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The Impact of Interest Rate Liberalization on Investment in Nigeria

The Impact of Interest Rate Liberalization on Investment in Nigeria

Project / Seminar Material
Reference ID: PS-7093-TM

DEDICATION

This research material titled “The Impact of Interest Rate Liberalization on Investment in Nigeria” is dedicated to God for his enabling grace, and to all computer enthusiasts who contributed to make life a pleasant experience during my research documentation.

ACKNOWLEDGEMENT

I extend my sincere gratitude to all those who contributed to the completion of this project. Special thanks to my Supervisor (Name of your Supervisor), the Head of Department (Name of your HOD), the Lecturers in the department of Economics, Book Authors and Profound Scholars of existing or related project material on “The Impact of Interest Rate Liberalization on Investment in Nigeria” for their invaluable guidance, support, and expertise throughout the journey.

I am also grateful to your study area (mention any funding organizations, if applicable) for their financial assistance. This research would not have been possible without the encouragement and assistance of some stakeholders (mention any mentors, teachers, or colleagues). Additionally, I would like to acknowledge the understanding and patience of my family and friends during this endeavor. Your unwavering support has been a constant source of motivation. Thank you all for being part of this meaningful endeavor.

ABSTRACT

The importance of investment in economic growth cannot be overemphasized. This has led to an upsurge in the study of its determinants. This research therefore, seeks to investigate The Impact of Interest Rate Liberalization on Investment in Nigeria from 1970-2012. Using the Error Correction Model (ECM), the result indicates that a long run relationship exists among the variables. The result further reveals that all the variables have significant impact on investment.

The study equally shows that there is no differential impact of interest rate liberalization on investment in Nigeria during the pre and post-liberalization regimes. Also, the impulse responses of these variables to shocks in the extraneous variables were verified; using the Multiple-Equation VAR models. In addition, the variance decomposition result shows that Period 2 shows a standard deviation value of 97.23 in investment resulting from own shock, 2.44 to a response to a shock from interest rate, 0.0186 to a response from market capitalization rate,0.205900 to a response to public expenditure and 0.101933 to response to trade openness.

In period 10, investment responds positively with a standard deviation of 18.77 originated from own shock and standard deviation values of 8.05, 7.94, 12.43 and 15.59 arising from a shock from interest rate, market capitalization rate, public expenditure and trade openness respectively. It is recommended that polices to make interest rate attractive to investors as well as improve trade should be encouraged. Also broadening the capital market and improving infrastructure through increased capital expenditure should be pursued. In addition to these, there should be consistency in policies so that policy summersaults does not affect investment.


The Impact of Interest Rate Liberalization on Investment in Nigeria

CHAPTER ONE


Introduction

1.1 Background of the Study

The Nigerian economy has at different times witnessed enormous interest rate swings in different sectors of the economy since the 1970s and mid 1980s under a regulated regime. The preferential interest rates were based on the premise that the market, if freely applied would exclude some priority sectors. Thus, interest rates were adjusted through the market forces in order to promote increased level of investment in the various preferred sectors of the economy.

Prominent among the preferred sectors were the agricultural, manufacturing and solid mineral sectors which were accorded priority and deposit money banks were directed to charge preferential interest rates on all loans to encourage the upsurge of small-scale industrialization which is a catalyst for economic development (Udoka, 2000). According to Mckinnon (1973) and Shaw (1973), this situation can ignite financial repression which occurs mostly when a country imposes ceiling on deposit and lending nominal interest rate at a low level relative to inflation. The resulting low or negative interest rates discourage savings mobilization and the channelling of mobilized savings through the financial system. This has a negative effect on the quantity and quality of investment and hence economic growth.

Closely followed by the regulated interest rate regime was the interest rate reform, a policy evolved under the financial sector liberalization. The policy was put in place to achieve efficiency in the financial sector, thus, engendering financial deepening. In Nigeria, financial sector reforms started with the deregulation of interest rate in August, 1987 (Ikhide & Alawade, 2001). Since then, the Nigerian government has been pursuing a market determined interest rate which does not permit a direct state intervention in the general direction of the economy (Nyong, 2007).

Since the introduction of the interest rate liberalization concept in the 1980s, many countries such as Angola, Burundi, Congo, Ivory Coast, Ghana, Malawi, Nigeria, China, India etc.

CHAPTER TWO

2.0 Literature Review

2.1 Introduction

This chapter focuses on the review of related literature. A literature review includes the current knowledge as well as theoretical and methodological contributions to a particular topic. It documents the state of the art with respect to the topic you are writing. It surveys the literature in the topic selected. In this research work the literature review includes the …

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