AN APPRAISAL OF THE EFFECT OF INTEREST RATE ON THE PERFORMANCE OF NIGERIA COMMERCIAL BANKS
(A CASE STUDY OF THE FIRST BANK OF NIGERIA, PLC)
ABSTRACT
This project entails; an appraisals
of interest rate on commercial banks performance. It begins with
background of the study that interest rate performs a rationing function
by allocation limited supply of credit among the many competing demand
on it. It is an important instrument for monetary management. It also
entails theoretical and empirical literature of commercial banks and
concept of monetary policy, more also, it entails research designs which
include the overall aims and objection to be taken in the course of
conducting a research and data presentation of which interest rate and
return on equity of first Banks of Nigeria was reviewed.
CHAPTER ONE
An interest rate is the cost of
borrowing money or conversely the income earned from lending money.
Interest rates are expressed as percentage of the principal per period.
Interest is often compounded, meaning the interest earned on a saving
account, for example, is considered part of the principal after a
predetermined period of time. Interest rates are one of the economy’s
single strongest influence. They facilitate the formation of capital and
have a profound effect on everything from individual investment
decision to job creation, monetary policy and corporate profit.
Four things interest rates, the risk of default, the length of the loan, inflation Rates and the real rate. Interest rates an generally higher for borrowers who are more likely to default. Interest rate perform a rationing function by allocating limited supply of credit among the many competing demands on it and it is an important instrument for monetary management.
The management of interest rates in Nigeria has involved two approaches, namely, administrative and true market determination. Prior to the structural adjustment program (SAP) in 1986.
The level and structure of interest rates are administrative rate determined by the central bank of Nigeria,. Both deposit and lending rate were fixed by the bank base on policy decisions. The major reason for administering interest rate at that time were desire to obtain social optimum to resources allocation promote orderly growth of the financial market, combat inflation and lessen the burden of internal dept serving on the government mobilize domestic financial intermediation process. Within the general framework of deregulating the economy in 1986 to enhance competition and efficient allocation of resources, the central bank of Nigeria introduced a market base interest rate policy in august 1987. The policy decision was without controllers and it was generally agreed that low interest did not encourage saving it was also feared the high interest rate which are likely to accomplish deregulation might shift investment. The deregulation interests allow banks to determine their deposit and lending with their customer. However, the minimum discount rate continued to be determined by the central bank in line with changes in overall economic conditions. Secondly, researcher also deferred in the adopted of a particular measurement for bank profitability performance. For instance, Uchendu (1995) as measures for commercial banking performance. However this study is only interested in the impact of interest rate on bank profitability covering the period of regulation and deregulation.
1.2 STATEMENT OF THE STUDY
Several factors influence the
profitability of banks. However, the regulatory frame work under which
banks operates is perhaps the most direct.
In all economies, the conduct of policies is normally routed through banking institution because of the crucial role institution plays in the intermediation process.
The use of interest rate policy credit
ceiling and discount rate policy among other policy variable are meant
to achieve similar objectives. Most of the policy variables affect bank
reserves, the monetary base aggregate money multiplier and finally Bank
financial condition. According to Uchendu (1995) commercial bank product
function for the industry is influenced mainly by interest and exchange
policies, credit availability, labour cost and policy stance a
provisioning for non-performing loans. An increase in interest rate as
well as their spread is expected to increase the profit as a high
exchange rate premium mould.
In this study the researcher is interested in determining the effect of interest rates on banks and profitability.
1.3 OBJECTIVES OF THE STUDY
The specific objectives are to assess the effect of interest rate policy on bank profitability.
- To determine the relationship between interest rate and bank profitability
- To analyze the relationship between interest rate and price of investment
In order to actualize the objective of the study, the following question are taken into consideration.
- To what extend does interest rate affects bank profitability?
- How does the interest rate affect the price of investment in the economy?
1.5 STATEMENT OF HYPOTHESIS
The following hypothesis will be subjected to statistical test.
Ho: there is no significant between interest rate and bank profitability.
Hi: there is significant between interest rate and bank profitability.
Ho; there is no significant between interest and performance of Nigerian commercial bank.
Hi; there is significant between interest and performance of Nigerian commercial bank.
1.6 SIGNIFICANCE OF THE STUDY
The problem on how to reduce distress in
banking failures and increasing profitability confront the banking
sector and the economy as a whole. This is because all organization
irrespective of their structure and functions have goals or aims. The
structure and functions have goals or aims. The accomplishment of their
goal or aims depends in the economy as a whole.
When economy is regulated or
deregulated, the impact of this on the banking sector, therefore cannot
be over emphasized neither can it be underestimated.
The result of the study could be useful in many ways amongst which are as follows:
- It could be used by banks management team to evaluate the performance of regulations and deregulation and how they affect their operations.
- It could also serve the needs of owner researcher as a reference material.
- It serves as my own contribution to knowledge.
CHAPTER TWO
LITERATURE REVIEW
2.1 INTRODUCTION
This chapter contains concept of
monetary policy and interest rate instrument policy, bank profitability
and policy variables. Because of its unique operation environment, a
commercial bank maximizes profit, subject of solvency and liquidity
constrain. This constrain are greatly influential by central bank stance
on monetary and banking policies. The portfolio management approach and
statistical model, mayor (1986) as well as production function theory,
Kelvin (1971) have been used in commercial loan theory, liability
theory, anticipated income hypothesizes, management theory and computer
model or statistical model.
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