Influence of Interest Rates Regimes on Deposit Money Banks’ Credit in Nigeria: An Econometric Assessment

Abstract

The paper examines the impact of interest rates reform on the financial intermediation function of the commercial banks in Nigeria using the dummy variables approach to Chow test for Structural Stability. The co-integration and error correction model were also used to capture both the long-run and short-run dynamics of the variables used in the model. The empirical results reveal that though the intermediation function of the commercial banks has significantly improved as a result of the deregulation of the interest rate, it has not translated into improved standard of living of the populace as the incidence of poverty is still on the increase. Also, the results show that lending rates do not influence demand for domestic credits in Nigeria, unlike deposit rates which proved to be a major determinant for amount of credits extended by the commercial banks.  We conclude that though, interest rates deregulation has improved credit extension to the domestic economy, the link between interest rates, domestic credit extension and economic growth is not automatic. Hence, the need for partial deregulation of interest rates that will ensure concessionary interest rates to the productive sector of the economy. Commercial banks are also advised to device better strategies that will boost their credit mobilization ability to ensure their profitability and sustain credit extension to the productive sector of the economy.