IMPLICATION OF
INTEREST RATE ON BANK LENDING IN NIGERIA A CASE STUDY OF ENTERPRISE
BANK
INTEREST RATE ON BANK LENDING IN NIGERIA A CASE STUDY OF ENTERPRISE
BANK
(A CASE STUDY
OF ENTERPRISE BANK)
OF ENTERPRISE BANK)
BY
A PROJECT WORK SUBMITTED TO THE
DEPARTMENT OF BANKING AND FINANCE, FEDERAL POLYTECHNIC ADO-EKITI, EKITI STATE.
DEPARTMENT OF BANKING AND FINANCE, FEDERAL POLYTECHNIC ADO-EKITI, EKITI STATE.
IN PARTIAL
FULFILLMENT FOR THE REQUIREMENT FOR THE AWARDS OF HIGHER NATIONAL DIPLOMA (HND)
BANKING AND FINANCE
FULFILLMENT FOR THE REQUIREMENT FOR THE AWARDS OF HIGHER NATIONAL DIPLOMA (HND)
BANKING AND FINANCE
TABLE OF CONTENTS
Title page
Certification
Dedication
Acknowledgement
Table of contents
Abstract
CHAPTER ONE: INTRODUCTION
1.1
Background of the Study
Background of the Study
1.2
Statement of the Problem
Statement of the Problem
1.3
Research Question
Research Question
1.4
Objective of Study
Objective of Study
1.5
Statement of hypotheses
Statement of hypotheses
1.6
Significance of study
Significance of study
1.7
Scope of the study
Scope of the study
1.8
Definition of Terms
Definition of Terms
CHAPTER TWO: LITERATURE REVIEW
2.0 Literature
Review
Review
2.1 Conceptual
Framework
Framework
2.2 Theoretical
framework
framework
2.3 Empirical
Framework
Framework
CHAPTER THREE: RESEARCH
METHODOLOGY
METHODOLOGY
3.1 Study
design
design
3.2 Sources
of data
of data
3.3 Population
of the study
of the study
3.4 Method
of data Presentation
of data Presentation
3.5 Model
Specification
Specification
3.6 Model
Estimation
Estimation
3.7 Variable
Description
Description
3.8 Sources
of data collection
of data collection
CHAPTER
FOUR: PRESENTATION AND ANALYSIS OF DATA
FOUR: PRESENTATION AND ANALYSIS OF DATA
4.1 Empirical
Result
Result
4.2 Interpretation
of Result
of Result
CHAPTER FIVE SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Summary
5.2 Conclusion
5.3 Recommendations
References
Appendix
ABSTRACT
The study aimed to test the effectiveness of the interest rate on bank
lending behaviours and how it affects the lending behaviour of Enterprise bank
in Nigeria.
The model used is estimated using enterprise bank (Heritage) loan and
advancement (LOA) and other determinants or variable such as their volume of
deposit (Vd) Interest (lending) rate (Ir) between the period of 2006 – 2013. the
model hypothesis shows that there is functional relationship between the
dependent variable and the independent variables. From the regression analysis,
the model was found to be significant and its estimators turned out as expected
and it was discovered that bank deposit have the greatest impact on their
lending behaviour. The study then suggests that bank should focus on mobilizing
more deposits as this will enhance their lending performance and should
formulate critical, realistic and comprehensive strategies and financial plan.
lending behaviours and how it affects the lending behaviour of Enterprise bank
in Nigeria.
The model used is estimated using enterprise bank (Heritage) loan and
advancement (LOA) and other determinants or variable such as their volume of
deposit (Vd) Interest (lending) rate (Ir) between the period of 2006 – 2013. the
model hypothesis shows that there is functional relationship between the
dependent variable and the independent variables. From the regression analysis,
the model was found to be significant and its estimators turned out as expected
and it was discovered that bank deposit have the greatest impact on their
lending behaviour. The study then suggests that bank should focus on mobilizing
more deposits as this will enhance their lending performance and should
formulate critical, realistic and comprehensive strategies and financial plan.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
One of the most regulated sectors in the Nigerian economy is
unarguably the banking industry. The reason includes the use of intervention by
authorities to short comings of the price fixing mechanism in the capitalist
system to ensure what is commercially rational for an industrial bank,
approximate social rationality. In the determination of interest rate it banks
and their customers are free to negotiate to arrive at the suitable interest
rate on both loans and advances. Despite the regulation, a number of challenges
still arose. The approach to banking was the use of direct control by the
central bank. The degree of compliance varied among banks. At times, withdrawal
of privilege or facilities was the case with banks that failed for comply, for
example most banks defaulted on ceilings imposed credit expansion and
allocation on sectional basis Ewert, R. (2000).
