The Impact Of Interest Rate Deregulation On Commercial Banks’ Lending Operations In Nigeria

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The Impact Of Interest Rate Deregulation On Commercial Banks’ Lending Operations In Nigeria


Interest rate was before 1st August, 1987, statutorily regulated by the Central Bank of Nigeria. But this out of the tune with the liberalization policy of the structural adjustment programmes of the Federal government. This research is an attempt at performance appraisal of the leading operations of commercial banks in the face of the deregulation of interest rate which is in consonance with the Federal Government stand on the use of market forces of demand and supply in resources allocation and determination of price. The major sources of data for this research are primary and secondary data. This research has five chapters, Tables and Graph. I will use research methodology. This is how my research work will look like.chapter one is introduction, background of the study, statement of the problem, objectives, scope, significance and limitation of the study, Hypothesis etc.

  1. Chapter two, Review of related literature, financial repression hypothesis, financial repression in Nigeria, interest rate manipulation before deregulation etc.
  2. Chapter three, will be research design and methodology, population of commercial banks, Determination sample size, bank customers size etc.
  3. Chapter four is presentation and analysis of data, rate of return of questionnaires etc.
  4. Chapter five will be conclusion

Chapter One


1.1 Background of the Study

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

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

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

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

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

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

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

1.2 Statement of the Problems

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

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

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

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

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

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

  1. Did commercial bank’s loans and advances deteriorate during the deregulation of interest rate?
  2. Did depositors react favourably by increasing the volume of their deposit after the deregulation?
  3. How have commercial banks been surviving the directives of deregulating the interest rate in this sector of the economy?

1.3 Objectives of the Study

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

  1. Whether the interest rate deregulation has affected the volume of commercial bank’s lending over the years.
  2. Are the effect statically different according to the size of the banks?
  3. The study will also find whether the interest rate paid to deposits mobilized by the commercial banks.
  4. The study will also find whether there were more loan losses (bad and doubtful debt) during the era of interest rate moderation than this period of deregulation .
  5. The research is also aimed at finding whether commercial banks made more profit before or during the deregulation.
  6. What else do commercial banks to attract more deposits to enhance commercial banks’ lending operation.

1.4 Significance of the Study

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

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

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

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

1.5 Scope of the Study

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

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

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

1.7 Hypotheses

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

Hypothesis I
  • Ho: These is one significant difference between the volume of leading (loans and advances) by commercial banks in interest rate regulated economy and one of interest rate deregulation.
  • HA: There is a significant difference between the volume of lending (loans and advances) by commercial banks in interest rate deregulation.
Hypothesis II
  • Ho: Commercial banks recorded more loan losses (bad and doubtful debt) in interest rate deregulated period than one of interest rate regulation
  • HA: Commercial banks did not record more loan losses (bad and doubtful debt) in interest rate deregulated period than one of interest rate regulation.
Hypothesis III
  • Ho: These is no significant difference between the volume of commercial banks’ total deposit liabilities in interest rate regulated period and one of interest rate deregulation.
  • HA: There is a significant difference between the volume of commercial banks’ total deposit liabilities in interest rate regulated period and one of interest rate deregulation.

1.8 Research Question

In order to find out the impact of interest rate deregulation on commercial banks’ lending operations in Nigeria ,the following research questions should be considered.

  • What impact does the interest rate deregulation crear in commercial banks’ lending operation?
  • What problems does it create in commercial banks’ lending operation?
  • How can these problems be solved to enhances the performance of the commercial banks’ lending operations?

1.9 Definition of Terms

The definition of term used will be made only on the conceptual frame work for general comprehension of each term rather than on the theoretically analysis.

Interest Rate:

Is used broadly to express the relationship in percentage between the interest for a given period of time and the principal. Whereas interest when used in absolute term means a payment for the use of a borrowed fund for a period of time.


Disentangling of official or administrative control and allowing for the interplay of at market forces of demand and supply to determine the rate of exchange of values. Deregulation of interest rate in Nigeria called for the setting of a floor rate below which it is no longer economically viable for any bank to lend, hence the minimum Rediscount Rate of the central Bank of Nigeria.


This is letting of sum of money usually by a Bank or other financial institution to a borrower to be repaid with or without interest


An account of funds consisting of cash and or cheques, drafts coupons and other cash items that may be converted into cash upon collection. The deposit is given to the commercial banks for the purpose of establishing credit balance.


The amount of existing income that is not spent on consumption. Savings as used in the research context is that part of income that is not consumed but are left in the commercial banks for some future use.

