ABSTRACT
The importance of investment in
economic growth cannot be overemphasized. This has led to an upsurge in the
study of its determinants. This research therefore, seeks to investigate the impact
of interest rate liberalization on investment in Nigeria from 1970-2012. Using
the Error Correction Model (ECM), the result indicates that a long run
relationship exists among the variables. The result further reveals that all
the variables have significant impact on investment. The study equally shows
that there is no differential impact of interest rate liberalization on
investment in Nigeria during the pre and post-liberalization regimes. Also, the
impulse responses of these variables to shocks in theextraneous variables were
verified; using the Multiple-Equation VAR models. In addition, the variance decomposition result shows thatPeriod 2
shows a standard deviation value of 97.23 in investment resulting from own
shock, 2.44 to a response to a shock from interest rate, 0.0186 to a response
from market capitalization rate,0.205900 to a response to public expenditure
and 0.101933 to response to trade openness. In period 10, investment responds
positively with a standard deviation of 18.77 originated from own shock and
standard deviation values of 8.05, 7.94, 12.43 and 15.59 arising from a shock
from interest rate, market capitalization rate, public expenditure and trade
openness respectively. It is recommended that polices to make interest rate
attractive to investors as well as improve trade should be encouraged. Also
broadening the capital market and improving infrastructure through increased
capital expenditure should be pursued. In addition to these, there should be
consistency in policies so that policy summersaults does not affect investment.
TABLE OF CONTENTS
Title page
Abstract
CHAPTER ONE
INTRODUCTION
1.1 Background to the study
1.2 Statement of the problem
1.3 Research Questions
1.4 Research Objectives
1.5 Research Hypotheses
1.6 Policy Relevance of the study
1.7 Scope of the study
CHAPTER TWO
POLICY CONTEXT OF INTEREST
RATE LIBERALIZATION IN NIGERIA
2.1 Management of Interest
Rate prior to 1986
2.2Management of Interest
Rate since 1987
CHAPTER THREE
REVIEW OF RELATED LITERATURE
3.1 Conceptual framework
3.2Theoretical framework
3.2.1 Theories of Interest
Rate
3.2.2 Theories of Investment
3.3 Empirical Literature
3.4 Limitation of previous studies
CHAPTER FOUR
METHODOLOGY
4.1 Theoretical framework
4.2 Model specification
4.3 Method of estimation
4.4 Justification of the model
4.5 source of data
CHAPTER FIVE
PRESENTATION AND ANALYSIS OF
RESULTS
5.1 Descriptive analysis of variable
5.2 Pre-Diagnostic tests
5.2.1 Unit root test result
5.2.2 Co-integration test
5.3 Presentations of regression result and interpretation
5.3.1 Error correction model
5.3.2 Innovation accounting
5.4 Evaluation of research Hypothesis
5.4.1 Test of working Hypothesis i
5.4.2 Test of working Hypothesis ii
5.4.3 Test of working Hypothesis iii
5.5 Chapter summary and prospects
CHAPTER SIX
SUMMARY, POLICY
RECOMMENDATIONS AND CONCLUSION
6.1 Summary of research finding
6.2 Policy recommendation
6.3 Conclusion
6.4 Recommendation for further studies
Appendix
Reference
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
The Nigerian
economy has at different times witnessed enormous interest rate swings in
different sectors of the economy since the 1970s and mid 1980s under a
regulated regime. The preferential interest rates were based on the premise
that the market, if freely applied would exclude some priority sectors. Thus,
interest rates were adjusted through the market forces in order to promote
increased level of investment in the various preferred sectors of the economy.
Prominent among the preferred sectors were the agricultural, manufacturing and
solid mineral sectors which were accorded priority and deposit money banks were
directed to charge preferential interest rates on all loans to encourage the
upsurge of small-scale industrialization which is a catalyst for economic
development (Udoka, 2000). According to Mckinnon (1973) and Shaw (1973), this
situation can ignite financial repression which occurs mostly when a country
imposes ceiling on deposit and lending nominal interest rate at a low level
relative to inflation. The resulting low or negative interest rates discourage
savings mobilization and the channelling of mobilized savings through the
financial system. This has a negative effect on the quantity and quality of
investment and hence economic growth.
Closely followed by the
regulated interest rate regime was the interest rate reform, a policy evolved
under the financial sector liberalization. The policy was put in place to
achieve efficiency in the financial sector, thus, engendering financial
deepening. In Nigeria, financial sector reforms started with the deregulation
of interest rate in August, 1987 (Ikhide & Alawade, 2001). Since then, the
Nigerian government has been pursuing a market determined interest rate which
does not permit a direct state intervention in the general direction of the
economy (Nyong, 2007).
Since the introduction of the
interest rate liberalization concept in the 1980s, many countries such as
Angola, Burundi, Congo, Ivory Coast, Ghana, Malawi, Nigeria, China, India etc.
have made attempts at liberalizing their financial sectors by deregulating
interest rate, eliminating or reducing
The liberalization of the interest rate system, mainly by
raising interest rates, was a policy measure adopted by the Nigerian Government
to increase private saving. The objective was to make and maintain positively
in real terms as the upsurge in inflation in the 1970s had rendered them
negative and there were rigid exchange and interest rate controls resulting in
low direct investment. Funds were inadequate as there was a general lull in the
economy. Monetary and credit aggregates moved rather sluggishly. Consequently,
there was a persistent pressure on the financial sector, which in turn
necessitated a liberalization of the financial system (Soyibo & Olayiwola,
2000).
In response to these developments, the government
deregulated interest rate in 1987 as part of the Structural Adjustment Program
(SAP). The official position then was that interest rate liberalization would,
among other things, enhance the provision of sufficient funds for investors,
especially manufacturers (a priority sector), who are considered to be the
prime agents of investment, and by implication, promotes economic growth
(Odhiambo, 2009). However, in a dramatic policy reversal, the government in
January, 1994 out-rightly introduces some measures of regulation into interest
rate management. It was claimed that there are more wide variations and
unnecessarily high interest rate under the complete deregulation of interest
rate immediately, deposit rate were once again set at 12% - 15% per annum while
a ceiling of 21% per annum was fixed for lending (CBN 2012).
The high interest rate observed in Nigeria during the era of
interest rates deregulation has been frequently blamed for the country‟s slow
growth and pointed out as a major failing of the Adjustment Program initiated
in August, 1986. The believe is premised on the assumption that the demand for
funds is for the purpose of investment and that investment demand will be
larger at a lower lending rate. This study regards that such blame is largely
for obvious reasons. First interest rate deregulation lead to an increase in
saving mobilization in Nigeria (Chuba, 1997). While it is impossible to achieve
economic growth without adequate investment, saving generates investment.....
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