ABSTRACT
The relationship
between interest rate and domestic investment has attracted the attention of
economists and other economic experts. This study carried out an empirical
analysis of the impact of interest rate on domestic investment in Nigeria
covering the period 1980-2016. Data for the research was extracted from the
central bank of Nigeria statistical bulletin. The methodology adopted in the
research is the multiple linear regression with the application of Ordinary
least Squares (OLS) technique. Findings from the study reveal that interest
rate has a negative and significant impact on domestic investment in Nigeria,
inflation has no significant impact on domestic investment in Nigeria and money
supply has no significant impact on domestic Investment in Nigeria. It is therefore the recommendation for the
study that the federal government through the Central Bank should boost the
level of domestic investment through an optimal reduction in interest rate and
the federal government should ensure a conducive and comfortable macroeconomic
atmosphere so that domestic investment can strive.
KEY
WORDS : Interest Rate, Domestic Investment, Inflation.
CHAPTER
ONE
INTRODUCTION
1.1
Background of the Study
The behaviour of
interest rates, to a large extent, determines the investment activities and
hence economic growth of a country. Investment depends upon the rate of
interest involved in getting funds from the market, while economic growth to a
large extent depends on the level investment. According to Jhingan (2003), if
the rate is high investment is at low level. A low rate of interest leads to an
increase in investment. There is therefore a need to promote an interest rate
regime that will ensure “inexpensive” spending for investment and consequently
enhancing economic growth at low financial cost.
Interest rate is
a critical variable in the loanable funds market, given its role in the
mobilization and efficient allocation of financial resources. Prior to the
adoption of the Structural Adjustment Programme (SAP) in 1986, the authorities
in Nigeria fixed the level and structure of interest rate. The major reasons
for regulating interest rates were the desire to obtain the social optimum in
resource flow to the preferred sector; promote an orderly growth of the
financial markets; combat inflation and lessen government’s debt service
burden. In order to facilitate the flow of domestic credit to the priority
sectors, discriminatory and below market interest rates were fixed for credit
to agriculture, manufacturing and residential housing construction. This policy
generally led to the unintended consequences of moral hazard and adverse
selection.
The financial
sector reforms, which commenced in July 1986, relied on market forces. Its
objective was the elimination of financial repression in order to improve the
incentive structure and ensure allocative efficiency. The policy stance of the
regulatory authorities has been guided by the general economic conditions and
developments in the financial markets. At various times, there had been policy
shifts induced by the need to deal with emerging problems. However, by October
1996, all forms of control on interest rates had been removed, following
further liberalization of the financial sector, thus the Central Bank of
Nigeria’s minimum rediscount rate became the nominal anchor of its interest
rate in the flow of banks credit, which averaged 19.8 percent in 1980 – 1986,
28.6 percent in 1987 – 1996 and averagely 42.9 percent in 1997 – 2000s
respectively. However, the unintended consequence of the policy shift from
controls to liberalization has been the rise in interest rates, especially
between 1986 and 1993. Interest rate was relatively stable between 1994 and
1997 and, thereafter, became volatile (CBN, 2015)
Based on the
foregoing, this study is aimed at carrying out an empirical analysis on the
impact of interest rate on domestic investment in Nigeria covering the period
1980-2016.
1.2
Statement of the Problem
The influence of
interest rate in determining the level of domestic investment in an economy
cannot be overemphasized. However, over the years in Nigeria, interest rate has
always been fluctuating and this has adversely affected the level of domestic
and foreign investment in the economy. Various measures have been taken by the
government to stabilize the level of interest rate in the economy but these
steps and policy strategies were ineffective in the economy. Firstly, through
the Central Bank of Nigeria (CBN), the interest rate has been pegged at various
rates so as to prevent fluctuations and volatility movements. This was
facilitated by the policy of interest rate deregulation in the economy in 1986.
However, despite these policies, the level of interest rate has not been
impressively stable and the level of domestic investment has not been optimally
on the increase. This study is thus focused on the evaluation of the impact of
interest rate on domestic investment in Nigeria.
1.3
Research Questions
In the course of
this study, the following research questions will be addressed:
1.
To what extent has interest rate
affected the level of domestic investment in Nigeria?
2.
To what extent has inflation impacted on
the level of domestic investment in Nigeria?
3.
To what extent has money supply impacted
on the level of domestic investment in Nigeria?
1.4
Objectives of the Study
The general aim
of this study is to evaluate the impact of interest rate on domestic investment
in Nigerian economy. The specific objectives of the study include:
1.
To ascertain the impact of interest rate
on domestic investment in Nigeria.
2.
To evaluate the impact of inflation on
domestic investment in Nigeria.
3.
To evaluate the impact of money supply
on domestic investment in Nigeria.
1.5 Hypotheses of the
Study
The
following hypotheses of the study will be tested:
Ho:
Interest rate has no significant impact on domestic investment in Nigeria
Ho:
Inflation has no significant impact on domestic investment in Nigeria
Ho:
Money supply has no significant impact on domestic investment in Nigeria
1.6 Significance of the
Study
A research draws its
relevance from the present and prospective beneficiaries and its
contribution(s) to academia at large. The pertinence of this research is
justified on the grounds that it will show the impact of interest rate on
domestic investment in Nigeria for the years under review; and thus provides a
framework for policy prescriptions and interventions. In furtherance to the
above, this research will find its relevance as made evidence in the following:
The
Banking Sector: The banking sector will benefit significantly
from this study as it will reveal the impact of interest rate on domestic
investment in Nigeria. This is because the banking sector use interest rate as
an instrument of lending and this study will show the impact it has on domestic
investment in Nigeria over the years.
Government:
The
federal government will find this study highly relevant as it will provide a
picture of the relative impact of interest rate on domestic investment and thus
motivate relevant policy reforms or sustenance. This research will also find
its relevance in the coffers of financial variable analysts given that the
subject under study is purely a monetary phenomenon.
Subsequent
Analysts: This investigation will also serve as a stepping stone for
researchers who develop interest in carrying an empirical analysis on the
concept of interest rate and domestic investment.
Scholars:
Students will find this piece highly relevant as it will undeniably increase
their knowledge horizon on the concept of interest rate and domestic
investment.
The
Academia: The education sector is also considered as one of the significant
beneficiaries because it is believed that this research will be an addition to
the existing stock of knowledge.
1.7 Scope and Limitations
of the Study
The
primary focus of this study is to carry out an empirical analysis of the impact
of interest rate on domestic investment in Nigeria between 1980 and 2016. In
the course of carrying out this research, the researcher was confronted with a
lot of limiting threats which amongst others included time constraint, dearth
of data and some discouraging attitudes from the staff of some statistical
agencies. However, despite these limitations, the researcher will ensure that
the objectives of the study are duly met and actualized.
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