unarguably the banking industry. The reason includes the use of intervention by
authorities to short comings of the price fixing mechanism in the capitalist
system to ensure what is commercially rational for an industrial bank,
approximate social rationality. In the determination of interest rate it banks
and their customers are free to negotiate to arrive at the suitable interest
rate on both loans and advances. Despite the regulation, a number of challenges
still arose. The approach to banking was the use of direct control by the
central bank. The degree of compliance varied among banks. At times, withdrawal
of privilege or facilities was the case with banks that failed for comply, for
example most banks defaulted on ceilings imposed credit expansion and
allocation on sectional basis Ewert, R. (2000).
Interest rates are defined as the rental payment for the use of
credit by borrowers and return for parting with liquidity by lenders, (Ewert,
R. (2000). Like other prices, interest rates perform a rational function by
allocating limited supply of credit among the many competing demands. In the
(1987) budget announcement of the then president, General Ibrahim Babangida, it
was observed that the pegging of interest rate contrary to expectation,
commercial banks encourage savings and since investments are made out of
savings, the establishment of commercial especially in rural areas makes
savings possible, hence economic development is accelerated (Anyanwu 1997).
credit by borrowers and return for parting with liquidity by lenders, (Ewert,
R. (2000). Like other prices, interest rates perform a rational function by
allocating limited supply of credit among the many competing demands. In the
(1987) budget announcement of the then president, General Ibrahim Babangida, it
was observed that the pegging of interest rate contrary to expectation,
commercial banks encourage savings and since investments are made out of
savings, the establishment of commercial especially in rural areas makes
savings possible, hence economic development is accelerated (Anyanwu 1997).
Socially, interest rate charged by banks could be regulated
to encourage savings mobilization, ensure and foster adequate investment for
rapid growth and development, bearing in mind the view of (Goldsmith 1969) that
the financial superstructure of an economy, accelerates economic performance to
the extent that it facilitate the migration of funds to the funds yield the
highest social return.
to encourage savings mobilization, ensure and foster adequate investment for
rapid growth and development, bearing in mind the view of (Goldsmith 1969) that
the financial superstructure of an economy, accelerates economic performance to
the extent that it facilitate the migration of funds to the funds yield the
highest social return.
Interest rates play important role in
controlling major macroeconomic variables. The primary role of interest rate is
to help in the mobilization of financial resources and to ensure efficient
utilization of resources for the promotion of economic growth and development
(CBN 1970).
controlling major macroeconomic variables. The primary role of interest rate is
to help in the mobilization of financial resources and to ensure efficient
utilization of resources for the promotion of economic growth and development
(CBN 1970).
However, they are various states of
interest rates in the financial system. They are generally classified into two
categories: Deposit and lending rates. Deposits rate are paid to savings and
time deposits of different maturities, while lending rates are interest rates
charged on loans to customers and they vary according to cost of loanable funds
and lending margins.
interest rates in the financial system. They are generally classified into two
categories: Deposit and lending rates. Deposits rate are paid to savings and
time deposits of different maturities, while lending rates are interest rates
charged on loans to customers and they vary according to cost of loanable funds
and lending margins.
A number of factors influence the
behaviour of interest rates in an economy. Prominent among these are the volume
of savings, inflation, investment, government spending, monetary policy and
taxation constitute the major source (supply) of credit while investment
represents the major demand for credit.
Therefore, the level of savings partly determines the level of interest rates.
For instance, a decrease in the accumulation of loanable funds (savings) is
bound to exert an upward pressure on interest rates, just as the reverse
situation would tend to have a moderating effect. Usually, when the structures
of interest rate are changed, the resulting relative rates of return will
induce shift in the assets portfolio of both banks and the non-banks public
institutions. Hence, the direction and magnitude of changes in the market
interest rates are of primary importance to economic agents and the policy
makers.
behaviour of interest rates in an economy. Prominent among these are the volume
of savings, inflation, investment, government spending, monetary policy and
taxation constitute the major source (supply) of credit while investment
represents the major demand for credit.
Therefore, the level of savings partly determines the level of interest rates.
