Post on 24-Jan-2023
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THE IMPACT OF INTEREST RATES ON SAVINGS AND
INVESTMENT IN NIGERIA
BEING A PROJECT PRESENTED TO THE DEPARTMENT OF
BANKING AND FINANCE, FACULTY OF BUSINESS
ADMINISTRATION, UNIVERSITY OF
NIGERIA, ENUGU CAMPUS
BY
SUNDAY, KINGSLEY UCHE
PG/MBA/08/53104
IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR
THE AWARD OF THE MASTERS IN BUSINESS
ADMINISTRATION DEGREE IN
BANKING AND FINANCE
SUPERVISOR: DR B.E. CHIKELEZE
MARCH 2012
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CHAPTER ONE: INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Interest is the reward that accrues to people who provide the fund with which capital
goods are bought (Soyibo and Adekanye, 1992). Interest can also be defined as the
payment made to a lender by a borrower for the use of a sum of money for certain
period of time. The charging of interest on loan was initially abolished during
medieval days, both was later legalized by King Henry VIII in 1545 when he
abolished the usury laws in it was condemned. These usury laws were established
during the medieval time when the payment of interest rate was strongly condemned
and termed usury. During that time it was believed that loan was an aid to an
individual or neighbour who is distressed, for such reason, they felt charging of
interest on loan was not proper (Bhatia and Khatkhate, 1973).
Interest rate deregulation was later introduced into the monetary system by Central
Bank of Nigeria, which was part of the Structural Adjustment Program (SAP), which
was introduced in July 1986 by the head of state then-Gen Ibrahim Babangida
(Osofisan, 1993). Interest can also be said to be the charge assessed for the use of
money. It can also be seen as “the payment made to owners of capital fund which
they are ready to put at the disposal of others; thus, interest rate is like a price which
bring into equilibrium the demand for resources to invest with the readiness to
establish from present consumption. Interest rate is determined by the force of
demand and supply of capital and for the condition that demand and supply of fund
are equal. Hence, interest level is arrived at by the intersection between savings and
investment (Luckett, 1984). Savings is defined as that portion of income after tax,
which is not spent on consumption goods. Savings can also be seen as that part of
income, which is not devoted to the purchase of household items and firm
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(McKinnon, 1973). Investment on the other hand can be defined as the expenditure
of funds lending to the creation of net additions to the stock of physical capital; it is
done almost exclusively by firms. Interest rate favours the investors when the
interest rate is low. The major factor that determines investment is interest rate and
this is influenced by savings. The investors will also be favoured when the marginal
efficiency of capital is high. Marginal efficiency is defined as the expected rate of
returns from additional unit of capital asset. It refers to the expected rate of profit per
year on real investment of the most efficient type, it depends upon the entrepreneur
expectation of future return. However, there will be no investment of profit
expectation which are not very bright, this is the reason why investment falls to a low
level during a depression despite all the encouragement to stimulate private
investment (Revel, 1975).
Interest rate favours savers when the rate is high, savings were looked upon as
beneficial both for the individual and the society at large. Thus, an increase in
savings will ultimately lead to an increase in savings of the community. It was due to
this effect that the classists believed in thriftiness (Ritter and Siber, 1986). They
were of the view that an individual saving was a great private as well as social virtue.
The Keynes were at a different view, which they advocate that individual savings is a
social virtue but rather supported the view that individual savings is greatly a social
vice. Increase savings on the part of individuals will result in a general curtailment in
the expenditure. When savings increase, investment is very essential for the
economic development of an economy. With increase investment, employment is
bound to increase which will in turn increase demand, prices, profit and more
production expansion. This expansion if properly utilized will lead to economic
development of a country (Shaw, 1973).
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Investment results as a consequence of capital accumulation, which in turn depends
upon savings (Ndulu, 1990). Savings by profit earners and their conversion into
investment was the main actor responsible for the economic development of Great
Britain in the 19th century. The realization of the role of interest rate in the attainment
of monetary policy objectives, the central bank of Nigeria decided to have a uniform
rate of interest on loan for all the commercial banks in Nigeria, as contained in its
credit guidance of 1969. The credit guidance of the Central Bank of Nigeria was later
changed in 1987. It introduced an interest rate policy based on free market forces in
view of the effort of government to deregulate the economy in the wake of the
second-tier foreign exchange market. This interest rate deregulation is a system
where the forces of demand and supply determine the prevailing interest rate. This
implies that there is no fixed rate to be charged by the bank on their loans and
advances and no given rates to be paid to depositors (Soyibo and Adekanye, 1992).
There are three main approaches in economics to the determination of interest rates.
These theories vary in their views on interest rate, although there are some
similarities among them, these theories include the following; the classical theory of
interest (loanable fund), the liquidity reference theory (Keynesian Approach), the
general equilibrium approach (modern). An overview of these theories of interest rate
reveals that interest rate can influence the growth of savings and investment in an
economy, the understanding of the nature, meaning and role of interest rate in the
same economy is crucial, in a nutshell, interest rate is a given prominent position as a
catalyst for growth in the economy and particularly a factor in determining the
growth of savings and investment (Osofisan, 1993).
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1.2 STATEMENT OF THE PROBLEM
Many developing countries, under a crushing burden of debt and other external
disequilibria, have adopted programmes to restructure their economies. A major
cornerstone of such adjustment programmes is the liberalization of financial markets
and a greater role assigned to market forces in the allocation of financial resources,
and generally involves interest rate deregulation and relaxation or cancellation of the
policy of directed credits.
The policy of interest rate in developing countries seems to have been backed by the
McKinnon-Shaw financial intermediation hypothesis which postulates that interest
rates have a positive response to savings and economic growth (McKinnon, 1973;
Shaw, 1973). The link between interest rate responsiveness and savings, as postulated
by the McKinnon-Shaw hypothesis, is investment. However, behaviourally and
operationally, savings and investment differ (Bhatia and Khatkhate, 1975; Fry,
1978); the transfer of savings to investment being dependent on a host of factors
other than the real interest rate. Such factors include the availability of investment
opportunities at rates of return exceeding cost of funds, the existence of private and
social profitability differences, institutional constraints and the cost of administering
funds. Thus, a study of the link between real interest rates and investment cannot be
done solely via the McKinnon-Shaw hypothesis. Unfortunately, studies of financial
liberalization policies assumed the link between savings and investment as given
and/or regard specification of the effect of the real interest rate on investment as
difficult (Mwega et a!., 1990).
Also, studies of the effect of adjustment programmes on economic growth tend to
assume the existence of the Keynesian savings and investment macroeconomic
balance (Ndulu, 1990). Yet, it is known that resource gaps constrain economic
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growth in developing countries. The successful application of financial liberalization
policies in developing countries, therefore, goes beyond demonstrating the
applicability or otherwise of the McKinnon-Shaw hypothesis. There is a need to
investigate the behavioural relationships between investment and savings (perhaps
via the real interest rate) to identify the determinants of the mechanism of
transmission of savings to investments.
In Soyibo and Adekanye (1992a), the applicability of the McKinnon-Shaw
hypothesis to Nigeria was established, though Shaw's hypothesis seems to be more
strongly supported. This suggests that the debt intermediation hypothesis holds in
Nigeria. To influence economic growth positively, the increased savings mobilized as
a result of financial system liberalization would need to be transmitted to investment.
An understanding of the savings-investment process therefore, can help inform
policy decisions aimed at promoting economic development.
At least two approaches can be adopted in this regard. First, the characteristics of the
supply side can be determined, with an analysis of the factors affecting portfolio
management decisions of suppliers of credit using their perceptions and objective
data. Second, the characteristics of the demand can be studied, establishing the
determinants of demand using perceptions as well as objective data. This paper
concerns itself with the first approach, using principally primary data to analyse the
perceptions of bankers. The limitations of this approach will be discussed later.
