Effect Of Interest Rate On The Borrowing Ability Of Bank Customers

Abstract

The study analyzed the effect of interest rate on the borrowing ability of commercial banks in Nigeria using time series data spanning from 2000 to 2017.  High interest rate in the economy seems to be the major problem of bank customers in terms of raising capital fund and this has made it difficult for them to make investment due to lack of capital fund. The specific objectives includes: to examine the effect of interest rate on the borrowing ability of bank customers and to ascertain the effects of exchange rate on the borrowing ability of bank customers. The research design used in this research work was Ex post-Facto design. Based on the nature of the study as time series was used, the secondary data was used in collecting data. The data were sourced from Statistical Bulletin of the Central Bank of Nigeria (CBN), Federal Office of Statistics (FOS) and Annual Abstract of Statistic of the National Bureau of Statistic (NBS). The data were analyzed using the Ordinary Least Square Technique (OLS) and multiple regression to estimate the values of the parameters B0, B1 and B2.  Borrowing ability of bank customers in the study was measured by total commercial banks loans, while interest rate (lending rate) and exchange rate was used as the explanatory variables. With respect to the general significance of the explanatory variables, the adjusted R-squared value (0.800738) implies that about 80.07% of the variations in commercial banks' loans (CBL) was explained by the variations in the explanatory variables which denotes that the regression has good fit and is reliable. The F-statistic, a measure of the overall significance of the regression model shows that the explanatory variables (INR and EXR) are collectively significant at 1% level. Based on the findings, it was found out that  Interest rate has a negative and significant effect on borrowing ability of bank customers in Nigeria.  Also Exchange rate has a positive and significant effect on the borrowing ability of bank customers. The study therefore concludes that interest rate has a significant effect on borrowing ability of bank customers in Nigeria. The study recommended that the government should aim at creating a macroeconomic environment that will reduce the volatile exchange rate in Nigeria so that the borrowing ability of bank customers can increase. And Government should use monetary policy to regulate increase in interest rate by commercial banks through Central bank so that the central bank will reduce borrowing rate to the commercial which the commercial bank can in turn reduce the borrowing rate (interest rate) to their customers.

Key words: Interest rate, exchange rate, borrowing ability

TABLE OF CONTENTS

Title page ﾿ i

Certification ﾿ ii

Declaration ﾿ iii

Dedication ﾿ iv

Acknowledgements ﾿ v

Table of contents ﾿ vi

List of tables ﾿ ix

List of figures ﾿ x

Abstract ﾿ xi

CHAPTER ONE 

INTRODUCTION ﾿ 1

1.1 Background to the Study ﾿ 1

1.2 Statement of the Problem ﾿ 3

1.3 Objectives of the Study ﾿ 3

1.4 Research Question ﾿ 3

1.5 Research Hypothesis ﾿ 4

1.6 Scope of the Study: ﾿ 4

1.7 Significance of the Study ﾿ 4

1.8 Definition of terms ﾿ 5

CHAPTER TWO

REVIEW OF RELATED LITERATURE ﾿ 7

2.1 Conceptual Framework ﾿ 7

2.1.1 The concepts of interest rate and Borrowing ﾿ 7

2.1.2  Compound Interest Rate ﾿ 8

2.1.3 Interest Rates                              ﾿ 8

2.1.4 Effects of Interest Rate Policies on the Nigerian Economy ﾿ 9

2.1.6  Factors Which Causes Variations in the Interest Rate Structure ﾿ 10

2.1.6.1  Rate of Inflation ﾿ 10

2.1.6.2 The Fluctuation of the Supply of and Demand for Fund ﾿ 10

2.1.6.3 Government Intervention ﾿ 11

2.2    Theoretical Framework              ﾿ 11

2.2.1   Theories of interest Rate ﾿ 11

2.2.2   The Classical Theory of Interest Rate ﾿ 11

2.2.3   The Neo-Classical or the Loanable Funds Theory of Interest Rate ﾿ 12

2.2.4   Keynes Liquidity Preference ﾿ 13

2.2.5   The General Equilibrium Approach (Modern) ﾿ 15

2.3 Theoretical Framework ﾿ 16

2.4 Gap in Literature ﾿ 21

CHAPTER THREE

RESEARCH METHODOLOGY ﾿ 22

3.1   Research Design ﾿ 22

3.2   Area of Study ﾿ 22

3.3 Nature and Source of Data ﾿ 22

3.4 Model Specification ﾿ 22

3.5 Technique for Analysis ﾿ 23

3.6 Sources of Data                              ﾿ 24

3.7 Evaluation Based on Statistical Criteria ﾿ 24             

CHAPTER FOUR

PRESENTATION OF DATA, ANALYSIS AND DISCUSSION ﾿ 26

4.1   Presentation of Data ﾿ 26

4.2   Descriptive Statistic ﾿ 27

4.3   Analysis of Data and Discussion of Findings ﾿ 27 ﾿

4.3.1 Regression Analysis ﾿ 27

4.3.2  Hypotheses Testing ﾿ 28 ﾿

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS ﾿ 30

5.1  Summary of Findings ﾿ 30

5.2  Conclusion ﾿ 30

5.3   Recommendations ﾿ 31

REFERENCES

APPENDIX