1.1 Introduction
Bank interest is referred to as the price paid for being allowed to use bank loan. The incentive for giving up liquid for a predetermined amount of time is the role of interest. According to Timothy et al, (2012), bank Interest Rate deregulation entails the removal of regulations affecting the loan acquisition from the banking sector. Regulations which have been relaxed include controls on interest rates at which banks can lend or borrow, controls on operations by banks outside their country of registration and restrictions on the types of business particular financial institutions can transact, direct credit abolition and exchange rate deregulation (Timothy, et al, 2012).
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research questions, Limitation of the study and Definition of technical terms.
1.2 Background of Study
The Nigerian Banking sector is among the most heavily regulated sector of the Nigerian economy. The special interest of government in the banking sector is due to its relevance in the provision of credit facilities of industries and most importantly the provision of soft loan for small scale businesses for development of economy in the country. As financial intermediary, banks help in channeling founds from surplus economics regions to the deficit one’s on order to facilitate business transaction and economic development in general. The real sectors economics are not left out in benefit found from the surplus spenders in the economy.
The banking industry which is a major instrument which government execute their policies need to appropriately reposition itself to take full advantages of the gains that might arise from deregulation, as well as face the challenges. Deregulation of the economy will definitely pose some challenges to the banking industry: Competitive lending rates, effectiveness of management of credit/credit risk, etc.
Bearing in mind that funds are owned by other people (the investing public / depositor) the banking ethic demands that such funds should be efficiently and effectively managed in order to build and maintain the confidence of depositor investors in the banking system and also uphold the competence and continued soundness of the banking system to reduce drastically the risk or possibility of bank failure or distress.
The government most often may think its necessary to intervene in the operation of the banking system with the intention of correcting the short comings of the price fixing mechanism to ensure that what is commercially rational for an individual bank is appropriately rational for all socially interest rate charged by banks could be regulated to encouraged saving mobilization, ensure and faster adequate investment for rapid growth and development.
According to Akiri and Adofu (2007), the existence of externalities and imperfection in the financial markets of most developing economics has often called for intervention by the government through its appropriate agent (the central Bank in the case of Nigeria) to encourage investment and to re-channel credit to those economic unity with high social race of returns but low commercial rate of returns.
Under the deregulated interest rate system, the market forces of demand and supply plays a very prominent role in the determination of interest i.e to arrive at a suitable interest role on both deposit and loans. Interest rate being cost of money, the government by deregulation interest intends to stop central on credit expansion by banks. If the cost of money is high, the business sector would not borrow and when they don’t borrow, it will go long way to reduce the inflationary tendencies associated with excess liquidity. Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Effect of Bank Interest Rate Deregulation on the Economic Growth.
1.3 Statement of Problems
Investigation revealed that banking industry operate on a profit base mobilizing fund from surplus sectors and lending it to into deficit sector in which interest rate is being charged on both the bank usually paid sector but charges higher interest when they want to lend it into deficit sector in order to make profit for banks to fulfill this, care must be taken in lending in order to safeguard the profitability of such banks.
1.4 Aim and Objectives of Study
The aim of the study is to analyze the effect of bank interest rate deregulation on the economic growth in Nigeria using Wema Bank Plc as a case study. In achieving this aim, the following specific objectives were laid out as follows:
- To assess the effect of the charges in interest rates on saving through the structure and growth of bank deposit implication on the economic growth;
- To critically identify and analyze the impact of government deregulation of the economy on banking sector loan interest rate;
- To examine the level of interest rate induce on savings in banks; and
- To recommend solution that will enhance the efficiency of banks operations in the study area will be equally made.
1.5 Research Questions
The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:
- Has interest rate deregulation of the economy resulted to an increase in profitability of commercial banks?
- Has interest rate deregulation led to an increase in banks’ debts?
- What is the impact of government deregulation of the economy on banking sector loan interest rate?
- What is the level of interest rate induced on savings in banks?
- What is the possible solution that will enhance the efficiency of banks operations in the study area?
- What are the effect of the charges in interest rates on saving through the structure and growth of bank deposit implication on the economic growth?
1.6 Research Hypothesis
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
Hypothesis One
- H0: The high interest rate does not induce saving in banks
- H1: The high interest rate induces savings in banks
Hypothesis Two
- H0: The high bank interest rate does not discourage customers from borrowing
- H1: The high bank interest rate discourages customers from borrowing
1.7 Significance of Study
This study will help the bank to know whether they should be more committed to increasing their changes on rate of interest and to know whether this will increase their customer patronage good will and profitability. The researcher therefore, that by studying the pricing decision, it will be of benefit to the economy and individual alike, it will be of benefit to the economy in the sense that it will as to determine approximation compensation for labour used in production.
This study will equally enable firms to known how consumer perceive products, the reasons for the high and low price. In addition, the study will serve as reference point for future researchers in relevance area.
1.8 Scope of Study
The scope of the research is focused on the Effect of Bank Interest Rate Deregulation on the Economic Growth in Nigeria using Wema Bank Plc in Delta State as a case study.
1.9 Limitations of the Study
During the course of this study, there were some problems encountered which stood as limitations to the research work. Some of the limitations include:
- Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
- Establishment Policies: Establishment policies posed a serious limitation as most staffs are not ready to release information needed for this research work. There were lots of information needed from the staffs of this establishment to enhance the study which took them time to release or they did not release at all for security purposes, hence the scope was reduced.
- Research Material: availability of research material is a major setback to the scope of the study.
- Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
- Initial Cooperation Delay from Respondents: A particular limitation of this work came as a result of the respondent refusal to offer their cooperation at the initial time they were contacted. This contributed in making the success of this research study difficult.
1.10 Definition of Technical Terms
Banking:
Banking is an industry that handles cash, credit, and other financial transactions.
Interest Rate:
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a bank as loan or overdraft etc.
Deregulation:
It is the removal or simplification of government rules and regulations that constraints the operation of bank on interest rate for loan given.
Lending:
It is concerned with granting of credit facilities to customers.
Normal Interest Rate:
This is the interest on the face value or coupon rate in the case of loans floated as securities.
Real Interest Rate:
This is the interest adjusted for the effect of inflation. Real interest is only used in performance assessment.
Sector:
A sector is an area of land, sea, or organization that has been divided from other areas. It is also an area or portion that is district from others.
Borrowing Rate:
Borrowing rate to a banker’s customer the “borrowing rate” i.e. bank’s lending rate.
Prime Lending Rate:
This is the rate banks lend to their first class loan risk customers. For other customers the lending rate will be higher, the difference representing a premium for risk under taken by the lender.
