t a b l e a t 9%;

s igh i f i cance leve1,with V1=2 and V2 = 20 degec-s of freedom

whose value is 3.49.

Therefore as 102.40 > 3.49 ( i e F* 7F), we re jec t t h e

n u l l hypothesis and accept t h a t changing i n t e r e s t r a t e

regime has e f f e c t on bankst p r o f i t a ! ~ i l i t y as measured by i ts

t o t a l loans and advances,

An a n a l y s i s of t h e da ta r e s u l t us ing t h e economic

a p r i o ~ t c r i t e r i a , s t a t i s t i c a l t e s t s of s igni f icance ,

econometric t e s t f o r the presence of autocorr.elation and

t e s t i n g of t h e hypothesis have undoubtedly revealed some

u s e f u l information f o r t h i s work3 By t h e economic a p r i o r i

c r i t e r i a , it h a s been revealed t h a t q o s t of t h e parameter

est imaten ' reasonably conformed t o t h e i r expected signs.

Typical ly , t h e parameter est imate, minimum Rediscount Hate

conformed t o t h e expected s i g n i n equat ions (I), (2) and

4 The impact of t h i s explanatory v a r i a b l e on the. dependent

v a r i a b l e is remarkable. However, t h e empir ical r e d k l t shows

t h a t banks! p ro f i t ab i l i j ry , using t o t a l depos i t us proqy i s

i n o l a s - t i c *t;o changes i n m i n i m u m red iscount rate . This

i s evidencedin oquatlon (4) where the r e s u l t holds t h a t 1%

ahange i n M R R l e a d s t o a pal t ry 0.43% negat ive d h a n p i a lbhnks

p r o f i t a b i l i t y ,

Nevertheless, t h e empir ical r e s u l t of t a b l e 4.1 shows

t h a t t h e MIk f e l l shor t of t h e expected s i g n s i n equat ions

(3) , (5) and. (6). It turned up w i t h p o s i t i v e signs. This

s u r p r h i n g r e s u l t has been a t t r i b u t e d t o t h e fac t t h a t

m u l t i v a r i a t e f a c t o r s have b e ~ r i n g on banksb p r o f i t a b i l i t y .

Going by t h e s t a t i s t i c a a t e s t s of s i g n i f i c a a c e us ing

t h e &tea t , a few of t h e parameters d id n o t e x h i b i t high

s t a t i s t i c a l s igni f icance; though t h $ s does n o t rend.er t h e

squationa u n s a t i s f a c t o r y because of t h e i r high values of t h e

adjus ted c o e f f i c i e n t of d e t emina t ion . !Pypicnlly, t h e

explnnatorg v a r i a b l e s - lending Rato, minimum R ~ d i s c o u n t

Rate and Treasury B i l l 8 Rate i n equat ion (2) appeared

s t a t i s t i q a l l y i n s i g n i f i c a n t a t 5% l e v e l of s i g n i f i c a n c e of

the two-tailed t e s t , but with an adjllated c o e f f i c i e n t of

68

determination, of 0.84. Again a l l t h e explanatory

va r i ab les of equation (5) proved s t a t i s t i c a l l y i n s i c n i f i c a n t

though with a high R ' ~ of 90%.

Notwithstanding t h e almost a l l t h e explanatory

var iableu i n equat ions (9) and (10) of t a b l e 4.3 showed

high s t a t i s t i c a l e ign i f i cance

of d e t & m i n a t i o n , ~ ~ * of 1.00

fn i n v e s t i g a t i n g whether

w i t h t h e i r addusted c o e f f i c i e n t

and 0.99 respect ive ly ,

some of t h e asswnptions of

t h e econometric method employed were v io la ted , t h e Durbin-

datson t e s t was used. Equations 1,3,5,6,9 and 10 s a t i s f i e d

t h e eaonomotric c r i t e r i a and a r e considered r e l i a b l e and

e f f i a i e n t , A look a t t a b l e 14.4 shows t h a t equat ions (I), (3 ) ,

(9) and (10) proved inconclusive, while t h a t of (5) and L6)

exh ib i t ed no autocorre1ation.n However, equat ions (2). (4)

(7) and (0j showed t h e presence of positive a u t k o r r e l a t i o n and * t h i s renders t h e i r parameter es t imates unrelia!Ae, .

