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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
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.
1.4 Research Questions
In line with the specific objectives enumerated above, the following research questions are raised:
i. To what extent has lending rate impacted on the performance of banks in Nigeria?
ii. To what extent has monetary policy rate impacted on the performance of banks in Nigeria?
iii. To what extent has exchange rate impacted on the performance of banks in Nigeria?
1.5 Research Hypotheses.
The following null hypotheses are formulated in order to examine the effect of lending rate on the performance of banks in Nigeria:
H0: Lending rate has no significant impact on the performance of banks in Nigeria.
HI: lending rate has significant impact on the performance of banks in Nigeria
H0: Monetary policy rate has no significant impact on the performance of banks in Nigeria.
H1: monetary policy has significant impact on the performance of banks in nigeria
H0: Exchange rate has no significant impact on the performance of banks in Nigeria.
H1: exchange rate has significant impact on the performance of banks in nigeria.
1.6 Significance of the Study
Evidently, lending rate instability is one of the economic problems that have continued to dominate national discourse in recent times while exchange rate is considered one of the drilling forces in economic development.
An understanding of the lending rate management on the growth of Nigeria economy is crucial for the appreciation of trend and policies that the apex bank (CBN) will use in re-designing an appropriate strategy in its stabilization efforts as to bring about a stable lending rate.
Therefore, this study will be of immense importance to the government and policy-makers alike especially in their efforts to fashion out sound and effective exchange rate administration. Sound policies in lending rate administration, will no doubt, foster improve international trade through exportation of goods and services etc.
The study will prove useful for stakeholders to understand lending Rate Management in determining the profitability of commercial banks and growth of the economy.
The general public and civil society can also benefit from the research because it will provide them with adequate information concerning activities of CBN as it relate to lending rate management. The research findings and recommendations will form a base that will be relied for further research work while contributing to existing body of knowledge.
1.7 Scope of the Study
This research work seeks to evaluate the effect of lending rate on Nigerian banks performance. Focus shall be on commercial banks lending rate, monetary policy rate and exchange rate management and implementation that would contribute to the performance of banks and growth of the economy. The study covered a period of thirty one (10) years (2003-2013), being the year the monetary authority shifted from fixed exchange rate regime to flexible exchange rate regime.
1.8 Definition of Terms
i. Exchange rate: This is the price of one country‟s currency in terms of another.
ii. Foreign exchange: Foreign exchange is a means of payment for international transaction; it is made up of currencies of other countries that are freely acceptable in settling international transactions.
iii. Dutch auction System (DAS): This is a method of exchange rate determination through auctions where the bidders pay according to their bid rates.
iv. Exchange control: This is a foreign exchange arrangement in which the government purchase all coming foreign exchange and is the only source from which foreign exchange can be purchased legally.
1.9 Organization of the study
Chapter one introduces the research work including the background of the study, statement of the problem, objective of the study, research questions, hypotheses, significance of the study, scope of the study, and structure of the study.
Chapter two critically reviews related literature. This encompasses the introduction, the conceptual framework, the lending rate models, overview of lending rates.
Chapter three examines the research methodology, the research design, the population, the sample size, the nature and source of data, the method of data collection, the techniques of data analysis.
Chapter four focuses on data presentation and analysis, test of hypotheses and summary of findings.
Chapter five presents the summary and conclusion of the research work. It looks at the recommendations, limitations of the study, suggestion for further research.