CHAPTER ONE INTRODUCTION
- Background to the Study
Lending rate management has been a contemporary issue among academics and policy makers for a very long time. This started predominantly when the Gold standard collapsed in the 1930‟s and subsequent emergence of the Bretton wood system of adjustment peg from the 1940‟s, through the espousal of flexible Lending rate given by the developing nation in 1970 and those carrying out structure reforms in the 1980‟s as well as in the wake of the currency crises in developing economies in the 1990‟s.
The financial systems of most developing nations have come under stress as a result of the economic shocks of the 1980s. The economic shocks largely manifested through indiscriminate distortions of financial prices which includes interest rates, has tended to reduce the real rate of growth and the real size of the financial system relative to non-financial magnitudes (Davidson and Gabriel, 2009). Rasheed (2010), states that Nigerian economy saw different interest rates for different sectors in 1970s through the mid-1980s (Regulated Regime, 1960-1985). The preferential interest rates were based on the assumption that the market rate, if universally applied, would exclude some of the priority sectors. Interest rates were, therefore, adjusted periodically with „visible hands‟ to promote increase in the level of investment in the different sectors of the economy. For example agriculture and manufacturing sectors were accorded priority, and the commercial banks were directed by the Central Bank to charge a preferential interest rates (vary from
year to year) on all loans and advances to small-scale industries. Since 1986, the inception of interest rates deregulation, the government of Nigeria has been pursuing a market determined interest rates regime, which does not permit a direct state intervention in the general direct of the economy (Adebiyi and Babatope-Obasa, 2004).
Lending rate policies in developing countries are often sensitive and controversial, mainly because of the kind of structural transformation required, such as reducing imports or expanding non-oil exports, which invariably imply a depreciation of the nominal exchange rate. Such domestic adjustments, due to their short-run impact on prices and demand, are perceived as damaging to the economy. Ironically, the distortions inherent in an overvalued Lending rate regime are hardly a subject of debate in developing economies that are dependent on imports for production and consumption. Lending which may be on short, medium or long-term basis is one of the services that deposit money banks do render to their customers. In other words, banks do grant loans and advances to individuals, business organizations as well as government in order to enable them embark on investment and development activities as a means of aiding their growth in particular or contributing toward the economic development of a country in general (Felicia, 2011).