CHAPTER ONE
INTRODUCTION
1.1
Background to the Study
Lending rate management has been a
contemporary issue among academics and policy makers for a very long time. This
started predominantly when the Gold standard collapsed in the 1930‟s and
subsequent emergence of the Bretton wood system of adjustment peg from the
1940‟s, through the espousal of flexible Lending rate given by the developing
nation in 1970 and those carrying out structure reforms in the 1980‟s as well
as in the wake of the currency crises in developing economies in the 1990‟s. The financial systems of most developing nations
have come under stress as a result of the economic shocks of the 1980s. The
economic shocks largely manifested through indiscriminate distortions of
financial prices which includes interest rates, has tended to reduce the real
rate of growth and the real size of the financial system relative to
non-financial magnitudes (Davidson and Gabriel, 2009). Rasheed (2010), states
that Nigerian economy saw different interest rates for different sectors in
1970s through the mid-1980s (Regulated Regime, 1960-1985). The preferential
interest rates were based on the assumption that the market rate, if
universally applied, would exclude some of the priority sectors. Interest rates
were, therefore, adjusted periodically with „visible hands‟ to promote increase
in the level of investment in the different sectors of the economy. For example
agriculture and manufacturing sectors were accorded priority, and the
commercial banks were directed by the Central Bank to charge a preferential
interest rates (vary from year to year) on all loans and advances to
small-scale industries. Since 1986, the inception of interest rates
deregulation, the government of Nigeria has been pursuing a market determined
interest rates regime, which does not permit a direct state intervention in the
general direct of the economy (Adebiyi and Babatope-Obasa, 2004).
Lending rate policies in developing
countries are often sensitive and controversial, mainly because of the kind of
structural transformation required, such as reducing imports or expanding
non-oil exports, which invariably imply a depreciation of the nominal exchange
rate. Such domestic adjustments, due to their short-run impact on prices and
demand, are perceived as damaging to the economy. Ironically, the distortions
inherent in an overvalued Lending rate regime are hardly a subject of debate in
developing economies that are dependent on imports for production and
consumption. Lending which may be on short, medium or long-term basis is one of
the services that deposit money banks do render to their customers. In other
words, banks do grant loans and advances to individuals, business organizations
as well as government in order to enable them embark on investment and
development activities as a means of aiding their growth in particular or
contributing toward the economic development of a country in general (Felicia,
2011).
Commercial banks are the most
important savings, mobilization and financial resource allocation institutions.
Consequently, these roles make them an important phenomenon in economic growth
and development. However, commercial banks decisions to lend out loans are
influenced by a lot of factors such as the prevailing interest rate, the volume
of deposits, the level of their domestic and foreign investment, banks liquidity
ratio, prestige and public recognition to mention just but a few.This study
becomes imperative because given that Commercial banks influence major saving
factors and 3
provides financial services that
ginger growth and development of any society (Felicia, 2011).This research
work, therefore, empirically investigates the effect of lending rates on
Nigerian banks performance using ordinary least square regression method of
analysis on secondary data covering the period (2003 – 2013).
1.2 Statement of the Problem
In Nigeria, the lending rate policy
has undergone substantial transformation from the immediate post-independence
period when the country maintained a fixed parity with the British pound,
through the oil boom of the 1970s, to the floating of the currency in 1986,
following the near collapse of the economy between 1982 and 1985 period. In
each of these periods, the economic and political considerations underpinning
the exchange rate policy had important repercussions for the structural
evolution of the economy, inflation, balance of payments and real income.
Despite various efforts by the
government to maintain a stable exchange rate, naira has continued to form the
80‟s (Benson and Victor, 2012). The deteriorating state of Nigerian economy and
the recent usage of high Exchange rate makes it pertinent to empirically
investigate the effect of Lending rates on Nigerian economic development.
In Nigeria, commercial banks need to
understand how to manage their huge assets in terms of their loans and
advances. For the banks to balance their main objectives of liquidity,
profitability and solvency, lending must be handled effectively and the banks
must behave in a way that the potential customers are attracted and retained.
The study focus on finding out the extent to which banks‟ lending rate affect
profitability in Nigeria Commercial Banks.
1.3 Objectives of the Study
The overall objective of this study is
to examine the effect of lending rates on Nigerian banks performance. The
specific objectives are to:
i. Determine the impact of lending
rate on the performance of banks in Nigeria.
ii. Evaluate the impact of monetary
policy rate on the performance of banks in Nigeria.
iii. Ascertain the impact of exchange
rate on the performance of banks in Nigeria.
TOPIC: THE EFFECTS OF LENDING RATE ON COMMERCIAL BANK PERFORMANCE
Format: MS Word
Chapters: 1 - 5
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Delivery: Email
Number of Pages: 60
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