ABSTRACT
The research work examined the Effect of Interest Rate on Investment and Money Demand in Nigerian Economy for the year 2005 – 2014. The research adopted ex-post facts research design. Data for this study were mainly collected from secondary sources and were garthered through Central Bank of Nigeria (CBN) and Federal Office of Statistics (FOS).
An econometric model specification was then built and SPSS 20.0 software was used in computing the data regression analysis. Findings of the study were drawn and indicates that interest rate has significant impact on investment decision and that there is significant relationship between Interest rate and money demand
The research study was concluded with a detailed discussion and recommendations based on the findings.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Investment plays a very important and positive role for progress and prosperity of any country. Many countries rely on investment to solve their economic problem such as poverty, unemployment etc (Muhammad and Mohammed 2004).
Interest rate on the other hand is the price paid for the use of money. It is the opportunity cost of borrowing money from a lender to finance investment project. It can also be seen as the return being paid to the provider of financial resources, for using the fund for future consumption (Sleka, 2004). Interest rates are normally expressed as a percentage rate. The volatile nature of interest is determined by many factors, which include taxes, risk of investment, inflationary expectations, liquidity preference, market imperfections in an economy etc.
Banks are given the primary responsibility of financial intermediation in order to make fund available for economic agents. Banks as financial intermediaries move fund from surplus sector/units of the economy to deficit sector/units by accepting deposits and channeling them into lending activities (Afolabi, 2003). The extent to which this could be done depend upon the rate of interest and level of development of financial sector as well as the saving habit of the people in the country.
Hence, the availability of investible funds is therefore regarded as a necessary starting part for all investment in the economy which will eventually translate to economic growth and development (Uremadu, 2006).
As already discussed so far, it is quite clear that an understanding of the nature of interest rate behavior is critical and crucial in designing policies to promote savings, investment and growth. It is pertinent to note that this research attempts to investigate and ascertain the effect of interest rate on investment and money demand in Nigeria.
1.2 Statement of the Problem
The financial systems of most developing countries (like Nigeria) have come under stress as a result of the economic shocks. The financial repression largely manifested through indiscriminate distortions of financial prices including interest rates, has tended to reduce the real rate of growth and the real size of financial system, more importantly, financial repression has (retarded) delayed development process as envisage by Shaw (1973). This led to insufficient availability of investible funds, which is regarded as a necessary starting point for all investment in an economy. This decline in investment as a result of decline in the external resource transfer since 1982 has been especially sharp in the highly indebted countries, and has been accompanied by a slowdown in growth in all Least Developed Countries (LDCs) Cole and Obstraid (2005). Both public and private investment rate have fallen, although the latter more drastically than the former. The observed reduction in investment in LDCS seems to be the result of several factors. First, the lower availability of foreign savings has not been matched by a corresponding increase in domestic savings. Secondly, the determinating of fiscal conditions due to the cut of foreign lending to the rise in domestic interest rate and the acceleration in inflation forced a contraction in public investment. Thirdly, the increase in macroeconomic instability associated with external shocks and the difficulties of domestic government to stabilize the economic has hampered private investment.
.