.Us fng , the appropr ia te equat ions (9) (3) and (5) t h a t

s a t i s f i e d both s t a t i s t i c a l and econometric c r i t e r i a t o t e s t

t h e t h r e e hypothesis of t h i s atu* (applying t h e &F'

s t a t i s t i c ) , t h e t h r e e n u l l hypothesis were r e j e c t e d a t %

l e v e l oP s ign i f i cance while qccepting t h e a l t e r n a i i v e hypothesis

t h a t changes i n i n t e r e s t r a t e s (explanatory va r i ab les ) s t r o n g l y

f nfluenced, explained and had e f f e c t on banks p ro f i t : ib i l i ty ,

CRAPTIiH FIVE

SUMFiRY, COF CL[JSION ANC IIECOMMENDATION

5,9 SWIPUIRY AND CONCLUSION

Judging from e x i s t i n g l i t e r a t u r e , inc lud ing t h e ones

reviewed above, t h e r e seems t o be no exhaust ive encyclopedia

on the::{','effect changes i n i n t e r e s t r a t e s have on macro

economic v a r i a b l e s as well as banks p r o f i t a b i z i t y , I n t h i s

empir ica l work, we have attempted t o a a s e s s t h e e f f e c t of

changes 3.n t h e var ious types o f i n t e h e s t r a t e s on t h e

p r o f i t a l ~ i l i t y of banks i n Nigeria.

From t h e a v a i l a b l e reviewed l i t e r a t u r e s , t h e o r i s t s ,{

and economists have r e a l l y discussed ex tens ive ly on t h e

concept of i n t e r e s t r a t e s , i t s s t r u c t u r e , n a t w e and r e l a t i o n s h i p

with c e r t a i n macro-economic v a r i a b l e s l i k e savings, investment

and economic growth, This s tudy equal ly reviewed t h e development

of i n t e r e a t r a t e s i n Nigeria, a s a e s s ~ d t h e behaviour of bmks

p o r t f o l i o , a f f e c t s of i n t e r e s t r a t e dbanges on banks profits-

, b i l i t y and t h e determinants of banks p r o f i t a b i l i t y generally.

This @ve r i s e t o t h e uniqueness of t h e t o p i c of t h i s study,

The s tudy employed t he ordinary l e a s t s q u w e (OLS) method.

The ecohometric approach adopted here is a general model t h a t can

be used t o i d e n t i f y and a s s e s s t h e r e l a t i v e con t r ibu t ion of *.the

important .var iables i n the i n t e r e s t ',.'rate s t ructure responsible

f o r a given banks p r o f i t a b i l i t y performance i n Ni~e) . - ia ,

The re su l t s of t h i s study show tha t banks p r o f i t a b i l i t y 1

perfomance i n Nigeria i a s igni f icant ly influenced by the

chanlps i n i n t e r e s t ra tes , From t h i s empirical t e s t ' s resu l t ,

the parameter estimate, m i n i m u m Rediscount Rate ( M H R ) showed

t h a t i t haa a reasonable influence/effect on banke' p rof i tab i l i ty ,

Conversely, t h i s p r o f i t a b i l i t y of banks proved empirically

ine las t i c t o changes in. t h i s MRR using t o t a l depos3it.x as proxy,

Novertheleas, our empirical analysis shows tha t changes i n

t h i e MRR could not conform t o the desired economic c r i t e r i a ,

Thin surprising dmpir ical r e su l t has been a t t r ibu ted t o t h e /

fac t t h a t a l o t of f ac to r s (both quant i ta t ive and qual-itative). n

The influen.ces of the other explanatory viiriables ( t reasury

b i l l r a t e , deposit r a t e and lending ra t e ) have equally been

empirically established and outlined clearly. To a reasonable

extent, t h e i r r e s u l t s conformed t o the desired signs following

the econoxnio a priorf c r i te r ia . The a l te rna t ive model a s well

a s the dynamic showed very useful empirical results . a

The s t a t i o t i c a l t e s t of significance using %tes t has

been. done with those parameter estimates tha t passed the t - tes t

a t a y$ s i g n i f i c a n ~ l e v e l - m a r k e d as te r i cks . The adjus ted

c o e f f i c i e n t of determinat ion expla ins t h e ex ten t t o which

changes i n t h e dependent v a r i a b l e (banks' p r o f i t a b i l i t y ) is

explained by t h e independent v a r i a b l e s ( i n t e r e s t m t e s ) .

