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THE EFFICACY OF INTERATE RATE DEREGULATION ON SAVINGS
MOBILIZATION IN THE NIGERIAN ECONOMY
ABSTRACT
The objective of this study was to examine the impact of
interest rate deregulation on savings mobilization in the Nigerian Economy,
using a time series annual data of \980-2008. The central focus of this work is
to investigate whether deregulated interest rate mobilizes savings as against
the Pre-SAP era which was a fixed rate policy. The study made use of secondary
data derived from Central Bank of Nigeria, using time series annual data for a
period of 28 years. We employ both descriptive and econometric techniques to
analyze our model which comprises of six variables based on the theoretical
underpinning. at the of the study, it was revealed that deregulated interest
rate policy in Nigeria since 1987 had positive impact on the level of savings
mobilized as against the PRE-SAP era which shows an insignificant or stagnant
effect on savings mobilized in the economy. Base on this result, the question
is how is the savings mobilized does not have effect on the real sector of the
economy or was it that, the fund was not channeled into the productive sectors
or no macroeconomic environment to enhance the funds for economic growth and
development? Finally, the study recommended to the policy makers that the
problem of economic recession is not deregulated interest rate policy but
rather on the part of the government in providing the macroeconomic environment
such constant Power Supply, Good network, political stability, security and
others, arc determinants of investment, economic growth and development .and
not only deregulated interest rate policy.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF
THE STUDY
Interest rate is a vital tool of macroeconomic management for
the government of any country in the world. The level of interest rate in any
economy especially the Nigerian economy is crucial in view of its role in
controlling inflation, inducing savings which can be channeled to investment
and thereby increasing employment output, and efficient financial resource
utilization. The 1960s to mid-1980s witnessed the administration of low
interest rates which was intended to encourage investment ( Ajakaiyc Olu and
Ayodele, 1994).
The advent of the structural adjustment programme in the
third quarter of 1986 ushered in an era of dynamic interest rate regime where
interest rates were more influenced by market forces. This shift de-emphasized
direct investment stimulation through low interest rates and encouraged savings
mobilization by decontrolling interest rates (Essien and Oniwioduokit, 1997).
Such liberalization represents a policy response, encompassing a package of
measures to remove all undesirable state imposed constraints on the free
working of the financial markets. The measures include the removal of interest
rate ceiling, and the loosening of deposit and credit controls
(Uremadu,S.O.:2006 ).The mobilized fund was intended for investment,
Undoubtedly, government's past efforts to promote economic
development by controlling interest rates and securing "inexpensive"
funding for their own activities have undermined development. More importantly,
financial repression has retarded the development process as envisaged by Shaw
(1973).
Interest rate can be defined as the return or yield on
equity, or opportunity cost of deferring current consumption into the future.
Nominal and real interest rates are considered in the general concept of
interest rates. Nominal rate is the observed and recorded rate in the economy
which incorporates monetary effects.
While real interest rate is the rate that brings equilibrium in the primary
market for new asset and the secondary market where old assets are traded. The
concept of real' interest Tate was developed by Irving Fisher when he tried to
establish the trade-offs between consumption today and that in the future.
In the Nigerian context, the liberalization of interest rates
is at the core, of the adjustment programme introduced in 1986 by the Nigeria
government. Prior to that period, the Nigerian economy particularly the
financial sector, was highly regulated, and this ultimately led to a high level
of financial repression. From 1986 by through the third quarter of 1987,
witnessed the administration of low interest rates. (Olu Ajakaye, Ayodele F.
Odusola 1994).
In practice, Savings and time deposit grew over the years in
response to the interest rate incentives. The deregulation of interest rate in
1987 must have encouraged financial savings as reflected by the sharp rise in
financial ratio from 17.H percent in 1986 to 26.85 percent in 1987 (Uchendu
1993).
However, there are several obstacles to the mobilization of
financial savings in developing countries that interest rate needs to tackle in
order to be effective in savings mobilization and also 'in mobilization
domestic recourses. First, formal institutions in rural areas, such as unit
area banks and commercial bank branches, have no strong incentives for savings
mobilization. Secondly, the real rate of interest on deposit has been
relatively low and sometimes negative as a result of financial depression.
Thirdly, there were inadequate facilitates in rural areas for
effective saving mobilization (Adedoyin Soyinbo and Kolawole Olayiwola, 2000).
The foregoing points to a basic, fact that interest rate is
expected to play central role in savings mobilization. It is in this context
that the impact of interest rate deregulation policy on savings mobilization is
a key policy target in the practice of financial reforms around the world
(Meshach Aziakpono, 1997).
1.2 STATEMENT OF
THE PROBLEM
The issue of the persistent low level of economic development
in Nigeria has been a matter of concern to many analysts. It has been argued
that this is the outcome of capital shortage (Molho, L.E 1986). It has also
been contended that the fragmented state of domestic savings and interest rate
regulation are key bottlenecks to self-sustainable development in Nigeria
(Ahmed, M.K 1993).
This study will examine the impact of 'interest rate
deregulation on savings mobilization with a view to assessing whether it
actually led to growth in the Nigerian economy. Developed countries like the G7
economics, the Asian tigers had exhibited the effectiveness of savings
mobilizations towards the growth and development of their economics, through
this they have investment in facilities that yield future returns and also lead
to increase in their reserves and through these countries, i.e developed
counties, can finance capital project which thus lead to increase in the social
and economic welfare of the entire citizenry.