However, a study of banking system operators' perceptions of the impact of the
different regulatory regimes on the performance of the system has its own merits. It
can spotlight the areas of general consensus as to the effectiveness or otherwise of
government policy. Such a study can also be a type of ex post evaluation of the
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impact of government policy on the banking system from the point of view of those
directly affected.
1.3 OBJECTIVES OF THE STUDY
The main objective of this research includes the following:
1. To determine the impact of interest rate on savings in Nigeria.
2. To determine how interest rate impact on the investment rate in Nigeria.
3. To determine the impact of savings on Investment in Nigeria
1.4 RESEARCH QUESTIONS
As a follow up to the above objectives, the following questions are asked;
1. What is the impact of interest rate on savings in Nigeria?
2. What is the impact of interest rate on investment in Nigeria?
3. Do savings have an impact on Investment in Nigeria?
1.5 HYPOTHESES
The following hypotheses have been formulated based on the objectives of study and
the research questions;
HO: There is no positive significant impact of interest rate on savings in Nigeria.
HO: There is no positive significant impact of interest rate on Investment in
Nigeria.
Ho: There is no positive significant impact of Savings on Investment in Nigeria?
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1.6 SCOPE OF THE STUDY
In order to carry out a comprehensive and meaningful research work on the critical
effect of interest rate as a determining factor in the growth of savings and
investments in Nigeria. This work was based mainly on Central Bank of Nigeria
(CBN), which regulates the employment of interest rate, savings and investment and
on the Intercontinental Bank plc. Data used covers a period of ten years (1970 –
2008) so that the impact of interest rate on savings and investment can be compared
using the interest policies.
1.7 SIGNIFICANCE OF THE STUDY
The deterioration of the Nigeria economy calls for a scrutinization of the economic
policies. This Nigeria like all other developing countries is faced with the problem of
choosing the most appropriate policies, which will be employed to attain economic
growth. An identification of the factors, which influence the economy, becomes
necessary, the level of investment being a major influence of economic growth lead
us to the study of interest rate which is one of the factors influencing investment as
well as savings (which provides funds for investment). In order to avoid decisional
myopia there is a need for efficient and proper economic planning. The need for
undertaking this study stems from the important role the rate of interest plays in
determining the growth of savings and investment. This shall be of immense benefit
to commercial banks in general, the CBN, the general economy and to future
researchers in the field of interest rate.
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1.8 DEFINITION OF TERMS
Marginal Efficiency of Capital is used to measure the rate of return on
investment Osofisan (1993).
Interest Rate This is the rate at which the Central Bank of
Nigeria lends to financial institution thus
supply and demand for funds Mwega, Ngola,
and Mwangi, (1990)
Interest rate policy This is the policy Central Bank uses to control
inflation in the economy. It also used to
control the money supply by the monetary
authorities, in order to achieve the stated or
desired goals Ndulu (1990).
Savings The total amount of deposit in financial
Institutions Fry (1978)
Investments investible Funds which are utilized to
expand
the growth in the economy Elliot(1984).
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REFERENCES
Bhatia, R.J. and D.R. Khatkhate (1973) ‘‘Interest rates, Savings, and Growth in
LDCs: An assessment of recent empirical research’’, World Development,
Vol. 16, No. 5
Elliot, J.W., (1984) Money, Banking and Financial Markets, New York; West
Publishing Company
Fry, M.J., (1978) ‘‘Money and Capital or Financial deepening in Economic
Development’’, Journal of Money, Credit and Banking, Vol. 10, No. 4
Luckett, D.G., (1984), Money and Banking, New York; McGraw Hill
McKinnon, R.I., (1973) Money and Capital Market in Economic Development,
Washington, DC; The Brookings Institution,.
Mwega, F.M., S.M. Ngola, and N. Mwangi, (1990), ‘‘Real interest rates and the
Mobilization of private savings in Africa: a case study of Kenya’’, AERC
Research Paper, African Economic Research Consortium, Nairobi.
Ndulu, BJ., (1990) ‘‘Growth and adjustment in Sub-Saharan Africa’’, a paper
Presented at the World Bank Economic Issues Conference, Nairobi, Kenya,
June
Osofisan, A.O., (1993) ‘‘An asset portfolio management model for Nigerian
Commercial Banks: a case study’’, Department of Economics, University of
Ibadan, MBA Project Report.
Revel J., (1975), Solvency and Regulation in Banks, Cardiff; University of Wales
Press
Ritter, L.S. and W.L. Siber, (1986), Principles of Money, Banking and Financial
Markets, New York; Basic Books Inc
Shaw, E., (1973), Financial Deepening in Economic Development, New York;
Oxford University Press,
Soyibo, A., (1991), ‘‘Managing bank assets in a depressed economy’’, a paper
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Presented at the Union Bank of Nigeria Area Managers' Conference, Ibadan,
17-18 May.
Soyibo, A. and F. Adekanye, (1992), ‘‘Financial System Regulation, Deregulation
and Savings Mobilization in Nigeria’’, African Economic Research
Consortium, Nairobi
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CHAPTER TWO: REVIEW OF RELATED LITERATURES
2.1 THEORIES OF INTEREST RATE
Several theories explained why interest is paid (Elliot, 1984). The theories of interest
can be divided into two; the monetary theories and the non-monetary theories. The
monetary theories are those theories of interest that stress the liquidity aspect of
money, while the non-monetary theories of interest are those theories which give
consideration to savings and productivity aspect of money. However, for the purpose
of this study, we shall examine the three theories of interest rate; the classical or
loanable funds theory, the liquidity performance theory (The Keynesian approach),
the general equilibrium approach (Soyibo and Adekanye, 1992).
2.1.1 THE CLASSICAL THEORY OF INTEREST RATE
The classical theory postulated that interest rate is an equilibrium factor between the
demand for and the supply of investible funds. The equality between savings and
investment is brought about by the mechanism of interest rate. When saving exceeds
investment, rate of interest will fall discouraging savings on one hand and
encouraging investment on the other hand. This tendency continues operating till
equality between savings and investment get established. Similarly, if investment
exceeds savings, rate of interest rises to discourage investment and encourage savings
till equality is established between savings and investment. Thus, classical system
regards rate of interest as the equilibrium force between savings and investment.
Classical economists approach to savings – investment equality is based on the
assumption of full employment in the economy system (Mwega,Ngola, and Mwangi,
1990).
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2.1.2 KEYNESIAN THEORY
In the Keynesian system of aggregate, the terms savings and investment refer to the
aggregate saving and aggregate investment. Investment means production that is not
currently consumed. It may take the form of machinery, equipment, building or
increased investments of consumers’ goods. Savings is the amount of the current
income, which is not spent upon consumption (Soyibo and Adekanye, 1992). The
fundamental thing in this approach is that savings and investment are always and
necessary equal. In the word of the Keynesian “provided it is agreed that income is
equal to the value of the part of current output which is not consumed and savings is
equal to the excess of income over consumption, the equality of savings and
investment necessarily follows”.
Income = value of output = consumption + investment
Savings = income – consumption.
Savings = investment.
According to Keynesian the determination of interest rate will be found in the money
market and these are basically the supply and demand for money. He identified three
motives for the desires to hold cash; transaction motive, precautionary motive and
speculative motive (McKinnon, 1973).
The first two motives are influenced by the level of income, while the speculative
motive is influenced by the level of interest rate. Keynes argues that if there were no
interest receivable, people would hold their assets in the form of cash. To get people
to hold their wealth in any other form, we must be prepared to pay them interest
because there is a cost associated with the conversion of the securities into cash.
