University of Nigeria               Research Publications 

OBINEME, Benjamin Chukwueloka

Aut

hor

PG/MBA/92/11467

Title

Fluctuations in Interest Rates and the Effect on the Manufacturing Sector of the Nigerian

Economy 1981-1990

Facu

lty

Banking and Finance

Dep

artm

ent

Business Administration

Dat

e

June, 1994

Sign

atur

e

FLUCTUATIONS IN INTEREST RATES 5

.THE EFFECT ON THE MANUF'ACTURING I I

SECTOR OF !ISWE NIGERIM ECONOMY

OBIMEHE BENJAMIN CHUKWUELOKA t

REG;. NO. PG/MBA/92/11467

BEING A THESIS PRESENTED TO !CHE 1 \

DEPARTMENT OF BA~I~ING AND FINANCE i I

FACULTY OF BUSINESS IUIHINISTRATION I

UNIVERSITY OF NIGERIA j Y' p *!

EmGU CAHPUS I i '

. I I

IN PARTIAL FULFILLMENT OF THE , / $1 t

FtEQUIRE3B3NTS FOR THE AWARD OF I + A HASTER OF BUSINESS ADMINISTRATION (MBA) i

!

. I

DEGREE IN BANKING AND FINANCE 8 . ~ \

JUNE 1994.

iii

CERTIFICATION

OBINEME BENJAMIN CHUKWUELOKA, a post graduate student in the

department of Banking and Finance with Reg. No. PG/MBA/92/11467,

has satisfactorily completed the requirements for the course and . research work for the degree of Master of Business Administration

', in Banking and Finance. .

The work embodied in this project is original

and has not been submitted in part or full for any other Diploma or

degree of this or any other University.

Dr. M - M : 0 * 1Qr\-(&f% HEAD OF DEPARTMENT

Dr. B.E. Chikeleze

SUPERVISOR

DEDICATION

This project is dedicated to the A l m i g h t y God for ,

continuous guidance and protect ion.

The successful completion of this work would not have been possible

without the valuable contributions of some individuals who gave

either financial or moral support, useful suggestions or advice

during the course of the work. I remain profoundly grateful to all

of them.

i In particular, I express my reserved and sincere appreciation to

Dr. B.E. Chikeleze, my project supervisor, for his unfailing

strength and ever willing spirit to assist whenever I call on him.

M y sincere gratitude also goes to other Lecturers, Dr. E. C,

Okorji, Dr. U.J.F. Ewurum, Chief P.c. Unamka, and Mr. Ben Orji who

encouraged me substantially. Their Fatherly advice and resource

assistance are too numerous to recount.

I also wish to express my gratitude to all members of my Family.

c . First in this list is my Late Father, Late Mr. L.O. Obineme, for a

good up-bringing and unallayed commitment to my education, late-

Mrs. B. U. Obineme, my mother for her financial and moral support

before her sudden death recently.

I am very g r a t e f u l t o m y twin brother b a r r i s t e r John Obineme

f o r h i s advice and o ther a ss i s t ance . I am a l s o very gra t e fu l

t o my brother Mr. Chukwuka Obineme f o r h i s f i n a n c i a l support,

Others' are m y two sisters M r s . Ijeoma Okorji (nee Obineme)

and Oluchi, f o r t h e i r encouragement, f i nanc i a l support and

o ther a ss i s t ance , my other brothers Chinedu, Nonso and

Ikechukwu. I am very gra t e fu l f o r t h e i r continuous prayer

e spec ia l ly during hard t i m e s .

I a l s o express m y g ra t i tude t o a l l members of s t a f f of Central

Bank of Nigeria Research Unit , Zonal 0ffi .ce Enugu, e spec i a l l y

the head of research u n i t f o r h i s cooperation. I apprec ia te

t h e useful cont r ibut ions of my colleagues, e spec i a l l y M r . I k .

Maduagvm .

Above a l l , I am very g r a t e fu l t o the Almighty God f o r h i s

eve r l a s t i ng mercy, i n sp i r a t i on and h i s guidance throughout

t h i s study.

OBINEME , B.C.

vii

ABSTRACT

The purpose of this study was to find out the effect of

fluctuations in interest rate on the manufacturing sector of the

Nigerian economy from 1981 - 1990.

Prior to and after 1970, the Central Bank of Nigeria (CBN) set

interest rates at low levels with sectorial targets to encourage

investment and economic development. With the introduction of the

1986 economic reform, interest rates were deregulated, allowing the

market a greater role in rationing Financial resources.

Fluctuations in interest rate witnessed since deregulation in

August 1987 may be partly due to the combined effscts of the

deregulatory policies introduced in different sectors of the

economy, especially the manufacturing sector, on the money and

capital market, together with the restrictive monetary policy

measures during the period.

viii

From the data collected and the analysis done, it is observed that

the fluctuations in interest rate have a high significant effect on

the manufacturing sector of the economy. The focus was on the

effects on gross investment, output, total credit demanded and

level of employment.

Based on the findings, some recommendations were made among which

are firstly, that interest rates especially the lending rates,

should be regulated through pegging, to encourage investment. It is

widely believed, that if interest rates are allowed to be

determined entirely by the market forces, the manufacturers will be

scared. Secondly, there is need to evolve a money market

arrangement that will be efficient in the use and allocation of

resources as each bank in the system operates efficiently as

measured by its cost of funds. These are aimed at sustaining a

viable investment situation in the Nigerian economy.

ix

LIST OF TABLES AND CHARTS

1. Commercial Bank lending rates (Table 1) . . . 83

2. Gross investment (percent) (Table 2 ) . . . 84

L 3. GNP, and Gross investment/GNP ( % ) (Table 3). . . 85

4. Lending Rates and Gross investment (Figure I ) . . 86

5. Respondents opinion (Table 4) . . . . . . . . . . . . 90

6. Respondent:: opinion (Table 5) . . . . . . . . . . . . 93

7. Respondents opinion (Table 6 ) . . . . . . . . . . . . 96

TABLE OF CONTENT

. . . Title Page . . . . . . . . . . . . i

Certification . , . . . . . . . . . . . . . iii L

Dedication . . . . . . . . . . . . . . . iv Acknowledgement . . . . . . . . . . . . v

b Abstract . . . . . . . . . . . . . . . . . . vii

List of Tables and Charts . . . . . . ix

Table of Content . . . . . . . . . . . . x

CHAPTER ONE: INTRODUCTION

Background of Study . . . Statement of problem

Objective of Study . . . Statement of Hypothesis

Scope of Study . . . . . . Significance of Study

Limitations of Study

CHAPTER TWO :REVIEW OF LITERATURE

2.1 Concept and determinants of

interest rate . . . . . . . . . . . . . . . 25

2.2 Origin and Structure of interest

rate in Nigeria . . . . . . . . . . . . 31

2.3 The concept. of fluctuation in

interest rate . . . . . . . . . . . . . . . 35

2.4 The basic functions of interest

rate in an economy . . . . . . . . . . . . 40

2.5 Interest ra.te and the manufacturing

. . . . . . . . . sector . . . . . . . . . 41

2.6 Interest rate up&r deregulated

, 2.7 Interest rate Policy, Savings and

. . . Investment . . . . . . . . . . . 59

2.8 Interest rates behaviour under

3 a programme of financial reform.

xii

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Sources of Data . . . . . . . . . . . . . 77

3.2 Method of investigation . . . . . . . . . . . 78

3.3 Questionnaire design . . . . . . . . , . . . 79

3.4 Method 05 Questionnaire Distribution. . . . 80

CHAPTER FOUR:

Presentation and Analysis . . . . . . . . . . . . 81 P

\ - CHAPTER FIVE: FINDINGS, RECOMMENDATIONS AND CONCLUSION

5.1 Findings . . . , . . . . . . . . . . . . . . . . . . 99

5 . 2 Recommendations . . . . . . . . . . . . . . . 102

I 5.3 Conclusion . . . . . . . . . . . . . . . . . . 104

APPENDIX ... ... ... ... ... ... ... ... 106

BIBLIOGRAPHY. , . . . . . . ... ... ... ... 110

CHAPTER ONE

INTRODUCTION

Interest rate is the cost of credit. It is the price that must be

paid to get people to forgo willingly the advantages of liquidity.

It is also price paid for the right to borrow and use loanable

funds. Interest rates are usually expressed as a percentage per

annum of the amount borrowed or lent.

Interest rate regulation is a major monetary policy instrument for

economic stabilization in nigeria. other monetary policy

instruments include open market operation (OMO), Discount Rate

mechanisms, Reserve Requirement, Moral suasion and Direct control

of Banking system. These monetary policies were designed to

regulate and control the volume and cost of money as well as a

dictate the direction of credit in the Nigerian economy, in order

P to achieve Macro - economic policy objectives.

These includes maintenance of low and stable price level within the

economy and the achievement of a high rate of or full employment.

Others are to achieve a rapid and sustainable economic growth and

development rate, and maintenance of balance of payments

equilibrium. 1

Therefore, the conception underlying a Bank Rate policy is that

high interest rate tends to discourage borrowing while low interest

rates, tends to encourage it. Consequently by raising or lowering

the Bank Rate, the authorities are in a position to cause an

increase or decrease in the quality of money. A higher Bank Rate

tends to induce would-be borrowers to abstain from borrowing and

debtors to repay their outstanding loans.

It also tends to induce lenders to be more cautious in granting

further loans, and even to call in existing loans, because of

possibility of a further rise in interest rates and of commercial

difficulties arising from high interest rates. With the aid of high

interest rates, the authorities can discourage new enterprises,

because high interest rates increase both cost of and risk attached

to business activities. The mere gesture of an increase of the Bank

Rate tends to produce a psychological effect which at times is

quite out of proportion to its actual material effect.

Conversely, a reduction of the Bank Rate, by bringing about all-

round reduction of interest rates, tends to encourzge firms and

individuals to borrow, it tends to stimulate new ventures and the

accumulation of stocks of raw materials or finished products.

Consequently, it tends to increase business activity and to raise

prices. The power of the authorities to bring about an expansion of

business activities through low interest rates are not nearly as

effective as their power to reduce business activity by means of

high interest rates. Even the latter powers cannot be depended upon

absolutely. The bank rates have to be raised to a very high level

before it breaks a boom. Situations apt to arise in which, the bank

rate in order that it should produce the desired effect, has to be

raised to a crisis level with disastrous consequences. 2

Since the inception of the Central Bank of Nigeria (CBN) on 1st

July, 1959, monetary policy has been under the control of the Bank

(CBN). Before 1st August 1987, interest rate was under the

A regulation of the central Bank. This regulation was achieved by fixing the range within both deposits and the lending rates are to

be maintained.

According to the CBN, interest rate

of orderly growth of the financial

regulation is for the promotion

market, to combat inflation and

to lesson the burden of internal debt servicing of the government .'

The monetary policy circular (MPC) No. 21 (amendment of July 31st

1987) addressed to all banks and other financial institutions

states:

In order to further enhance the development of the

financial system and to accelerate the attainment of the

objectives of on-going structural Adjustment Programme

(SAP), some amendment to MPC No 21 issued in January 1987

has become necessary . . . . . . With effect from August 1st 1987 all controls on interest rates are hereby

abolished,

>

Since the deregulation, interest rates have been rising almost

uninterruptedly especially in recent years. From the average of

12.6 percent at the end of July, 1987, which marked the end of' the

era of administrative determination of the rates, lending rates

' moved to 17.6 percent in August 1987 - the immediate month

commencing the period of deregulation of the rates.

Since then lending rates had been increasing. The upsurge in the

Lending-rates also stimulated the cold attitude of banks towards

deposit mobilization. The drive to mobilize deposits was

accompanied by increasea in the saving, and time deposits rates

which moved from the respective averages of 11 and 12.1 percent in

July, 1987, At end - December, the lending rate had moved to 18.5 I

percent while saving and fixed deposit rates rose to 14.0 and 15.10

percent respectively. 4

the year 1988 was a period of monetary ease when interest rates

were expected to fall. In order to ensure the achievement of that

goal during the year, the minimum liquidity ratio was reduced to

27.5 percent while the minimum rediscount rate was lowered from 15

to 12.75 percent. The fiscal operations of the government were also

accomplished by large deficit spending causing substantial increase

in money supply. Throughout the year interest rate levels were

substantially lower that their levels in the comparable period of

1987 - in response to the reflationary policy measures introduced during the year.

Not only were there little variations in the rates, the rates also

fluctuated around levels which were generally lower than in the

comparable period of the preceding year. Lending rates maintained

an average level of 17.4 percent while the corresponding figures

for saving and time deposits were 11.1 and 13.9 percent.

