INTEREST RATE DEREGULATION AND NON-PERFORMING LOANS IN NIGERIA
Wisdom Ezemndi Nwaguru 1
Obanoke Eromosele Felix 2
Anukam Stephen Chidozirim 3
Department of Taxation, University of Agriculture and Environmental Sciences, Umuagwo, Imo State, Nigeria 1
Department of Banking and Finance, National Institute of Construction Technology and Management (NICTM), Uromi, Edo State, Nigeria 2
Economic Department, Imo State University, Owerri, Nigeria 3
Corresponding Email: eromon2002@gmail.com 2
Abstract
Interest rate is one key factor that determines the quality and quantity of loans extended by Deposit Money Banks (DMBs) and by extension it affects the performance of these banks. Generally, the value and volume of non-performing loans (NPL) is determined by economic, borrower and lender related factors. Accordingly, this study investigated the effects of these factors like maximum lending rate, foreign exchange rate, real GDP and inflation rate on the ratio of non-performing loan to the total loan value of DMBs in Nigeria between 1992 and 2023. Thus, foreign exchange rate, real GDP and inflation rate were used as control variables to lending (interest) rate. Relying on data from the World bank and Central Bank of Nigeria (CBN) statistical bulletin, the data collected were subjected to descriptive analysis, unit root test, bounds cointegration test, ARDL short and long run analysis, ECM estimation and a couple of diagnostic tests. Basically, result revealed that there is a long run relationship between the variables while in the short run, maximum lending rate, exchange rate and real GDP have negative but significant effects on NPL. However, in the long run, only lending rate and real GDP have negative and significant effects on NPL. The study as such inferred that interest rate deregulation has a negative but significant effect on non-performing loans in Nigeria. Hence, it was suggested amongst others that there is need to completely deregulate interest rate in the Nigerian banking sector in order to further reduce the volume and value of non-performing loans in the Nigerian banking system. Also, a holistic approach that cuts across economic, borrower and lender-related factors should not be taken for granted.
Keywords: Interest Rate Deregulation, Non-performing Loans, Lending Rate, Deposit Rate.
