THE EFFECT OF INTEREST RATE MARGIN ON THE PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1. Background of the Study

The financial systems of most developing nations have come under stress as a result of the economic shocks of the 1980s. The economic shock largely manifested through indiscriminate distortions of financial prices which includes interest rates, has tended to reduce the real rate of growth and real size of the financial system relative to non-financial magnitudes (Davidson and Gabriel, 2004). Rasheed (2010), states that Nigerian economy saw different sectors in 1970s through the mid-1980s (regulated regime, 1960-1985).

Since 1986, the inception of interest rate deregulation, the government of Nigeria has been pursuing a market determined interest rate regime, which does not permit a direct state intervention in the general direct of the economy (Adebiyi and Babatope-Obasa, 2004).

Deposit Money Banks are the most important savings mobilization and financial resource allocation institutions. Consequently, these roles make them an important phenomenon in economic growth and development. In performing this role, it must be realized that banks have the potential, scope and prospects for mobilizing financial resources and allocating them to productive investments and in return promote their performances. Therefore, no matter the sources of the generation of income or the economic policies of the country, Deposit Money Bank would be interested in giving out loans and advances to their numerous customers bearing in mind the three principles guiding their operations which are profitability, liquidity and solvency (Adolphus, 2011). Depositors are paid some amount as interest for parting with their fund while borrowers are charged some amount as lending rates for making use of the funds. The difference between the lending and the deposit rate constitutes the margin. Net interest margin or interest rate margin and interest rate spread are used interchangeably in most literature. However, some authors prefer to use the term net interest margin when using ex-post data (difference between banks quoted lending and deposit interest rate) (see Enendu, 2003).

THE EFFECT OF INTEREST RATE MARGIN ON THE PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA