Interest Rates and Deposit Money Banks’ Profitability: Evidence from Nigeria (1980-2014)

Abstract

This study examined interest rates and the profitability of commercial banks in Nigeria from 1980 – 2014. The objective was to investigate the extent to which various interest rate measures affect profitability performance of the quoted commercial banks. Time series data were sourced from annual financial reports of the commercial banks, and Central Bank of Nigeria (CBN) statistical bulletin various issues. Profitability measures such as Return on Investment (ROI), Return on Assets (ROA) and Return on Equity (ROE) were modeled as the function of Monetary Policy Rate (MPR), Prime Lending Rate (PLR), Short-term Savings Rate (STSR), Long-term Saving Rate (LTSR), Treasury Bill Rate (TBR) and Maximum Lending Rate (MLR). The Ordinary Least Square (OLS) method of Regression Analysis was used to estimate the relationship between the dependent and the independent variables.  Augmented Dickey Fuller Test (ADF), Johansen Cointegration Test, Granger Causality Test and Vector Error Correction (VEC) Test were used to determine the dynamic relationship among the variables. Findings showed that the independent variables have greater impact on ROI and ROA than ROE. The Granger Causality proved no casual relationship between the variables. Therefore we recommend that interest rate policies should be integrated with profitability objectives of the commercial banks.