For instance, a decrease in the accumulation of loanable funds (savings) is
bound to exert an upward pressure on interest rates, just as the reverse
situation would tend to have a moderating effect. Usually, when the structures
of interest rate are changed, the resulting relative rates of return will
induce shift in the assets portfolio of both banks and the non-banks public
institutions. Hence, the direction and magnitude of changes in the market
interest rates are of primary importance to economic agents and the policy
makers.
Consequently, the Nigerian Economy
has been highly prone to interest rate volatility and fragility (CBN, 2000).
Interest rates of all instruments have experienced very volatile movements.
Inconsistencies have been the order of the day (Adewunmi, 1997)
has been highly prone to interest rate volatility and fragility (CBN, 2000).
Interest rates of all instruments have experienced very volatile movements.
Inconsistencies have been the order of the day (Adewunmi, 1997)
Lending which may be on short, medium or long-term basis is
one of the services that commercial banks do render to their customers. In
other words, banks do grant loans and advances to individuals, business
organizations as well as government in order to enable them embark on
investment and development activities as a mean of aiding their growth in
particular or contributing toward the economic development of a country in
general.
one of the services that commercial banks do render to their customers. In
other words, banks do grant loans and advances to individuals, business
organizations as well as government in order to enable them embark on
investment and development activities as a mean of aiding their growth in
particular or contributing toward the economic development of a country in
general.
Commercial banks are the most important savings, mobilization
and financial resource allocation institutions. Consequently, these roles make
them an important phenomenon in economic growth and development. In performing
this role, it must be realized that banks have the potential, scope and
prospects for mobilizing financial resources and allocating them to productive
investments. Therefore, no matter the sources of the generation of income or
the economic policies of the country, commercial banks would be interested in
giving out loans and advances to their numerous customers bearing in mind, the
three principles guiding their operations which are, profitability, liquidity
and solvency.
and financial resource allocation institutions. Consequently, these roles make
them an important phenomenon in economic growth and development. In performing
this role, it must be realized that banks have the potential, scope and
prospects for mobilizing financial resources and allocating them to productive
investments. Therefore, no matter the sources of the generation of income or
the economic policies of the country, commercial banks would be interested in
giving out loans and advances to their numerous customers bearing in mind, the
three principles guiding their operations which are, profitability, liquidity
and solvency.
However, commercial banks decisions to lend out loans are
influenced by a lot of factors such as the prevailing interest rate, the volume
of deposits, the level of their domestic and foreign investment, banks
liquidity ratio, prestige and public recognition to mention a few.
influenced by a lot of factors such as the prevailing interest rate, the volume
of deposits, the level of their domestic and foreign investment, banks
liquidity ratio, prestige and public recognition to mention a few.
Lending practices in the world could be traced to the period
of industrial revolution which increase the pace of commercial and production
activities thereby bringing about the need for large capital outlays for
projects Many captains of industry at this period were unable to meet up with
the sudden upturn in the financial requirements and therefore turn to the banks
for assistance. However, the emergence of banks in Nigeria
in 1872 with the establishment of the African Banks Corporation (ABC) and later
appearance of other banks in the scene during the colonial era witnessed the
beginning of banks lending practice in Nigeria. Though, the lending
practices of the then colonial banks were biased and discriminatory and could
not be said to be a good lending practice as only the expatriates were given
loans and advances. This among other reasons led to the establishment of
indigenous banks in Nigeria.
of industrial revolution which increase the pace of commercial and production
activities thereby bringing about the need for large capital outlays for
projects Many captains of industry at this period were unable to meet up with
the sudden upturn in the financial requirements and therefore turn to the banks
for assistance. However, the emergence of banks in Nigeria
in 1872 with the establishment of the African Banks Corporation (ABC) and later
appearance of other banks in the scene during the colonial era witnessed the
beginning of banks lending practice in Nigeria. Though, the lending
practices of the then colonial banks were biased and discriminatory and could
not be said to be a good lending practice as only the expatriates were given
loans and advances. This among other reasons led to the establishment of
indigenous banks in Nigeria.
Prior to the advent of Structural Adjustment Programme (SAP)
in the country in 1986, the lending practices of banks were strictly regulated
under the close surveillance of the banks supervisory bodies. The SAP period
brought about some relaxation of the stringent rules guiding banking practices.
