Interest rate and commercial banks’ lending operations in Nigeria: A structural break analysis using chow test

Felix Awara Eke,Ihuoma Chikulirim Eke,Odim Godday Inyang

doi:10.4314/gjss.v14i1.2

Abstract

This study used the classical least squares method to empirically examine interest rate deregulation effect on the lending operations of Nigerian commercial banks for the period 1970 to 2013. The period was divided into two policy regime periods; the regulated interest rate era spanning 1970-1986 and the deregulated period 1987-2013. The Chow test was applied to examine if there was any significant difference in the relationship between interest rate and commercial banks’ lending for the two periods. The empirical result obtained for the interest rate regulation era showed that interest rate spread and statutory liquidity ratio had negative and significant effect on the volume of commercial banks’ loans, while fixed exchange rate had negative and insignificant impact on banks’ loans and advances. It was found that Monetary Policy Rate (MPR) and inflation rate exert a positive and significant impact on banks’ loans for the period. For the deregulation era, the result showed that MPR and the exchange rate had significant impact on banks’ loans and advances. While the former exerted a negative impact, the later had a positive influence on loans and advances. Interest rate spread, statutory liquidity ratio and inflation rate were found not to have significantly impacted on commercial banks’ loans and advances for the period. The chow test result confirms the impact of deregulation on volume of commercial banks loans and advances due to the deregulation of interest rate. The study submits that, there exist a relatively inelastic relationship between interest rate spread and banks’ loans at the deregulated interest rate era. This was largely attributed to imperfections as well as the under-developed nature of the financial market. The study suggests that the monetary authority should evolve a guided interest rate deregulation regime with MPR increasingly used to regulate the activities of commercial banks in the area of loans and advances. In order to deepen the financial sector, there is the need to improve financial infrastructure which will enhance commercial bank operations resulting in a more competitive financial market and an improved investment climate in the country. Keywords : Interest rate, bank lending, Deregulation, chow test

Highlights

Commercial banks’ role in the economic development of any nation remains paramount the activities of these banks are of primary concern to monetary authorities
Findings on the effect of interest rate on commercial bank lending operations are discussed in three fold
From the result for the first period which span from 1970 to 1986, otherwise referred to as the interest rate regulation period, the variables and their co-efficient as presented in Table 2,interest rate spread (-0.28), statutory liquidity ratio (-0.04), exchange rate (-0.52) and inflation rate (0.02) conformed to their a’priori expected signs while monetary policy rate (0.31) did not. This reveals that a unit increase in interest rate spread, liquidity ratio and exchange rate will lead to a decrease in banks loans and advances by 28%, 4% and 52% respectively

Summary

Introduction

Commercial banks’ role in the economic development of any nation remains paramount the activities of these banks are of primary concern to monetary authorities. As financial intermediaries they serve as funds mobilizers from the surplus economic units of the economy and advance same to the units with shortfall in financial resources. Little wonder they are often times referred to as the ‘lubricants of the economy’. Felix Awara Eke, Department of Economics, University of Calabar, Calabar, Nigeria.

Methods

Results

Conclusion