CHAPTER ONE

BACKGROUND OF THE STUDY

There had been administrative control on the nation’s interest rates until July 31, 1987 when, in consonance with the spirit of the structural Adjustment programme (SAP) of the Federal Government the Central Bank of Nigeria issued a circular on interest rates bordering on the deregulation of this financial sector of the economy.

          As a signal to the direction, the Central Bank wanted the interest rate to go, the minimum Re-discount Rate (MRR) was raised from 11 to 15% which now peaks at 18.5%.   The apex financial institution (CBN) declared that interest rates payable on deposits or chargeable on loans and advances were henceforth to be determined by the interplay of the market forces of demand and supply.

          Nigerians being what they are agitative and speculative went to town some decrying the policy as the last straw that would break the back of our fragile economy, others extolled the policy as the best and boldest steps ever taken towards the revamping of the ailing economy.  These divergent views of the financial experts both in the academic and in the Banking sector about the likely impact of the interest rate deregulation motivated me to appraise the impact of the deregulation on commercial banking operation.

          Notable among those who bemoaned the deregulation of interest rate was Abiodum (1987).  According to him, Deregulation a fragile economy like ours will have the overall effect of dampening it since the high interest rate will cause slow down investment as borrowing will be curtailed.

          But this view was opposed by Iklude (1987) 2.  he was of the view that “interest rate deregulation will not only bring relief to the financially repressed economy but will ensure a real return on deposit which has over the year been negative.           What these argument  boiled down to was that interest rate deregulation would lead to efficient allocation of financial market resources because interest rate will now reflect relative scarcity and relative efficiency in different uses.                                                                                                                                                                                                                

          According to Abraham Nwankwo (1987) 3 “Bigger banks will price small ones out at the market by lending cheep to customers and paying them interest rate on their deposits”.

          It is in the light of the controversies that accompanied the interest rate deregulation that prompted the deregulation on commercial Bank lending operation.

STATEMENT OF THE PROBLEMS

          Interest Rate deregulation, like other stringent economy measured by the present administration has far reaching consequences on the nation’s banking industry and on the borrowing public.

          Commercial banks that had lent huge sums of money before the deregulation of interest rate were in stormy water making their customers repay their loans at the new rate.  The borrowing public complained that their banks had without prior notice unleashed high interest rate on them.  They were at daggers drawn as the measure created had blood between the banks and their customers.

          The interest rate deregulation with its attendant high interest payable on loan and advances terribly limited the borrower’s  quest for loan/advances since  it was impossible for most of them to get inflationary adjusted rate of return on their borrowed fund-this has remained elusive for many  borrowers.

          Inspite of the deregulation, customers complain that commercial Banks pay  very  little interest rate for example on savings and charge borrowers/customers more than twice what they pay them on their savings accounts.  This they complained was unfair as the return became negative when adjusted with the rate of inflation.

          The general public also complained that banks (especially commercial and merchant Banks) have been posting huge profit after tax inspite of the bitting effect of the economy.  The bank’s credit ceiling was partly responsible for the state of the affairs, invoking economic Aloxim that the constant liquidity mop up on the banking sector by the apex  financial institution was also responsible saying, the more illiquid a bank is, the more profitable it becomes”.

          A  performance appraisal  of the impact of the deregulation is long over due at least to  shade light on the above controversies surrounding the policy three years after its introduction, thereafter, the problems are hereunder stated in question as follows:

(i)      Did commercial bank’s loans and advances deteriorate during the deregulation of interest rate?

(ii)      Did  depositors react favourably by increasing the volume of their deposit after the deregulation?

(iii)     How have commercial banks been surviving the directives of deregulating the interest rate in this sector of the economy?

OBJECTIVES OF THE STUDY

          The study aims to determine and analyze the impact of interest rate deregulation in Nigeria specifically, the study seeks to answer  the following  questions:-

1.      Whether the interest rate deregulation has affected the volume of commercial bank’s  lending over the years.

2.      Are the effect  statically different according to the size of the banks?

3.      The study will also find whether the interest rate paid to deposits mobilized by the commercial banks.

4.      The study will also find  whether there were more loan losses (bad and doubtful debt) during the era of interest rate moderation than this period of deregulation .

5.      The research is also aimed at  finding whether commercial banks made more profit before or  during the deregulation.

6.      What else do  commercial banks to attract more deposits to enhance commercial banks’ lending operation.

SIGNIFICANCE OF THE STUDY

          A study of this nature which is  more of a p0erformance appraised of the  commercial banks’ lending operation during the deregulation is of great significance to group of persons, institutions and governments.

          The study will be of  great importance to the banking  sector of our  economy because from  the empirical view of the impact of interest rate deregulation on commercial bank’s – CBN will also find  the study valuable because it will enable it feel the purse  of the commercial banks’ three years after the deregulation.

          Commercial banks’ customers will also  find results of the research very useful since it will enable them have a generalized view of  lending operation  by commercial banks in a deregulation economy.

          `commercial banks’  management will from the research evolve aggressive survival strategies.

SCOPE OF THE STUDY

          This study was  concerned with the impact of interest rate deregulation on  commercial banks’ lending operation.

          For effective coverage the study focused on  loan and advances,  leaving operations like  call. Money and inter-bank lending as well as other short term placements of funds.

          This research examined the volume of deposit liabilities, loans and Advances, Bad and doubtful debts and Net profit over the period of the Union Banks of Nigeria Plc Enugu.   

LIMITATIONS OF STUDY

     I which to  state that this study was carried out within the limits imposed by time and financial constraints  and as a result, the study was limited to union bank of Nigeria Plc Enugu.  Another constraints through human was the attitudes of most of the loan officers of the banks who  completed the questionnaires, some times, the respondents never actually answered the questions.  This state of affairs could be frustrating as some of the respondents were said to be too busy unnecessary administrative or bureaucratic bottle-neck and utmost  secrecy that characterize the banking industry in Nigeria  are serious problems that plaque research in this sector of the economy.

     Another constraints were the attitudes of customer – respondents.  Some of them  never  actually completed  the  questionnaire  while some did so haphazardly, rending the questionnaires almost useless.

     Another constraint was the time scheduled for the completion of the work and limited resources at the disposed at the researcher.

     Finally, in the light of the above constraints, the generalization that was made about the impact of interest rate deregulation on commercial banks’ lending operation was limited by the above problem  truthfulness in response to the  questionnaires as well as sampling procedures used by the  researcher.

HYPOTHESES

     For effective and valid investigation, the following hypotheses have been  postulated which will be  tested using appropriate statistical in