An Evaluation of the Effect of Interest Rate on the Profitability of Commercial Banks in Nigeria (A Case Study of First Bank of Nigeria, Jos Main Branch)

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CHAPTER ONE

RESEARCH DESIGN

1.1INTRODUCTION

In the era when planned economic development has been identified as a means of achieving economic take-off in developing countries, the study of some key institutions is imperative. This study is on the banking sector. Thus “An Evaluation of the Effect of Interest Rate on the Profitability of Commercial Banks”

Banks act as financial intermediaries collecting deposits from one group and lending it out to another group. In this role they are able to convert short-term deposits into long-term loans. They bring together people who have money to lend and people who need money. The banks thus act as intermediaries collecting deposits and paying interest on them and making loans and charging interest on the loans made to their customers.

Checkley (1998), Commercial banks are great monetary institution important to the general welfare of the economy.

It will be observed that interest rate is the key element in the performance in this intermediary function of the commercial banks. At high interest rates the cost of borrowing will be increased and prospective borrowers will shy away from borrowing and that in turn affects negatively the profitability of the banks and they also shows up when interest rate is down.

The banker is faced with maintaining a balance between solvency, liquidity and profitability. Consequently the commercial bank’s major challenge is how to manipulate the economic variables in order to ensure an optimum balance between solvency, liquidity and profitability.

It is in compliance with the above issues that First Bank of Nigeria Plc is being used as a typical example to emphasize.

Five Chapters.

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An Evaluation of the Effect of Interest Rate on the Profitability of Commercial Banks in Nigeria (A Case Study of First Bank of Nigeria, Jos Main Branch)

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