Therefore the impact of interest rate deregulation on savings
mobilization in the Nigerian economy is questionable and sustainable, inspire
of different interest rate reforms; Nigerian economy had not really benefited
the gains of these policy.
Based on the recent bank expansion, the recapitalization
process and other CBN regulatory measures, a number of policy issues and
questions readily come to mind. Although a vast empirical literature has shed
light on various aspects of saving behaviour, several crucial questions remain
unanswered with regards to the relevance of policies in raising the saving rate
vis-a-vis the non-policy determinants of saving from the perspective of
policies, there is need to know the following salient questions:
What is the magnitude and direction of these macroeconomic
variables on saving?
How effective is the macroeconomic stability and higher
income growth in raising the saving rate?
What is the effectiveness of financial development in raising
private saving?
Is there a role for fiscal policy in increasing national
saving?
What is the impact of interest rate on total savings?
1.3 OBJECTIVES OF
THE STUDY
The main objective of this research work will be to examine
the efficacy of interest rate deregulation on savings mobilization in the Nigerian
economy. In line with the above objective, the specific objectives include:
To evaluate the correlation which exists between savings,
investment and growth as established in the previous literature.
To carry out an analysis of the sources and trend of savings
in Nigeria.
To compare the differences between interest rate regulated
and deregulated system vis-a-vis their impact on savings mobilization in
Nigeria.
To evaluate the role of life-cycle hypotheses as a study of
savings behaviour in a peculiar economies like Nigeria, where all other
determinants of savings arc existing or not.
1.4 RESEARCH
HYPOTHESIS
In the course of assessing the impact of interest rate
deregulation on savings mobilization in Nigeria, the statement of hypothesis
follows:
Ho: Interest rate
deregulation does not have any impact on savings mobilization in Nigeria.
H1: Interest rate
deregulation has a significant impact on savings mobilization in Nigeria.
1.5
RESEARCH METHODOLOGY
The research work made use of both descriptive and
econometric analyses. The descriptive approach of trend analysis was used to
determine the relationship between interest rates and saving mobilization
behaviour in Nigeria. Following the framework analysis of life cycle hypothesis
Model and McKinnon Shaw hypothesis (1973). The specification of the
relationship between interest rates and saving; mobilization is modified and
expanded to include the ratio of broad money Supply to GDP (which captures the
effect of financial deepening), Domestic savings GDP ratio and shift in
financial policy from regulation to deregulation of Interest.
The model for this study is specified as:
PSR = F(INT, FB, DFD, DSG, FPS)
PSRt = α0 + α1 INTt + α2 FBt + α3 DFD + α4 DSG + α5 FSP + U
Where
al >0,a2>0, α3>0,α4>0,a5>0
PRS = private saving rate
INT = deposit interest rate
FB = Fiscal balance
DFD= degree of financial deepening
DSG = Ratio of gross national saving to GDP, and
FPS = dummy variable to capture the shift in financial policy
from regulation to deregulation of interest rate
U = Stochastic variable
The saving equation was estimated using annual data for the
period 1980-2003.
The estimate period was determined largely by the
availability of adequate data of all variable.
1.6 SIGNIFICANCE OF
THE STUDY
The justification of this study addresses the fact that the
low level of savings in the Nigerian economy limits the investment rate on
which economic growth depends on. Thus a holistic approach to mobilizing
savings within interest rate is a major policy strategy that makes study
relevant.
This study also provides policy implications as it relates to
the link between interest rate deregulation and savings mobilization in the
Nigeria economy from literature and the development experiences of the Asian
tiger domestic savings is an important and major source of finance for
investment. There is therefore the need to examine the importance of
deregulation policy on savings in order to proffer solution to the low level of
savings in the Nigeria economy.
1.7 SCOPE AND
LIMITATION OF THE STUDY
The role of savings in the economy growth of any country
cannot be overemphasized. Therefore, the .purpose of this study is to focus on
the understanding of the nature of aggregate national savings behaviour as
critical in designing policies to promote savings, investment and growth (Umoh,
2003). Thus, the scope of this research work is to investigate the impact of
deregulated interest rate on savings mobilization in Nigeria using time series
data covering
1980-2009 periods.
However, some limitations will be experienced in the course
of this research work like lack of availability of appropriate data and
relevant information is the financial constraint, in terms of fund to carry out
an appropriate work and more so, the time constraint to execute the work is
costly. Although, none of these constraints anticipated would limit the potency
and accuracy of futurable outcome for prediction.
1.8 PLAN OF THE
STUDY
In order to justify further the critical important of
deregulated interest rate on savings mobilization in Nigeria, the research work
is arranged in five chapters as explained sequentially below.
Chapter one includes background of the study, statement of
the problem, hypothesis statement, model specification, significance of the
study and scope and limit of the study.
Chapter two addresses the theoretical under pinning and the
literature review of the subject matter,
Chapter three gives an insight into methodology including
sources of data, Models specification and economic frame work..
Chapter Four produces the empirical results and
interpretation of the results for discussion of the findings
Chapter Five ends with provision of summary, recommendation
and conclusion of the research work.
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