Effect of Interest Rate on Savings Mobilization in Nigeria

Abstract

The study examines the extent at which interest rate affects savings mobilization in Nigeria. The study is hinged on the modified variant of McKinnon and Shaw hypothesis that accounts for the link between savings mobilization and interest rate. ARDL model was used in the study to test for co-integration for the long run and the unrestricted error correction model for the short run contemporaneous dynamics. Data gotten from CBN annual report and World Economic Outlook covers the period; 1986-2022 was used for the study. Accordingly, the study finds out that savings mobilization is significant but have negative responsive to changes in nominal interest rate both in the short run and long run. Also, the study further finds out that the effect of prime lending rate on savings mobilization is significant but has positive response in long run as against its significant negative effect in the short run. Thirdly, it was observed that maximum leading rate had significant positive effect on savings mobilization in the short run while inflation rate exerted significant negative effect on savings mobilization contrary to the latter significant positive response to changes in M2-GDP ratio in the short run. The study recommended the need for government to consider a reduction from the current double digit to single digit particularly in nominal interest rate and prime lending rate in order to stimulate savings through investment in Nigeria. Finally, monetary authorities may consider a moderation rise in price level thereby encouraging people to save.