Impact of Interest Rate on Commercial Bank Lending and Deposit Mobilization in Nigeria, 1986-2017

Abstract

There has not been a consensus on the efficacy of monetary policy instruments in achieving the much desired macroeconomic objectives in Nigeria. It is therefore against this background that this study sought to: (i) examine the impact of nominal interest rate on commercial bank deposit mobilization in Nigeria, (ii) determine the impact of nominal interest rate on commercial bank lending in Nigeria, (iii) examine the impact of real interest rate on deposit mobilization in Nigeria, and (iv) assess the impact of real interest rate on commercial bank lending in Nigeria. The study adopted the ex-post facto research design. Annual time’s series were collated from the Central Bank of Nigeria (CBN) statistical bulletin for the period 1986 - 2017. Four (4) hypotheses were formulated and tested using the Ordinary Least Squares (OLS). Commercial bank total credit granted (CBTCG) and commercial bank total deposit mobilized (CBTDM) were adopted as the dependent variables and nominal interest rate (NIR) and real interest rate (RIR) were the dependent variables for the hypotheses. The study also used descriptive statistics on the dependent and independent variables to complement the results. The result revealed that nominal interest (deposit) rate had positive and significant impact on commercial bank deposit mobilization in Nigeria; real interest (deposit) rate had positive and non-significant impact on commercial bank deposit mobilization in Nigeria; nominal interest (lending) rate had negative and significant impact on commercial bank lending in Nigeria and real interest (lending) rate had negative and non-significant impact on commercial bank lending in Nigeria. The study thus concludes that interest rate regime is an important factor in determining the direction and volume of deposit and advances. The study recommends amongst others that since the main source of funds for commercial banks is deposit, banks should give due emphasis to their deposits and strive to increase them and banks should increase their deposit interest rates in order to mobilise deposits since there exists a positive relationship between savings and deposit interests rates.