Interest Rates and Return on Assets of Selected Deposit Money Banks in Nigeria (2008-2017)

International Journal of Research and Scientific Innovation (IJRSI) | Volume VII, Issue V, May 2020 | ISSN 2321–2705

Interest Rates and Return on Assets of Selected Deposit Money Banks in Nigeria (2008-2017)

Prof (Mrs) Esther O. ADEGBITE¹, Dr Abolade Francis AKINTOLA², Adepeju Adetumilara ADEDIRE^3
1Department of Finance, University of Lagos, Akoka-Yaba, Lagos, Nigeria
^2,3Department of Finance, Babcock University, Ilishan – Remo, Ogun State, Nigeria

Abstract:- The paper investigated relationship between interest rate and return on assets of selected deposit money banks in Nigeria from 2008 to 2017. Data considered for the study were obtained from secondary source while ten (10) deposit money banks were selected for the study.
Data gathered were analyzed using regression estimate while panel data analysis was utilized to examine magnitude and significance of the relationship and the research variables. Panel unit root test and Pedroni residual co-integration test were also applied in the study.
The study concluded that prime lending rate, ratio of loan to deposit and treasury bill do not significantly affect return on assets, while savings deposit rate and maximum lending rate exert positive and significant effect on return on assets of deposit money banks in Nigeria.
The study recommends that policy making authorities in Nigeria should coordinate interest rate fluctuations better and induce competition in the entire financial sector.

Keywords: Interest rate, Prime lending rate, Unit root test, Modified ordinary least square.

I. INTRODUCTION

Deposit money bank serves as an intermediary between the surplus and the deficit units; meeting the ultimate needs of both borrowers and lenders. Early banks lent mainly to two classes of borrowers: merchants and governments (Kohn, 2004). Lending to merchants usually took the form of discounting commercial bills. Governments on the other hand were always in need of credits. They borrowed from early banks in exchange of trading rights which attracted a certain interest rate.
A research work of the Central Bank of Nigeria(CBN) in 2016 defines interest rate as the rental payments for the use of credit by borrowers and return for parting with liquidity by lenders over time. It was established in the research findings that interest rate serves as a vehicle for financial intermediary in the economy, it guides the flow of funds from savers to borrowers, it reflects the time value of money and it is also used by the Central Bank of Nigeria as a policy tool to determine the supply and costs of money in the economy. In other words, the economic activity in any economy, to a large extent, is influenced by interest rate.

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