However, the relative stability in the level of interest rates was

achieved as a result of bulging liquidity overhang pumped into the

I economy in 1988. The impact of the excessive liquidity on aggregate

demand become translated into escalating general level of prices.

The resulting inflationary pressures brought about a resurgence- of

interest rates towards the end of 1988. The need to curb the

inflationary pressures caused the monetary authorities to introduce

measures that could reduce the excess liquidity and restore

normally into the system. Apart from the credit squeeze of that

year, the authorities raised minimum rediscount rate (MRR) by 0.5

percentage points to 13.25 percent; the cash reserve ratios of the

commercial and merchant banks were raised by one percentage point

across the board. 1

The statutory minimum liquidity ratio was also raised from 27.5 to

30.0 percent for commercial banks and 20.0 to 22.5 percent for

merchant banks. Foreign guarantee/Currency deposits as collateral

for naira loans were abolished in all financial institutions

including banks.

The most effective attack on liquidity in 1989 was the transfer of

all the bank deposits of the Federal and State Government

Ministries/Departments and parastatals (including Insurance and

Reinsurance companies, the Nigerian National Petroleum Corporation

(NNPC) and wholly owned subsidiaries to the central Bank of

Nigeria. The impact of these policy measures on interest rate

levels was easily discernible. The lending rate which had risen to

an average of 17.7 percent in January, 1989, rose further to an

average of 21.2 percent in August, 1989. Fixed deposits rates rose

to 17.25 percent. But the rate on saving deposit remained sticky,

or even declined slightly to 12 percent. The development in the

structure of the deposit rates appeared to suggest that, while the

banks seemed satisfied with the level of savings their desire to

retain savings at that level caused them to offer high fixed

deposit rates. .I

However, l e n d i n g r a t e s c o n t i n u e d t o r i s e p u l l i n g a l o n g w i t h i t

f i x e d d e p o s i t r a t e s and l e a v i n g s a v i n g s d e p o s i t r a t e s b e h i n d , a

s i t u a t i o n which i f l e f t t o p e r s i s t cou ld d i s c o u r a g e s a v i n g s

e s p e c i a l l y a s t h e r e a l s a v i n g i n t e r e s t r a t e was a l r e a d y n e g a t i v e

due t o t h e h i g h i n f l a t i o n r a t e .

The expanding gap between t h e s a v i n g s d e p o s i t r a t e and t h e l e n d i n g

r a t e become a m a t t e r of concern t o t h e a u t h o r i t i e s t o t h e e x t e n t

t h a t an accord had t o be reached w i t h t h e banks . The accord

s t i p u l a t e d t h a t t h e d i f f e r e n c e between t h e s a v i n g s d e p o s i t r a t e and

t h e prime l e n d i n g r a t e (PLR) of a bank shou ld n o t exceed 7+

p e r c e n t a g e p o i n t s , and t h a t t h e maximum l e n d i n g r a t e s h o u l d n o t

exceed 4 p e r c e n t a g e p o i n t s above t h e P L R . Simu1ta:~eous w i t h t h e

a c c o r d was t h e i n t r o d u c t i o n of an a u c t i o n market where t h e t r e a s u r y

b i l l d i s c o u n t r a t e was t o be de te rmined . The outcome of t h e

t r e a s u r y b i l l r a t e £ram t h e f i x e d 1 2 . 7 5 p e r c e n t t o 1 7 . 5 p e r c e n t .

The implementation of t h e a c c o r d t o g e t h e r w i t h t h e newly

e s t a b l i s h e d r a t e s i n t h e t r e a s u r y b i l l market l e t t o r a p i d upward

movement i n a l l , l e v e l s of i n t e r e s t r a t e s . The MRR was a l s o r e v i s e d

upwards t o b r i n g it i n l i n e w i t h t h e regime of t h e market

de te rmined i n t e r e s t r a t e s .

The rapid upward movement in the interest rates was not favourable

to production, growth and infact the manufacturing sector of the

economy. Although the deposit rate seemed high enough to promote

rising flow of saving, the high lending rate appeared to have

hindered the usage of the resources mobilized. In an attempt to

economize on a resource that was getting increasingly expensive,

many firms especially the manufacturers abstained from borrowing

from banks while the bulk of those who borrowed made losses or profit margins that could not support production initiatives. This

could have resulted in sharp curtailment of output. Long-term

financial requirements for expansion was largely met through the

floatation of new equity and debenture. This was confirmed by the

large boost in the amount of new issue s of stocks and debentures

during the period. While distribution trade and other quick

yielding activities were able to obtain bank financing, investment

in equipment and machinery for prosecuting expanding productive

activities reduced sharply.

- Although the high interest rate encouraged inflow of funds, the

bulk of the inflow went to distributive trade and business I, services.

The initial sudden rise in all interest levels immediately after

deregulation of the rates was not unexpected. What appears to be

unusual is that the presence of factors which are expected to bring

about a fall in the rates did not achieve the expected change, For J.

example, a situation of persistent decline in the inflation rate is

expected to bring about a reversal in the expectation of the

o economic agents involved in the determina.tion of nominal lending

rate; and translate the change in expectation to.tidecline in the - - .I nominal lending rate. The Nigerian situation presents a paradoxical

case in which tho interest rates continue to rise and .then remained

sticky downwards in a situation of uninterrupted decline in

inflation rate that lasted more than one year. Even the presence of

excess liquidity in the banking system during the greater part of

1990 did not succeed at bringing down the rates.

Consequently, during the entire period of 1990, all levels of

interest rates exceeded their 1989 levels substantially. While the

lending rates attained an average of 26.7 percent, saving and fixed

deposit rates reached 18.7 and 21.3 percent respectively, compared

with their corresponding levels of 20.3 percent for the lending

' rates; 12.0 and 17.25 percent for the saving and fixed deposit

rates in 1989. 5 *

The Central Bank of Nigeria (CBN) in its monetary and credit policy

I guidelines for 1991 fiscal year maintained that the economy in the

past year (1990) was excessively liquid, in which case some

measures needed to be adopted to mop-up the excess liquidity in the

current financial year. Thus the government pegged the interest

rate at a maximum of 21 percent, thus individual banks could either

lend at that percentage, or if thought fit, reduce it.

It is crystal clear that since the introduction of the policy on

interest rates deregulation in the banking industry in August,

1987, the levels of the rates have persistently increased. 5L

In particular, the lending rates of commercial and merchant banks .

assumed a sharp upward trend. This dealt a serious devastating blow

to the manufacturing sector and the economy as a whole. The broad

roles of interest rate, which has been highlighted, emphasizes

their significance in the structure of basic prices and indicate

the need for sound policy measures in the attempt to evolve an

* efficient financial market for an economy.

1.2 STATEMENTAP PROBLEM

The fluctuations in interest rate is one of the greatest challenges

to the manufacturing sector and the economy of the nation. This is

a situation whereby the interest rate like other monetary policies

is not pegged but allowed to be determined by the market forces.

The implication is that the percentage at which the interest rate

was fixed may either be unacceptable to the investors(borrowers) or

the banks (lenders) or both.

The removal of the peg on interest rate augurs badly for the

economy, especially the manufacturing sector-, while the

deregulation is a boom to the banks. It brings hard times to the '

manufacturing sector and has infact, created inflationary ripples

that have pervaded the whole economy.

The reduction of the interest rate is likely to encourage long-term

investment for loag term profit whi.ck'. will contribute.; to creation

of jobs and reduction of unemployment. Therefore, the lowering of

the interest rate is better but must b e related to the rate of

inflation because if the interest rate is lower than the rate of

inflation, there will be a negative return on investment.

It is envisaged that there will be a shift in investment form

industry and manufacturing to speculative trading, This trends

surely cannot bring real economic growth as manufacturing and

Agricultural sectors will, as a consequence, lack good competitive

footing. It is generally expected that manufacturers would pass on

increased production cost to the final consumers, whose purchasing

power has dropped due to inflation, and so might not sustain

increase in the prices of consumer goods.

The industrialists might as a way out of this problem, resort to

rationalize production by reducing capacity utilization. This in

turn might erode jobs by leading to retrenchments and unemployment.

the empirical studies on the interest elasticity of demand for

money in Nigeria are severely limited in number and in quality. I r

Nigeria, the shift from one type of near money asset, to another ir

response to variations in interest rates is difficult since thc

interest rates are presented and administered by the monetarl

authorities. They do not seek their levels by the operation oi

market forces.

The interest rat.e problem is further complicated by the fact that

the key development areas - manufacturing , Agriculture, housing etc. Usually involve high risk exposure. And it is common knowledge

that when return on productive activity is low, or declines,

incentives to engage in activities also declines. It does appear

that while the development role of bank must be given adequate

recognition in an economic environment such as ours, a higher

premium should be placed on incentives, inducements and favourable

measure by the government. The erosion of usual sources of hard

core depositions imply that banks are not obliged to rely more on

costly sources of funds to facilitate their lending. Therefore,

unless adequate rewards are available to compensate for the risk of

allocating more resources to such preferred sectors, it is to be

expected that resources might shift to sectors that offer greater

opportunities for their efficient use.

It is then imperative to avert the collapse of the manufacturing

sector. It is in the light of these, therefore, that it becomes

necessary to know the effects of fluctuations in interest rates on

the manufacturing sector of the Nigerian economy from 1981 - 1990.

OBJECTIVES OF STUDY

In Nigeria, interest rate was used as an instrument of control. In

other periods when interest rate was used as an instrument of

monetary policy, this was directed at reducing the cost of

government borrowing or at making credit for the private sector

more costly.

Interest rates were lower and controlled, until August 1, 1987,

when the control was abolished and free market forces determined

the interest rates to be applied n the Nigerian economy. Although,

it has been pegged recently.

Fluctuation in interest rate is likely to result in interest rate

war led by the big banks in an attempt partly to price weaker banks

out of the market. The manufacturing sector will be affected in

many ways:-

Precisely, the study is aimed at accomplishing the primary tasks

that are stated. as follows:-

1. Determining the effect of fluctuation in interest rates on

gross investment.

2. Finding out the effect of fluctuations in lending rates on the

output of the manufacturing sector.

3. Assessing the effect of this fluctuation in lending rates on

the demand for credit by the manufacturing sector.

4. Ascertaining the effect of this fluctuation in interest rate

on the level of employment and finally to;

Make recommendations on the effective ways to check constant

fluctuations in interest rates in t h e country a s a means of

achieving constant and balanced growth in the manufacturing

sector in particular and the economy in general,

1.4 STATEMENT OF HYPOTHESIS

NULL HYPOTHESIS

In line with the above problems identified and the objectives of

t h i s study, t h e following hypothesis are formulated with respect to

the manufacturing sector of the economy.

HYPOTHESIS 1

HO: Fluctuations in interest rates have no significant effect on 4

gross investment.

HYPOTHESIS 2

HO: Fluctuations in lending rate have no significant effect on the

output of the manufacturing sector of Nigerian economy.

HYPOTHESIS 3

HO: Fluctuations in lending r a t e s have no significant effect on

t h e total credit demanded from Banks by the manufacturing 1

sector.

HYPOTHESIS 4

HO: Fluctuations in interest rate have no significant effect on

the level of employment on t h e manufacturing sector of

Nigerian economy.

1.5 SCOPE OF S T m

The study is a critical evaluation of the effects of fluctuations

in interest rates on the manufacturing sector of the Nigerian

economy. .

Though references were made to periods as far back as 1970's and

even beyond, this is aimed at making the study intelligible to the

subject matter and not that the period is within the scope of this

study.

The study covers ten years period from 1981 - 1990. 1.6 SIGNIFICANCE OF STUDY

The research work will be immense significance to the

manufacturers/Investors, Government, Bankers, Students/Academic.

The study will act as a guide to manufacturers in particular and

investors in general in educating them on the dangers inherent in

the fluctuation .in interest rate. The suggestions made therein, P

will no doubt equip them with modern knowledge and strategies to

deal with fluctuati!3$ interest rates in a dynamic environment such

as ours.

The research work will act as a guide to the Government on

directing its monetary policies. In particular, the government will

have a very good insight into the realities of our econmy and will

put them into consideration in formulating future economic and .'

monetary policies for this country.

The research work will help in educating the bankers on the need

for regulating the industry. However, the recommendations which

were mainly aimed at them will surely help them to attain a high

banking practice in Nigeria,

The research will act as a secondary data for successive students

of this country who wish to carry out further research on the

interest rate fluctuations. Indeed the students and the academic

circle in general will definitely benefit a lot from this study,

1.7 LIMITATIONS OF STUDY

This study was seriously constrained by a number of factors,

ranging from money, time and ill equipped libraries.

