ABSTRACT
The objective of this study was to examine the impact of interest rate deregulation on savings mobilization in the Nigerian Economy, using a time series annual data of \980-2008. The central focus of this work is to investigate whether deregulated interest rate mobilizes savings as against the Pre-SAP era which was a fixed rate policy. The study made use of secondary data derived from Central Bank of Nigeria, using time series annual data for a period of 28 years. We employ both descriptive and econometric techniques to analyze our model which comprises of six variables based on the theoretical underpinning. at the of the study, it was revealed that deregulated interest rate policy in Nigeria since 1987 had positive impact on the level of savings mobilized as against the PRE-SAP era which shows an insignificant or stagnant effect on savings mobilized in the economy. Base on this result, the question is how is the savings mobilized does not have effect on the real sector of the economy or was it that, the fund was not channeled into the productive sectors or no macroeconomic environment to enhance the funds for economic growth and development? Finally, the study recommended to the policy makers that the problem of economic recession is not deregulated interest rate policy but rather on the part of the government in providing the macroeconomic environment such constant Power Supply, Good network, political stability, security and others, arc determinants of investment, economic growth and development .and not only deregulated interest rate policy.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Interest rate is a vital tool of macroeconomic management for the government of any country in the world. The level of interest rate in any economy especially the Nigerian economy is crucial in view of its role in controlling inflation, inducing savings which can be channeled to investment and thereby increasing employment output, and efficient financial resource utilization. The 1960s to mid-1980s witnessed the administration of low interest rates which was intended to encourage investment ( Ajakaiyc Olu and Ayodele, 1994).
The advent of the structural adjustment programme in the third quarter of 1986 ushered in an era of dynamic interest rate regime where interest rates were more influenced by market forces. This shift de-emphasized direct investment stimulation through low interest rates and encouraged savings mobilization by decontrolling interest rates (Essien and Oniwioduokit, 1997). Such liberalization represents a policy response, encompassing a package of measures to remove all undesirable state imposed constraints on the free working of the financial markets. The measures include the removal of interest rate ceiling, and the loosening of deposit and credit controls (Uremadu,S.O.:2006 ).The mobilized fund was intended for investment,
Undoubtedly, government's past efforts to promote economic development by controlling interest rates and securing "inexpensive" funding for their own activities have undermined development. More importantly, financial repression has retarded the development process as envisaged by Shaw (1973).
Interest rate can be defined as the return or yield on equity, or opportunity cost of deferring current consumption into the future. Nominal and real interest rates are considered in the general concept of interest rates. Nominal rate is the observed and recorded rate in the economy which incorporates monetary effects. While real interest rate is the rate that brings equilibrium in the primary market for new asset and the secondary market where old assets are traded. The concept of real' interest Tate was developed by Irving Fisher when he tried to establish the trade-offs between consumption today and that in the future.
In the Nigerian context, the liberalization of interest rates is at the core, of the adjustment programme introduced in 1986 by the Nigeria government. Prior to that period, the Nigerianeconomy particularly the financial sector, was highly regulated, and this ultimately led to a high level of financial repression. From 1986 by through the third quarter of 1987, witnessed the administration of low interest rates. (Olu Ajakaye, Ayodele F. Odusola 1994).
In practice, Savings and time deposit grew over the years in response to the interest rate incentives. The deregulation of interest rate in 1987 must have encouraged financial savings as reflected by the sharp rise in financial ratio from 17.H percent in 1986 to 26.85 percent in1987 (Uchendu 1993).
However, there are several obstacles to the mobilization of financial savings in developing countries that interest rate needs to tackle in order to be effective in savings mobilization and also 'in mobilization domestic recourses. First, formal institutions in rural areas, such as unit area banks and commercial bank branches, have no strong incentives for savings mobilization. Secondly, the real rate of interest on deposit has been relatively low and sometimes negative as a result of financial depression.
Thirdly, there were inadequate facilitates in rural areas for effective saving mobilization (Adedoyin Soyinbo and Kolawole Olayiwola, 2000).
The foregoing points to a basic, fact that interest rate is expected to play central role in savings mobilization. It is in this context that the impact of interest rate deregulation policy on savings mobilization is a key policy target in the practice of financial reforms around the world (Meshach Aziakpono, 1997).
1.2 STATEMENT OF THE PROBLEM
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