Bad Debt:

An amount due on an open account that has been proved to be uncollectible. Any uncollectible receivable is formed bad debts

Chapter Five

5.0 Summary of Findings, Conclusions and Recommendations

In summarizing the findings of this research, it is necessary to have in mind, the objectives of the study which are:-

  1. To find out whether the high interest rates now payable on depositors balances have improved the volume of deposit liabilities of the commercial banks.
  2. To find out whether the interest rate deregulation has affected the volume of commercial banks lending over the year.
  3. To find out whether commercial banks made more profits during the period of deregulations.
  4. To find out what else the commercial banks do to attract more deposits to themselves.
  5. Make recommendations to enhance commercial banks lending operation.

5.1 The Findings are as Follows:

A. Commercial Bank Lending

In matching our first objectives with our findings, we were able to analyze the volume of commercial bank lending between the two period 1994 – 1995 on one and 1996 – 1997. In 1994 for instance, total loans and advances by the union bank of Nigeria Plc stood at N7,795,1659 and N9,337,464 in 1995 thus yielding a growth or increase of 19.77%. In 1996, the percentage increase in loans and advances was slashed to 13.33% by the devastating effect of the deregulation. A total of N10,580,647 was disbursed by union bank of Nigeria Plc. The situation improved slightly in 1997 when it increased to N12,277,189 and increase of 15.46%.

B. Total Deposit Liabilities

The ability of any commercial bank to do business is related to its level of liquidity and legal constraints. On the impact of interest rate deregulation on the volume of deposits mobilized by the banks during the period under review, there was a positive response to the effect that deregulation has increased the volume of their total deposit by a large proportion. This they attributed to the high interest rate payable on customers deposit balances.

C. Hypothesis

The first hypothesis tested the significant differences among commercial banks in interest rate deregulation in lending and found that there was no significant differences between the volume of lending among the union bank of Nigeria Plc over the two periods. This confirms the ceiling on credit be removed to enable them increase their lending portfolios . As far as the ceiling persists, the effect of the deregulation on lending with be difficult to gauge.

The second hypothesis tested for the deference between the volume of deposit liabilities before and in the face of the deregulation that large banks will price small banks out of business was a beautiful theoretical frame work which easily collapsed like a pack of card when subjected to today’s economic realities. From our survey the smaller banks and indeed the new generation banks pay higher rates to customer’s deposit balances.

5.2 Conclusion

In conclusion, it would be said that the commercial banks in the country (as represented by the volume of their lending significantly during the deregulation.

Although there was a substantial increase in their total deposit liabilities which should, perfectly positive correlation with the loans and advances, the inability of customers to pay in the new rate increased the provision for bad and doubtful debt astronomically.

Finally a case is made here for central bank to consider the removal of credit ceiling and prescribed sectoral allocation of credit since the two seemed to have lost their place in an interest rate deregulation environment.

5.3 Recommendation

The recommendations we shall make here will be for:-

  1. The central bank of Nigeria
  2. The commercial banks and their
  3. Customers
1. The central Bank of Nigeria
  • The central Bank should consider a gradual phase out of unnecessary control on banks with regard to sectoral distribution of their loans and advances.
  • The central Bank should also remove credit ceiling for all banks. This is to prevent smaller banks who are exempted from ceiling on the ground that they have not attained a total deposit of N50m from engaging in cut throat competitions which does not make for4 sanity in the financial market.
  • Loan officers should be held responsible for any available bad and doubtful debt which the bank incures as a result of irresponsibility and unbridled negligence on the part of the officers concerned.
2. Commercial Banks
  • Many commercial Banks were hard hit by the deregulation and those that were poorly managed especially those in which state government have substantial shares would have been seat packing out of the banking system but for interim arrangement of their owners. To avoid another era of “banking boom and crashes”, the commercial banks should consider the following.
  • Commercial banks should reorientate their investment offices to be more critical and stringent in their project appraisal, this they should do by ensuring that for a manufacturing firm, such firm can source its raw material locally and show evidence of procuring the foreign raw material content if any is effective. It should drastically reduce its overhead cost by employing computer and highly qualified staff.
  • Commercial banks should consider two tier interest rate repayment of loan. The first tier should be for these who obtained their loan before the deregulation so that they will be able to amortizes their loans at the schedule time. This is based on the fact that the rate of return upon which their project appraised cannot be said to have significantly grown to take care of the new rate. On the other hand, all those who borrow after the deregulation could be asked to pay in which ever rate the bank arroes of.
  • Commercial banks should assist their customers more in form of advisory services since the present system demand for efficient and effective lending, without advice from informed bankers, the customers will be projects that will be adjoined commercially and economically liable.
3. Customers

Commercial banks’ customers should realize that the banking system is dynamic and that the deregulation will eliminate all ineffective and inefficient lending. To attract loans for themselves, first they should bear in mind that they are making use of other people’s money and not a share of their own national cake. On a serious note, they should realize that loanable fund is a repayable fund. This will make them think twice before demanding for loan.

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