CHAPTER
ONE
1.0 INTRODUCTION
The
impact of interest rate has received a great deal of attention in recent times.
In order to see to the smooth running of the economy of the nation, the apex
bank (CBN) introduced monetary policy, which serves as a control of banking
operations. The policy makes use of several instrument or tools, but the tool
in focus here is the “Interest rate”.
An
interest rate is defined as a percentage charged for the use of funds borrowed
from the bank or an investor within or for a predetermined period of time. This
period of time may be short term (Less than one year), medium term (one to five
years) and long-tem (more than five years rate) The borrowing rate is the cost
of money. Deposit rate is the rate paid on deposit e.g savings account, fixed
deposit account or current account.
However,
the difference between Monetary Policy Rate (MPR) and the Maximum Lending Rate
by the Deposit Money Bank is called Interest rate Spread (IRS).On the other
hand interest rate can also be measured as the difference between bank deposit
rate and that of lending rate.
One
of the major problems of every economy in the world is inflation; this is caused
by too much money in circulation.
Experts
believed that, one of the major causes of high price of goods and services is
too much money in circulation and that if the aspect is being properly managed;
it will go long way in reducing the level of inflation in the economy. In order
to minimize the level of inflation, interest rate serves as one of the vital instrument
that provides solution. The CBN use its guidelines are used to either increase
the rate or reduce it. It is based on whether there is shortage of money in
circulation or excess. When the rate increases it aims at reducing the
spendable fund in the hand of citizens. On the other hand, that is, when it is
reduced, it helps to inject funds into the economy in order to encourage more
productivity. Products are been encouraged to borrow money because the cost is
low.
Another
important aspect of interest rate is the rate charged by CBN on bills for other
banks. This is usually stated in monetary policy of CBN for the year. The rate
charged by Central Bank of Nigeria is what determines the rate at which
commercial banks will give out their loan and advance to their customers.
The
higher the CBN rate, the higher the rate charged by banks on loan thereby
encouraging the customers to borrowing from the banks.
1.1 STATEMENT OF PROBLEM
Many
financial institutions once raised with the problems associated with high
interest rate are contributing to some of the economic problems we are facing
today. Then consistent increase of interest rate has discouraged the manufacturing
firms in the nation.
Firms
that are supposed to produced goods and services for our local consumption we
are both being negatively affected by this fact. These gives room for
unemployment and shortage of local products. Some years back, due to the effect
of global economic recession, the lending rate of bank increased to more than
27%, this scared many borrower away from borrowing because the risk is very
high, Consequently, these problems have led to the redundancy of Nigerians to
invest their money in portfolio Investment, thereby creating inadequate
intimidation and mobilization of funds from surplus economic unit to the deficit
economic unit Therefore, the attention of the project will focus on the problem
associated with high interest rate on Nigeria bank performance
1.2
OBJECTIVES OF THE STUDY
This
study specifically:
a.
Examine the impact of interest rate on commercial banks performance
b.
To determine the extent to which interest rate affects profitability of
Commercial banks.
1.3
RESEARCH QUESTIONS
To
enable the researcher carry out his study effectively, the following research
questions were formulated:
1.
Has interest rate affects Commercial
Banks performance.
2.
To what extent has interest rate affect profitability of Commercial Banks?
1.4 RESEARCH HYPOTHESES
Ho:-
Interest rate has no significant impact on the Nigeria Commercial Banks
performance,
H1:-
Interest rate has significant impact on the Nigeria Commercial Banks
performance.
Ho:-
High interest rate does not have any significant positive effect on Commercial Banks profitability.
H1
:-
High interest rate have significant positive effect on increases Commercial
Banks profitability.
1.5
SIGNIFICANCE OF THE STUDY
The
research work will highlight the impact of interest rate policy in the bank Performance,
how it has contributed to the realization of a better economy and sound financial
system. In this case proper implementation of the CBN interest rate guidelines
by other banks is vital.
This
study will enlighten the public on the impact of interest rate on bank performance.
The study will be of great usefulness to the present generation of bankers,
banking and finance students, financial experts, investors and the general
public.
1.6
SCOPE AND LIMITATIONS OF THE STUDY
The
research work is expected to cover the impact of interest rate on all
Commercial
Banks and other financial institutions that are under the binding of CBN
interest rate policy. But due to limited time and resources needed for the execution
of this project, the work shall be limited to First Bank of Nigeria Plc.; who
will have all the necessary information we will need for the effective execution
of this project to serve as generalization for Commercial Banks.
1.7 HISTORICAL BACKGROUND TO THE CASE STUDY
First
Bank of Nigeria Plc, was incorporated as a limited liability company in March
31, 1894, with head office in Liverpool by Sir Alfred Jones, a shipping magnate.
It started business in the office of elder Dempster and company in Lagos under
the corporate name of the bank of British West Africa (BBWA) with a paid up
capital of 12,000 pounds sterling, after absorbing the predecessor, the African
banking corporation which was established earlier in 1892. The African banking
corporation recorded an impressive growth and worked closed with the colonial
government in performing the traditional functions of a central Bank, such as
issue of share in the West African sub-region. To justify its West African
coverage, a branch of the bank in Nigeria was the old Calabar in 1900 and two
years later services were extended to northern Nigeria.
The
bank had at various times embarked on reconstruction initiatives. In 1957, it
changed its name from Bank of British West Africa to bank of West Africa. In
1969, the bank was corporate locally as the standard bank of Nigeria limited in
lines with the decree of 1968. Changes in the name of the bank also occurred in
1979 and 1991, to First bank of Nigeria limited and First bank of Nigeria Plc.,
respectively. In 1985, the bank introduced a decentralized structure with five
regional administrations. To further enhance the banks operational efficiency,
this was reconfigured into sixteen-area office in 2003.First bank got listed on
the Nigeria Stock Exchange (N813) in March 1971 and has won the NSE presidents
merits award eleven times for the best financial reports in the banking sector.
1.8 DEFINITION OF TERMS
COMMERCIAL
BANKS: Commercial Banks are described as supermarket of financial services. They
are retail banks that take small amount of deposit from many customers and
operate wide network of branches because of the nature of their business. The
most important function of commercial banks are the acceptance of deposits, the
provision of facilities for domestic and foreign
remittance
and granting of loans and advances to their customers. DETERMINANTS OF LENDING:
These are factors which influence the lending decision of lending principles of
commercial banks. They include the volume 0f deposits of the banks, the
preceding interest rare, the legal requirement of the Central Bank of Nigeria,
level of domestic and foreign investment of commercial bank, the banks
liquidity ratio, the nature of their business, the prestige of goodwill of the
banks, CBN monetary policies and guidelines, the economic position of a nation,
the political and socio- cultural environment in which they operate, the status
of their individual customers, the internal policies of the banks, their
capital base to mention a few. Some have positive impact and some negative
impact on the banks’ lending behavior.
LENDING
BEHAVIOUR: These are laid down principles which guide the lending practice of
banks. These principles could be due to external or internal factors. These
principles act as a blue print to measure the effectiveness of Commercial Banks
lending activities.
SHORT
TERM FACILITIES: These are credit extended to customers that are expected to be
rapid within one year e.g. overdraft and LPO financing.
MEDIUM
TERM FACILITIES: These are credit extended to customer and repayable between 3
and 5 years. Examples are terms loans and leasing.
Order for full projects: #2000
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Bank account number:. 0165460421
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