The Bank and Other Financial Act Amendment (BOFIA) 1998, requires banks to report large
borrowing to the CBN. The CBN also require that their total value of a loan
credit facility or any other liability in respect of a borrower, at any time,
should not exceed 20% of the shareholders funds unimpaired by losses in the
case of commercial banks.
in the country in 1986, the lending practices of banks were strictly regulated
under the close surveillance of the banks supervisory bodies. The SAP period
brought about some relaxation of the stringent rules guiding banking practices.
The Bank and Other Financial Act Amendment (BOFIA) 1998, requires banks to report large
borrowing to the CBN. The CBN also require that their total value of a loan
credit facility or any other liability in respect of a borrower, at any time,
should not exceed 20% of the shareholders funds unimpaired by losses in the
case of commercial banks.
1.2 Statement of the problem
It is a well known fact that the
Nigerian Economy is characterized by volatile interest rates, macro economic
instability. Several measures embarked upon by the CBN failed to correct these
defects in the economy. The most important of these measures were contained in
the amendment of the CBN monetary circular No 21 which diverted the control of
rates from CBN on August1, 1987. The bank had been in control of the cost of
credit in the economy regulating the interest rates charged by the commercial
and merchant banks in their lending activities.
Nigerian Economy is characterized by volatile interest rates, macro economic
instability. Several measures embarked upon by the CBN failed to correct these
defects in the economy. The most important of these measures were contained in
the amendment of the CBN monetary circular No 21 which diverted the control of
rates from CBN on August1, 1987. The bank had been in control of the cost of
credit in the economy regulating the interest rates charged by the commercial
and merchant banks in their lending activities.
As it is, banks determination and
control of interest rates on loans did not help for the stability of major
macroeconomic variables due to the volatile nature of rates during the planning
period. Currently, interest rates are market determined and the study intend to
investigate the impact of interest rate on some bank lending with special focus
on enterprise Bank.
control of interest rates on loans did not help for the stability of major
macroeconomic variables due to the volatile nature of rates during the planning
period. Currently, interest rates are market determined and the study intend to
investigate the impact of interest rate on some bank lending with special focus
on enterprise Bank.
1.3 Research Question
1.
Does
interest rate has influence on bank lending?
Does
interest rate has influence on bank lending?
2.
Does volume of deposit have effect on their
lending behavior
Does volume of deposit have effect on their
lending behavior
1.4 Objectives of the Study
The major aim of this research
project is to determine the implication of interest rate on bank lending with special
reference to Enterprise Bank (Heritage Bank).
project is to determine the implication of interest rate on bank lending with special
reference to Enterprise Bank (Heritage Bank).
The specific objective is;
1. To examine the extent to which
interest rate affects bank lending with
references to Enterprise bank (Heritage Bank)
interest rate affects bank lending with
references to Enterprise bank (Heritage Bank)
2. To examine if volume of deposit have
effect on the lending behavior
effect on the lending behavior
1.5 Statement of Hypotheses
The main arguments of the study were synthesized into the
following hypothesis:
following hypothesis:
To achieve the objectives stated
earlier, the following hypotheses were formulated:
earlier, the following hypotheses were formulated:
i.
H1: Interest
rate does not have a influence on enterprise bank lending
behaviours in Nigeria.
H1: Interest
rate does not have a influence on enterprise bank lending
behaviours in Nigeria.
Ho: Interest rate has a influence on
enterprise bank lending behaviour in Nigeria
enterprise bank lending behaviour in Nigeria
ii.
H1: Volume of deposit does not have effect on the
bank lending behaviours of the enterprise bank
H1: Volume of deposit does not have effect on the
bank lending behaviours of the enterprise bank
iii.
Ho: Volume of deposit has effect on the bank lending behaviour of enterprise
bank
Ho: Volume of deposit has effect on the bank lending behaviour of enterprise
bank
1.6 Significance
of the Study
of the Study
This research work will go a long way
to cater for the yearning needs and aspirations of the people about the need
for commercial banks to re-examine their lending behaviour and propositions in
the face of economic changes witnessing sporadic explosion of knowledge,
technological breakthrough, fast financial services, increasing needs of
financial resources and paramount of all, the speedy pace of economic growth
and development.
to cater for the yearning needs and aspirations of the people about the need
for commercial banks to re-examine their lending behaviour and propositions in
the face of economic changes witnessing sporadic explosion of knowledge,
technological breakthrough, fast financial services, increasing needs of
financial resources and paramount of all, the speedy pace of economic growth
and development.
