ABSTRACT
The banking sector is quite key to economic growth. More key is the cost of banking as it determines mobilization of savings, level of investment and hence industrial growth. Meanwhile, what is referred to as cost of banking is the interest rate. The nature of interest rate just like any typical price - mechanism is important to economic efficiency, effectiveness and equity. The wide spread notion is that market and price deregulation is a precondition to economic efficiency and prosperity. But market failure in the form of externalities has often proved to be a challenge in less developed countries. Here the researcher has examined empirically the impact of interest rate deregulation regime on the Nigerian economy's real sector; Nigeria being a less- developed country. To do this, qualitative techniques were used in the form of reviewing various relevant literatures and theoretical positions of past researchers and economists of note. Quantitative techniques were not left out. Secondary data were deployed in the form of time-series sample and a model was specified and estimated in the form ofordinary least square (OLS) multiple equation with G.D.P as dependent variable and deposit- rate and lending rate as the independent variables. To evaluate the integrity of the process, the following test procedures were carried out including coefficient of determination (R2), standard error test of significance and test of significance (F-test). From the output of the process, appropriate analysis, presentation and interpretations were made. The work was concluded with a general summary, conclusion and recommendations made.
PREFACE
Here in this study, the deregulated interest rates were examined in relation to the real or industrial sector of the economy.
Given this, it should be expected that in a deregulated financial sector:' there should be variegated interest rates that differ from one bank to the other. Contrary to this, the interest rates used in this study as stated in 4.2 (Data presentation) were the industry's averages sourced from the CBN and NBS which, given the nature of keen competition in the banking industry, represent the deregulated interest rates as any significant deviation either from the industry's averages or from that of any service provider, the sensitive elasticity implications of this would mean a substitution effect in line with the laws of demand and supply. Hence,we benefitted from the statistical knowledge of measures of central tendencies and that of dispersion when applied with economic bias to the financial banking sector. Close to this, is that the econometric study did not use the interest rate spread rather made use of differentiated interest rates. Hence, we have the savings rate and the lending rate as the independent variables of a multiple econometric model used.
As to the dependent variable used in this econometric study, the G.D.P was used preferably because it was capturing in terms of national output. And this formed the basis why the model estimate was adjudged well fit as stated under 4.4 (Interpretation of results). This is because the coefficient of multiple determination (R2) and the adjusted coefficient of multiple determination (R2) both 0.602 and 0.567 respectively as stated in 4.3 (Estimated results) were used as yardsticks though they were not too strong correlation coefficients with 0.398 and 0.433 stochastic error elements. Considering that the Nigerian economy has been dependent on the oil revenue up to the tune of 80% of the G.D.P hence the determined relation coefficients could be assumed impressive in the light elf the ideal that the industrial sector should be the engine room of the economy.
Also, the data used was a time-series data. Furthermore, it is worth saying that the time frame used 1985 - 2010 covered the years of deregulation in the banking industry. Financial deregulation came with the Babaginda-led administration with his romance with the Breton-woods orgariization in the mid 1980s as stated in chapter one. Since then deregulation has been the rule rather than the exception considering deregulation as not total absence of regulation.
In conclusion, what had been done with this preface is to state the basic underlying assumptions that are inherent in the data used and the rationale underpinning the interpretation of the estimated result. In short, attempt has been made at the characterization of the data presentation and interpretation used as guidance for the users and readers of the study, in order not to be considered far-fetched and bogus,
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
It is widely recognized that the banking industry by the nature of its activities is among the most heavily regulated sector in both the developed and developing economies. As financial .intermediaries, banks assist in channeling funds from surplus economic units to deficit ones: to facilitate business transactions and economic development generally.
Interest rate charges by banks were regulated to encourage savings mobilization and ensure adequate investment for rapid economic growth. The existence of market imperfections and externalities in financial markets especially in developing countries has often induced official intervention not only to boost investment, but also to redirect credit allocation within the economy.
The deregulation of interest rate in the banking industry involves, the systematic removal of regulatory controls, structures and operational, guidelines which may be considered inhibitive of orderly growth, competitive and efficient allocation of resources in the' banking industry.
Financial markets are one of the first sectors of the economy to be subjected to deregulation. The campaign for deregulation of financial markets has been vigorously undertaken in many developed economies. In the recent times, a number of third world countries with heavy debt burdens and dwindling foreign earnings had also adopted policies designed to deregulate their economies particularly the financial markets sub-sector.
Thus has virtually been -carried out as part of comprehensive Structural Adjustment Programme (SAP) aimed at ensuring that market forces are assigned greater roles in the allocation of the scare financial resources.
Nigeria as part of the Structural Adjustment Programme (SAP) has commenced the deregulation of its financial system. It was introduced into the Nigerian economy in 1986 during the General Babangida regime. The programme started most earnestly with the liberalization of interest rates trade and exchange rate and the deregulation of the bank interest rate policy.
Prior to the introduction of SAP, the banking system was subjected to strict administrative control and the economy was, characterized by serious structural distortions caused by the oil commodity (crude oil) which constituted over 90% of the country's foreign exchange earnings and over 80% of total government revenue. There was an import syndrome which resulted in a high dependence on imports for both consumer and producer goods.
To reverse this trend, stringent exchange control and import restriction measures including comprehensive import licensing policy were adopted. But as this crisis persisted, it became evident that the ad-hoc policies of the past could not bring about the desired change in the economy so, a comprehensive Structural Adjustment of the economy was called for. Hence, the structural programme in July 1986.
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