Limited fund posed some threat to the realization of the

researcher's dream in this work.

Travelling to Lagos to collect data from the Central Bank of

Nigeria (CBN) and meeting well established manufacturers, producing

and distributing questionnaires, typing and binding the findings

into this booklet all demanded a lot in monetary terms. Being an

unemployed post graduate student with lean financial standing and

having other financial commitments to attend to, this much needed

fund was very difficult to generate. Only the tough, they say, gets

going when the going gets tough, In the words of Olu Omoju, "When

a man runs the race of life and gives up because of the wedge of

troubles within and peace without, he is said to have sunk. But if

inspite of all its and odds he can reach his target, he becomes an

enviable survivor. 'I.

Perhaps time was one of the major hinderance to this work. Since

the researcher was combining this research with serious search for

highly competitive jobs in the present Nigerian economy, time was

always unavoidable problem. The assertion that time is money seems

to have this researcher in contemplation.

u

It is most unfortunate that our libraries are ill equipped to

provide only little materials on the subject of fluctuations in

interest rates especially, the effects on the manufacturing sector

of Nigerian economy. All the same, the researcher made maximum use

of the data available for this study. .

NOTES

1. CBN Annual Report and Statement of Accounts. Dec. 31st, 1986.

2. Eizing Paul, A Text Book on Monetary Policy Macmillian, St.

Martins Press, 1972, PP. 286 - 287.

3. Adekanye Femi, The Elements of Banking in Niseria, F & A

Publishers Ltd., Nigeria, 1986, P. 70.

4. CBN, MPC No 21 (Amendment) No. 1, July 31st 1987.

5. Oresotu F.O., Interest Rates Behaviour since Deregulation."

CBN Bullion, January/March 1991, Vol. 15, No. 1 P. 47.

CHAPTER TWO

LITERATURE REVIEW

I n t e r e s t r a t e w i l l r i g h t l y be s e e n a s a p r i c e f o r money. I t i s a

p r i c e p a i d by t h o s e who purchase money and s i n c e t h e c a t e g o r y of

purchasers v a r i e s and the purposes f o r which t h e y borrow v a r y a l s o ,

t h e r e is a lways a t any t i m e a v a r i e t y of i n t e r e s t r a t e s f o r

d i f f e r e n t k i n d s of f u n d s . F l u c t u a t i o n s i n i n t e r e s t r a t e s t h a t

a f f e c t s t h e l e v e l of i n v e s t m e n t s , i n v a r i a b l y a f f e c t s t h e

manufac tu r ing s e c t o r of t h a t economy.

2.1 CONCEPT AND DETERMINANTS OF INTEREST RATE.

Keynes, defined the interest rate as "the premium which people are

paid in order to induce them to part with their liquidity or the

reward for parting with liquidity for a period". Therefore, the

interest rate can. only be determined in the market where the

liquidity preference (ie demand for money), an increase in the

supply of money would lead to disequilibrium between the demand for

and supply of money. Equilibrium can only be attained if the rate

is allowed to fall. Hence, the interest rate as far as Keynes was

concerned is nothing but a monetary phenomenon. What really

determines the interest rate is the demand for money since the

supply is determined by monetary authorities.

Interest rate can also be defined as the return or yield on equity

or opportunity cost of deferring current consumption into the

future. Examples of interest rates are savings rate, discount rate,

lending rate an treasury bill issue rate. The rate of return on

equity is sometimes associated with the interest free banking. 2

The Basic difference between savings rate and rate of return on

h . equity is that the future yield of the first type is known in the

current period while the yield on the later is known in the future

when the investment matures. Real and nominal interest rates are

further distinguished.

The idea of real interest rates was developed by living fisher when

he tried to establish the trade-offs between consumption today and

that in the future. The marginal rate that equilibrate thz economic

agent's time preference (indifference to the consumption of a good

today or tomorrsw), ability to transform current consumption

opportunities into future consumption, and ability to borrow or

lend is called the real interest rate. Additionally, the real rate

equals the rate that brings equilibrium in the primary market (New

lending and borrowing) %-,F new asset and the secondary market where --

old assets are trades.

In practice, the form of interest rate observed and recorded in the

economy is the nominal interest rate, which incorporates monetary

effects. Nominal interest rate is normally equal to or greater than

real interest. The divergence between the two is affected by

inflation, risk, taxes, government and institutional investment

policy, Asset market characteristics and investor preference, and

term structure to maturity. 4

LMFLATION

An increase in the aggregate price level widens the gap between the

nominal and real interest rates, and reduces the real return on

savings and investment. If r and i represent the real and nominal

I interest rates, respectively;

l = r + x + ( r n )

1- wherexis the rate of inflation. Thus, nominal interest rate if is the 'sum of the real interest rate, inflation rate and their

product.

>

RISK

The incidence of default increases the risk premium on the rate of

return on an asset. Because of this, government securities that are

deemed to be risk free, attract no risk premium, while corporate

bonds carry high premium because of the possibility of business

failure. This is one of the reasons why interest rates or yield on

government securities are lower than that of corporate bonds and

stocks. Also, the type of risk (systematic and unsystematic) affect Q

the return on investments. The Capital A s s e t pricing model is used

to study the effect of risk on return on Assets.

TAXES

Taxes affect the rate of return or yield on investment. Assets with

low tax rate tend to be preferred to those with higher tax rate. As

an example, a corporate bound A with a rate of return, RA, and tax

rate, r.A, will be preferred to corporate bond B with a rate of

return, RB, and '0, is greater than or equal to rB, if its after tax

return is greater, assuming they are identical in other respects.

GOVERNMENT AND INSTITUTIONAL INVESTMENT POLICY

Some investors put their funds in certain assets because of

government and institutional directives. In such situations

interest rates on the assets are not market determined. For

instance, banks wore directed by Central Bank of Nigeria to hole a

certain percentage of their liquid assets in government securities,

while insurance companies were instructed by government to invest

up to 25 percent of their life insurance funds in mortgage finance.

ASSET MARKET CHAR.ACTERISTICS AND INVESTOR PREFERENCE

Some investors prefer investing in certain assets because of their

characteristics (Low risk, tax rate or liquidity). As a result, the

market for the asset becomes segmented which limits the demand and

supply for the product (asset) and, hence, the rate of return or

yield on the asset. This is the idea behind the segmentation theory

of financial markets.

Similarly, investors desire to hold certain assets due to changing

market conditions, leads to asset substitution and changes on their

rate of return. It is expected that an asset's value is going to

appreciate, the demand for it will increase and hence increase its

yield.

TERM STRUCTURE TO MATURITY

Another determinant of interest rates is the term structure to

maturity. The term structure of interest rates is the relationship

between current short-term and long term rates on loans (debt) with

one some characteristics - value, risk, liquidity, etc. The

graphical representation of this is called the yield curve. If

short-term rates are rising, it is expected that the long term rate

will rise.

On the other hand, a falling short term rate signifies a future low

long-term rate. A consequent effect is that the forward interest

rate (forward interest rate is the current rate on a loan or debt

to be taken in a future time based on the prevailing short and

long-term interest rates on that class of loan or debt

instrument)on, for examples, a future one million naira loan to be

taken two years from now, will depend on interest rates on one

million loan maturing in, say, one and three years now. An

understanding of the term structure to maturity of future debts is

important in taking future financial ventures. The unbiased s

expectation theory, segmentation theory and liquidity preference

(preferred,Habit theory) are used to explain the term structure of

interest rates. 5

2 . 2 ORIGIN AND STRUCTURE OF INTEREST RATE IN NIGERIA

Interest rate operate primarily on the cost or price of money and

credit. As a price for obtaining loanable funds and a return for

fore-going liquidity, interest rates have an important allocative

influences on the level of economic activity.

By affecting tho vital operating costs of business changes,

interest rate on exert a significant impact on the level of

investment. Moreover, as a return to savers, interest rates can

also exert a significant impact on the distribution of income

between present and future consumption. Like any other price,

interest rates play a large part in equating the supply of and the

demand for laonable funds. It is because of these important

influences that monetary authorities attach much important to the

structure, level and changes in interest rate. It also explains why

interest rate control is usually invested in the apex of the

financial system. Central Bank of any country is charged with the

responsibility of maintaining stability in the purchasing power of

the currency both within and without. C

I n t e r e s t rates was f i r s t used as a n i n s t r u m e n t of monetary p o l i c y

i n Nige . r ia between 1 9 5 9 and 1962 a s a means of r e p a t r i a t i n g s h o r t -

te rm funds from abroad t o N i g e r i a .

INTEREST RATE STRUCTURE BETWEEN 1980 - 19990

P r i o r t o 1 9 8 0 o r p r e c i s e l y between 1967-70 and 1978-79, t e i n a n n u a l

monetary c i r c u l ~ r were i s s u e d by t h e C e n t r a l Bank of N i g e r i a .

The g e n e r a l o b j e c t i v e of t h e s e g u i d e l i n e s i s t o e n s u r e t h a t

L adequa te c r e d i t goes t o t h e p r o d u c t i v e s e c t o r s t o expand p r o d u c t i o n

a s a c u r e against i n f l a t i o n , and t o c u r b consumption and t h e r e b y

dampen t h e p r e s s u r e on p r i c e s i n c r e a s e s . I n March, 1 9 7 0 , t h e CBN

assumed, i n a s t r i c t l y fo rmal manner, t h e mant le of c o n t r o l and

r e g u l a t i o n , f o r t h e f i r s t t i m e , t h e minimum and maximum r a t e s and

advances on l o a n s , 2 3 and 7 + minimum and maximum r e s p e c t i v e l y ,

above r e d i s c o u n t r a t e of t h e C e n t r a l Bank and I+% below and 13%

above t h e minimum r e d i s c o u n t r a t e a s t h e minimum and maximum - r e s p e c t i v e l y on i n t e r e s t b e a r i n g d e p o s i t s . With t h i s development

and o v e r tower ing a u t h o r i t y of t h e C e n t r a l Bank i n r e g u l a t i n g t h e ' i n t e r e s t r a t e s had come t o s t a y . 6

I n 1980, . t h e r e was a s l i g h t upward r e v i s i o n of most i n t e r e s t r a t e s .

The l e n d i n g r a t e s of commercial Banks i n c r e a s e d on t h e a v e r a g e by

+ p e r c e n t w h i l e r a t e s c h a r g e s on l o a n s t o t h e favoured s e c t o r s of

t h e economy remained unchanged. T h i s r a t e was r e t a i n e d 1981 f i s c a l

y e a r .

The i n t e r e s t r a t e f o r 1 9 8 2 was r e v i s e d t h r e e t i m e s t h a t i s i n

J a n u a r y , A p r i l and December. The f i r s t two r e v i s i o n s were i n t h e

upward d i r e c t i o n w h i l e t h e t h i r d was downward. But r a t e s cha rged on

l o a n s t o t h e favoured s e c t o r s of t h e economy remained unchanged as

a t J a n u a r y , By A p r i l a l l r a t e s were r e v i s e d upwards by +% above

t h e i r r e s p e c t i v e l e v e l s a s a t J a n u a r y 1982. However, i n November

t h e r e was a downward r e v i s i o n of 1% a c r o s s t h e b o a r d . T h i s was

main ly d e s i g n e d t o s t i m u l a t e inves tment spend ing .

These r a t e s were r e t a i n e d i n 1983 , however, a s a means of

encourag ing t h e banks t o u n d e r t a k e medium and long t e rm l e n d i n g

l o a n s t o p r e f e r r e d d e b t o r s . Sub s e c t o r s having a m a t u r i t y of t h r e e

of more y e a r s c o u l d c a r r y i n t e r e s t r a t e up t o t h e maximum 1 3 % . :

By 1984 , i n t e r e s t r a t e s were a d j u s t e d upwards a c r o s s t h e board by

1 2 % p o i n t w i t h t h e e x c e p t i o n of l e n d i n g f o r A g r i c u l t u r e and

maximum l e n d i n g r a t e a l lowed .

The increase in the rates on the government debt instruments are

meant to stimulate investment in them. The upward revision in

Commercial Banks deposits rates were aimed at attracting more

deposits to the institutions while the adjustment in the lending

rates were designed to ensure more efficient allocation of

investible funds.

Y IN 1985, the level and structure of interest rate remained

virtually unchanged as its 1984 level except for the marginal

I increases allowed in the lending rates for Agricultural production.

The year 1986 witnessed the introduction of Structural Adjustment

Policy (SAP). Curing the first nine months of 1986, the structure

and levels of interest rates remained virtually unaltered from the

1985 levels.

