THE IMPACT OF LENDING RATE ON THE INVESTMENT GROWTH IN NIGERIA

1.0 Introduction

Bank lending is an integral part of bank's services with its origin dating back to the origin of banking. Successful lending in banking requires elaborate loan policy (a written statement specifying the rules and regulations guiding the granting of loan by it's management).

The impact of lending rates on the investment growth in Nigeria is the rate at which financial institutes in Nigeria lend money.

Lending in finance implies extending credit to an individual, companies or organizations against stipulated terms and conditions.

Since the aim of every development effort is to achieve a self reliance economy. The central Bank of Nigeria has to harmonize investment growth in order to encourage investment in the economy.

1.1 Background of the Study

Over the years, Nigerian government has being making efforts at attaining a lending rate and self-reliance economy. These efforts have been due to economic development and also the importance of lending rate on the investment growth to the Nigeria economy.

One major way through which the investment growth can be encouraged is through the availability of finance for their operation. Today, finance seems to be the most difficult to obtain as a result of several variables which is one of the most important in the increase rate of lending.

The investment growth in Nigeria economy has been the most unfortunate and hardest by the increase in the interest rate regime.

Since the 2005 lending rate deregulation, which makes the banks lending rate reduced historically against the government. An increase in lending rate makes it more costly to hold cash assets, since banks are in business to reduce their cash assets as lending rate.

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1.2 Statement of the Problem

The problems in the impact of lending rate on the investment growth of the economy in Nigeria are numerous. But some will be discussed. They are as thus:

1. Problem of the inflation rate in the economy
2. Problem of distress in banking sector
3. Political and economic conditions
4. Impact of monetary and fiscal policies
5. Legitimate credit needs of the people

Problem of inflation rate in the economy:

When there is more money floating within the market, it means that the supply of money exceeds the demand. So self-reliance economy cannot be achieved because high price might be heading for a recession.

Problem of distress in banking sector:

A situation where a bank cannot meet up its financial obligation to creditor statement, the research says that high level of un-employment rate in Nigeria posses a threat to banks survival. Statistically, output also shows that government interventions could lead to a counter productive effect on commercial banks strength, if not properly guided.

Political and economic conditions:

Stable political and environment is necessary for strategic planning which impacts positively on the banks operations. Economic boom or recession has its effect on banks operations. Operators should be knowledgeable in these areas for maximum result.

Impact of monetary and fiscal policies:

Banking is the hub of the economy. It is highly sensitive to monetary and fiscal policies. An astute banker should be able to anticipate the impact of expansionary or contractionary policy on her operations and take proactive measures to maximize her returns.

Legitimate credit needs of people:

Sometimes, legitimate credit needs of people come in conflict with availability of loanable funds and institutional imposed limitations like loan policy and or regulatory restrictions like sectorial allocation of loans etc. it is incumbent on the credit officers to make effective use of the situation.

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1.3 Objectives of the Study

The objectives of this research work are as follows:

1. To ascertain the impact of lending rates on the investment growth in Nigeria economy.
2. Make recommendations aimed at helping investors in obtaining fund or affordable interest rate, top enhance their operations thereby, enhancing the development of the economy.
3. Since the aim of every development effort is to achieve a self-reliance economy. The central bank of Nigeria (CBN) has harmonized interest rate in order to encourage investments in the economy.

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1.4 Research Questions

These are ideas or suggestions that are based on known facts and are used as a base for reasoning or further investigation. It is a way of assuring a thing which may not be necessary true or false.

It is a theory to be proved or disproved by reference to facts.

In the course of this study, the following research questions are stated thus:

• Does high cost of funds affect investment growth?
• Can high rate of lending increase the investment growth in Nigeria?
• Can high interest rates increase the price of consumer goods?
• Can lending rate enhance the economic development of the economy?

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1.5 Statement of Hypothesis

• H1: High cost of inflation rate has affected the Nigeria banks.
• H1: High cost of fund affects the investment growth in the economy.

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1.6 Significance of the Study

This study on the impact of lending rates on the investment growth in Nigeria economy cannot be over stressed.