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FIGURE 2.1: Loanable Funds Theory: Shift in demand
8
4
0 10 20 30 40
Source: Ndulu (1990)
FIGURE 2.2 Liquidity Preference Curve and the money supply
Sm1 Sm2
13 E1
10 E2
0 10 20 30
Source: Ndulu (1990)
In fig. I, the demand funds has been stimulated by other factors in the economy
resulting in a shift in the original demand curve (D1 – D1) to a higher level (D2 –
E1
E2
D2
D2
D2
D2
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D2) as a result of the rise in the equilibrium rate or interest from points E1. In fig, II,
the money supply is plotted against the liquidity preference curve to demonstrate the
greater money supply, the lower the interest rates are likely to be. Liquidity
preference curve is intersected by Sm1 and Sm2, when money supply is at a lower
level (Sm1) interest rate are at 13% if supply of money increases to Sm2 this has the
effect of decreasing interest rate to 10% (Elliot, 1984).
2.1.3 THE GENERAL EQUILIBRIUM APPROACH (MODERN)
The modern theory of interest rate is superior to both the classical and the Keynesian
theories of interest rate (Osofisan, 1993). This is because it interests all the four
factors that is; savings, investment, the demand for money, and the supply of money
successfully. Modern theory of interest postulates that the equilibrium level of
money income and the equilibrium level of the rate of interest will be determined by
that particular combination of income and the rate of interest at which the double
condition of equilibrium stated below occurs given the savings, the investment, the
demand for money and the supply of money (Soyibo and Adekanye, 1992).
Thus;
I = S …………..(1)
Md = Ms ……..(2)
Where I represents investment
S represents savings
Md represents the Demand for money
Ms represents the supply of money.
According to equation one above, it them means that in the monetary sector of the
economy the demand for money is equal to the supply of money. In equation II,
investment and savings are in equilibrium in the real sector of the economy. The
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theory claims that any other combination of income and the rate of interest either in
the monetary sector or in both sectors of the economy will be in dis-equilibrium. As
a result of this, money income and rate of interest will change until the level of
money income and that of the interest rate is re-established at which both sectors of
the economy are in equilibrium.
2.2 FACTORS WHICH CAUSES VARIATIONS IN THE INTEREST RATE
STRUCTURE
There are many factors that are responsible for the variation in the structure of
interest rate. These factors include (Adekanye, 1993).;
Rate of Inflation
Inflation can be defined as a general rise in overall price level. Criffiths, defined
inflation as a condition of generalized excess of demand of stocks of goods and flows
of real income, a rise in per capital income of stocks of flow of money income.
There is a need to distinguish between the normal interest rate and the real interest
rate in order to understand how the rate of inflation affects the level of interest rate.
Where the normal interest rate is straightforward rate, for example, 10%, the real
interest rate is the nominal rate adjusted for the expected rate of inflation. If inflation
rate is expected to exceed the level of interest during the period of the loan, the real
rate to the lender becomes negative. Therefore during the period of rapidly rising
inflation, lender expects a normal rate, which exceeds the expected inflationary rate.
The Fluctuation of the Supply of and Demand for Fund
There are different stages of the business cycle offering different columns of supply
and demand for funds. For instance, when the economy is on the peak stage (during
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boom) the demand for fund tend to be greater than the supply of funds and thus raise
interest rates on the other hand, when the economy is declining the level of interest
rate falls as a result of slump in business activities because expected returns may not
be enough to offset the cost of capital.
Government Intervention
The government controls the rate of interest through the Central Bank. If the money
supply is reduced, interest rate will rise. The government does this by selling
securities ad in effect; controlling the rate on securities it wants to sell sufficiently so
that the public is attracted to purchase them quickly, this section government raises
interest rate.
Market Expectations
This also plays a role in causing the structure of the rate of interest to vary. When
inflation rate increases, it will raise the rate of interest and if market expectation in
that inflation rate is reduced and that a relaxed monetary control is in the pipeline, the
interest rate will fall because of the speculation.
2.3 THE CONCEPT OF SAVINGS AND INVESTMENT
This distinction between savings and investment is that they are separate acts
accomplished largely by different people and for different purpose, thus while
savings is done by households and business as well as government, investment is
done excessively by businessmen (Mwega,Ngola, and Mwangi, 1990). Savings
simple definition shows it as the act of net spending income or consumption, while
investment simply means the expenditure of funds leading to the creation of wealth
net addition to the stock of physical capital like machines, factories, other building
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are investment. Savings then is that portion of income, which is not devoted to the
purchasing of consumer goods and services.
Macro economics defines interest in a way that it refers only to real capital goods, the
purchase of which injects a flow of money in the economy (McKinnon, 1973). Gross
private investment is divided into three distinct components thus; business fixed
investment, residential construction and net change in business inventories. Each of
these is being determined by substantially different sets of factors. There are three
types of savings on deposits kept with the bank, these are; savings, time deposits and
demand deposits. The savings and demand deposits are volatile accounts because
these accounts are easily introduced into by their owner. Time deposit is a much
more predictable account because it has a definite time dimension attached to it. In
our analysis it is important to recognize the fact that most savings are voluntary and
depends on a wide range of factors particularly the level of income. i.e., the
household, firms and government all save and that each of these three sectors uses
savings to make investment (Elliot, 1984).
In an economic sense therefore, investment is required for the following purposes;
for the business to buy new premises, machinery and to raise the fund to finance
increased manufacturing capacity, for public sector to carry out public works such as
building news or reconstruction of houses, roads, schools and hospital etc, for
individual to buy or improve existing houses, or other fixed assets and for banks,
Invest the customers’ deposits to the other projects like investing in another bank for
profit (Mwega,Ngola, and Mwangi, 1990). Thus investment increases a country’s
productive capacity and raises the standard of living. The processes of savings and
investment play central roles in the circular flow of income and in determining the
level of income (Soyibo and Adekanye, 1992). .
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The illustration below shows the circular flow of income.
FIGURE 2.3 Illustrates of the circular flow of income
Source: Elliot, (1984)
According to the diagram not all income received by firms are distributed to
household as wages or dividend. Some are retained in reserves as savings in the form
of undistributed profit. In the same way not all income received by household are
spent in consumer goods, some are also retained in the personal savings. In both
cases, such savings are regarded as leakages from the flow (Shaw, 1973). In fig III,
the income, which the firms receive from the sale of investment goods, is shown as
investment injection. The assumption of the circular flow of income is that there are
no foreign countries and no government intervention. Thus if savings and investment
are the only withdrawals and injections respectively that affect the flow, is apparent
that the flow will continue indefinitely at the same pressure as long as savings is
equal to investment (McKinnon, 1973).
WAGES &
DIVIDEND
PERSONAL
SAVINGS &
WITHDRAWALS
HOUSEHOLD
FIRMS
INVESTMENT
INJECTION
BUSINESS
SAVINGS &
WITHDRAWALS
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2.4 FACTORS INFLUENCING SAVINGS AND INVESTMENT
In a capitalist society, investment is undertaken mainly by firms whose objectives are
to make a profit as well as by government whose own objective is not necessarily to
make a profit but also for the welfare of its citizens. Although government
investment accounts for a lesser percentage of the total fixed investment which
includes the construction of roads, hospital, schools, etc. government however, take
decision to invest or not in the height of economic, political and social requirement.
Therefore, these are not particularly influenced by the profit motive. A business firm
is likely to invest in new capital expenditure only if the net return it expects to gain is
at least sufficient to cover the following: the cost of capital and the rate of interest on
the money involved.