However, based on .+,-he government decision to embark on progressive

- deregulation of the economy, a more dynamic interest rate Policy

was introduced in the last quarter of the year. This allowed banks

"0 negotiate with their customers interest rate in time deposit

accounts above the minimum fixed at 83% per annum. IN addition, all

lending rates were adjusted upwards.

As from August 1, 1987 interest rate which the bank fixed are

linked to the CBN's minimum rediscount rate which was reduced , , , , . ~ r o m initial 15% to 12.758. This reduction in the minimum

.C

rediscount rate means a reduction of the bank lending rate of

commercial banks by anything between 2% - 3% points in general.

The prime lending rates in 1989 range between 15% - 18% while the 4

deposit rates ranged between 11% and 13%. This shows a healthy and

positive move towards achieving the aims of the deregulation of

interest rates. The fluctuation trend continued in 1990.

2.3 THE CONCEPT OF FLUCTUATIONS IN INTEREST RATE

According to F . 0. Oresotu, "The factors affecting interest rates

cannot be adequate without reference to the stance of the monetary

policy pursued as this will indicate the state of excess supply of

and excess demand for money prevailing in the economy during the

period" . I

In other words, the state of excess money supply indicates the

extent of pressure on the level of interest rates generally. For

instance, for a change in money s t ~ c k to be held in such a way that

the demand for money balances equates its supply, some variables in

the demand and supply for money must also change so as to achieve

required equilibrium.

P

T h i s i m p l i e s t h a t changes i n i n t e r e s t r a t e s may sometimes o c c u r

t h r o u g h t h e need t o e q u i l i b r a t e t h e demand w i t h t h e s u p p l y of

money. However, t h i s shou ld n o t be t a k e n a s t h e o n l y avenue t h r o u g h

which i n t e r e s t r a t e s changes i n a n economy.Changes i n i n t e r e s t r a t e

may occur th rough changes i n o t h e r f a c t o r s i n t h e demand f o r money

which w i l l i n t u r n a f f e c t market c o n d i t i o n s .

1. 1. INFLATION EFFECT

Lenders i n o r d e r t o compensate f o r l o s s i n r e a l v a l u e of t h e i r

money a r i s i n g from t h e i n f l a t i o n , t e n d t o i n c r e a s e t h e r e a l r a t e of

i n t e r e s t by t h e i r own expec ted r a t e of p r i c e i n f l a t i o n . Of c o u r s e ,

d u r i n g such s i t u a t i o n , because borrowers a r e s u r e t h a t t h e goods

purchased t h r o u g h t h e l o a n w i l l a l s o a p p r e c i a t e by a f a c t o r of

t h e i r own e x p e c t e d i n f l a t i o n , t h e y a r e w i l l i n g t o borrow. When t h e

e x p e c t a t i o n s of t h e borrowers and t h e l e n d e r a r e a t l e a s t t h e same,

it i s p o s s i b l e f o r l o a n t r a n s a c t i o n s t o be concluded under t h i s

s i t u a t i o n of p e r s i s t e n t i n f l a t i o n .

LIOUIDITY EFFECT

The real rate can be expressed in terms of the excess supply of

money which is the factor that determines the pressure of interest

rates in the money market. Excess supply of money changes depending

on the supply and demand factors. A positive value of excess supply

causes interest rate to fail in the first instance as wealth owners

bid up the pzices of assets and lowers the yields. There could be

an impact also on the prices of goods which are raised by the

associated increase in demand. The goods could be locally produced

or imported. Thus, the exchange rate of the national currency tends

to depreciate as i i result of the higher level of liquidity. If the

excess money is maintained, the accompanying price increase tend to

make economic agents from expectations that inflation and

depreciation will persist and reflect these in the determination of

prices and interest rates.

3 . EXTERNAL FACTOR EFFECTS

Change in the Naira exchange rate affects domestic nominal interest

rates through its effect on both the transactions and speculative

demand for money. If, for instance, the exchange rate is expected

to depreciate, irnporters expect to require more units of local

currency to finance foreign payments. The expectation of the

depreciation also heightens inflationary expectation, increasing

the demand for money balances. This will tend to exert upward

pressure on lending rates.

4 . IMPERFECTION IN THE INTER BANK MARKET

Tnspite of the fact that there are many banks, the current

structure of the banking system tends to be oligopolistic, as few

old, but well established commercial banks are usually in surplus

funds to the detriment of other banks, that are in perpetual need

of reserves. The greater the pressure on the lopsided distributed

supply, the higher the inter-bank interest rates charge.

For example, Merchant Banks a r e p e r s i s t e n t l y s h o r t of t h e i r normal

needs a s t h e y a r e n o t n a t u r a l l y des igned t o m o b i l i z e d e p o s i t s .

A l s o , commercial banks i n temporary s h o r t a g e of funds c o n t r i b u t e d

t h e i r own q u o t e t o t h e demand p r e s s u r e s . Thus, it i s c la imed t h a t

i n t e r bank i n t e r e s t r a t e s have e x h i b i t e d abnormal h i g h f l u c t u a t i o n s

because of t h e a c t i v i t i e s of t h e few banks which a r e i n s u r p l u s

f u n d s . T h i s h a s t h e tendency t o i n c r e a s e t h e d i r e c t c o a t of funds

t o banks and t h e r e f o r e r a i s e nominal i n t e r e s t r a t e s .

2 . 4 THE BASIC FUNCTIONS OF INTEREST RATE I N AN ECONOMY

Oresote had outlined the basic functions of interest rate in an

economy in which individual economic agents take decisions as to

whether it should borrow, invest, save, and/or consume under three

broad aspects : -

1. Interest rates, as a return on Financial aspects serve as

incentive to savers, making them defer present consumption to

future date. The relevant interest rates in this case are the

deposit rates corrected for price inflation (or more

precisely, expected inflation rate). In this connection,

interest rates affect the availability of saving; and to the

extent that deposits rates vary depending on the maturity of

the financial assets, they also influence the allocation of

current saving among the assets.

2. Interest rates, being a component of cost of capital, affect

the demand for, and allocation of loanable funds. The

applicable rate of interest in this case is the bank lending

rate, the changes in which a f f e c t t h e c o s t of c a p i t a l which

influences investors willingness to invest in machine and

equipment (rsal investment).

In this,way, the level of interest (lending) rate could influence

growth- in financial instrument, output and employment.

The domestic interest rates, in conjunction with the rate of

return on foreign financial assets, expected exchange rate,

inflation rate, determine the allocation of accumulated

saving, among domestic financial assets, foreign assets, and

goods that are hedged against inflation, the speculative

movements of funds into/out or domestic/foreign assets depends

on the relative level of interest rates and whichever is

appropriate among exchange rates inflation rate and foreign

interest rates. 8

He further opined that "These broad role of interest rates

emphasize their significant in the structure of basic prices and

indicate the need fo;.r sound policy measures in the attempt to

evolve an efficient financial market for an economy. I' Y

2 . 5 INTEREST RATE AND THE MANUFACTURING SECTOR.

This is the "heart" of this study. Eleazu, lo said, "How will this

af f ect the development of manufacturing sector?". He declared that

he is not aware of big manufacturers that is so liquid these days J that would not need loan, even as working capital.

With largb inventories, low sales sue to fail in real incomes,

borrowing can only increase their costs. In an already low capital

utilization situation, one would be too optimistic to expect new

investments. Even if one wants to make new investments, will banks

be out to improve their annual profit margin, be willing to lend

long, given the deregulated sectoral allocations.

He concluded by saying that he is not aware of any line of small

scale manufacturing, where after paying all the high cost of inputs

will still have I a rate of return

on investment to justify borrowing at 19-213 rate of interest.

Olowoniyi, pointed out that manufacturers will be forced to raise

the cost of their products as the cost of production arises with a

rise in interest rate. He further argued that this will lead to

cost push inflation and that there is tendencies that this will

harm the economy.

Daniel Longe, the Managing Director of Peugeot Automobile Nigeria

Limited (PAN) has had cause to cry out. He said that the sales at

the assembly plant "dropped from 265 cars per day to as low as 10

cars per day between December 1988 and February 1989. The interim

tariff measures introduced by the Federal Government have only

I opened sales for about 30 cars per day, seven times less than Pre-

' SFEM days".

!

PAN'S problems are typical of the manufacturing sector of the

economy. The manufacturing sector is affected in man.y ways. The

manufacturing sector is affected in many ways. The manufacturer's

Association of Nigeria, MAN, says that the major complaints is that

industrial performance is still very low as evidence by sales

turnover, capacity utilization and employment.

Uzo E. Okere, Assistant Director (economy) for MAN, said that

average capacity utilizations stands at 25 percent as compared with

30 percent in 1986. He maintained that employment in the sector

dropped by 14 percent in the first half of 1989 alone and that

"industrial closures, especially among the small scale industries

as well as reduction in working shifts are still rampant.

Warehouses are still filled with goods resulting from the downward

trend in demand". The result is stagnation in the growth of the

economy, a fact sonfirmed by the world Bank report of Nigeria.

Doherty J, Managing Director, Bats Nigeria Limited, the

multinational shoe maker has this to say on the prevailing high

? interest rates caused by the deregulation of interest rates on:-

Installed Capacity: f

It may be difficult to maintain present capacity utilization due to

replacement cost of raw materials and the continuing squeeze on

working capital. Apart from high interest rates, another constraint

is the scarcity of loan capital. Both of these factors also have an

indirect effect an the ability of consumers to buy finished goods

which in turn further depresses capacity utilization.

Pxicinq of Productions :

There is strong upward pressure on prices. We are however trying to

9 maintain prices at current levels by examining our expansions to

see where we can cut costs. We will not increase prices where

L alternatives exists for tow main reasons.

( i ) Consumers canno t t o l e r a t e any more p r i c e i n c r e a s e s . They w i l l

e i . t h e r s t o p buying o r go f o r lower q u a l i t y s h o e s .

( i i ) Low p r i c e s i m p o r t s r e s t r i c t o u t a b i l i t y t o i n c r e a s e p r i c e s i n

s p i t e of t h e p r e v a i l i n g i n t e r e s t r a t e s and NEPA t a r i f f .

A s s e t Replacement:

C u r r e n t high i n t e r e s t r a t e s f o r c e s one t o t h i n k t w i c e as t h o s e who

s u p p l y a s s e t s a:Lso pay t h e same i n t e r e s t r a t e s and c o n s e q u e n t l y

c h a r g e h i g h e r p r i c e s . T h e r e i s a p o t e n t i a l m u l t i p l i e r e f f e c t h e r e

a s everybody goes on c h a r g i n g h igh p r i c e s .

On expans ion and d i v e r s i f i c a t i o n Programmes:-

The expans ion programme ( b o t h A g r i c u l t u r a l and e x p o r t o r i e n t e d i s

s u f f e r i n g ) . When t h e y f i r s t conce ived t h e i d e a i n 1988, i n t e r e s t

r a t e s were around 18 p e r c e n t w h i l e t h e y have r l s e n by some 2 2

p e r c e n t . T h i s r a i s e s t h e commercial r i s k f a c t o r of t h e p r o s p e c t b u t

w e a r e d e t e r m i n s d t o c o n t i n u e w i t h it because i t is i n h e r e n t l y

sound and we have c o n t r a c t u a l agreements t o c o n s i d e r .

Faced w i t h t h e d i s t r e s s problems i n t h e money m a r k e t , manufac tu r ing

companies i n N i g e r i a a r e now shopping f o r funds from i n s u r a n c e

companies i n t h e company.

The President of the manufacturers's Association of Nigeria (MAN),

Alhaji Hassan ~darnu,*' recently in Abuja appealed to all Insurance

Companies in the Country to channel some of their huge resources to

the Manufacturing sector.

The money market industry which essentially is made up of banks

(Commercial and Nerchant) Finance houses and Mortgage banks, is

currently bewildered with problem such as insolvency and crisis of

confidence,

While the Central Bank of Nigeria (CBN) for instance has adjudged

a good number of banks and finance houses distressed, the apex

regulatory authority for mortgage banks, the Federal Mortgage Bank

of Nigeria is on with various actions to sanitize the primary

mortgage institutions in the Country.

Besides, many banks are disinterested in lending because of the

pegging of interest rates.

At the presentation ceremony of a book "Insurance and Development

in Nigerian - Reinsurance Corporation PLC, in commemoration of 15th Anniversary, Adamu l4 said since some of the funds within the

industry are long term nature, "this is one of the ways in whick

your industry can assist the nation in its present economic

predicament. ' I .

He noted that the Country today is undergoing a lot of economic

problems especially in connection with the productive sectors such

as manufacturing.

The manufacturing sector, he added, if well motivated will

contribute immensely towards earning foreign exchange through

export promotion activities as well as reducing the hardship of the t

ordinary Nigerian.

