THE IMPACT OF INTEREST RATE DEREGULATION ON COMMERCIAL BANKS’ LENDING OPERATIONS IN NIGERIA.

 
There had been administrative control on the nation’s interest rates until July 31, 1987 when, in consonance with the spirit of the structural Adjustment programme (SAP) of the Federal Government the Central Bank of Nigeria issued a circular on interest rates bordering on the deregulation of this financial sector of the economy. As a signal to the direction, the Central Bank wanted the interest rate to go, the minimum Re-discount Rate (MRR) was raised from 11 to 15% which now peaks at 18.5%. The apex financial institution (CBN) declared that interest rates payable on deposits or chargeable on loans and advances were henceforth to be determined by the interplay of the market forces of demand and supply.
Nigerians being what they are agitative and speculative went to town some decrying the policy as the last straw that would break the back of our fragile economy, others extolled the policy as the best and boldest steps ever taken towards the revamping of the ailing economy.  These divergent views of the financial experts both in the academic and in the Banking sector about the likely impact of the interest rate deregulation motivated me to appraise the impact of the deregulation on commercial banking operation. Notable among those who bemoaned the deregulation of interest rate was Abiodum (1987).  According to him, Deregulation a fragile economy like ours will have the overall effect of dampening it since the high interest rate will cause slow down investment as borrowing will be curtailed. But this view was opposed by Iklude (1987) 2.  he was of the view that “interest rate deregulation will not only bring relief to the financially repressed economy but will ensure a real return on deposit which has over the year been negative. What these argument  boiled down to was that interest rate deregulation would lead to efficient allocation of financial market resources because interest rate will now reflect relative scarcity and relative efficiency in different uses.
According to Abraham Nwankwo (1987) 3 “Bigger banks will price small ones out at the market by lending cheep to customers and paying them interest rate on their deposits”. It is in the light of the controversies that accompanied the interest rate deregulation that prompted the deregulation on commercial Bank lending operation.
Interest Rate deregulation, like other stringent economy measured by the present administration has far reaching consequences on the nation’s banking industry and on the borrowing public. Commercial banks that had lent huge sums of money before the deregulation of interest rate were in stormy water making their customers repay their loans at the new rate.  The borrowing public complained that their banks had without prior notice unleashed high interest rate on them.  They were at daggers drawn as the measure created had blood between the banks and their customers. The interest rate deregulation with its attendant high interest payable on loan and advances terribly limited the borrower’s  quest for loan/advances since  it was impossible for most of them to get inflationary adjusted rate of return on their borrowed fund-this has remained elusive for many  borrowers.  Inspite of the deregulation, customers complain that commercial Banks pay  very  little interest rate for example on savings and charge borrowers/customers more than twice what they pay them on their savings accounts.  This they complained was unfair as the return became negative when adjusted with the rate of inflation.
The general public also complained that banks (especially commercial and merchant Banks) have been posting huge profit after tax inspite of the bitting effect of the economy.  The bank’s credit ceiling was partly responsible for the state of the affairs, invoking economic Aloxim that the constant liquidity mop up on the banking sector by the apex  financial institution was also responsible saying, the more illiquid a bank is, the more profitable it becomes”.
A  performance appraisal  of the impact of the deregulation is long over due at least to  shade light on the above controversies surrounding the policy three years after its introduction, thereafter, the problems are hereunder stated in question as follows:
(i) Did commercial bank’s loans and advances deteriorate during the deregulation of interest rate?
(ii)  Did  depositors react favourably by increasing the volume of their deposit after the deregulation?
(iii) How have commercial banks been surviving the directives of deregulating the interest rate in this sector of the economy?
The study aims to determine and analyze the impact of interest rate deregulation in Nigeria specifically, the study seeks to answer  the following  questions:-
1. Whether the interest rate deregulation has affected the volume of commercial bank’s  lending over the years.
2.  Are the effect  statically different according to the size of the banks?
3. The study will also find whether the interest rate paid to deposits mobilized by the commercial banks.
4. The study will also find  whether there were more loan losses (bad and doubtful debt) during the era of interest rate moderation than this period of deregulation .
5.   The research is also aimed at  finding whether commercial banks made more profit before or  during the deregulation.
6. What else do  commercial banks to attract more deposits to enhance commercial banks’ lending operation.
A study of this nature which is  more of a p0erformance appraised of the  commercial banks’ lending operation during the deregulation is of great significance to group of persons, institutions and governments.
The study will be of  great importance to the banking  sector of our  economy because from  the empirical view of the impact of interest rate deregulation on commercial bank’s – CBN will also find  the study valuable because it will enable it feel the purse  of the commercial banks’ three years after the deregulation. Commercial banks’ customers will also  find results of the research very useful since it will enable them have a generalized view of  lending operation  by commercial banks in a deregulation economy. commercial banks’  management will from the research evolve aggressive survival strategies.
This study was  concerned with the impact of interest rate deregulation on  commercial banks’ lending operation. For effective coverage the study focused on  loan and advances,  leaving operations like  call. Money and inter-bank lending as well as other short term placements of funds. This research examined the volume of deposit liabilities, loans and Advances, Bad and doubtful debts and Net profit over the period of the Union Banks of Nigeria Plc Enugu.
 For effective and valid investigation, the following hypotheses have been  postulated which will be  tested using appropriate statistical instruments.
Ho:  These is one significant difference between the volume of leading (loans  and  advances) by  commercial banks in interest rate regulated economy and one of interest rate deregulation.
HA:  There is a significant difference between the volume of lending (loans and advances) by  commercial banks in interest rate deregulation.
Ho:  Commercial banks recorded more loan  losses (bad and doubtful  debt)  in interest rate deregulated period than one of interest rate  regulation
HA:  Commercial banks did not record more loan losses (bad and doubtful debt) in interest rate deregulated period than one of interest rate regulation.
Ho:  These is no significant difference  between the volume of commercial banks’  total  deposit liabilities in interest rate regulated period and one of interest rate deregulation.
HA:  There is a significant difference between the volume of commercial banks’  total deposit liabilities in interest rate regulated period and one of interest rate deregulation.
 In order to find out the impact of interest rate deregulation on commercial banks’  lending  operations in Nigeria ,the  following research questions should be considered.
1.  What impact does  the interest rate deregulation crear in commercial banks’ lending operation?
2.  What problems does it create in commercial banks’ lending operation?
3.  How can these problems be solved to enhances the performance of the  commercial banks’ lending operations?
The  definition  of term used will be made only on the conceptual frame work for general comprehension of each term rather than  on the  theoretically analysis.
Interest Rate:  Is used  broadly to  express the relationship in percentage between  the interest  for a given period of time and the principal.  Whereas interest when used in absolute term  means a payment for the use of a borrowed fund for a period of time.
Deregulation:  Disentangling of official or administrative control  and allowing for the interplay of  at market forces of demand and supply to determine  the rate of exchange of values.  Deregulation of interest rate in Nigeria called for the setting of a floor rate below which it is no longer economically viable for any  bank to lend, hence the minimum Rediscount Rate of the central Bank of Nigeria.
Lending:  This is letting of sum of money usually by a Bank or other financial  institution to a borrower to be repaid with or without interest
Deposit:  An account of funds consisting of cash and or cheques, drafts  coupons and other  cash items  that may be converted into  cash upon collection.  The deposit is given to the commercial banks for the purpose of establishing  credit balance. 
Savings: The amount of existing income that is not spent on consumption.  Savings as used in the research context  is that part of income that is not consumed but are left in the commercial banks for some future use.
Bad debt:  An  amount due on an open account that has been proved to be uncollectible.  Any uncollectible receivable is formed bad debts