CHAPTER ONE

INTRODUCTION

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

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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

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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

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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:

Hypothesis One

H0: Lending rate has no significant impact on the performance of banks in Nigeria.