8 Said he: Unless we re-activate and encourage the development of the

Manufacturing sector, all our economic efforts may not yield the

c desired, development and stability.".

2.6 INTEREST RATE UNDER DEREGULATED ECONOMY

There is no gain saying that the interest rate deregulation as part

of the Structural Adjustment Programmed is hinged on the tripod of

economic reconstruction, self-reliance and social justice .15 But we

will note that there are opponents and proponents of the

Deregulation of interest rates since its introduction in August

1987.

Among the opponents is 010woniyi.16 He argued for instance, the

Government directives that interest rate will be determined by

market forces for demand and supply is a statement not based on

sound economic realities of today". He opined that interest rates

deregulation will have adverse consequences on the economy and

that:

It will if time is not taken make a negative impact on

the economy except urgent and immediate action is taken

to ensure that companies are not further suffocated . 1 7 -

He was also of the opinion that if the returns made by companies

does not match the interest rate charge by banks on loans given to

them especially, the small-scale industries and medium sized

industries, that, they are likely to into liquidation and

receivership.

? Also the aim the deregulation intended to achieve in terms of

5 encouraging savings among individuals are far to be reached as most

Nigerians cannot afford two meals not to talk of supply fund to

save.

@ He also maintained that the consequences of the deregulation could

derail the economic recovery train and the expected investment in C

new ventures will be a mirage. He concluded that the aims of the

deregulation will not be achieved when he said:

P The flow of foreign capital which must have been a major

consideration is not likely to materialize where there is

b a stagnation in the economy due to poor purchasing power.

Investment in new business whether involving foreign or

local capital is bound to correlate with market

potentials. No doubt, even now the markets are saturated,

as no willing buyers are available. 19

Utorni 2 0 said that companies will be liquidated if there is rise in

the interest rate because they depend almost completely on debt

r ' rather than equity. He further pointed out that if the industries

that are supposed to help revive the economy closes down, there

will be more economic problem for the Nation.

On the effect of deregulation on the economic investment in Nigeria

Etiebet said that if interest rate are allowed to be determined

by the forces of supply and demand, this will cause rise in the

rate charged for loanable funds which will further compound the

problem of industrialists. He also said that if the deregulation is

pursued, the nation will soon undergo stagnation in investments,

Oreybu, stressing the adverse effects of 'the deregulation on the

industries said that unduely high interest rates for the economy

remains the channelling of scarce resources to quick profit making

ventures such as merchandise trade to the increasing neglect of

investments in vital sectors such as Agriculture, agro allied and

small scale industries which generally show low returns apart from

being of high risk nature.

In support of the view, Balogun," pointed out that a high interest

rate will generally tend to discourage and estrange productive

borrowing. Since the cost of capital will become high and because

of the inverse relationship between inyestment and the cost of . capital, this will result in lowering of investments.

H e also .maintained t h a t the much needed new investment^ wi l. be I

dampened and the activities of the small scale and mediuri, . ze industries will be affected with the high debt servicing and h G \ w

financial burden imposed by the high interest rates on them. 131

sees the high interest as causing a rise in the cost of consumer C

goods which will reduce the demand for them. The implication of '

this, he said is that the nations' Gross Domestic Product (GDP) Y

will be lowered thereby dampening the prospects for industrial

growth and economic reconstruction. C

Raufu, 2' also opined that the deregulation will dampen .investments

and also the cost-puch i n f l a t i o n t h a t w i l l result from the policy

will bring about escalating cost because investors will pass the

burden of cost of production to consumers by raising the pricas of

their products. He is also of the view that many industries may go

into liquidation as a result of high interest, espeeially, the

small-scale industries, as they nay find it difficult, if not P impossible to settle their debts.

Anyanwu,, 2 5 reiterated the adverse effects of deregulation when he

said that sectorally, the Agricultural, small-scale industrial

residential building construction as well as the other strategic

and the preferred sectors of the Nigerian economy will suffer since

they cannot stand the competitiveness therefrom. B

He further stated thatt'Apart from their inability to provide the Y

necessary collateral securities they cannot afford to borrow at

very high lending rates as those from high yielding and quick

u return investment distributive sectorstt 16. This will definitely undermine the objective of diversification of the revenue base of

c the economy.

He said that the anticipation that with high deposit rate, more

people will be encouraged to deposits.is.jraiic,as there is just no

money to deposit as many Nigerians are unemployed.

9 ~ e s u f u , ~ ~ in his own perspective, stated thatl'investment lending

will be discouraged by the deregulation policy bezause those

business which already had bank loans would find the burden of

repayment of debt very hard".

The National President of the Nigerian Association of small-scale

Industries (NASI) Chief Kolawale, cried out that "the present

deregulation of interest rate is not conducive for small scale

industrialiststl.He maintained that the high interest rate charged

by banks will not be favourable to small scale industries.

Stressing his view, Ezebuirof2j rightly warned that the

industrialists, especially small and medium scale industrialists

are still suffering the effect of the recent government directive

that banks should recall loans secured with foreign assets

deposits. As a result of the directive, many businesses were hard

hit as their accounts with banks were debited by the banks in

compliances with the Central Bank of Nigeria order recalling loans

secured with foreign assets deposits. He maintained that the

deregulation of interest rate in Nigeria with the ensuring credit

squeeze will be detrimental to industry capital utilization. As

industry capacity utilization starts to drop, the unemployment

? situation is bound to worsen and our economic growth and

development will eventually be retarded. .'

A more, d r a s t i c e f f e c t i s t h a t of a Lagos based v e a e t a b l e o i l

company. One of t h e t o p e x e c u t i v e s s a i d t h a t t h e company has

t e m p o r a r i l y f o l d e d up p r o d u c t i o n because it cou ld n o t e a s i l y r a i s e

a s h o r t t e rm corr~mercial paper a t a whopping prime l e n d i n g r a t e of

4 0 % a f t e r t h e u s u a l i n t e r e s t s f o r s e r v i c e s r e n d e r e d were charged . F

P r o f e s s o r P h i l l - i p s , j" c r i t i c a l l y a p p r a i s e d d e r e g u l . a t i o n and ..

concluded t h a t d e r e g u l a t i o n h a s s o f a r been ev idenced p r i n c i p a l l y

by t h e a b o l i t i o n of i m p o r t a n t e x p o r t l i c e n s i n g schemes a s a l o g i c a l

consequence of t h e i n s t i t u t i o n of SFEM, t h e a b o l i t i o n of t h e

commodity board scheme, t h e d e r e g u l a t i o n of i n t e r e s t r a t e s and t h e

t removal of p r i c e c o n t r o l s . The government bureaucracy c o n t i n u e s as

b e f o r e , constitu1:ing t h e g r e a t e s t b o t t l e neck t o economic a c t i v i t y

and s t i l l f i g h t i n g shy of u r g e n t i n s t i t u t i o n a l r e f o r m s . I t h a s s o

f a r been found t h a t r e l i a n c e on market f o r c e s i n a n envi ronment of

i n e f f i c i e n t government bureaucracy r e l a t i v e l y narrow and weak

p r i v a t e e n t r e p r e n e u r s h i p , h i g h dependence on f o r e i g n f a c t o r s and a

g e n e r a l an t i -deve lopmenta l environment may n o t produce t h e d e s i r e d

o r o p t i o n a l s o l u t i o n sough t f o r as r a p i d l y d e s i r e d . u

Iroche also highlighted th& effect of high interest rate on

small- scale enterprises and the economy remain a problem due to

shortage of liquidity. While government is pursuing interest rate

deregulation, it is at the same time trying to control the rates.

He said that the directive to fix inter-bank rates at least one f

practically one percentage point below the prime rate is not

controlled by monetary authorities. With the continued shortage of

liquidity, the stage is set for lending rates to climb to a lethal

35- 40 percent range earlier predicted for the year 1990. The

government, however, believes it would stimulate savings and

investment through higher interest rates, while the banks does not

agree with them.

Commenting on the extent the banks have adjusted to tne reduced

level of liquidity in the system, the former governor of the

Central Bank of Nigeria bitterly complained that:

Lending r a t e s have been pushed t o a h e i g h t t h a t t h r e a t e n s

t h e 1i:Ee of non-bank c o r p o r a t e s e c t o r and u l t i m a t e l y t h e

f i n a n c i a l sys tem a s w e l l . . . . . . . . . . . . And t h i s has

happened even though banks have p a i d r e l a t i v e l y low r a t e s

on s a v i n g s d e p o s i t s . The s i t u a t i o n s u g g e s t s t h a t t h e

l i q u i d banks a r e employing some c o l l e c t i v e market power

t o t h e i r immediate a d v a n t a g e . 3 2

I n s p i t e of t h e numerous r e a s o n s g i v e n by t h e opponents of

d e r e g u l a t i o n , of i n t e r e s t r a t e , s u p p o r t e r s l i k e Nwanna, Nwankwo,

S a n u s i , S o l a r i n , A d e t a y o , and Oyims adduced t h e i r own r e a s o n s .

~ w a n n a , ~ ' see t h e p o l i c y a s a welcome break-way from t h e r i g i d i t i e s

of t h e p a s t . He said t h a t t h e d e r e g u l a t i o n is a r a t i o x l approach

t o t h e s e a r c h f o r e f f i c i e n c y i n r e s o u r c e a l l o c a t i o n . Me s a i d t h a t

i n making t h e i n t e r e s t r a t e more dynamic, f o r e i g n c a p i t a l a r e

a t t r a c t e d . T h i s can o n l y occur i f f o r e i g n i n v e s t o r s a r e a s s u r e d

t h a t t h e i r money w i l l be s a f e and t h a t t h e y w i l l e a r n s a t i s f a c t o r y

r a t e s .

IYwankwo,14 i n h i s own view, op ined t h a t t h e d e r e g u l a t i o n p o l i c y on

i n t e r e s t r a t e w i l l l e a d t o more e f f i c i e n t a l l o c a t i o n of f i n a n c i a l

market r e s o u r c e s because i n t e r e s t r a t e w i l l now r e f l e c t r e l a t i v e

e f f i c i e n c y i n d i f f e r e n t u s e s . He s a i d t h a t o n l y e f f i c i e n t i n v e s t o r s

w i l l be a b l e t o s u c c e s s f u l l y compete f o r s c a r c e f i n a n c i a l

r e s o u r c e s .

Sanusi,' j5 based his arguments on a question of time factor. He said

that just like the SAP itself it will take sometime and consistent

implementation of policy measures before the full impact of

deregulation can be evaluated. Most of the expected effected

effects, particularly with regard to pricing policies are of medium v or long-term in nature and would therefore require mora time before

proper evaluation can be undertaken. Also, it is difficult to

isolate the effects of the policy measures of deregulation since

they have been part of a whole package of diverse policy measures

to restructure the economy. He equally noted that investors,

producers and consumers have increasingly resorted to curtailing

their demand for imported goods and finding alternative ways of

meeting their consumption and input requirements locally.

As expected, Banks were having a field day. According to Adetayo, 3 6

(Planning Manager of first city merchant Bank), "we (the banks ) are

merely responding to market forces". ?-

Another Banker, Solarin, with Treasury Kims Merchant Bank 7

observed that the government beyond sustaining the present levels

of savings may also use higher interest rates to reduce the

inflationary rate then put at more than 40 percent, through

moderating demand pressure on credit.

But that will be at a price. He maintained that under this

situation, investors will curtail frivolous spending. According to

him,"people now have to put their money to good use and ensure more

prudent management of resources for the industries".

' ~yims, " asserted that the Central Bank of Nigeria did not take

into consideration, the fact that it is not in all cases that a - rise in the demand for funds lead to improved investment and boost

in employment levels or increase in industrial capacity

U utilization.

2.7 INTEREST RATE POLICY, SAVINGS AND INVESTMENT

Interest rate policy is among the emerging issues in current

economic policy in Nigeria in view of the role it is expected to

play in the deregulated economy in inducing savings which can be I

channelled to investment and thereby increasing employment, output

and efficient financial resources utilization. The 1960s to mid-

1980s witnesses the administration of low interest rates which was

intended to encourage investment. The advent of the Structural

Adjustment programme in the third quarter of 1986 ushered in an era

when fixed and low interest rates were gradually replaced by a

dynamic interest rate regime where rates were more influenced by

market forces.

The policy shift de-emphasized direct investment stimulation

through low interest rates and encouraged savings mobilization by

decontrolling interest rates. The mobilized fund was intended for

investment. The pursuit of the two interest rate regimes in Nigeria

provided a case study of the keynesian interest rates investment Ir relationship and the Makinnon-shaw interest rates, savings and

investment hypothesis. 39

The objectives of interast rate policy in Nigeria are normally

embedded in the broad objectives of monetary and credit policy, 4 0 namely, .

