Interest rate and commercial banks’ lending operations in Nigeria: A structural break analysis using chow test

Abstract

This study used the classical least squares method to empirically examine interest rate deregulation effect on the lending operations of Nigerian commercial banks for  the period 1970 to 2013. The period was divided into two policy regime periods; the regulated interest rate era spanning 1970-1986 and the deregulated period  1987-2013. The Chow test was applied to examine if there was any significant difference in the relationship between interest rate and commercial banks’ lending for the two periods. The empirical result obtained for the interest rate regulation era showed that interest rate spread and statutory liquidity ratio had negative and  significant effect on the volume of commercial banks’ loans, while fixed exchange  rate had negative and  insignificant impact on banks’ loans and advances. It was found that Monetary Policy Rate (MPR) and inflation rate exert a positive and  significant impact on banks’ loans for the period. For the deregulation era, the result showed that MPR and the exchange rate had significant impact on banks’ loans and advances. While the former exerted a negative impact, the later had a positive  influence on loans and advances. Interest rate spread, statutory liquidity ratio and inflation rate were found not to have significantly impacted on commercial banks’  loans and advances for the period. The chow test result confirms the impact of  deregulation on volume of commercial banks loans and advances due to the  deregulation of interest rate. The study submits that, there exist a relatively  inelastic relationship between interest rate spread and banks’ loans at the   deregulated interest rate era. This was largely attributed to imperfections as well as the under-developed nature of the financial market. The study suggests that the monetary authority should evolve a guided interest rate deregulation regime with MPR increasingly used to regulate the activities of commercial banks in the area of loans and advances. In order to deepen the financial sector, there is the need to improve financial infrastructure which will enhance commercial bank operations resulting in a more competitive financial market and an improved investment climate in the country.

Keywords: Interest rate, bank lending, Deregulation, chow test