1.0 Introduction
Along with fiscal policy which is concerned with revenue and spending activities of government, monetary policy is widely used to ensure that pre-determined objectives are achieved. One of the most effective and widely used instrument of monetary policy is interest rate. The term interest rate can simply be defined as the cost of using someone else’s money or reviewed from the lenders point of view, as the price for allowing one use someone’s money. It can also be said to represent the price of money (Oluba, 2008). Consequently by keeping interest rate how and reasonably stable, entrepreneurial activities that ill crystallize in improved macroeconomic activities will be enhanced. Interest rate can also exert short-term influence on commercial banks operations and performance.
The banking industry plays a vital role in any economy and as such adequate attention must be given to this sector for the survival of the economy of the nation.
Thus, it is necessary to regulate the activities of the banking system in order to conform to the micro economic objectives of the government. One way of regulating the activities of the banking industry is the use of interest rates.
Aigbokhan (1995), was of the opinion that, the banking industry in Nigeria has undergone radical changes in terms of various interest rate regimes. The evolution of interest rate in Nigeria started in the early 1960 when the interest rate was solely the responsibility of the government to a scenario where by interest rates were determined both by the joint market forces of demand and supply in the 1970’s and 1980’s.Denbury (1980),further noted that extensive government intervention characterized interest rate policies beginning in the 1960’s aimed at promoting the development of fundamental sectors of the economy. Since 1981several financial sector reforms have been carried out encompassing elements of liberalization and other measures aimed at enhancing prudence and tackling the volatility of interest rates.(Odozi, 1998). Prior to this period of reform and various policy framework formulations, the banking industry was characterized by all forms of irregularities and indiscriminate implemental of interest rate polices. This compelled the government through the regulatory agent the Central Bank of Nigeria (CBN) to release and review interest rates from time to time.The interest rates as determined by the central bank of Nigeria from time to time has a significant impact on the operations of commercial banks especially in terms of their overall performance, balance sheet position and the general state of affairs.This study focuses on how banks respond and operate under various interest rate regimes in the manner that benefits them. The study shall also look at how the banks can use different interest rates to operate in a bid to boost overall performance and optimize their resources.
Interest rate is the maximum or minimum rates set by the central bank of Nigeria at which it rediscounts first class bills of exchange and Government securities held by banks. The interest rate policy emerged when the central bank of Nigeria discovered that inflationary pressures have started emerging within the economy. Due to this, the bank rate policy was adopted which is the use of interest rates to control the circulation of money in the economy. The central bank of Nigeria decided to raise the bank rate of borrowing from it by commercial banks. This became costly forcing commercial banks in Nigeria to curtail their borrowing, and this significantly affected their operations and overall performance. In turn, the commercial banks raised their lending rates to the business community and other sundry borrowers resulting to reduced borrowings which in turn reduced the money in circulation. Increased interest rate has the attendant problem of contracting money in circulation, credit and price reduction.Based on the foregoing; there is the urgent need to examine the effect of interest rate volatility on the performance of commercial banks.
The primary aim of this study is to;
Considering the research problem in question, the following research questions are listed below:-
For purpose of this study, the following hypothesis will be considered,
Hypothesis1
Ho: Volatility of interest rate does not affect the performance of commercial banks
H1
: Volatility of interest rate affects the performance of commercial banks
Hypothesis 2
Ho: Volatility of interest rate does not affect bank loans, borrowings or customers savings.
H 1
Most importantly, the significance of this study was to find out clearly, the extent to which interest rate fluctuations or volatility affect or impact on the performance of commercial bank in Nigeria generally, and UBA PLC specifically.
Secondarily, it is significant as it enable the researcher to partially fulfill the requirement for the award of a post graduate Diploma in management of the University of Agriculture, Makurdi.
For purpose of this study certain words and concepts are used which may appear obscure to a reader not well research in the field of finance. An attempt is thus made to define them here.