(a) Moderation of inflation

( b ) Reduction of pressure on balance of payments and exchange 1 rate, and enhancement of external reserves.

". (c) Operation of efficient financial system; and

(d) Inducement o f increased financial savings

investment,employment and growth,

The Keynesian theory implies that low interest rate, as a component

of cost of fund, encourages borrowing for investment. On the other

hand, Mckinnon and Shaw view administered low interest rate as

detrimental to increased savings and hence investments demand. The

argued that high interest rates induces savings which can be two

transmission channels through which interest rates affect

investment. They relate to investment as cost capital. Also, L interest rates encourage financial savings which can be invested

(self finance) or lent out to borrowers as loans external finance) . 'r

Many studies have investigated these transmission mechanisms which

tallies with interest rate policy regimes articulated in Nigeria

prior to and after the 1986 economic deregulation.

Greens and Vilanueva (1991) ,41 ; estimated the effect of different

macro economic variables and policies, including interest rates, on

private investment on a group of developing countries. Their

results show that private investment gross domestic pr~duct (GDP)

ratio is positively related to real GDP growth, level of per capita ' GDP and the rate of public sector investment, while real interest

rate, domestic inflation, the debt-service ratio, and the ratio of

debt to GDP negatively affected private investment r~tio.

I Rarna (1990) ,42 investigated the theoretical and empirical

determinants of private investment in developing countries and

identified macro economic and institutional factors, such as

financial repression, foreign exchange shortage, lack of

infrastructure, economic instability, aggregate demand, public

investment, relative factor prices and credit availability as

important variables that explained private investment. He noted

that empirical results accuracies were diminished by errors in a measurement of economic variables and research methodology.

Balassa (1989), made similar observations in his review of the

effect of interest rates on savings in developing countries.

In an efforts to examine the response of investment to interest

rate changes during stabilization programmes, Hall (1977), 44 ,I -

discussed the view that stabilization policies affect short-term

interest rates while long-term rates are more responsive to C'

investments. Theoretically, he concluded that since short-term

interest rate is the appropriate rate used in calculating cost of

capital in investment decisions, the relationship between term

structure of interest rates and investment, needs empirical

clarification.

Balassa (1989) 45, as well as Arrieta (1988)~~ extensively reviewed

the literature on the effects of interest rates on savings in

developing countries, including time series studies on many

countries. Balassa concluded +observing that even though most of

the studies indicated positive relationship between interest rate

9 and savings, they were inconclusive on whether savings is

significantly affected by movements in interest rates, apparently as a result of data measurement and exclusion of appropriate lag

structure.

Khathate (1988) used non-parametric methodology in his study on

the relationship between interest rates and other macro economic

variables, including savings and investments. He grouped sixty four

developing countries (including Nigeria) into three, based on the

level of their real interest rate. Group A , B, and C comprised t)

countries with non-negative, moderately negative and severely

negative real interest rates, respectively. He then computed Y

economic ratio s, among which were gross savings-income and

investment income for the countries. Applying the Mann-Whitney

test, he found that the impact of real interest rate was not

significantly for the three groups. However, his methodology was

" criticized by Balassa, arguing that a relationship has to be

established by the use of regression analysis.

Using a theoretical model and comparative statistics, Molho (1986),

48 investigated the Mckinnon-Shaw Hypothesis that high real deposit

rates encourage savings accumulation which will encourage

* investment from own sources (Mckinnon) and external borrowing

(Shaw) . 9

He s p e c i f i e d a n a g g r e g a t e s a v i n g s f u n c t i o n . Apply ing p a r t i a l

d e r i v a t i v e s on t h e a g g r e g a t e s a v i n g s and i n v e s t m e n t f u n c t i o n s , he

conc luded t h a t t h e e f f e c t of f u t u r e r a t e of r e t u r n on c a p i t a l and

c u r r e n t d e p o s i t r a t e on s a v i n g s a r e i n d e t e r m i n a t e , w h i l e p a s t

d e p o s i t r a t e and c u r r e n t s u p p l y of l o a n s n e g a t i v e l y a f f e c t e d

c u r r e n t s a v i n g s . He a l s o assumed a p o s i t i v e r e l a t i o n s h i p between

t h e s t o c k of d e p o s i t s and t h e s u p p l y of l o a n s . A d d i t i o n a l l y , he

assumed unambiguously t h a t c u r r e n t s u p p l y of l o a n and r a t e of

r e t u r n on c a p i t a l and p a s t d e p o s i t r a t e a r e p o s i t i v e l y r e l a t e d t o

c a p i t a l f o r m a t i o n . He a l s o assumed t h a t t h e c u r r e n t d e p o s i t r a t e

was i n v e r s e l y r e l a t e d t o i n v e s t m e n t . Though he d i d n o t v e r i f y t h e s e

f i n d i n g s e m p i r i c a l l y , h e concluded d e p o s i t s and p h y s i c a l c a p i t a l a r e

compl imen ta ry .

Agu ( 1 9 8 8 ) , 49 r ev iewed t h e d e t e r m i n a n t s and s t r u c t u r s of i n t e r e s t

r a t e s i n N i g e r i a and no ted t h e e x i s t e n c e of v e r y low nominal and

n e g a t i v e r e a l i n t e r e s t r a t e s d u r i n g most of t h e r e v i e w p e r i o d (1970

- 8 5 ) He d e m o n s t r a t e d t h e n e g a t i v e e f f e c t of low r e a l i n t e r e s t

r a t e s on s a v i n g s and i n v e s t m e n t u s i n g t h e u s u a l Mckinnan f i n a n c i a l

r e p r e s s i o n d iag ram.

His main' conclusion was that the relationship between raal interest

rates and savings is inconclusive.

Agu's conclusion based on theoretical analysis prompted Reichel

(19911, 5 0 to investigate the empirical relationship between the J

real interest rate and savings in Nigeria. He formulated models to

buttress his point. J

His regression results showed that;

(1) Real interest rate was positively related contrary to his

conclusion, gross domestic and financial savings and real

interest rate were not significantly related except when

output was included as explanatory variables;

(2) Output was significantly and positively related to gross

domestic sa.vings but only positively related to financial

savings.

3 ( 3 ) Output growth rate and investment output ratio showed negative

but insignificantly relationship.

Soyibo and Adekanye (1991) 5i tested the determinants of savings in

Nigeria using variants of Fry (1978) - MFM, Yusuf and Peters

(1984) - MYPM, and Leite and Makonnen (1986) - MLM Mcdels. thay

found that laggea aggregate savings ratio (as should be expected),

as well as current GDP, foreign savings and export real interest

rate were significant in savings determination in Nigeria.

2 . 8 I'NTEREST RATES BEHAVIOUR UNDER A PROGRAMME OF FINANCIAL REFORM

Before the deregulation, the level and structure of interest rates

in Nigeria were fixed and administratively determined as in the

case of the exchange rate and wage rate. The most imp~rtant

considerations which dominated interest rate policy at that time

were the impact of interest rate changes on the level of public

sector domestic: borrowing as low as possible, interest rates on

government debt instrument were then fixed at relatively low

levels. Also, in a bid to channel domestic credit to defined

priority sectors discriminatory lending rates were fixed for loans

and advances granted by banks to different sectors reflecting the

authorities' preferences.

Oresotu opined that "of course, the attendant problems, which

become unmanageable because of the deliberate policy of keep the

rates lower then the levels the market conditions could admit,

compelled the deregulation of the ratest' .53

esotu 'dealt extensively on thi s asp

68

ect and noted that the

measures for the reform of the financial sector were adopted within

an overall context of comprehensive structural adjustment

programmes (SAP) comprising stabilization measures and other

measures designed to institute market systems for efficient

resource allocation.

I

The reform was expected to promote financial savings, reduce the

distortions in investment decisions, and induce more effective

intermediaries between savers and investors. Generally, the

financial sector reform could be classified into three c a t e g o r i e s :

reform for the improvement of financial structure; reform designed

to improve monetary management; and reforms to aid capital

movements and the foreign exchange market.

The monetary policy reform measures initially adopted included the

rationalization of credit controls. The sector-specific credit

' distribution targats have been streamlined with a view to giving

banks greater discretion in the sectoral allocation of credit. The b

former 18 sector classification was reduced to only two sector

categorization requiring 50% to be channeled to Agriculture and

Manufacturing and the remaining 50% to go to other sector.

Regulatory measures pertaining to liquidity and reserve

requirements, which used to discriminate between commercial and

merchant banks were unified to give similar treatment to banks in

general.

@ The monetary measures also included interest rates deregulation

which was achieved in stages. Another policy elements in the rate it

was the fixing c.f the spread between the saving deposit rates and

prime lending rates(PLR) as well as the margin between the PLR and

t= the maximum lending rate. Interbank rate was also to bear a

relationship to the prime lending rate. 5 1

3

However, the major problem is whether these measures have

contributed or will contribute to the expected growth and

development in investment and to the manufacturing sector in

particular.

a It is crystal clear that the reform that~rill illgenerally embraced,

is that which will stimulate investment, and increase the

manufacturers output, demand for credit and of course, the level of

employment.

NOTES

1. Adekanye Femi,The Elements of Bankins in Niseria F & A

Publishers Ltd; Nigeria, 1986, P. 78,

2. Khan Moshin S. (1986) "Islamic Interest - free Banking: A I

theoretical Analysisl',IMF STAFF PAPERS, Vol. 33.

I 3. Uchendu, Okorie, A, "Interest Rate Policy, savings and investment in Nigeria", Central Bank of Niseria Economic and

Financial Review, March 1993, Vol. 31, No.1, P. 35.

4. Compel, Tim S. (1982). Financial Institutions, _markets and

Economic Activity, Mcgraw Hill Book Company, New York.

5. Harris, Lawrence (1981). Monetary Theory, McGraw-Hill Book

Company, New York.

6. Okigbo P.N.C. Nigeria's Financial System Structure and Growth,

Longman Group Ltd., 1982 P. 68. 0

7. Oresotu F.O., "Interest Rate Behaviour under a programmed of

'3 financial reform: The Nigerian case", CBN Economic and

Financial Review, June 1992, Vol. 30 No. 2, P. 109.

8. Oresotu F.O., "Interest Rates Behaviour since Deregulation",

CGM Buliion, January/march 1991, Vol. 15, No. 1, P. 45.

9 . Ibid, P. 45.

i:

10. Eleazu 0 . Unma, "The effect of current National Financial

Policies on the manufacturing sector", Nigerian Review Vol. 1

Preview Edition March 1988, P. 5 0 .

CI 11. Olowoniyi A, "Deregulation of Interest rate and settlement of

local debts", Business Times Sept. 21, 1987, P.15. 3

12. Doherty J. "High interest rates and the manufacturing sector".

Financial Post March 19, 1989, P. 20.

13. Shofowora Tunde, "Manufacturers turn t.o Insurance firm for

capital", The Guardian April 16, 1994, P. 9. a

14. Ibid. '4

15. Anyanwu J.C. "Impact of interest rate Deregulation on Nigerian

Economy1', Business Concord August 28, 1987, P. 18.

16. Olowoniyi Ibid.

17. Ibid

18. Ibid

3 19. Ibid

, 20 . Utomi P. "Deregulation interest rate", Business Concord,

August 21, 1987, P. 12.

I

21. Etiebet D, "Liberalized interest Rates" Busines~Concord

Sept 18 1987, P. 9. h

22. Oraegbu; K. "High interest rate scar genuine investors"

Business TImes Nov. 7, 1987, P. 10.

23. Balogun O., " Deregulating; the Nigerian Economy: The interest rate Question", Newswatch Dec. 14, 1988, P. 30.

a.

24. Rauf u A. 'lIrnplications of Deregulating interest rates", 0

Business Times Sept. 1988, P 19.

25. Anyanwu J.C. "Effects of interest rate DeregulationM,Daily

Star October 17, 1988, P. 11. C

26. Ibid.

27. Yesufu T.M. "Effects of New interest rate on tha Economytt,

Business T i m n Dec. 13, 1988, P. 10.

28. Kolawale A.F.,"Effects of High interest rate or, the small 3

scale industrialists1', Business Times, January 9, 1989. P. 2 4 .

29. Ezebuiro 0. "Credit squeeze, A thunder on the economy"

Business Times Oct. 9, 1989, P. 9.

30. Phillips A.O. . , "A general overview of SAP in Developing Economy: the case of Nigeria", Nigerian institute of social

I and Economic Research 1989, P. 4.

