IMPACT OF INTEREST RATE CHANGES ON EFFECTIVE PRICING OF BANK CREDIT IN NIGERIA

Background of the Study: Operators in the banking system argue that the pegging lending rate at the present level by the Central Bank of Nigeria (CBN) is not realistic as it is not market determined especially urban considered against the cost of deposits (term deposits and saving account) as the rate of inflation, financial and business risks.

However, it is argued that the Central Bank of Nigeria (C.B.N) sometimes reacts to the face of persistence of excess bank reserves due to weak demand for credit by the private sector and the acute shortage of money market securities in which banks could invest.

Downward and upward tendencies in the level of interest rates are conditioned in part by counter cyclical changes in bank reserves and bank credit.

The purpose of this research work is to verify the fixing of rates of interest changed by banks.  The impact of pegged lending rates on effective pricing of bank credit over the years will be assessed.

The work involved an explanation of: The impact of liquidity ratios on interest rates, the relationship between the supply of fund and the pricing of bank credit will also be verified, the impact of liquidity ratio on supply credit and the impact of inflation on the pricing of bank credit.

When the Central Bank of Nigeria (CBN) pegs rates of interest, banks seem to be shortchanged.  Yet there is need to fund industrial, agricultural and commercial activities.  These sectors required low funding cost if the economy must experience full capacity utilization full employment and a reduction in social crises.

Some scholars have also approached the subject from the perspective of time series in a bid to find a common ground of consensus but here also, the results have been contentious. For instance, Harrison, Sussman and Zeira (1999) using a panel of data for 48 US states from 1982- 1994, find a feedback effect between the real and the financial sector that helps to explain intranational differences in output per capita. Luintel and Khan (1999) using the VAR technique on 10 developing countries with yearly data from the 1950s to the mid-1990s find two cointegrating vectors identified as long-run financial depth and output relationship linking financial development to economic development. They also find causality between the level of financial development (depth) and growth in per capita income in all sample countries.

This confirms the findings of Demetriades and Hussein (1996) who, with data on 16 developing countries, with 30 to 40 yearly observations from the 1960s, find that in most countries evidence favours bidirectional causality and in quite a few countries economic growth systematically causes financial development. Also, Shan, Morris and Sun (2001), using quarterly data from the mid-70s to 90s for 9 OECD countries, find evidence of reverse causality, namely from growth to financial development, in some countries and bi-directional causality in others, but no evidence of one-way causality from financial development to growth.

Monetary policy is a precise step taken by the Central Bank (Monetary Authority) to control the value, supply and cost of money in the economy with a view to actualizing predetermined macroeconomic objectives (CBN, 2013). It is the objective of the apex bank to control the volume of money circulation with the instrument of money supply and interest (Ufoeze, Odimgbe, Ezeabalisi and Alajekwu, 2018). This discussed the important role of money in an economy.