The Efficacy Of Interest Rate Deregulation On Savings Mobilization In The Nigerian Economy

Project and Seminar Material for Economics

Project and Seminar Material for Economics


The objective of this study was to examine the impact of interest rate deregulation on savings mobilization in the Nigerian Economy, using a time series annual data of \980-2008. The central focus of this work is to investigate whether deregulated interest rate mobilizes savings as against the Pre-SAP era which was a fixed rate policy. The study made use of secondary data derived from Central Bank of Nigeria, using time series annual data for a period of 28 years. We employ both descriptive and econometric techniques to analyze our model which comprises of six variables based on the theoretical underpinning. at the of the study, it was revealed that deregulated interest rate policy in Nigeria since 1987 had positive impact on the level of savings mobilized as against the PRE-SAP era which shows an insignificant or stagnant effect on savings mobilized in the economy.

Base on this result, the question is how is the savings mobilized does not have effect on the real sector of the economy or was it that, the fund was not channeled into the productive sectors or no macroeconomic environment to enhance the funds for economic growth and development? Finally, the study recommended to the policy makers that the problem of economic recession is not deregulated interest rate policy but rather on the part of the government in providing the macroeconomic environment such constant Power Supply, Good network, political stability, security and others, arc determinants of investment, economic growth and development .and not only deregulated interest rate policy.

Chapter One


1.1 Background Of The Study

Interest rate is a vital tool of macroeconomic management for the government of any country in the world. The level of interest rate in any economy especially the Nigerian economy is crucial in view of its role in controlling inflation, inducing savings which can be channeled to investment and thereby increasing employment output, and efficient financial resource utilization. The 1960s to mid-1980s witnessed the administration of low interest rates which was intended to encourage investment ( Ajakaiyc Olu and Ayodele, 1994).

The advent of the structural adjustment programme in the third quarter of 1986 ushered in an era of dynamic interest rate regime where interest rates were more influenced by market forces. This shift de-emphasized direct investment stimulation through low interest rates and encouraged savings mobilization by decontrolling interest rates (Essien and Oniwioduokit, 1997). Such liberalization represents a policy response, encompassing a package of measures to remove all undesirable state imposed constraints on the free working of the financial markets. The measures include the removal of interest rate ceiling, and the loosening of deposit and credit controls (Uremadu,S.O.:2006 ).The mobilized fund was intended for investment,

Undoubtedly, government’s past efforts to promote economic development by controlling interest rates and securing “inexpensive” funding for their own activities have undermined development. More importantly, financial repression has retarded the development process as envisaged by Shaw (1973).

Interest rate can be defined as the return or yield on equity, or opportunity cost of deferring current consumption into the future. Nominal and real interest rates are considered in the general concept of interest rates. Nominal rate is the observed and recorded rate in the economy which incorporates monetary effects. While real interest rate is the rate that brings equilibrium in the primary market for new asset and the secondary market where old assets are traded. The concept of real’ interest Tate was developed by Irving Fisher when he tried to establish the trade-offs between consumption today and that in the future.

In the Nigerian context, the liberalization of interest rates is at the core, of the adjustment programme introduced in 1986 by the Nigeria government. Prior to that period, the Nigerianeconomy particularly the financial sector, was highly regulated, and this ultimately led to a high level of financial repression. From 1986 by through the third quarter of 1987, witnessed the administration of low interest rates. (Olu Ajakaye, Ayodele F. Odusola 1994).

In practice, Savings and time deposit grew over the years in response to the interest rate incentives. The deregulation of interest rate in 1987 must have encouraged financial savings as reflected by the sharp rise in financial ratio from 17.H percent in 1986 to 26.85 percent in1987 (Uchendu 1993).

However, there are several obstacles to the mobilization of financial savings in developing countries that interest rate needs to tackle in order to be effective in savings mobilization and also ‘in mobilization domestic recourses. First, formal institutions in rural areas, such as unit area banks and commercial bank branches, have no strong incentives for savings mobilization. Secondly, the real rate of interest on deposit has been relatively low and sometimes negative as a result of financial depression.

Thirdly, there were inadequate facilitates in rural areas for effective saving mobilization (Adedoyin Soyinbo and Kolawole Olayiwola, 2000).

The foregoing points to a basic, fact that interest rate is expected to play central role in savings mobilization. It is in this context that the impact of interest rate deregulation policy on savings mobilization is a key policy target in the practice of financial reforms around the world (Meshach Aziakpono, 1997).