Net return refers to the increase in the revenue of the firm after allowance has been
made for the maintenance and operating cost. The outstanding characteristic of
investment is its volatility as it rises sharply in boom periods and drops in
depressions. Investment depends on the expected rate of profit to be obtained from
additions to physical capital. In a nutshell investment depends on either major
factors; the level of national income, the level of the rate of interest, technological
advances and innovations, changes in size and distribution of population of expected
volume of sales, changes in government expenditure or taxes, prospects for demand
and future levels of cost and the state f business confidence and influence by other
government policies, international affairs, stock market or tangible elements in the
business environment(Adekanye, 1993)..
Savings in the complement of consumption factors which affects consumption and
savings also change with it (Osofisan, 1993). Thus, existence of a propensity to
consume implies a propensity to save. The propensity to save is the relationship
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between savings and income. Income is the principal determinant of savings thus
when income rises, both savings and consumption rise vice versa. There are two
main reasons why people save in an economy, these are; for specific purpose and for
unspecific purpose. People may save for a specific reason or purpose. These
purposes include payment such as to pay for motor vehicle. Saving for unspecific
purpose includes savings for the rainy day or to have something to fall back on in the
event of some unexpected occurrence in the future.
2.5 INTEREST RATE LEVEL OF SAVINGS AND INVESTMENT
The analysis of savings and investment in any economy cannot be derived from an
understanding of the nature, meaning and role of interest rate in economy (Fry,
1978). Having defined the rate of interest and extensively reviewed its theories as
well as the factors that cause variations in its structure, it is pertinent to analyze
critically the nature of interest rate and how it determines the level of savings and
investment. There are basically two forms of interest rate (Luckett, 1984), which can
be allowed to depositors or charges to borrowers, they are; the fixed interest rate and
the fluctuating interest rate. When the interest rate is fixed it means that the depositor
knows in advance the amount of interest that will be allowed or charged on his/her
deposits and the borrower also know how much to be charge on his/her loan in
advance. Fluctuating rates are those that allow alternation or are liable to alteration
either upwards or downwards or with little or no notice. There are four theories that
discuss fluctuation in interest rates, these are (Osofisan, 1993);
1. The abstaince theory or classical theory of interest rate.
2. The loanable funds or neo-classical theory of interest rate.
3. The liquidity preference of Keynesian theory of interest rate.
4. The modern theory of the neo-Keynesian theory of interest rate.
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It has been proved beyond doubts that interest rate at least has an influence on
savings and investment (Ritter and Siber, 1986). Conventional wisdom informs us
that when the interest rate is high, the level of savings will rise because depositors
will profit, as he will have more returns on his deposits. In the same view, if the
interest rate falls, the level of savings will drop, as people will not be motivated to
save. On the contrary, if the level of interest rate rises, the level of investment falls
because the cost of acquiring funds becomes expensive and when the level of interest
drops, the level of investment rises as the cost of acquiring funds for investment
purposes is reduced. In order to understand how the interest rate influences savings
and investment we shall review the following; investment demand for output, he
supply of savings, the marginal responsiveness of investment demand to interest rate
and the investment demand and the supply of savings (Luckett, 1984),.
2.6 THE SUPPLY OF SAVINGS
The supply of savings is viewed from two different perspectives; at any level of
income, it is the sum of personal savings, gross business savings and government
savings. This view emphasizes the supply of savings as potential sources of funds to
finance private investment and the total value of output minus that value of output for
personal consumption and by government. This view makes it clear that a decrease of
savings at any level of income reflects an equal increase of the demand for output at
that level of income in the form of consumption and government demand and vice
versa (Soyibo and Adekanye, 1992).
2.7 THE PROBLEMS OF BANK LENDING AND DEPOSIT IN NIGERIA
A lot of factors reduce the ability of banks to lend money to their clients. According
to Oladele (1985), the following four factors are constraints to banks lending in
Nigeria.
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1. Personal limitation of the officer is one of the problems of banks lending in
Nigeria. Under this factor, the ability of the lending officer to interpret the
financial data of borrowing customer in order to determine the influence and
ability of the customer to service the loan facility granted is very important.
2. Limitations created by borrower are a major problem, which hinders the
chances of borrowing. In some cases proper feasibility studies are not carried
out on a project to establish its viability or resist risk before asking for loans.
In such a case, a firm has to give the lending officer false impression of the
viability of the business.
3. Limitations imposed by the institutions for instance efficiently managed banks
do prescribe priority sector for their lending and establish discretionary lending
limit for their officers and offices.
4. Banks are also constrained by specific laws and regulations, which are
intended to control them by the government such laws, include the following;
amount of capital available to savers, interest paid on the deposits, financial
markets, banking habit and record of bank performance
As savings is the excess of income of expenditure, it then means that to save one
must have an income that exceeds his/her expenditure (Bhatia and Khatkhate, 1973).
But in Nigeria where per capital income is very low, deposits are also very low.
Interest paid on capital or deposit also influences the level of savings. Interest is the
price for use of money. There is a direct relationship between interest rate on deposit
and the volume of deposit. A high rate is an inducement for people to save. A
financial market is one where securities are traded. A developed financial market has
one of its advantages, the duty of keeping investors and potential investors informed
on the economic activity in the economy (Osofisan, 1993).
24
In Nigeria, the banking habits are not developed (Soyibo, 1991). The average
Nigerian still believes the best way to save is not by keeping our money in the bank
but in communal meetings that exist in our communities and keeping ones money
under the mattress where it is easily accessible. Under this particular sector, large
blame goes to illiteracy and ignorance on the part of the public as it is deemed that
depositing money in a bank requires many formalities and bureaucracy. As a result
of this they find other means of saving their money. The final factor, which
influences the depositor in the banks, is the efficient performances of the banks. As
effective management will induce a lot of people to save; this is because there will be
confidence. Furthermore, banks should be courteous and realize the importance of
the customers.
2.8 EFFECTS OF INTEREST RATE POLICIES ON THE NIGERIAN
ECONOMY
When we analyze the interest rate policies in Nigeria, we are as a matter of fact
referring to two prominent policies, for example; the regulated policy and the
deregulated policy (Adekanye, 1993).
Under the regulated policy, the minimum and maximum interest rate for both loans
and deposits are explicitly specified. Although the regulated policy has its advantages
at least for the fact that it came into operation, it means that there is an interest
problem in the financial system, which it came to correct. However, its major defeat
was its regardless and inflexibility (thus no bank dear charges below or above the
stated interest levels). During the period when the regulated policy was in separation,
there was not significance change in the Nigerian economy. On the point of the
general policy, there was not general awareness of the role of the interest rate. Until
in 1987 when the Central Bank of Nigeria announced the deregulation of the interest
25
rate, i.e, they abolished with effect from august 1st, 1987, all control on interest rate,
hence they will now be determined by the forces of demand and supply (Osofisan,
1993). The deregulation of the interest rate in Nigeria is part of the Structural
Adjustment Program, which was designed to remove the fundamental structural
distortion prevalent in the Nigeria economy since the 1970s. Explaining the rationale
behind this measure, the Central Bank of Nigeria said that, it is recognition of the fact
that effects of interest rate control have been more adverse than favourable in
promoting the development of financial system. Hence the proper thing to do is to
allow interest rate to be determined by the forces of demand and supply in line with
the whole objectives of the Structural Adjustment Program (Adekanye, 1993).
The protagonist of the deregulation of interest rate based their judgment on the fact
that, it will encourage the inflow of capitals, which the economy requires to increase
productivity (Ritter and Siber, 1986). It is also hoping that it will stimulate savings
by making interest on deposits that are expected as a result, these policies include; It
is aimed at stimulating domestic financial savings as a result of high rates to be paid
to deposition, those who normally keep their money under the pillows or big holes
will not keep them in the banks in order to benefit from this high rate, It is aimed at
stimulating efficient resource allocation, the dynamic interest rate is also aimed at
attracting foreign investors. Given the profit maximization objectives and every
business entrepreneur there is the tendency to be attracted to where those objectives
will be achieved, deregulation of interest rate will lead to more efficient allocation of
financial market resources because interest rate will now reflect relative scarcity and
relative efficiency in different uses and the challenges of the deregulation provide the
condition for more innovations in the banking sector. It will lead to gradual
extinction of the armchair banking.
