AN APPRAISAL OF THE EFFECT OF INTEREST RATE ON THE PERFORMANCE OF NIGERIA COMMERCIAL BANKS

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

1.1 BACKGROUND OF THE STUDY

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.

1. To determine the relationship between interest rate and bank profitability
2. To analyze the relationship between interest rate and price of investment

1.4 RESEARCH QUESTION

In order to actualize the objective of the study, the following question are taken into consideration.

1. To what extend does interest rate affects bank profitability?
2. 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:

1. It could be used by banks management team to evaluate the performance of regulations and deregulation and how they affect their operations.
2. It could also serve the needs of owner researcher as a reference material.
3. 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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