31. Iroche S. ItThough on money: the New Budget still fails to

provide on inflationary Autidote", The Niserian Economist Jan.

22, 1990, P 17 - 18. 32. Ahmed A. Former Governor, CBN Being a speech delivered at the

a Annual Dinner of the Nigerian Institute of Bankers (NIB) in

33. Nwanna V.C, "Interest rates Deregulation: Implications and

Predictions", Business Times , March 7, 1987, P. 8.

34. Nwankwo A . 8 , "Deregulation and concern about inflation",

Business T i m a August 31, 1987, P. 18.

35. Sanusi J.O., "Deregulating the Nigerian Economy: Problems and

prospects", Bullion Vol. 13, No, 1, Jan/march, 1989, P 6-14.

36. -- "Digging the Near Gold mine: interest rates

Rising, more banks are lowering", African Guard*, Jan. 9,

1989, P. 28.

37. Ibid.

38. Oyims Larry, "Implications of pegging Interest rate", Daily

Satellite Vol. 9, No. 1909, May 9, 1991, P. 7.

39. Uchendu, Ibid P. 34.

40. Central Bank of Nigeria: Monetary and credit policy Guidelines

(Various issues).

41. Green, Joshua and Delano Vianuera, "Private Investment in

Developing Countries: An Empirical Analysis" IMF Staff Papers, --

Vol. 38,No. 1, March 1991, P. 33 - 58.

42. Rama, Martin, "Empirical Investment Equations in Developing

Countri,es",World Bank workins paper, No. 563, December,

1990.

4 3 . Balassa, Bola, "The Effects of Interest Rates on savings in

Developing Countries" World Bank workins paper, No. 56,

September 1989.

P 4 4 . Hall, Robert E , "Investment, interest Rates, and the Effects of stabilization policies" Brookinqs papers 011 Economic

- Activities, Vol. 1, 1977, PP. 61 - 103.

4 5 . Balassa ( I b i d )

46. Arrieta, M Gonsales, "Interest Rates, savings and growth in

LDCs; An Assessment of Recent Empirical Research, "World

Development. V o l . 16, No. 5, 1988,PP.589.

47. Uchendu (Ibid)

48. Molho, Lazarus E, "Interest Rates, savings and Investment in

Developing Countries: A Re-Examination of the Mckinnon - show

Hypothesis,"IMF Staff Papers, Vol 33, No. 1, 1986, PP. 90 - C

116.

0 4 9 Agu C . C . " I n t e r e s t r a t e s p o l i c y in Nigeria and its Attendant

Distortions." Savinss and Development, 'Vol, XI1,No.

1,1988, P. 19 - 3 3 .

Reichel, Richard, "The macroeconomic impact of Negative Real

interest Rates in Nigeria: Some Econometric Evidence," Savinqs

and Development, Vol XV, No. 3, 1991, PP. 273 -

Soyibo and Femi Adekanye, "Financial System Regulation

Deregulation and savings mobilization in Nigeria." African

Economic Research Consortium Research Paper Final Report,

Nairobi, Kenya, 1991.

Mayer , Paul A . Money, Financial Instit,utions and the Economy,

Irwin Publishers, Homewood, (1986).

Oresotu (Ibid)

54. Ibid

CHAPTER THREE

RESEARCH METHODOLOGY Research methodology is a particular method employed in carrying

out a particular research work. The section discusses the way the

data and information collected and used for this project work was

generated.

Consequently, it will cover sources of data, methods of

investigation, questionnaire design, and method of questionnaire

distribution.

3.1 SOURCES OF DATA

Data for this study came from two main sources. These included:

Secondary data and Primary data.

( a ) SECONDARY D A U

0 These are the existing facts recorded& smeone else in the past

which can be collected through desk research. These secondary data

came from secondary sources. The researcher searched for data in

connection through several Central Bank of Nigeria (CBN) Annual,

Quarterly and monthly reports, different editions of CBN Bullion,

Economic and financial review, statistical Bulletin. J

Other ~ublications including magazines journals and newspapers were

not left out.

Data were also gathered from other places like University of

Nigeria Enugu Campus Library, Enugu State University of Technology

Library, National Library Enugu and the Enugu Zonal office of the

Central Bank of Nigeria Research unit.

(b) PRIMARY DATA

Primary data are those originated by the researcher for the purpose

of they study at hand. They are the data collected for the first

time from the public or areas of interest by the researcher. The

primary data for this work were generated mainly through personal

interviews and questionnaires (mainly manufacturers in many parts

of the country),

9 . 2 METHOD OF INVESTIGATION

The major method of investigation in this research work was survey v

method. The tools used in this method included personal interviews

and the use of questionnaire.

(i)

(ii)

3 . 3

METHOD OF PRESENTATION

The method used in the data presentation include the Tabular

presentations, percentages, and graphical method.

METHOD OF DATA ANALYSIS

The data collected by the researcher were analyzed fully.

Analytical technique of percentages and chi-square were

applied where they are desirable. However qualitative analysis

of the report will be done where necessary.

QUESTIONNAIRE DESIGN

In order to ensure that the study was properly carried ouz, one set

of questionnaire was designed. This set of questionnaire was

administered; to different manufacturers.

The questionnaire was designed to study the effects (particularly

on the output, demand for credits and level of employment) on the

manufacturing sector of Nigerian economy, 1981 - 1990.

3 . 4 METHOD OF OUESTIONNAIRE DISTRIBUTION

The study was carried out in different strategic States in Nigeria.

The areas covered include Lagos, Aba, Awka and Onitsha.

The Questionnaires were distributed mainly to the manufacturers of

sugar confectionery, soft drinks, beer and stout, foot wear , paints, cement, roofing sheet, vehicle, radio and television

assembly, soap and detergent.

They were directed to the Senior Officers of tho companies

involved. Some of the companies are:- - Cadbury Nigeria PLC Lagos

- Coca Cola Nigerian Ltd.

- Nigerian Mineral waters Ltd, Onitsha

- Life Breweries Ltd.

- Phina paint Industry Ltd.

- Ebony Paints Ltd.

- Lever Brothers Nigeria PLC 5 - Bats Nigeria Ltd and others.

The eighty two questionnaires distributed were carefully

administered and returned.

(=HAPTER FOUR

PRESENTATION AND ANALYSIS OF DATA

In this chapter, the presentation and analysis of data on

fluctuations in interest rates and the effect on the manufacturing 0

sector of the Nigerian economy, 1981 - 1990 will be made.

0

Here presentation and analysis are based on the extensive

information got by the researcher through personal interviews,

questionnaires documents got on the companies, central bank of

Nigeria, Federal Office of Statistics, observations, explanation

made by and to hi.~n . respectively during visits to the companies.

4

For clear and neat data presentation and analysis, the stated

b objectives will be handled separately. Qualitative analysis will be

done where they are required. However, Analytical technique of

percentages and chi-square will be applied in the relevant areas to

establish the hypothesis.

The relevant interest rate used in this study are the lending

rates. ' The com~nercial Banks rates will be used for the

illustrations, for convenient sake. However, the merchant banks

lending rates will be mentioned to further buttress the point in

the course of explanations.

The lending rates will be divided into three parts. they are first 3

class Advance . , produce Advance, and other Advances. It will be noted also that the prime lending rates were virtually the same

o thing with the first class Advance.

I. There are two periods in this study that are very important. They

are era of pre-deregulation, (1981 - 1986), and Deregulation era,

(1987 - 1990).

YEAR

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

SOURCE :

TABLE 1

LENDING RATES (PERCENT)

(COMMERCIAL BANKS 1

LENDING RATES

FIRST CLASS ADVANCE PRODUCE ADVANCE

9.75

7.75

9.75

7.00

8.50

10.50

19.00

17.30

25.90

26.00

CBN STATISTICAL BULLETIN (1992)

OTHER ADVANCE

TABLE 2

GROSS INVESTMENT (PERCENT)

YEAR

- -- G R O S S INVESTMENT

13.90

SOURCE: FEDERAL OFFICE OF STATISTICS AND CENTRAL BANK OF NIGERIA

TABLE 3

GNP, AND GROSS INVESTMENT/GNP ($1

YEAR

SOURCES: FEDERAL OFFICE OF STATISTICS AND CENTRAL BANK OF NIGERIA a

;ROSS NATIONAL

PRODUCT ( GNP )

7 9 . 2 1

7 9 . 1 6

7 5 . 1 4

6 9 . 7 1

7 5 . 6 7

7 8 . 2 6

68 .49

7 7 . 0 0

8 1 . 3 9

9 0 . 5 6

GROSS INVESTMENT

(GNP )

1 7 . 5 4

1 3 . 0 5

1 0 . 0 8

4 . . 5 3

5 . 5 3

6 . 1 0

5 . 1 4

4 .06

5 . 2 0

6 . 3 3

In line' with the objective of this study, the first hypothesis

formulated was that:-

Fluctuations in interest rates have no significant effect on gross

investment.

From the available data in Table 1, the commercial Banks lending

rates were unstable. A mere glance on the table shows that the

lending rates were generally low during the pre-deregulation period

than the deregulation period which recorded very high interest

rates. The high interest rates are not just lending rates, but also

includes savings and deposit rates and others.

In 1981, the first class advance was 7.75%, produce Advance 9.75%

and other advances was 10%. The gross investment in 1981 was

13.90%.

The lending rates started rising in 1982 except the produce Advance

which was 7.75%. The first class Advance and other Advances rose to

10.258 and 11.75% respectively as indicated in Table 1. Table

revealed that gross investment went down to 10.338 in 1982. In

Table 3, gross National Product (GNP) lowered from 79.21% in 1981

to 79.16% in 1992. The Gross investment (GI) divided by GNP lowered

from 17.5% in 1981 to 13.05% in 1982.

The fluctuations continued in 1983 as shown in the table and

brought the gross investment to 7.58%. The GI/GNP was 10.08%.

In 1984, first class advance rose to 12.50% while other advances

was 13%. The rise showed significantly on the gross investment

which slumped down to 3.16%. In Table 3, the GNP and GI/GNP were

69.71% and 4.53% respectively.

The lending rates recorded virtually low rates in 1985. First Class I Advance was 9.25% and other Advances was 11.75%. The low lending

rates brought up the gross investment to 4.19% as shown in Table 2,

The GI/GNP equally increased to 5.53%.

1986 brought the era of low interest rates to an end. In table 1

the lending rates for first class advance and produce advance were

10.50%. Other advances.was 12%. It brought the gross investment to

4.78%. In figure 1, the lending rates and the gross investment e

showed the graphical flow of the rates. As the lending rates

fluctuates, it affect the gross investment. 0

1986 ended the pre-deregulation period.

The sharp upward movement of interest rates in 1987 ushered in the

period of deregulation. During this period, interest rates were no

longer controlled, but determined by the market forces. In 1987,

the first Class Advance and Produce Advance rose from mere 10.50%

in' 1986 to 17.50% and 19% respectively. Other Advances rose to

19.20%. These high lending rates quickly brought down the gross

investment to a dismal 3.57%. They equally reflected on the general

economy. The GNP recorded 69.49%, while the GI/GNP was 5.34%.

In 1988, the lending rates were still high. The gross investment

went down further t.o 3.13%. However, the rates were generally lower

than that of 1987 and then put the GNP at 77%.

The lending rates of the commercial banks were still raising in

1989 as shown in table 1. First Class Advance rose to 25.88. I Produce stood at 25.9%, while other advances recorded 24.6%. The

Merchant Banks prime and maximum lending rates rose to 29.8% in

1989. The fluctuation in the lending rates brought the gross

investment to 4.23%.

1990, which is the final year of study, made a lot of revelations.

First class Advance were lowered to 2 5 . 5 % for the commercial banks.

The Merchant Banks equably recorded lower rates in 1990 of 2 8 . 5 %

and 29% prime and maximum lending rates respectively in December.

These brought the gross investment to 5 .73%. The . G N P was 90.56%, r

while GI/GNP was also 6 . 3 3 % as shown in Table 3. The flow of the

lending rates and gross investment was shown in figure 1. *

DECISION

% From the tables, figure 1, and the analysis, it is crystal clear

that fluctuations in interest rates have significant effect on C gross investment.

HYPOTHESIS 2

Do you think that the fluctuations in lending rate affect the

output of your company.

T A B L E 4 --

8

J

RESPONSE

YES

NO

TOTAL -

NO

69

1 3

8 2 --

PERCENTAGE %

8 4

16

100

The table 4 depicts that 69 or 84 of the respondents are of the

opinion that the fluctuations in lending rate affect the output of

their company, while.13 or 16% claim that it has no effect on their

output.

The result in this table is used to test the hypothesis.