26
Deregulation of the interest rate has achieved most of its aims, but some are two sides
of a coin, the deregulation of interest rate has its good and bad effect on the economy.
Although it has brought about keen competition for customers among the banks,
customers can no negotiate for higher deposit rates and bankers now have t canvass
for customers. A higher lending rate has brought sanity into the borrowing habits of
Nigerians (Soyibo, 1991). Investors seeking loans are now more selective and
careful in the way they dispense money on projects. In the same vein, rate of deposits
have attracted enormous savings. However, the deregulation of interest rates has
been received with mixed feeling in certain circle. With the bank’s lending rate of
about 19.18% and the minimum liquidity ratio raised from 25% to 30%, the amount
of funds available to commercial banks for credit purposes has been lowered. It is
feared that this will cause greater credit squeeze in the economy (Revel 1975).
Government financing of developing projects will be adversely affected since given
the rationality of investors, people will patronize banks with high rates on deposits
than investment in government development projects. There are some fears that new
interest rate structure may create more inflation in the long run and thus, will further
compound the problem of unemployment. There is also the fear the much talked
about capital flight may not be crushed. This is because; the problem of foreign
investment is not lack of economic incentive, but that of lack of confidence in
Nigerian system as a whole. However, the empirical effect of interest rate on savings
and investment represented by deposits and loans will be determined (Fry, 1978).
27
REFERENCES
Adekanye, F.A., (1993) ‘‘Commercial bank performance in a developing economy: a
Multivariate regression analysis approach’’, PhD thesis, Department of
International Banking and Finance, Business School, City University, London
Bhatia, R.J. and D.R. Khatkhate (1973) ‘‘Interest rates, Savings, and Growth in
LDCs: An assessment of recent empirical research’’, World Development, Vol.
16, No. 5
Elliot, J.W., (1984) Money, Banking and Financial Markets, New York; West
Publishing Company
Fry, M.J., (1978) ‘‘Money and Capital or Financial deepening in Economic
Development’’, Journal of Money, Credit and Banking, Vol. 10, No. 4
Luckett, D.G., (1984), Money and Banking, New York; McGraw Hill
McKinnon, R.I., (1973) Money and Capital Market in Economic Development,
Washington, DC; The Brookings Institution.
Mwega, F.M., S.M. Ngola, and N. Mwangi, (1990), ‘‘Real interest rates and the
Mobilization of private savings in Africa: a case study of Kenya’’, AERC
Research Paper, African Economic Research Consortium, Nairobi.
Ndulu, BJ., (1990) ‘‘Growth and adjustment in Sub-Saharan Africa’’, a paper
Presented at the World Bank Economic Issues Conference, Nairobi, Kenya,
June
Nigeria Deposit Insurance Corporation (NDIC), (1989) Annual Reports and
Statement of Accounts, Lagos, December 31
Osofisan, A.O., (1993) ‘‘An asset portfolio management model for Nigerian
Commercial Banks: a case study’’, Department of Economics, University of
Ibadan, MBA Project Report.
Revel J., (1975), Solvency and Regulation in Banks, Cardiff; University of Wales
Press
Ritter, L.S. and W.L. Siber, (1986), Principles of Money, Banking and Financial
28
Markets, New York; Basic Books Inc
Shaw, E., (1973), Financial Deepening in Economic Development, New York;
Oxford University Press
Soyibo, A., (1991), ‘‘Managing bank assets in a depressed economy’’, a paper
Presented at the Union Bank of Nigeria Area Managers' Conference, Ibadan,
17-18 May.
Soyibo, A. and F. Adekanye, (1992), ‘‘Financial System Regulation, Deregulation
and Savings Mobilization in Nigeria’’, African Economic Research
Consortium, Nairobi
29
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 RESEARCH DESIGN
According to Onwumere (2005), a research design is a kind of blue print that guides
the researcher in his/her investigation and analysis. It is a format in which the
researcher employs in order to systematically apply the scientific method in the
investigation of problems.
The research design employed in this research is the ex-post facto research design.
This is because, the researcher does not aim to control any of the variables under
investigation and our pre-disposition is to observe occurrence over a period of time
(1970-2008). Another justification for the research design is the desire of the
researcher to use secondary data to test the hypothesis formulated. These are already
existing data, thus, cannot be manipulated by the researcher.
3.2 NATURE AND SOURCES OF DATA
Data refers to facts, information, ideas which can be represented in figures, charts and
graphs (Ozo, Odo, Ani and Ugwu, 2007). The nature and sources of data for this
research is secondary data sources. The secondary data source is through the Annual
Reports and Accounts of the Central Bank of Nigeria (CBN) under consideration in
the research.
Data will be collected first hand from the original source, and from data collected and
extracted from the Annual statements and accounts the Central Bank of Nigeria
(CBN).
30
3.3 SAMPLE SIZE / SAMPLING TECHNIQUES
The idea of sampling or determining sample size is to obtain a part of the population
from which some information about the entire population can be inferred. Sample in
this research refers to the portion of the universe or population which reasonable
reflects opinions, attitudes or behaviour of the entire groups.
The sampling technique adopted in this research is the non-probability sampling
method. The major non-probability sampling method adopted is the convenience
sampling method. In this case, sampling is based upon the convenience of the
researcher. Since the sample size is based on the immediate elements within his
surroundings, the elements the research can reach out and the number of elements
which we believe is convenient for this research necessitated the use of this sampling
technique. Also, the choice of the period is based on the availability of Data. Thus we
assume it will show trend on the impact of interest rate on Savings and Investment as
well as the impact of Savings on Investment.
3.4 MODEL SPECIFICATION
A model is a simplified view of reality deigned to enable a researcher describe the
essence and inter relationship within the system or phenomenon it depicts
(Onwumere, 2005). The hypotheses will be tested using the Simple Linear Regression
Model.
In writing the model equation, the following symbols were used to denote their
respective variables.
INT = Interest rate
SAV = Savings rate
31
INV = Investment rate
a = Constant of the equation
b = Coefficient of the independent variable
u = Error terms
Thus, for hypothesis one which states that Interest rate does not have positive
significant relationship Savings rate in Nigeria,
It was represented by the equation.
SAV = a + INT (b) + u …………............................................................ (i)
For hypothesis two, which states that Interest rate does not have a positive significant
impact on investment in Nigeria, it was represented by the equation
INV = a + INT (b) + u ………................................................................ (ii)
For hypothesis three, which states that Savings does not have a positive significant
impact on investment in Nigeria, it was represented by the equation
INV = a + SAV (b) + u ………................................................................ (ii)
3.5 TECHNIQUES OF ANALYSIS
As stated, data will be analyzed using our statistical tools of Simple Linear
Regression model (using the SPSS Statistical software package) because it is utilizes
for the purpose of prediction where the independent variable is used to obtain a better
32
prediction of dependent variable (Ozo, Odo, Ani and Ugwu, 2007). This was
necessitated by our use of secondary data collected from the Annual Reports and
Accounts of the Central Bank of Nigeria (CBN) for the period 1970- 2008. Thus,
given the general form of the simple linear regression model given in 3.4, the
following formulas will be used to determine the slope of the regression line and the
Y-intercept (Douglas, Willian and Mason, 2002). This will enable us determine the
impact of interest rate on savings and investment in Nigeria. Thus
b = n (∑ XY) - (∑ X) (∑ Y)
n ((∑ X2) - (∑ X
2)
a = ∑Y - b ∑ X
n n
We will analyze each microfinance bank separately within the scope under review
and also in aggregate. Thus, it is hoped that inferences will be drawn from the
analyses.
