The Impact Of Interest Rate On Domestic Investment

Obamuyi (2009) investigated the relationship between interest rates and economic growth in Nigeria, using time series analysis and annual data from 1970 - 2006. The co-integration and error correction model were used to capture both the long-run and short-run dynamics of the variables in the model. The empirical results indicate that real lending rates have significant effect on economic growth. There also exists a unique long-run relationship between economic growth and its determinants, including interest rate. The results imply that the behaviour of interest rate is important for economic growth in view of the relationships between interest rates and investment and investment and growth. Thus, the formulation and implementation of financial policies that enhance investment-friendly rate of interest is necessary for promoting economic growth in Nigeria.

Itodo (2011) assessed the impact of interest rate deregulation on economic growth in Nigeria. Using an autoregressive model, GDP growth rate (G) was regressed against lending rate (LR), savings rate (SR), Inflation rate (IF), exchange rate (X), financial deepening (FD) and lagged G (G-1) for two separate periods; the regulation era (1970-1986) and deregulation era (1987–2009). The result showed that deregulated interest rate (represented by LR) has an insignificant impact on economic growth. However, inflation rate and exchange rates were found to have positive and significant impact on economic growth.

Lucky and Lyndon (2016) examined the relationship between interest rate, economic growth and bank lending in Nigeria. Secondary time series panel data on the study variables were sourced from Central Bank of Nigeria (CBN) Statistical Bulletin for the period 1985 – 2014. The study employed Ordinary Least Squares (OLS) technique to analyze data. The study found that interest rate had negative relationship with bank lending in Nigeria. While economic growth had positive correlation with bank lending in Nigeria. The study recommended a policy shift towards infrastructural development and an increased productive base of the notion in order to improve the financial sector performance by stabilizing the macroeconomic instruments. This it is hoped would not only help in enhancing the profitability of banks in the country but would also improve the standard of living of the Nigerian people.

Malede (2014) examined the determinants of commercial bank lending in Ethiopia, using time series panel data from selected banks for the period 2005 – 2011. He employed OLS technique to the study variables such as bank size, credit risk, gross domestic product, investment, deposit, interest rate, liquidity ratio and cash reserve requirement. The results revealed significant relationship between bank size, credit risk, gross domestic product, liquidity ratio and commercial bank lending, while deposit, investment cash reserve requirement and interest rate had no effect on bank lending in Ethiopia. In a similar study, Tomak (2013) investigated the effect of bank size, deposit, interest rate, inflation and gross domestic product on bank lending in Turkey, using data collected from selected banks for the period 2003 – 2012. The study employed Breusch-Pagan/Cook-Weisberg test to analyze data. The results indicate that bank lending in Turkey depended on bank size and inflation rate.

Ajayi and Atanda (2012) examined the effect of monetary policy instruments on bank performance in Nigeria using time series data for the period 1980 – 2008. The study model defined bank total loan as a function of minimum policy rate, cash reserve ratio, liquidity ratio, inflation and exchange rate. The study employed a regression model based on the Engle-Granger two-step co-integration approach. They found that interest rate, inflation rate and exchange rate had positive effect on bank loan, while liquidity ratio and cash reserve ratio had negative effect on bank loan. They concluded that monetary policy instruments are not effective stimulants for bank lending in Nigeria. In another study, Amidu (2006) examined the impact of monetary policy on bank lending in Ghana using cross sectional panel data collected from the Bank of Ghana covering the period 1998 – 2004. The study adopted money supply and prime lending rate as proxy for monetary policy and the independent variables. These were regressed against bank loan, the dependent variable. The found that money supply had positive effect on bank loan, but prime lending rate had negative influence on bank loan in Ghana.

Adeyeye (2006­) examined empirically the relationship between interest rates and economic growth in Nigeria over a 30 year period. The roles of monetary policy in increasing the growth of the economy by controlling the availability and cost of credit (interest rates) through various interest rate policies were discussed. Adequacy and structure of interest rates as well as the factors that affect interest rates were reviewed. Various interest rate regimes in Nigeria vis-à-vis macroeconomic indicators and performance were examined. Hypotheses were formulated to determine the direction of causality between savings and economic growth. Empirical models were formulated using Nigerian data for the period 1970 to 2003 and the study adopted ordinary least square method in its estimation. The study reveals, among others, that financial savings as well as bank loans were negatively but significantly related to gross domestic investment suggesting that real interest rate policy cannot be used to promote investment and economic growth without fuelling inflation. There is therefore the need for government to make it a matter of national priority the putting in place policies through practical strategies that will ensure consistently moderate and acceptable levels of inflation and interest rate for the economy.

Obansa, Aluko and Millicent (2012) established empirically the relationship exiting among Exchange rate, Interest rate and economic growth in Nigerian economy over the period of 1970-2010. Fundamentally, the period of the study was fractured into two prominent distinctions of economic era- the regulation era and the deregulation era. The study adopted vector auto- regression (VAR) technique, with specific emphasis on Impulse Response factor and the Forecast Error Variance Decomposition. The result indicated that Exchange rate had a stronger impact on Economic growth than Interest rate. Particularly, Interest rate impact was found to be positive but however declined as the time horizon increased. It had a little impact on Economic growth in the period of regulation than in the deregulation era. The conclusion arising from the study shows that Exchange rate liberalization was good to Nigerian Economy as it promotes Economic growth. Interest rate liberalization on the other hand does not make an appreciable impact on the Economic growth as it undermines investment drive. The paper therefore recommends that Interest rate liberalization and deregulation should be replaced with the policy of Interest rate regulation as obtained in the 1970s and early 1980s.