TESTING OF HYPOTHESIS 2

Null Hypothesis: Fluctuations in lending rate have no

significantly effect on the output of the manufacturing sector

of Nigeria Economy.

Alternative Hypothesis: Fluctuation in lending rate have

significant effect on the output of the manufacturing sector

of Nigerian Economy.

To test the hypothesis, the data in table 4 shows that 84% of the

respondents are of the opinion that fluctuations in interest rates

have a significant effect on the output of the manufacturing sector

of Nigerian Economy. While 16% claim that it has not significant

I? effect on the output of the manufacturing sector of the economy.

50% is assigned to each of the two attributes:

Yes (ei) 50 ie 4.1

No (ei) 50 ie 41

Given a l 'evel of s i g n i f i c a n t ( x ) = 5%

Degree of freedom i s N - 1 = 2 - 1 = 1

X' table value is XI = 3.841

Using the chi square XI = Z j O i - ei 1'

e i

Then x2 is calculated from t h e observed da ta i n t a b l e 4 as

fol lows: -

x2 t a b l e va lue is x2e - - 3 . 8 4 1

Calculated X'O - - 1 9 . 1 2

ei

41

41

82

oi-ei

28

28

-

X

YES

NO

TOTAL

oi

69

13

82

(oi-ei)

784

784

1568

(oi-ei12

ei

19.12

1 9 . 1 2

3 8 . 2 4

DECISION.

Since x20 > x2e based on our analytical paint, there is a high

significant effect of fluctuations in lending rate on the output of

the manufacturing sector of Nigerian Economy, and therefore, the

alterative hypothesis Hi should be accepted.

HYPOTHESIS 3

Do the fluctuation in lending rates affect your company's demand

for credits from banks?.

TABLE 5

!

RESPONSE

YES

NO

TOTAL -

NO

7 2

1 0

8 2

PERCENTAGE % -

88 -

1 2

1 0 0 -1 -

lk

The table 5 depicts that 72 or 88% of the respondents are of the

opinion that the fluctuations in lending rate have effect on their

company's demand for credits from banks,while 10 or 12% claim that

it has no effect on their demand for credits from banks.

'+ The result in this table is used to test the hypothesis.

TESTING OF HYPOTHESIS 3 -

HO: Null Hypothesis: Fluctuations in lending rate have no

Y significantly effect on the total credit demanded from banks

by the manufacturing sector. C

HI: Alternative Hypothesis: Fluctuation in lending rate have

significant effect on t.he total credit demand from banks by

the manufacturing sector.

To test the hypothesis, the data in table 5 shows that 88% of the

respondents are of the opinion that fluctuations in interest rates

have a significant effect on the total demand from banks by the @ manufacturing sector while 12% claim that it has no signifi~ar~t

effect on the total credit demanded from banks by the manufacturin.g

sector.

50% is assigned to each of the two attributes:

Yes (ei) 50 ie 41

No (ei) 50 ie 41

Given a level o f significant (x) = 5%

Degree of freedom is N - 1 = 2 - 1 = 1

X' table value is X, = 3.841

Using the chi square XZ = C(Oi - ei l2 ei

Then X' is calculated from the observed data in table 5 as

follows:-

x2 table value is xZe - - 3.841

Calculated x20 - - 23.44

X

YES -- NO

TOTAL

---

ei

41

41

82

-

oi

7 2

10

82

oi-ei

31

33

-

(oi-ei) 2

961

961 -

1922

(oi-eic

ei

23.44

23.44

46 88 .---- _ I

DECISION

Since x2b> x2e based on our analytical view point, there is a high

significant effect of fluctuations in lending rates on the total

credits demanded from Banks by the manufacturing sector,

therefore the alternative hypothesis Hi should be accepted.

HYPOTHESIS 4

Do you think that the fluctuations in interest rates affect

level of employment in your organizations?.

and

t h e

TABLE 6

U I I- The table 6 depicts that 74 or 90 % of the respondents -d are o

RESPONSE

YES

NO

TOTAL

' opinion that the fluctuations in interest rate have an effect on

the level of employment in their organizations.

NO

7 4

8

82

The result in this table is used to test the hypothesis.

PERCENTAGE %

90

10 -

100

TESTING OF HYPOTHESIS 4

HO: .Null Hypothesis: Fluctuations in lending rate have no

significant effect on the level of employment on the

manufacturing sector of Nigerian economy.

HI: Alternative Hypothesis: Fluctuation in lending rate have

significant effect on the level of employment in t h e

manufacturing sector of Nigerian economy.

To test the hypothesis, the data in table 6 shows that 90% of the

rgspondents are of the opinion that fluctuations in interest rates

have a' significant effect on the level of employment on t h e

manufacturing sector, while 10% claim that it has no significant

effect on the level of employment on the manufacturing sector of

Nigerian economy.

50% is assigned to each of the two attributes:

Yes (ei) 50 i e 41

No (ei) 50 l e 41

P Given a level of significant (x) = 5%

Degree of freedom is N - 1 = 2 - 1 = 1

x2 table value is Xe = 3.841

Using the chi square X' = K O i - ei 1'

Then XI . is calculated from the observed data in table 6 as

follows~: -

XI table value is x2e - - 3.841

Calculated x2a - - 26.56

X

YES

NO

TOTAL

DECISION

Since xZo 7 x2e based on our analytical view point, thsre is a high

significant effect of fluctuations in lending rates on the level of

employment on the manufacturing sector of Nigerian economy and

t h e r e f o r e the alternative hypothesis Hi should be accepted.

oi

74

8 -

8 2

In conclusion, the whole analysis shows that the fluc!tuations in

interest rates affect the manufacturing sector of Nigerian economy.

ei

41

41

82 -

oi -e i

31

3 3

-

(oi-ei) Z

1089

(oi-ei L~ ei

26.56

26.56

2178 53.12

CHAPTER FIVE

FINDINGS, RECOMMENDATIONS AND CONCLUSION

From the study, relevant findings were made. Firstly, it was found d

that fluctuations in interest rates have significanr effect on gross investment. The tables,figure 1 and the analysis showed that

gross investment was very sensitive to interest rate movements.

Specifically, it was shown that gross investment was significantly

related to commercial banks lending interest rate.

Also, the fluctuations in lending rate have a significant effect on

the output of the manufacturing sector of Nigerian economy. The

chi-square test of significance was used to carry out the test.

' It was found out that the fluctuations in lending rates have a

significant effect on the total credit demanded from banks by the

' manufacturing sector.

The chi-square was used here to carry out the test.

From the study also, it was found that fluctuations in interest

rates have significant effect on the level of employment on the

manufacturing sector of Nigerian economy. The chi-square was also

used to carry out the test.

The difference was very clear between the pre-deregulation period

and the deregulation period. The pre-deregulation period was

favourable to production and growth of the manufacturing sector.

The controlled low interest rates was a successful encouragement to

investment before August 1, 1987.

The rapid upward movement in the interest rates, which ushered in

the deregulation period was not favorable to production and growth

of the manufacturing sector.Many manufacturers were scared and some

of them were forced to fold up. It was found that as they were

trying to cut their dependence on banks, they resorted to staff

retrenchment which worsened the unemployment situation in Nigeria,

The determinants of interest rates were established. Factors

identified that affect interest rates include inflation, risk,

taxes, market assets characteristics, investor preference,

government and institutional policy as well as term to maturity of

2 loans (debt).

u The major or most important factor affecting nominal lsnding rate

in Nigeria is the persistent exchange rate depreciation. The

identified channel, of causation in the demand for money especially

for transactions purposes, which increases as the exchange rate

depreciates, putting pressure on domestic liquidity.

Finally, it was found that the upsurge in interest rate witnessed

since the deregulation of the rates may be partly due to the

combined effects of the deregulatory policies introduced in

different sectors of the economy on the money and capital markets

together with the restrictive monetary policy stance during the L

period. The review of past monetary and credit policy guidelines

Q revealed that interest rate target levels were specified for

various sectors of the economy depending on government's sectoral

priority.

Based on the findings in this research, the following

recommendations will be made; 4

1. Firstly, interest rates, especially the lending rates should b

be regulated through pegging, to encourage investment. In

order words, interest rates should be pegged because if they

are allowed to be determined entirely by the market forces,

the manufacturers will be seriously affected.

2. The monetary authorities must ensure that the banks and other

financial institutions adhere strictly to the rates

prescribed. Most of the banks and finance houses are

distressed. @hey evolve a lot of surviving strategies to

remain in business. Therefore they require close monitoring to ,. make it very successful.

0 3. There is need to evolve a money market arrangement that will

be efficient in the use and allocation of resources as each

bank in the system operates efficiently as measured by its

cost of funds. The public and the manufacturing sector will

benefit a lot from this money market arrangement.

4. he' monetary authorities will insist that the appropriate

amount of credits should be channelled to the productive

sectors of the economy as required at low interest rates.

Again, the credit allocation to the manufacturing sector

should be greater, because it is the bedrock of the Nigerian

Economy. Low lending rates will definitely make the credit

allocation more purposeful.

5. Finally, the regulatory monetary authorities must control the 4

incessant springing up of commercial and merchant banks,

finance houses, mortgage banks or the so-called shylock

savings and loans in every nook and corners of the country. It

is self evidence that most of them have a 'hidden agenda'.

They do not have genuine intentions for the investors and the

manufacturing sectors in particular. They charge extremely

high interest rates.

The study was conducted to highlight the effect of fluctuations in

interest rates on the manufacturing sector of the Nigerian economy,

1981 - 1990. To tackle this, a general introduction was made,

followed by the statement of problem and specification of research

objectives. The significant and limitations of the study were also

mentioned.

In carrying out the study, extensive review of related literature

was done to get adequate theoretical information on the area of

study and thereafter the methods used in carrying out the study

were stated.

Based on information and data collected from manufacturers in

relation to the objectives of the study, through personal

interviews and discussions, observations made and explanations got,

questionnaires responses, important findings were made about the

effect of the fluctuations in interest rates on the manufacturing

sectors. Recommendations based on the findings were as well made.

3

From the study, it was revealed that since the introduction of the

policy on interest rates deregulation in the banking industry in

August 1987, the levels of interest rates have persistently

increased. In particular, the lending rates of commercial and

ci merchant banks assumed a sharp upward trend. This is the clear

evidence to regulate the interest rates, especially the lending

t rates, to encourage investment and a sustainable growth in the

manufacturing sector of Nigerian economy.

FACULTY OF BUSINESS ADMINISTRATION

DEPARTMENT OF BANKING AND FINANCE

UNIVERSITY OF NIGERIA

ENUGU CAMPUS

QUESTIONNAIRE ON FGUCTUATIONS IN INTEREST RATES AND THE EFFECT ON

THE MANUFACTURING SECTOR.

This questionnaire is designed to study the effects of fluctuations

in interest rates, particularly, on the output, demand for credits

and level of employment on the manufacturing sector of Nigerian

economy, 1981 - 1990. All information given will be treated in strict confidence. Your cooperation therefore is high1.y solicited.

INSTRUCTION

Please tick (x) cr fill in where applicable.

1, Does your company obtain loan from Banks

(a) Yes [ I (b) No r I

2. What type of credit facility do you normally request?

(a) Bank Overdraft [ 1 (b) Short term loan [ 1

(c) Medium term loan [ 1

(d) Long term loan [ 1

, .' - . 3 . . At what rate of interest do you borrow between 1981 and August

il, 1987 .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. At what rate of interest do you borrow between August 1, 1987

and ? 990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Do the fluctuation in lending rates affect your company's

demand for credits from banks?

(a) Yes E I ( b ) No E I

6. Do you think that the low capacity utilization in

manufacturing sector is due to the high interest rate

prevailing in the economy?

0 ( a ) Yes E 1 0 No E I

7. Do you thing that upward movement of cost of funds push the

cost of production towards the same directiori?.

( a ) Yes C I

8 . Do 'you think that the fluctuations in lending rate affect the

output of your company?

( a ) yes [ 1

(b) No [ 1

I

9. Do you thing that fluctuations in interest rates affect the

t level of employment in your organizations?

(a) Yes C I ( b ) No [ I

10. What ways are you trying to cut your dependence on banks?

here: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11. The deregulation of interest rates in Nigeria has not to any

appreciable extent achieved its objective with respect to the

manufacturing sector?

12. What recommendation would you make to the Central Bank of

~ i g e r ' i a (CBN) and the Federal Government to curb the high

interest rate in the economy?

(a) Fixing. a rate [ 1

(b) To allow the market forces to discipline itself [ 1

(c) Release its tight hold on liquidity [ 1 (d) Suggest other ways the fluctuations in interest rate can be

t checked:. . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thanks for your cooperation.

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