33
REFERENCES
Douglas, A. L., W. G. Willian and R. D. Mason (2002) Statistical Techniques in
Business And Economics, Boston; Mc-Graw Hill Irwin
Onwumere, J. U. J (2005), Business and Economics Research Method, Lagos; Don
Vinton Limited
Ozo, J. O. Ani and T. U, Ugwu (2007), Introduction to Project Writing for Business
And Financial Studies, Enugu; New Dimension Publishers
34
CHAPTER FOUR
PRESENTATION AND ANALYSES OF DATA
4.1 INTRODUCTION
This chapter deals with the presentation of data sourced from secondary sources
(Central Bank of Nigeria Statistical Bulletin). As stated in chapter Three, the
statistical tool to be used is the simple linear regression which was run using SPSS
software.
4.2 DATA PRESENTATION
TABLE 4.1 SAVINGS RATE, SAVINGS DEPOSIT AND LOANS AND
ADVANCES (INVESTIBLE FUNDS) (1970-2008)
YEAR WEIGHTED DEPOSIT
AND LENDING RATE
AGGREGATE SAVINGS
DEPOSIT
AGGREGATE LOANS
AND ADVANCES
(INVESTABLE FUNDS)
(%) N = MILLIONS N = MILLIONS
1970 3.00 129.70 351.50
1971 3.00 160.40 502.00
1972 3.00 200.90 619.50
1973 3.00 224.90 753.50
1974 3.00 286.70 938.10
1975 4.00 521.30 1,437.50
1976 4.00 709.20 2,123.00
1977 4.00 930.10 4,313.50
1978 5.00 1,075.70 4,114.90
1979 5.00 1,283.80 4,630.40
1980 6.00 1,589.50 6,349.10
1981 6.00 1,979.20 8,582.90
1982 7.50 2,321.20 10,275.30
1983 7.50 2,879.30 11,093.90
35
1984 9.50 3,361.30 11,503.90
1985 9.50 3,699.90 12,170.20
1986 9.80 4,270.20 15,701.60
1987 14.00 5,206.70 17,531.90
1988 14.50 7,122.70 19,561.20
1989 16.40 9,237.80 22,008.00
1990 18.80 13,013.50 26,000.00
1991 14.29 19,395.30 31,306.20
1992 16.10 26,071.10 42,736.80
1993 16.66 37,054.80 65,665.30
1994 13.50 49,601.10 66,127.60
1995 12.61 52,135.00 114,883.90
1996 11.69 68,770.90 169,437.10
1997 4.8 84,099.50 385,550.50
1998 5.49 101,373.50 272,895.50
1999 5.33 128,365.80 1,265,984.40
2000 5.29 164,624.30 1,795,768.30
2001 5.49 216,509.40 2,796,112.20
2002 4.15 244,084.10 3,606,229.10
2003 4.11 312,368.90 4,339,443.00
2004 4.19 359,311.20 5,686,669.40
2005 3.83 401,986.80 7,468,655.10
2006 3.13 592,514.80 9,542,573.80
2007 3.24 753,868.80 15,285,128.80
2008 NA 1,091,812.20 27,153,935.40
Source: CBN Statistical Bulletin, Volume 18 (2009)
As could be observed from the above table from 1970-1974, the weighted average
deposit and lending rate was 3%. Between 1975 -1977, it increased to 4% and also
increased to 5% and 6% respectively from 1978-1981. From 1982-1986, it increased
to 7.5% to 9.5% respectively. From 1970-1986, it was the period of Regulated
Interest rates. In 1986, the Structural Adjustment Programmes of the Federal
Government Interest rates was deregulated, thus, from 1987-1996 deregulations in
interest rates was practiced. This led to more than double increase in interest rates as
36
could be observed from the table above. It peaked in 1990 when it rose to 18.8%,
however deregulation was abandon in 1996, this reflected in fall in interest rates to
4.8% in 1997 and since it has remain regulated till 2008. 2006 has witnessed the
lowest rates (3.13%) while 1998 and 2001 has had the highest from 1997-2008.
Below in Figure 4.1 is a graphical presentation of the trends in interest from 1970-
2008.
FIGURE 4.1 TREND OF INTEREST RATE (1970-2008)
SOURCE: TABLE 4.1
In the case of Loans and Advances granted by various financial institutions for
investment purposes, it could be observed that, there has been a steady increase from
1970-2008. From 1970-1974, it was in the range of #351.5million- #938.1million.
From 1975-1981, it increased to the range of #1,437.5million-#8,582.9million.
Another range of increase could be observed from 1982-1994 when it rose from
#10,275.3million to #66,127.6million. Also from 1995-1998 it range
#114,883.9million-#272,895.5million. From 1999-2006, it again rose from
#1,265,984.8million-#9,542,573.4million and it peaked in 2007 and 2008 where the
figure was #15,285,128.8million and #27,153,935.4million respectively. The
37
progression in the rise in investment funds from 1970-2008 can be seen in Figure 4.2
below.
FIGURE 4.2 TREND OF INTEREST RATE AND SAVINGS (1970-2008)
SOURCE: TABLE 4.1
In the case of Savings deposits held by various financial institutions for the period
under review, it could be observed that, there was also a steady increase from 1970-
2008. From 1970-1977, it was in the range of #129.7million- #930.1million. From
1978-1989, it increased to the range of #1, 075.7million-#9,237.8million. Another
range of increase could be observed from 1998-2007 it rose from #101,373.5million
to #753,868.8million and it peaked in 2008 where the figure was #1,091,812.2million.
The progression in the rise in Savings Deposits from 1970-2008 can be seen in Figure
4.3 below.
38
FIGURE 4.3 TREND OF INTEREST RATE AND INVESTMENT (1970-2008)
SOURCE: TABLE 4.1
A comparative comparism of Savings deposit and funds for Investment from1970-
2008 is shown in Figure 4.4 below.
FIGURE 4.4 TREND OF SAVINGS AND INVESTMENT (1970-2008)
SOURCE: TABLE 4.1
39
4.3 TEST OF HYPOTHESES
Below in a tabular form are the extract of the analysed results. The test of hypotheses
was done in three steps. These are;
Step One: Restatement of Hypothesis
Step Two: Presentation of SPSS model results
Step Three: Decision Criterion and
Step 4: Decision
4.3.1 TEST OF HYPOTHESIS ONE
Step One: Restatement of Hypothesis
The hypothesis is restated in Null and Alternative forms as follows;
HO: There is no positive significant impact of interest rate on savings in Nigeria.
Ha: There is a positive significant impact of interest rate on savings in Nigeria.
Step Two: Presentation of SPSS model results
TABLE4.2 Model Summary for Hypothesis one
Model R R Square
Adjusted
R Square t-value Beta Durbin-Watson
1 .344(a) .119 .095 -2.230 .344 .117
SOURCE: APPENDIX 1
NOTE:
R = Correlation Coefficient or Beta
R2 = Coefficient of Determination
Adj. R2 = Adjusted Coefficient of Determination
DW = Durbin Watson (d) test statistic
T-value = Student t- test Statistic
F = F- test statistic
Model Equation ASAVINGS = 24.89 +1.6 INT
40
Step Three: Decision Criterion
The t–value is – 2.230 and from the equation the coefficient of Interest rate is 1.6,
thus there is a positive significant impact of interest rate on aggregate savings. The
correlation coefficient (R) is 0.344 but the beta indicates that it has a positive
correlation, thus, increase in interest rate leads to an increase in aggregate savings for
the periods under study. The variation that can be explained by the correlation is 12%
as indicated by the coefficient of determination. A d-test statistic value of 0.117
shows no autocorrelation.