Again by our econometric t e s t f o r t h e p r e s m d e of auto-

c o r r e l a t i o n , r e suk t shows t h a t most of t h e @quaMona s a t i s f i e d

t h e econometric c r i t e r i a and a r e adjuged t o be r e l i a b l e

and e f f i c i e n t while some showed evidences of tho present of

ege~ ia$-aor re la t ion and the re fo re adjudged t o be unre l iab le .

In , . , the h y p o t h e s i s t e s t i n g , equat ions (q), (3) and (5)

were used t o t e s t t h e t h r e e hypothesis t h n t were propounded,

The nub1 hypothesis 0% no inf luence was redected w h i l e accept ing

the a l t e r n a t J v e t h a t t h e explanatory v a r i s b l e s strongly inf luenced,

explained and had efyec t on t h e dependent vari~blo,

PuWing together t h e e x i s t i n g f a c t s and the i r~dicdrt ions

from t h e empirical ana lys i s , it i s c l e a r khut chani;es i n i uce r e s t

zaCe3, re&ne have inf luence on t h e p r o f i t a b i l i t y of banlca

* i n ~igeria. The impl ica t ion which emerges from ' the empir ica l

evidence $s t h a t adjustments i n i n t e r e s t r a t e s t r u c t u r e a lone

may n o t ~ e a l l y be a very e f f e c t i v e means of in f luenc ing

banks p m f i t a b i l i t y performance as so many o the r eoonomic and d / 4 .

nnd management $actors equally come i n t o play. I n conclusion

"$p t he re fo rd , i n t e r e s t - m g e s a f f e c t bonks p r o f i t : i l ~ i l i t y

performance and hence should be fine-tuned t o encourage

e f f i c i d n t and prof i t ,ab le bankine operat ion, s:~v$.n:;s, investment

and economic growth,

On , th is -pr3cmj.se, i t w i l l . h e recomrn.ended. thnl; ?.'ox banks'

bett cr profitaM.lity perf orm;:!lca, t h e j .ntercnt ?-::t? 'pol icy

s h o u l d be ntructured as t o mobi l ize f i nanc i a l savings Again

t he economic environment, namely, infrantruuture, economic

innl;nbil . if ;y, inad.cquate i n f orin:-ltion o n i t t - ; wCn~c.n.k, av : l i l ab i l i ty

of investment. . oppor tuni t ies and pub l i c r;afety ~hon1.d be

recof;nisod as a f f e c t i n g t h e channel ing of Pln.qncinl savings i n t o

banks.

The monctary au tho r i t y s h o u l d conaide? tho effect chances

i n t h i s i n t e r e s t r a t e s wogld have t o t h e operationtq +of banking s .

and finr?ncj.al sec to rs genera l ly wnich a r e t h e I t l i f e bloodN/

., ' l u b r i c a n t n of t h e economy a t large. The c u r r e n t peg[r;ing of . . \,,\ -'.

, lending ra te a t 21 p e r cent maximum is unrealis+&c and counter \ *. \ \

'% roduct ive as bankers appear r e luc t an t t o l end t o i n v e s t o r s \\P a t \. t h a t r a t e ,

I n t e r e s t r a t e s need t o be reslm-&uxed i n iTig,.eria. I n

doing t h i s , t h e gap between t h e m i n i m u m lending r a t e and

t h e maximum lending r a t e should be narrowed. The e x i s t i n g

gap allowa easy and hidden s h i f t i n g of c r e d i t b y t h e banks

t o t h e naximum p r a o since they a r e ou t ~d maximize p r o f i t .

The margin between t h e two should not bo wider t h a n between

I per cent and 13 per cent. The spread heh-ean the rediscount

r a t e aod *he prime r a t e should a l s o be narrowed down t o

d i s ~ o u r ~ f p banks t ak ing undue advantsge of t h e gap tk r e s o r t

t o t h e udisaount windowTt and t o on-lend borrovdng a t the'.\ \

Ifdiscount window' f o r p r o f i t motive as a r e s u l t o f t h c wide,', < .

spread 'u.&t.een t h e tr<o raten.

Las t ly , i t nus t be recommended t h a t R c o n s i s t e n t optimal

combination of p o l i c y measures ( inc lud ing i n t s r w I- r a t e s

p r o z i t a b i l i t y performance of banks in Nigeria.

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