EFFECTS OF INTEREST RATES ON SAVINGS AND INVESTMENT IN THE NIGERIAN ECONOMY

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO STUDY

In Nigeria, interest rate policy is among the emerging issue in current economic policy as regard the role of it is expected to play in the deregulated economy in inducing savings which can be channeled to investment and thereby increasing employment, output and efficient financial resources utilization. The administration of low interest rate which was intended to encourage investment was witnessed in the 1950s to mid 1960s. In the third quarter (3/4) of 1986, Structural Adjustment Programme (SAP) was introduced by the then head of state General (Rtd) Ibrahim Gbadamosi Badangida. This programme ushered in an era when fixed low interest rate was gradually replaced by a deregulated interest rate regime where rates were more influenced or determined by market forces.

The policy shift de-emphasized direct investment stimulation through the low interest rates. The mobilized fund was intended for investment. In Nigeria, the pursuit of the two interest rate regime provide a case study for Keynesian interest rate investment relationship and the McKinnon Shaw interest rate saving and investment hypothesis. Several reason have been given as to why people invest and save. Some of these reasons are; the direction of interest rate, the returns that is expected from such an investment, the interest accrues to savers and some other developmental reasons. It is obvious that the higher the rate of interest the lower the level of investment and also the lower the rate of interest, the higher the level investment. However, this work is also directed toward understanding the kind of relationship that exist between interest rate, savings and investment McKinnon and Shaw conclude that higher interest rate induce savings which can be utilized is investment therefore these two transmission channeled through which interest rate affect investment, the relate to interest rate as a cost of fund (capital). Also, interest rate encourage financial savings, which can be invested (self-finance) or lent out to borrow as loan (external finance).