Step 4: Decision
From the above, the Null hypothesis is rejected and the Alternative hypothesis which
states there is a positive significant impact of interest rate on savings in Nigeria is
accepted.
4.3.2 TEST OF HYPOTHESIS TWO
Step One: Restatement of Hypothesis
The hypothesis is restated in Null and Alternative forms as follows;
Ho: There is no positive significant impact of interest rate on Investment in
Nigeria.
Ha: There is positive significant impact of interest rate on Investment in
Nigeria.
41
Step Two: Presentation of SPSS model results
TABLE 4.3 Model Summary for Hypothesis Two
Model R R Square
Adjusted
R Square t-value Beta Durbin-Watson
1 .324(a) .105 .081 -2.083 -.324 .216
SOURCE: APPENDIX 2
NOTE:
R = Correlation Coefficient or Beta
R2 = Coefficient of Determination
Adj. R2 = Adjusted Coefficient of Determination
DW = Durbin Watson (d) test statistic
T-value = Student t- test Statistic
F = F- test statistic
Model Equation AINVEST = 47.0 – 3.7 INT
Step Three: Decision Criterion
The t–value is – 2.083 and from the equation the coefficient of Interest rate is -3.7,
thus there is a negative significant impact of interest rate on aggregate investment in
Nigeria. The correlation coefficient (R) is 0.324 but the beta indicates that it has a
negative correlation, thus, increase in interest rate leads to a decrease in aggregate
investment for the periods under study. The variation that can be explained by the
equation is 10.5% as indicated by the coefficient of determination. A d-test statistic
value of 0.216 shows no autocorrelation.
Step 4: Decision
From the above, the Alternative hypothesis is rejected and the Null hypothesis which
states there is no positive significant impact of interest rate on investment in Nigeria
is accepted.
4.3.3 TEST OF HYPOTHESIS THREE
Step One: Restatement of Hypothesis
The hypothesis is restated in Null and Alternative forms as follows;
Ho: There is no positive significant impact of Savings on Investment in Nigeria
42
Ha: There is positive significant impact of Savings on Investment in Nigeria
Step Two: Presentation of SPSS model results
TABLE 4.4 Model Summary for Hypothesis Three
Model R R Square
Adjusted
R Square t-value Beta Durbin-Watson
1 .978(a) .956 .955 28.438 .978 .714
SOURCE: APPENDIX 2
NOTE:
R = Correlation Coefficient or Beta
R2 = Coefficient of Determination
Adj. R2 = Adjusted Coefficient of Determination
DW = Durbin Watson (d) test statistic
T-value = Student t- test Statistic
F = F- test statistic
Model Equation AINVEST = -588 + 21.6 ASAVINGS
Step Three: Decision Criterion
The t–value is 28.438 and from the equation the coefficient of aggregate savings is
21.6, thus there is a positive significant impact of aggregate savings on aggregate
investment in Nigeria. The correlation coefficient (R) is 0.978 and the beta indicates
that it has positive correlation, thus, increase in aggregate savings leads to an increase
in aggregate investment for the periods under study. The variation that can be
explained by the equation is 95.6% as indicated by the coefficient of determination. A
d-test statistic value of 0.714 shows no autocorrelation.
Step 4: Decision
From the above, the Null hypothesis is rejected and the Alternative hypothesis which
states that there is a positive significant impact of aggregate savings on investment in
Nigeria is accepted.
43
CHAPTER FIVE
SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSIONS
5.1 SUMMARY OF FINDINGS
Based on the hypothesis tested in this research, we found out the following:-
1) Interest rates have a positive significant impact on Aggregate savings in
Nigeria. This was confirmed by a positive interest rate coefficient. Also there
was positive correlation between interest rate and Aggregate savings, thus an
increase in interest rate will lead to an increase in Aggregate savings in the
economy. The result can be found in the works of McKinnon (1973) and Shaw
(1973). They found out that interest rates have a positive response to savings
and economic growth thus the link between interest rate responsiveness and
savings, as postulated by the McKinnon-Shaw is positive.
2) Interest rates have a negative significant impact on Aggregate investment in
Nigeria. This was confirmed by a negative interest rate coefficient and a t-value
above the rule of thumb benchmark of two. Also, there was a negative
correlation between interest rate and Aggregate investment in Nigeria, thus an
increase in interest rate will lead to decrease in Aggregate investment in
Nigeria and vice versa.
44
3) Aggregate savings have a positive significant impact on Aggregate investment
in Nigeria. This was confirmed by a positive Aggregate savings coefficient and
a t-value greater than the rule of thumb bench mark value of two for
significance. Also there was a positive correlation between Aggregate savings
and Aggregate investment thus an increase in Aggregate savings will lead to an
increase in Aggregate investment in Nigeria.
5.2 RECOMMENDATIONS
As could be observed from the findings in this research that when the interest rate is
high, the level of savings will rise because depositors will profit, as he will have more
returns on his deposits. In the same view, if the interest rate falls, the level of savings
will drop, as people will not be motivated to save. On the contrary, if the level of
interest rate rises, the level of investment falls because the cost of acquiring funds
becomes expensive and when the level of interest drops, the level of investment rises
as the cost of acquiring funds for investment purposes is reduced. Also it was
observed that when savings increases the level of investment increases because more
funds will be available in the hands of investors to fund capital projects in the
economy. Thus the following recommendations are made;
First and foremost an understanding of the savings-investment process can help
inform policy decisions aimed at promoting economic development thus government
should ensure that interest rate payable on savings is such as to stimulate savings
rather than consumption as it has been proven from this research that interest rate
have a positive impact on savings which in turn stimulate investments.
Secondly, investment is required for the following purposes; for the business to buy
new premises, machinery and to raise the fund to finance increased manufacturing
45
capacity, for public sector to carry out public works such as building news or
reconstruction of houses, roads, schools and hospital etc, for individual to buy or
improve existing houses, or other fixed assets and for banks. Thus investment
increases a country’s productive capacity and raises the standard of living. The
processes of savings and investment play central roles in the circular flow of income
and in determining the level of income, therefore government should ensure that the
rate of interest on loans and advances are such as to stimulate investment thus leading
to increase in the gross domestic product and the living standards of the citizens.
Lastly, investors seeking loans are now more selective and careful in the way they
dispense money on projects. In the same vein, rate of deposits have attracted
enormous savings. Therefore savings culture should be cultivated by Nigerians as the
link between savings and investment is direct which means an increase in savings
leads to increase in investment.
5.3 CONCLUSIONS
As have been established in this research that interest rate favours savers when the
rate is high and not favourable when it is low. Savings is also looked upon as
beneficial both for the individual and the society at large, thus, an increase in savings
will ultimately lead to an increase in savings of the community. It was due to this
effect that the classists believed in thriftiness. They were of the view that an
individual saving was a great private as well as social virtue. The Keynes were at a
different view, which they advocate that individual savings is a social virtue but rather
supported the view that individual savings is greatly a social vice. Increase savings
on the part of individuals will result in a general curtailment in the expenditure.
When savings increase, investment also increases and investment is very essential for
the economic development of an economy. With increase investment, employment is
46
bound to increase which will in turn increase demand, prices, profit and more
production expansion. This expansion if properly utilized will lead to economic
development of a country. However in Nigeria, the banking habits are not developed.
The average Nigerian still believes the best way to save is not by keeping our money
in the bank but in communal meetings that exist in our communities and keeping ones
money under the mattress where it is easily accessible. Under this particular sector,
large blame goes to illiteracy and ignorance on the part of the public as it is deemed
that depositing money in a bank requires many formalities and bureaucracy. The
factor which influences deposit in banks is efficient performances of the banks in the
process of intermediation. Thus an effective management will induce a lot of people
to save; this is because there will be confidence. Therefore it could be said that
interest rate plays a major role on the growth of any nation.
