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

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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.

TABLE OF CONTENTS

Titlei

Approval ii

Certificationiii

Dedicationiv

Acknowledgementsv

Abstractvi

List of Tables vii

CHAPTER ONE - INTRODUCTION

Background of the Study 1

Statement of the Problem 3

Objectives of the Study 5

Research Hypotheses 6

Significance of the Study 6

Scope of the Study 8

Limitations of the Study 8

CHAPTER TWO – REVIEW OF RELATED LITERATURE

2.1 Evolution of Commercial Bank in Nigeria 10

2.2 Conceptual Framework 14

2.3 Empirical Literature 28

2.4 Theoretical Literature 37

2.5 Theoretical Framework 40

CHAPTER THREE – METHODOLOGY

3.1 Research Design 47

3.2 Sources of Data 47

3.3 Area of Study 48

3.4 Description of Research Variables 48

3.5 Model Specification 51

3.6 Estimation Techniques 52

CHAPTER FOUR – PRESENTATION AND ANALYSIS OF RESULTS

4.1 Descriptive Analysis 56

4.2 Diagnostic Analysis 57

4.3 Cointegration Test 63

4.4 Error Correction Model 65

4.5 Test of Hypotheses 67

CHAPTER FIVE – FINDINGS, RECOMMENDATIONS AND CONCLUSION

5.1 Summary of Findings 70

5.2 Recommendations 71

5.3 Conclusion 72

LIST OF TABLES

Table 1: Descriptive Result 56

Table 2: Augmented Dickey Fuller Unit Root Trend and Intercept 57

Table 3: Breusch-Godfry Serial Correlation LM Test 58

Table 4: Heteroskedasticity Test: Breusch-Pagan-Godfrey 63

Table 5: Cointegration 64

Table 6: ECM Result 65

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

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