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THE EFFECT OF INTEREST RATE ON SAVINGS IN NIGERIA

ABSTRACT

This study examined the effect of interest rates on savings in Nigeria Using multiple regression analysis. The study also carried out some diagnostic tests like heteroskedasticity, serial correlation test and stability test. This work made use of secondary data sourced from the central bank of Nigeria statistical bulletin from 1981 to 2014. The result of this regression analysis showed that the coefficient of interest rate was positive and the level of significance, 0.05 was less than the p-value so interest rate has a positive but insignificant relationship with savings in Nigeria. The control variable used (GDP and government expenditure) also showed positive but insignificant relationship with savings. This simply means that interest rate has no significant effect on savings in Nigeria. Rather, savings are affected by low income. Since the result shows a positive relationship between interest rates and saving, it was recommended that the central bank should adopt a policy of interest rates that will not only boost savings in Nigeria but also improve the level of investment which will in the long run increase the income of individuals and thereby increasing their level of savings and therefore that of the economy as a whole. Also the government should spend more on viable projects as it increases investment, income, savings and finally economic growth. The government should also provide enabling environment to thrive as this will increase income thereby increasing total savings of the country.

CHAPTER ONE

INTRODUCTION

Background of the Study

Interest rate and savings are inseparably linked. They are among the economic variables that are of great importance to a large number of people, the government, business firms, entrepreneurs, foreign investors, the financial sector and the household. They are so important that they determine to a large extent the level of investment and the economic growth in an economy (Udude, 2015). Interest rate is an important economic price. This is because whether seen from the point of view of cost of capital or from the perspective of opportunity cost of funds, interest rate has fundamental implications for the economy either impacting on the cost of capital or influencing the availability of credit, by increasing savings (Acha and Acha 2011).

Interest rate is the opportunity cost of borrowing money from a lender to finance investment project. It is the price paid for the use of money. Interest rates play important role in controlling major macroeconomic variables. The primary role of interest rate is to help in the mobilization of financial resources and to ensure efficient utilization of resources for the promotion of economic growth and development (CBN 1970). Savings is defined as that portion of income after tax, which is not spent on consumption goods. Savings can also be seen as that part of income, which is not devoted to the purchase of household items and firm (McKinnon, 1973). 

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