Project Materials

ECONOMICS

EFFICACY OF INTEREST RATE DEREGULATION ON SAVINGS MOBILIZATION IN THE NIGERIAN ECONOMY.

EFFICACY OF INTEREST RATE DEREGULATION ON SAVINGS MOBILIZATION IN THE NIGERIAN ECONOMY.

Need help with a related project topic or New topic? Send Us Your Topic 

DOWNLOAD THE COMPLETE PROJECT MATERIAL

EFFICACY OF INTEREST RATE DEREGULATION ON SAVINGS MOBILIZATION IN THE NIGERIAN ECONOMY.

Chapter one

INTRODUCTION

1.1 Background of the Study

The interest rate is an important macroeconomic management tool for each country’s government. The level of interest rates in any economy, particularly the Nigerian economy, is critical because it controls inflation, encourages savings that can be channelled to investment, improving employment output, and ensures effective financial resource utilisation. From the 1960s to the mid-1980s, low interest rates were implemented with the intention of encouraging investment.

The implementation of the structural adjustment programme in the third quarter of 1986 marked the beginning of a dynamic interest rate regime in which interest rates were more influenced by market forces.

This shift shifted the emphasis away from direct investment stimulus through low interest rates and towards savings mobilisation through interest rate deregulation (Essien and Oniwoduokit, 1997).

Such liberalisation is a policy response that includes a bundle of steps to eliminate any undesired state-imposed restraints on the unfettered operation of financial markets.

The approaches include eliminating the interest rate ceiling and easing deposit and credit regulations (Uremadu, S.O.: 2006).The mobilised fund was meant for investment.

Undoubtedly, the government’s previous efforts to stimulate economic development by controlling interest rates and obtaining “cheap” money for their own interests have hampered progress. More crucially, financial regulation has slowed the development process predicted by Shaw (1973).

Interest rates are defined as the return or yield on equity, or the potential cost of delaying current spending into the future. The general concept of interest rates includes both nominal and real interest rates.

The nominal rate is the observed and documented rate in the economy, which includes monetary effects. The real interest rate is the rate that maintains equilibrium in both the primary market for new assets and the secondary market for old assets. Irving Fisher established the concept of “real” interest Tate when he tried to determine the trade-offs between current and future spending.

In the Nigerian context, interest rate liberalisation is central to the government’s adjustment policy, which was implemented in 1986. Prior to that period, the Nigerian economy, particularly the financial sector, was heavily controlled, which resulted in a high level of financial repression. Low interest rates were administered from 1986 to the third quarter of 1987. (Olu Ajakaye, Ayodele F. Odusola, 1994).

In practice, savings and time deposits increased over time in response to interest rate incentives. The deregulation of interest rates in 1987 must have boosted financial savings, as seen by the dramatic increase in financial ratios from 17.H percent in 1986 to 26.85 percent in 1987 (Uchendu 1993).

However, there are various barriers to the mobilisation of financial savings in developing nations that interest rates must address in order to be effective in both savings mobilisation and domestic resource mobilisation.

First, institutional institutions in rural regions, such as unit area banks and commercial bank branches, do not provide substantial incentives for savings mobilisation. Second, due to the financial crisis, the real interest rate on deposits has been relatively low, if not negative.

Third, there were insufficient facilities in rural areas for successful savings mobilisation (Adedoyin Soyinbo and Kolawole Olayiwola, 2000).

The above highlights a basic fact: interest rates are expected to play a central role in saving mobilisation. In this regard, the impact of interest rate deregulation policy on savings mobilisation is a significant policy goal in the implementation of global financial reforms (Meshach Aziakpono, 1997).

1.2 Statement of the Problem

Many observers have expressed concern about Nigeria’s continued low level of economic progress. According to Molho (1986), this is the result of a capital deficit.

It has also been argued that Nigeria’s fragmented domestic savings system and interest rate control are major impediments to self-sustaining development (Ahmed, M.K. 1993).

This study will look at the influence of interest rate deregulation on savings mobilisation and whether it resulted in growth in the Nigerian economy.

Developed countries, such as the G7 economics and the Asian tigers, have demonstrated the effectiveness of savings mobilisation towards the growth and development of their economies.

Through this, they have invested in facilities that yield future returns while also increasing their reserves, and through these countries, i.e. developed countries, can finance capital projects, resulting in an increase in the social and economic welfare of the entire citizenry.

As a result, the influence of interest rate deregulation on savings mobilisation in the Nigerian economy is uncertain and long-term, and despite several interest rate reforms, the Nigerian economy has not reaped the benefits of these policies.

Given the current bank expansion, recapitalization process, and other CBN regulatory steps, a variety of policy challenges and questions arise.

Although a vast empirical literature has shed light on various aspects of saving behaviour, several critical questions remain unanswered regarding the relevance of policies in raising the saving rate in comparison to the non-policy determinants of saving. From the perspective of policies, the following salient questions must be addressed:

· How do these macroeconomic variables affect saving?

· How effective are macroeconomic stability and income growth in increasing the savings rate?

· How effective is financial development in encouraging private savings?

· Can fiscal policy increase national savings?

· How does the interest rate affect overall savings?

1.3 Objectives of the Study

The primary goal of this research would be to assess the impact of interest rate deregulation on savings mobilisation in the Nigerian economy. In accordance with the preceding objective, the specific objectives include:

· Evaluate the association between savings, investment, and growth based on existing literature.

• Analyse the origins and trends of savings in Nigeria.

· This study compares the influence of regulated and deregulated interest rate systems on savings in Nigeria.

The purpose of this study is to assess the impact of life-cycle hypotheses on saves behaviour in Nigeria’s unique economy, taking into account all other factors that may impact savings.

1.4 Research Hypothesis

The hypothesis statement for measuring the impact of interest rate deregulation on savings mobilisation in Nigeria is as follows:

Ho: Interest rate deregulation has no effect on savings mobilisation in Nigeria.

H1: Deregulation of interest rates has a major impact on savings mobilisation in Nigeria.

1.5. Research Methodology

The research included both descriptive and econometric analysis. The descriptive approach of trend analysis was utilised to determine the association between interest rates and saving behaviour in Nigeria.

Following the framework analysis of the Life Cycle Hypothesis Model and the McKinnon Shaw Hypothesis (1973). The relationship between interest rates and saving and mobilisation is modified and expanded to include the broad money supply to GDP ratio (which captures the effect of financial deepening), the domestic savings GDP ratio, and the shift in financial policy from regulation to deregulation of interest.

The model for this investigation is stated as follows:

PSR equals F(INT, FB, DFD, DSG, FPS).

PSRt equals α0 + α1 INTt + α2 FBt + α3 DFD + α4 DSG + α5 FSP + U.

Where

al >0,a2>0, α3>0,α4>0,a5>0

PRS = private savings rate.

INT = deposit interest rate.

FB = Fiscal Balance.

DFD = Degree of Financial Deepening.

DSG = The ratio of gross national saving to GDP,

FPS = dummy variable that captures the movement in financial policy from regulation to deregulation of interest rates.

U = stochastic variable.

The savings equation was estimated using annual data from 1980 to 2003.

The estimate timeframe was mostly dictated by the availability of sufficient data for all variables.

Need help with a related project topic or New topic? Send Us Your Topic 

DOWNLOAD THE COMPLETE PROJECT MATERIAL

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Advertisements