EFFECT OF INTEREST RATE ON INVESTMENT AND MONEY DEMAND IN NIGERIAN ECONOMY.
Need help with a related project topic or New topic? Send Us Your Topic
DOWNLOAD THE COMPLETE PROJECT MATERIAL
EFFECT OF INTEREST RATE ON INVESTMENT AND MONEY DEMAND IN NIGERIAN ECONOMY.
Chapter one
INTRODUCTION
1.1 Background for the Study
Investment is extremely crucial and beneficial to any country’s success and prosperity. Many countries rely on investment to address economic challenges such as poverty and unemployment (Muhammad and Mohammed 2004).
In contrast, the interest rate is the cost of using money. It represents the opportunity cost of borrowing money from a lender to fund an investment endeavour. It can also be viewed as a return paid to the provider of financial resources in exchange for using the funds for future consumption (Sleka, 2004).
Interest rates are typically stated as percentage rates. Taxes, investment risk, inflationary expectations, liquidity preferences, market inefficiencies in an economy, and other factors all influence the volatility of interest rates.
Banks are charged with the primary responsibility of financial intermediation, which involves making funds available to economic agents. Banks operate as financial intermediaries, moving funds from the surplus to the deficit sectors of the economy by collecting deposits and channelling them into lending operations (Afolabi, 2003).
The amount to which this may be accomplished is determined by the interest rate, the level of growth of the financial system, and the country’s people’s saving habits.
As a result, the availability of investible capital is viewed as an essential need for every economic investment, which would eventually lead to economic growth and development (Uremadu, 2006).
As previously said, knowing the nature of interest rate behaviour is vital when devising policies to promote savings, investment, and growth.
It is important to note that this study seeks to analyse and determine the impact of interest rates on investment and money demand in Nigeria.
1.2 Statement of Problem
Most developing countries’ financial systems (including Nigeria’s) have been stressed as a result of economic shocks. Financial repression, primarily manifested through indiscriminate distortions of financial prices, including interest rates, has tended to reduce the real rate of growth and the real size of the financial system; more importantly, financial repression has (retarded) delayed the development process envisaged by Shaw (1973).
This resulted in a scarcity of investible funds, which is viewed as a prerequisite for all economic investment. This fall in investment as a result of the decline in external resource transfer since 1982 has been particularly acute in highly indebted nations, and it has been followed by a slowdown in growth in all Least Developed nations (LDCs) (Cole & Obstraid, 2005).
Both governmental and private investment rates have declined, with the latter falling more dramatically than the former. Several reasons appear to have contributed to the reported decrease in LDCS investment.
First, the reduced availability of foreign savings has not been offset by an increase in local savings. Second, the tightening of fiscal conditions as a result of reduced foreign funding, an increase in domestic interest rates, and an acceleration in inflation prompted a reduction in public investment.
Third, the increase in macroeconomic volatility caused by external shocks, as well as the problems faced by domestic governments in stabilising the economy, has restricted private investment.
Finally, the existing debt has inhibited investment due to the implicit credit limits in international capital markets (Omole and Falokun, 1999).
Declining investment ratios and levels are problematic, first and foremost because investment is critical to growth. Second, low investment increases economic vulnerability (Niambon and Oshikoya, 2001).
Nigeria’s key issue is to implement policies that will assist revitalise and increase investment in the country, thereby stimulating and sustaining economic growth.
The problem of interest rate volatility affects personal investments and governmental decision making in any country, and Nigeria is no exception.
As Schwartzman (1992) stated, the movement of interest rates in one direction or another is influenced by a multitude of factors, including economic, inflationary, monetary, fiscal, global, and political.
Banks pay high interest rates to depositors, so investors cannot patronise them as more and fewer investors invest in the capital market. This causes a drop in money demand and capital investment in the economy.
The highlighted problems can be summarised as follows:
i. High interest rate, which influences investment decisions
ii. Interest rates have reduced the demand for money in Nigeria.
1.3 Object of the Study
The purpose of this research project is to investigate the effect of interest rates on investment and money demand, and the specific objectives are:
1. Determine the influence of interest rates on investment decisions in Nigeria.
2. Conduct an empirical investigation on the influence of interest rates on money demand in Nigeria.
1.4 Research Questions.
To fulfil the goal of this research study, the study will seek to answer the following research questions in order to reach a logical conclusion:
1. How does the interest rate affect investment decisions in Nigeria?
2. To what extent do interest rates influence money demand in Nigeria?
Need help with a related project topic or New topic? Send Us Your Topic