1.2 Statement Of The Problem

The issue of the persistent low level of economic development in Nigeria has been a matter of concern to many analysts. It has been argued that this is the outcome of capital shortage (Molho, L.E 1986). It has also been contended that the fragmented state of domestic savings and interest rate regulation are key bottlenecks to self-sustainable development in Nigeria (Ahmed, M.K 1993).

This study will examine the impact of ‘interest rate deregulation on savings mobilization with a view to assessing whether it actually led to growth in the Nigerian economy. Developed countries like the G7 economics, the Asian tigers had exhibited the effectiveness of savings mobilizations towards the growth and development of their economics, through this they have investment in facilities that yield future returns and also lead to increase in their reserves and through these countries, i.e developed counties, can finance capital project which thus lead to increase in the social and economic welfare of the entire citizenry.

Therefore the impact of interest rate deregulation on savings mobilization in the Nigerian economy is questionable and sustainable, inspire of different interest rate reforms; Nigerian economy had not really benefited the gains of these policy.

Based on the recent bank expansion, the recapitalization process and other CBN regulatory measures, a number of policy issues and questions readily come to mind. Although a vast empirical literature has shed light on various aspects of saving behaviour, several crucial questions remain unanswered with regards to the relevance of policies in raising the saving rate vis-a-vis the non-policy determinants of saving from the perspective of policies, there is need to know the following salient questions:

  1. What is the magnitude and direction of these macroeconomic variables on saving?
  2. How effective is the macroeconomic stability and higher income growth in raising the saving rate?
  3. What is the effectiveness of financial development in raising private saving?
  4. Is there a role for fiscal policy in increasing national saving?
  5. What is the impact of interest rate on total savings?

1.3 Objectives Of The Study

The main objective of this research work will be to examine the efficacy of interest rate deregulation on savings mobilization in the Nigerian economy. In line with the above objective, the specific objectives include:

  1. To evaluate the correlation which exists between savings, investment and growth as established in the previous literature.
  2. To carry out an analysis of the sources and trend of savings in Nigeria.
  3. To compare the differences between interest rate regulated and deregulated system vis-a-vis their impact on savings mobilization in Nigeria.
  4. To evaluate the role of life-cycle hypotheses as a study of savings behaviour in a peculiar economies like Nigeria, where all other determinants of savings arc existing or not.

1.4 Research Hypothesis

In the course of assessing the impact of interest rate deregulation on savings mobilization in Nigeria, the statement of hypothesis follows:­

  • Ho: Interest rate deregulation does not have any impact on savings mobilization in Nigeria.
  • H1: Interest rate deregulation has a significant impact on savings mobilization in Nigeria.

1.5 Research Methodology

The research work made use of both descriptive and econometric analyses. The descriptive approach of trend analysis was used to determine the relationship between interest rates and saving mobilization behaviour in Nigeria. Following the framework analysis of life cycle hypothesis Model and McKinnon Shaw hypothesis (1973). The specification of the relationship between interest rates and saving; mobilization is modified and expanded to include the ratio of broad money Supply to GDP (which captures the effect of financial deepening), Domestic savings GDP ratio and shift in financial policy from regulation to deregulation of Interest.

The model for this study is specified as:

  • PSRt = α0 + α1 INTt + α2 FBt + α3 DFD + α4 DSG + α5 FSP + U


  • al >0,a2>0, α3>0,α4>0,a5>0
  • PRS = private saving rate
  • INT = deposit interest rate
  • FB = Fiscal balance
  • DFD= degree of financial deepening
  • DSG = Ratio of gross national saving to GDP, and
  • FPS = dummy variable to capture the shift in financial policy fromregulation to deregulation of interest rate
  • U = Stochastic variable

The saving equation was estimated using annual data for the period 1980-2003.

The estimate period was determined largely by the availability ofadequate data of all variable.

1.6 Significance Of The Study

The justification of this study addresses the fact that the low level of savings in the Nigerian economy limits the investment rate on which economic growth depends on.Thus a holistic approach to mobilizing savings within interest rate is a major policy strategy that makes study relevant.

This study also provides policy implications as it relates to the link between interest rate deregulation and savings mobilization in the Nigeria economy from literature and the development experiences of the Asian tiger domestic savings is an important and major source of finance for investment. There is therefore the need to examine the importance of deregulation policy on savings in order to proffer solution to the low level of savings in the Nigeria economy.

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