47
REFERENCES
McKinnon, R.I., (1973) Money and Capital Market in Economic Development,
Washington, DC; The Brookings Institution
Shaw, E., (1973), Financial Deepening in Economic Development, New York;
Oxford University Press
48
APPENDIX 1 SPSS MODEL RESULT FOR HYPOTHESIS ONE
Descriptive Statistics
122157.7 234961.30770 39
7.5295 4.80530 39
ASAVINGS
INT
Mean Std. Deviation N
Correlations
1.000 -.344
-.344 1.000
. .016
.016 .
39 39
39 39
ASAVINGS
INT
ASAVINGS
INT
ASAVINGS
INT
Pearson Correlation
Sig. (1-tailed)
N
ASAVINGS INT
Variables Entered/Removed b
INTa . Enter
Model1
Variables
Entered
Variables
Removed Method
All requested variables entered.a.
Dependent Variable: ASAVINGSb.
Model Summary(b)
Model R R Square
Adjusted R
Square
Std. Error of the
Estimate
Change Statistics
Durbin-
Watson
R Square
Change F Change df1 df2 Sig. F Change
1 .344(a) .119 .095 223560.81863 .119 4.974 1 37 .032 .117
a Predictors: (Constant), INT
b Dependent Variable: ASAVINGS
49
ANOVAb
2.5E+011 1 2.486E+011 4.974 .032a
1.8E+012 37 4.998E+010
2.1E+012 38
Regression
Residual
Total
Model
1
Sum of
Squares df Mean Square F Sig.
Predictors: (Constant), INTa.
Dependent Variable: ASAVINGSb.
Coefficients(a)
Unstandardized Coefficients
Standardized
Coefficients 95% Confidence Interval for B
Model B Std. Error Beta T Sig. Zero-order VIF
1(Constant)
248899.8 67162.08 3.706 .001 112816.564 384983.203
INT -16832.7 7547.16 -.344 -2.230 .032 -32124.773 -1540.775 -.344
a Dependent Variable: ASAVINGS
Coefficient Correlations(a)
Model INT
1 Correlations INT 1.000
Covariances INT 56959625.922
a Dependent Variable: ASAVINGS
Collinearity Diagnosticsa
1.846 1.000 .08 .08
.154 3.464 .92 .92
Dimension
1
2
Model
1
Eigenvalue
Condition
Index (Constant) INT
Variance Proportions
Dependent Variable: ASAVINGSa.
50
Residuals Statisticsa
-67556.3 198401.6 122157.7 80886.49392 39
-198272 897618.8 .00000 220599.61744 39
-2.345 .943 .000 1.000 39
-.887 4.015 .000 .987 39
Predicted Value
Residual
Std. Predicted Value
Std. Residual
Minimum Maximum Mean Std. Deviation N
Dependent Variable: ASAVINGSa.
51
APPENDIX 2 SPSS MODEL RESULT FOR HYPOTHESIS TWO
Descriptive Statistics
2058197 5205515.956 39
7.5295 4.80530 39
AINVEST
INT
Mean Std. Deviation N
Correlations
1.000 -.324
-.324 1.000
. .022
.022 .
39 39
39 39
AINVEST
INT
AINVEST
INT
AINVEST
INT
Pearson Correlation
Sig. (1-tailed)
N
AINVEST INT
Variables Entered/Removedb
INTa . Enter
Model
1
Variables
Entered
Variables
Removed Method
All requested variables entered.a.
Dependent Variable: AINVESTb.
Model Summary(b)
Model R R Square
Adjusted R
Square
Std. Error of the
Estimate
Change Statistics
Durbin-
Watson
Sig. F
Change F Change df1 df2
Sig. F
Change
1 .324(a) .105 .081 4990915.97767 .105 4.338 1 37 .044 .216
a Predictors: (Constant), INT
b Dependent Variable: AINVEST
52
ANOVAb
1.1E+014 1 1.081E+014 4.338 .044a
9.2E+014 37 2.491E+013
1.0E+015 38
Regression
Residual
Total
Model
1
Sum of
Squares df Mean Square F Sig.
Predictors: (Constant), INTa.
Dependent Variable: AINVESTb.
Coefficients(a)
Model Unstandardized Coefficients Standardized Coefficients
B Std. Error Beta T Sig.
1(Constant) 4700507.554 1499369.824 3.135 .003
INT -350928.419 168487.673 -.324 -2.083 .044
a Dependent Variable: AINVEST
Coefficient Correlationsa
1.000
3E+010
INT
INT
Correlations
Covariances
Model
1
INT
Dependent Variable: AINVESTa.
Collinearity Diagnosticsa
1.846 1.000 .08 .08
.154 3.464 .92 .92
Dimension
1
2
Model
1
Eigenvalue
Condition
Index (Constant) INT
Variance Proportions
Dependent Variable: AINVESTa.
53
Residuals Statisticsa
-1896947 3647722 2058197 1686315.643 39
-3647371 2E+007 .00000 4924808.211 39
-2.345 .943 .000 1.000 39
-.731 4.727 .000 .987 39
Predicted Value
Residual
Std. Predicted Value
Std. Residual
Minimum Maximum Mean Std. Deviation N
Dependent Variable: AINVESTa.
54
APPENDIX 3 SPSS MODEL RESULT FOR HYPOTHESIS THREE
Descriptive Statistics
2058197 5205515.956 39
122157.7 234961.30770 39
AINVEST
ASAVINGS
Mean Std. Deviation N
Correlations
1.000 .978
.978 1.000
. .000
.000 .
39 39
39 39
AINVEST
ASAVINGS
AINVEST
ASAVINGS
AINVEST
ASAVINGS
Pearson Correlation
Sig. (1-tailed)
N
AINVEST ASAVINGS
Variables Entered/Removedb
ASAVINGSa . Enter
Model
1
Variables
Entered
Variables
Removed Method
All requested variables entered.a.
Dependent Variable: AINVESTb.
Model Summary
Model Change Statistics
R R Square
Adjusted R
Square
Std. Error of the
Estimate
R Square
Change F Change df1 df2
Durbin
Watson
1 .978(a) .956 .955 1103414.49190 .956 808.734 1 37 .714
a Predictors: (Constant), ASAVINGS
55
ANOVAb
9.8E+014 1 9.847E+014 808.734 .000a
4.5E+013 37 1.218E+012
1.0E+015 38
Regression
Residual
Total
Model
1
Sum of
Squares df Mean Square F Sig.
Predictors: (Constant), ASAVINGSa.
Dependent Variable: AINVESTb.
Coefficients(a)
Unstandardized Coefficients
Standardized
Coefficients Collinearity Statistics
Model B Std. Error Beta t Sig. B Std. Error
1(Constant)
ASAVINGS
-588318.381 199697.403 -2.946 .006
21.665 .762 .978 28.438 .000 1.000 1.000
a Dependent Variable: AINVEST
Coefficient Correlationsa
1.000
.580
ASAVINGS
ASAVINGS
Correlations
Covariances
Model
1
ASAVINGS
Dependent Variable: AINVESTa.
Collinearity Diagnosticsa
1.466 1.000 .27 .27
.534 1.657 .73 .73
Dimension
1
2
Model
1
Eigenvalue
Condition
Index (Constant) ASAVINGS
Variance Proportions
Dependent Variable: AINVESTa.
56
Residuals Statisticsa
-585508 2E+007 2058197 5090374.536 39
-2705784 4088432 .00000 1088799.085 39
-.519 4.127 .000 1.000 39
-2.452 3.705 .000 .987 39
Predicted Value
Residual
Std. Predicted Value
Std. Residual
Minimum Maximum Mean Std. Deviation N
Dependent Variable: AINVESTa.
57
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