EFFECT OF INTEREST RATE MARGIN ON THE PERFORMANCE OF DEPOSIT MONEY BANKS (DMBs) IN NIGERIA

Abstract

This study examined the effect of interest rate margin on the performance of deposit money banks in Nigeria within the sample period of 1980 to 2016. The general objective was to verify how interest rate margin affects the performance of the deposit money banks. The data for this research work (Profitability Rate, Interest Rate, Monetary Policy Rate, Deposit Rate and Lending Rate (LNDR) was obtained from the CBN Statistical Bulletin (2016) and analyzed using Cointegration, and Error Correction Model approach. Profitability Rate was regressed against Interest Rate, Monetary Policy Rate, Deposit Rate and Lending Rate. The result showed that all the variables employed for the purpose of this study had a significant effect on profitability rate in Nigeria for the period under review. The f-statistics revealed that the explanatory variables jointly influence the Profitability Rate.  The unit root test indicates that all the variables were stationary at first differencing. The cointegration test revealed that the variables had a long run relationship with bank profitability in Nigeria within the sample period this necessitated the application of ordinary least square, which revealed that the variables are good measures of bank profitability. Also the R2 was 0.87, showed that 87% of the changes in bank profitability was as a result of fluctuations in the explanatory variables. The Breusch-Godfreyshowed that there is no autocorrelation in the series. Hence, the result could be employed for the formulation of policies.Based on these findings the research recommends among others that; it was discovered that the interest rate had a negative effect on the profitability and overall performance of the deposit money bank; it was observed that once the interest rate is high, investors tend not to borrow as they might not be able to pay back. Therefore, for profitability of the deposit money banks to be improved, there is the need to reduce the rate of interest as this will help attract individuals to get loans for investment purposes hence, improve profitability.