Based on these facts, the researcher drew her conclusions on the significance of the study to include the following:

1. This research will be of important to central bank of Nigeria as it will enable it to know how to fix lending rate to commercial bank which will in turn not affects borrower. It will enable it to know when to increase and enable lending rate.
2. This study will equally be of importance to the banking institution as it will enable them to know the aim of the CBN in fixing any lending rate so as to help implement it.
3. The borrowing public will also benefit from this study as it will help them know the normal lending rate to borrow in order to maximize their investment.
4. Finally, it will be of importance to researchers, investigators, academics and to students of Banking and Finance who wish to have adequate knowledge on lending rate and investment as well as on avenue for further research.

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1.7 Scope of the Study

• This work is on the impact of lending rate on the investment growth in Nigeria.
• The lending activities will be used as a case study to deduct what happens in other banks.
• The scope of this work is the study of two banks which is first bank PLC and Union Bank PLC.
• The activities of these banks are from 2006 — 2011.

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1.8 Limitation of the Study

The researcher faces a number of limitation in which the curse of its study. Such as time constraints, financial constraints and respondents.

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1. Time Constraints:

This work is not exhaustive as there is no time to travel to different branches of central bank of Nigeria and commercial bank to collect data.

2. Financial Constraints:

As at the time of this study, the researcher is faced with financial problem which has made the researcher not to be able to source for enough materials and data for the work.

3. Respondents Constraints:

This is the reluctance of the respondents to respond to questions, the respondents exhibits high level of bias in the name of protecting the image of their banks and not to loose confident information their may cause problem to the economy of the bank or in the country.

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1.9 Definition of Terms

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1. Bank

This is a financial institution licensed to carry out banking business with the central bank as the apex institution under the bankers and other financial institution decree No. 25 of 1991.

2. Cost of Fund

This refers as the price in which the borrowers of funds must pay for making use of fund or interest rates.

3. Bank Lending Rate

This can be defined as the percentage borrowed funds a customer must pay to a bank for making use of the funds. It is the interest which a lender that is the bank received.

4. Lending Rate

This is used to control the volume of liquidity in the economy. It is the rate of interest that you must pay when you borrow money from any organization.

5. Investment Growth

In a broad sense, investment is any asset or property right held for the primary purpose of conserving wealth or earning an income. In finance, investment is putting money into something with the expectation of gain that upon through analysis has a high degree of security of principle as well as security of return within an expected period of time.

6. Money Market

It refers to a group of financial institutions set up for dealing in short-term credit instrument of high liquidity such as treasury bills and treasury certificate.

7. C.B.N

The central bank Plc of Nigeria is the apex regulatory of the financial institutions which stand at the top of other financial institutions.

8. Regulation

Regulation as it applies to financial institutions is the body of law rules, directives and guidelines which are now put in place by the government and regulatory institutions for compliance and adherence by financial institutions by financial institutions within the market.

9. Liquidity

The liquidity of an asset refers to the case with which assets can be converted to cash with certainty.

10. Term Loan

This is a consumer and industrial loan with an original maturity of more than one year. Also it is a loan granted under a formal agreement, revolving credit as stand-by on which the original maturity of the commitment was in excess of one year.

11. Capital Market

This is a network of financial institution and facilities that interest to mobilize and allocate long-term savings in an economy. It provides services that are essential to a modern economy mainly, by contributing to capital formation through financial intermediation.

12. Securities Acceptance By Lenders

This is the right or interest in property which is given to a lender (creditor) by a borrower (debtor) for the purpose of providing buffer or cushion in which the lender may fall back on incase the borrower defaults in repayment.

13. Bank Services

These are benefits that one party can offer to another, that are essential, intangible and do not result in the ownership of anything.

14. Credit

This is the ability to obtain a loan when necessary and also being worthy of trust with other people's money.

15. Investment Funds

This can be defined as funds set aside by management for improving the growth potential of the firm.

16. Growth

In investment or finance, growth is said to be vital in the situation where a company is expanding.

17. Profitability

The lending must be profitable to the banker before it will be granted and also be profitable to the borrower too because it is only by so doing, their repayment will be made.

18. Suitability

The banker should be satisfied with the suitability of the advance. This means that even when the safety of the advance is assured, the banker should be conscious of the legality of the transaction.

19. Safety

Whenever a banker is granting facility, what strikes his mind first “will the money come back”. It is this desire for safety of the money that makes a banker to lay great emphasis on character, integrity and reliability of the borrower.

20. Bank Rate

This is also known as minimum rediscount rate (MRR) is the rate at which the central bank rediscounts first class bills of exchange and government securities presented to it when it is acting as lender of last resort.