The findings of this study will be
considered significant in the following ways;
considered significant in the following ways;
v The major findings would be very
useful to the CBN when formulating monetary policy for the country.
useful to the CBN when formulating monetary policy for the country.
v The findings will be useful to the
policy makers for providing guidelines for controlling operations in money and
capital market.
policy makers for providing guidelines for controlling operations in money and
capital market.
v Lastly, the findings will serve as
guidelines to the investing public in their decision making.
guidelines to the investing public in their decision making.
1.7 Scope
of the Study
of the Study
The study is aimed at investigating
the impact of interest rate on bank lending with special reference to
enterprise bank. Interest rates include mainly the lending rates. However, this
study will be limited to lending rates during the floating interest rates
regime. The study will cover the years from 2006 to 2013
the impact of interest rate on bank lending with special reference to
enterprise bank. Interest rates include mainly the lending rates. However, this
study will be limited to lending rates during the floating interest rates
regime. The study will cover the years from 2006 to 2013
1.8 Definitions of Terms
Commercial Banks: Commercial banks are described as
supermarkets of financial services. They are retail banks that take small
amount of deposits from many customers and operate wide network of branches
because of the nature of their business. Commercial banks account for the bulk
of total institutionalized savings within the system. The most important
function of commercial banks are the acceptance of deposits, the provision of
facilities for domestic and foreign remittance and granting of loans and
advances to their customers.
supermarkets of financial services. They are retail banks that take small
amount of deposits from many customers and operate wide network of branches
because of the nature of their business. Commercial banks account for the bulk
of total institutionalized savings within the system. The most important
function of commercial banks are the acceptance of deposits, the provision of
facilities for domestic and foreign remittance and granting of loans and
advances to their customers.
Determinants of Lending: These are factors which influence
the lending decisions or lending principles of commercial banks. They include
the volume of deposits of the banks, the preceding interest rate, the legal
reserve requirement of the Central Bank of Nigeria, level of domestic and
foreign investments of commercial banks, the banks liquidity ratio, the nature
of their businesses, the prestige or goodwill of the banks, CBN monetary
policies and/or guidelines, the general economic position of a nation, the
political and socio-cultural environment in which they operate, the status of
their individual customers, the internal policies of the banks, their capital
bases to mention a few. Some have positive impact and some negative impact on
the banks lending behaviour.
the lending decisions or lending principles of commercial banks. They include
the volume of deposits of the banks, the preceding interest rate, the legal
reserve requirement of the Central Bank of Nigeria, level of domestic and
foreign investments of commercial banks, the banks liquidity ratio, the nature
of their businesses, the prestige or goodwill of the banks, CBN monetary
policies and/or guidelines, the general economic position of a nation, the
political and socio-cultural environment in which they operate, the status of
their individual customers, the internal policies of the banks, their capital
bases to mention a few. Some have positive impact and some negative impact on
the banks lending behaviour.
Lending Behaviour: These are laid down principles
which guide the lending practice of banks. These principles could be due to
external or internal factors. These principles act as a blue print to measure
the effectiveness of commercial banks lending activities.
which guide the lending practice of banks. These principles could be due to
external or internal factors. These principles act as a blue print to measure
the effectiveness of commercial banks lending activities.
Short Term Facilities: These are credits extended to
customers that are expected to be repaid within one year e.g. bridging loan,
overdraft and LPO financing.
customers that are expected to be repaid within one year e.g. bridging loan,
overdraft and LPO financing.
Medium Term Facilities: These are credits extended to
customers and repayable between 3 and 5 years. Examples include term loans and
leasing.
customers and repayable between 3 and 5 years. Examples include term loans and
leasing.
Long Term Facilities: This includes banks loans or
debentures which are repayable between 5 and 10 years or more depending on the
life span of the project it is spent on. The main source of long term funds for
business firms include bond, preferred stock, common stocks and hybrid securities
such as convertible bonds and convertible preferred stocks.
debentures which are repayable between 5 and 10 years or more depending on the
life span of the project it is spent on. The main source of long term funds for
business firms include bond, preferred stock, common stocks and hybrid securities
such as convertible bonds and convertible preferred stocks.
Loans and Advances: These are monetary facilities
advanced by commercial banks to their customers who may be individual or
corporate.
advanced by commercial banks to their customers who may be individual or
corporate.
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