The Impact of Interest Rate on Profitability of Deposit Money Banks in Nigeria (1995-2012)

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ABSTRACT

This research work investigates the impact of interest rates on deposit money banks profitability between 1995 and 2012. The study was necessitated by the pivotal role interest rates play in the development and growth of the economy. The study made use of secondary data in its analysis. Four explanatory variables, Minimum Rediscount Rate, Real Deposit Rate, Prime Lending Rate and Loan Deposit Rate were specified and were used to establish a relationship with the level of Banks profitability using the multiple regression tools. Banks’ profitability was proxied by Return on Assets and Return on Equity. In the specific finding of the study, only the t-values of Prime Lending Rate in model 1 and model 2 are significant. The t-values of all the other variables are not significant at 5% level. Consequently, only the alternative hypothesis of H03 was accepted in both models while the null hypotheses of all other stated hypotheses are accepted. Hence, there is significant relationship between Prime Lending Rate and Profitability of Deposit Money Banks in Nigeria. The conclusion therefore, is that prime lending rate of banks is very important in determining the profitability of banks and should not be neglected. Based on the above findings, the study recommends that Bank interest rate in the financial market must be market driven to allow for efficient process.

Keywords: Deposit Money Banks, Interest Rates, Minimum Rediscount Rate, Real Deposit Rate, Prime Lending Rate, Loan Deposit Rate, Banks profitability, Return on Assets, Return on Equity.

CHAPTER ONE: Introduction

1.1 Background of Study 1
1.2 Statement of the Problem 4
1.3 Objectives of the Study 5
1.4 Research Questions 6
1.5 Research Hypotheses 7
1.6 Significance of the study 7
1.7 Scope and Limitations of Study 8
1.8 Organization of the Work 8

CHAPTER TWO: Literature Review

2.1 Conceptual Framework of Interest Rate 9

2.1.1 Interest rate Management in Nigeria 9
2.1.2 Interest rate Charged on Borrowers 16

2.2 Theoretical Frame work
2.3 Loan Pricing Theory

2.3.1 Firm Characteristics Theory
2.3.2 Theory of Multiple Lending.

2.3.3 The Signalling Arguments 20
2.3.4 Credit Market Theory 20

2.4 Financial Institutions 20
2.5 Commercial Banks 21
2.6 Commercial Banks Services 23

2.6.1 Individual Banking 23
2.6.2 Institutional Banking 24
2.6.3 Global Banking 24

2.7 Commercial Banks Funding 26

2.7.1 Deposits 26
2.7.2 Non-Deposit Borrowing 28
2.7.3 Equity Capital 28

2.8 Commercial Banks Products 29

2.8.1 Real Estate Loans 29
2.8.2 Commercial and Industrial loans 30
2.8.3 Individual Loans 30
2.8.4 Other Loans 30
2.8.5 Some Non debt products 31

2.9 Empirical Review 34

CHAPTER THREE: Research Methodology

3.1 Introduction 37
3.2 Research Design 37
3.3 Population and Sampling Techniques 38

3.3.1 Sampling Technique
3.4 The Model Specification

3.4.1 Types and Sources of Data
3.4.2 Development of the Model
3.4.3 Method of Data Analysis

3.4.4 The F-Test 41
3.4.5 Coefficient of Determination (R2) 41
3.4.6 Student T-Test 42

3.5 Estimation Procedure 43

3.5.1 Test for Stationary 43
3.5.2 Co-Integration Test 43
3.5.3 Autocorrelation Test 44

3.6 Assumption 44

CHAPTER FOUR: Data Presentation, Analysis and Interpretation

4.1 Introduction 46
4.2 Data Presentation 46
4.3 Analysis of Data and Interpretation of Results 47

4.3.1 Stationary Test Result 47
4.3.2 Result of Co-integration Test 48
4.3.3 Regression Result 50

4.4 Statistical Criteria 51

4.4.1 F-test 51
4.4.2 Coefficient of Determination (R2) 52
4.4.3 The Student t-test 52
4.4.4 Testing of Hypotheses 53
4.4.5 Autocorrelation (Serial Correlation) 54

The Impact of Interest Rate on Profitability of Deposit Money Banks in Nigeria (1995-2012)

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