ABSTRACT

This study is on the effects of interest rate in domestic investment in Nigeria. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made accountants, human resource managers, senior staff and junior staff was used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies

 CHAPTER ONE

INTRODUCTION

• Background of the study

Interest is the reward that accrues to people who provide the fund with which capital goods are bought (Soyibo and Adekanye, 1992). Interest can also be defined as the payment made to a lender by a borrower for the use of a sum of money for certain period of time. The charging of interest on loan was initially abolished during medieval days, both was later legalized by King Henry VIII in 1545 when he abolished the usury laws in it was condemned. These usury laws were established during the medieval time when the payment of interest rate was strongly condemned and termed usury. During that time, it was believed that loan was an aid to an individual or neighbour who is distressed, for such reason, they felt charging of interest on loan was not proper (Bhatia and Khatkhate, 1973)

There have been several policies in Nigeria which includes Protection and tax holidays for Infant Industries, liberal credit facilities for industrial and Agricultural Investments, interest rate policies amongst others. These measures are geared towards boosting the level of investment in the country which will ultimately grow the economy of the nation. However, investment is influenced by several factors which include Exchange Rate Instability, Poor Infrastructure, Political Instability, Poor Credit Ratings, Interest Rates, Exchange rates amongst others. Interest rate boosts the level of investment as a result interest rate is a major determinant of investment. Interest rate is the price paid for the use of money. Investment is the change in capital stock during a period. Investment plays a very important role in economic growth in a country. Countries rely on investment to solve economic problems such as poverty, unemployment etc.(Muhammad 2004). As such determinants of level of investment become paramount in an economy. Banks as intermediaries move fund from surplus units of the economy to deficit units by accepting deposits and channeling them into the appropriate sectors. The extent to which this could be done depends on the rate of interest and level of development of financial sector as well as the saving and investment habit of the people. Hence, the availability of investible fund is therefore necessary for all investment in the economy which eventually translates to economic growth and development (Uremadu,2006). Interest rate policy is among the emerging issues in view of the role it is expected to play in the deregulated economy in inducing savings which can be channeled to investment and thereby increasing employment, output and efficient financial resource utilization (Uchendu 1993). Also, interest rates can have a substantial influence on the rate and pattern of economic growth by influencing the volume and disposition of saving as well as the volume and productivity of investment (Leahy, 1993 as cited in Lensink 2000). The behaviour of interest rates, aids to determine the investment activities and hence economic growth of a country. Investment depends upon the rate of interest involved in getting funds from the market by investors, while economic growth to a large extent depends on the level of investment. Therefore, the need to promote an interest rate that will ensure increase in investment and consequently enhancing economic growth cannot be over emphasized.

• STATEMENT OF THE PROBLEM

Over the years, achieving sustainable growth and development in Nigeria has been very challenging. There has been low level of savings and investment, instability in Monetary and Fiscal Policies, Falling Crude Oil Prices in the International Market, High level of interest rate, and Poor infrastructural development amongst others. As a result of the instability in the country, the Nigerian Government with the aid of the International Monetary Fund adopted the Structural Adjustment Programme in 1986. The aim was to restructure the productive and consumption patterns of the economy through the elimination of price distortions and reduction in the dependency on crude oil export and import of raw materials and consumer goods. Prior to the introduction of the Structural Adjustment Programme in Nigeria in 1986, the Monetary Authority, the Central Bank determined interest rate with a specific range between deposit and lending rates. Banks were required to channel specific percentage of their credits to the priority sectors of the economy. The Agricultural and Industrial sectors were the priority as well as the productive sectors of the domestic economy. Despite these measures put in place by the Government, stimulating the productive sectors of the economy have not been achieved. Interest rate has been unstable and high level of Investment has not yet been achieved.

• OBJECTIVE OF THE STUDY

The objectives of the study are;

1. To determine the impact of real interest rate on Domestic Investment
2. To investigate the effect of prime lending rate on Domestic Investment
3. To determine the effects of interest rate in domestic investment in Nigeria
   • RESEARCH HYPOTHESES

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

H₀: there is no impact of real interest rate on Domestic Investment

H₁: there is impact of real interest rate on Domestic Investment

H₀²: there are no effects of interest rate in domestic investment in Nigeria

H₂: there are effects of interest rate in domestic investment in Nigeria

1.5 SIGNIFICANCE OF THE STUDY

The study will give a clear insight on effects of interest rate in domestic investment in Nigeria. The study will be significant to students, Nigeria government and the general public. The study will also serve as reference to other researchers that will embark on this study

• SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers effects of interest rate in domestic investment in Nigeria. The researcher encounters some constrain which limited the scope of the study;

1. a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
2. b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
3. c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.

1.7 DEFINITION OF TERMS

INTEREST RATE: the proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.

DOMESTIC INVESTMENT: investment in the companies and products of someone’s own country rather than in those of foreign countries: On the whole, China depends more on domestic investment and consumption than on exports to generate its growth.