Tuesday, 2 December 2014


1.1      Background of the Study
Investment is the change in capital stock during a period. Consequently, unlike capital, investment is a flow term and not a stock term. This means that capital is measured at a point in time, while investment can only be measure over a period of time.

Investment plays a very important and positive role for progress and prosperity of any country. Many countries rely on investment to solve their economic problem such as poverty, unemployment etc (Muhammad Haron and Mohammed Nasr (2004).

Interest rate on the other hand is the price paid for the use of money. It is the opportunity cost of borrowing money from a lender to finance investment project. It can also be seen as the return being paid to the provider of financial resources, for going the fund for future consumption. Interest rates are normally expressed as a percentage rate. The volatile nature of interest is determined by many factors, which include taxes, risk of investment, inflationary expectations, liquidity preference, market imperfections in an economy etc.

Banks are given the primary responsibility of financial intermediation in order to make  fund  available  for  economic  agents.  Banks  as  financial  intermediaries move  fund.  Surplus  sector/units  of  the  economy  to  deficit  sector/units  by
accepting deposits and channeling them into lending activities. The extent to which this could be done depend upon the rate of interest and level of development of financial sector as well as the saving habit of the people in the country.

Hence, the availability of investible funds is therefore regarded as a necessary starting part for all investment in the economy which will eventually translate to economic growth and development (Uremadu, 2006).

Many researchers have done a lot of study on the impact of interest rate on investment. In Nigeria, Ologu (1992) in a study of The Impart of CBN Money Policy on aggregate investment behavior. Found out only few of the variables were significant at both the 95% and 90% confidence limits in explaining the behavior of investment during the (1976-90) period of student”. Specifically, he found out that:
1.  Contrary to expectation and to change’s stock adjustment hypothesis, the existing stock of capital goods (plants and machinery) was not a major determinant of investment behavior of forms in Nigeria.
2.  Interest rate was significant in  influencing investment decision nothing that” this is not surprising since in a situation of limited residual funds as in Nigeria, the cost of capital should exert significant influence on both the frequency and volume of demand for invisibles funds by investors.

Lesotho  (2006)  studied  “An  investigation  of   the  determinants  of   private investment the case of Botwana”. Among his independent variable were real interest rate, credit to the private investors, public investment and trade credit to the private investors, real interest rate affect private investment positively and significantly. Other variable do not affect private investment level in the short- term as they show insignificant co-efficient. GDP growth and conform similar finding sin studies by Oshikoya (1994), Ghura and Godwin (2000) and Malmbo and Oshikoya (2001).

Aysam et al (2004) in their study “How to Boot Private Investment in the MENA countries. The role of Economic Reforms. Among their independent variables were accelerator, real interest rate, macroeconomic stability, structural reform, external stability, macroeconomic volatility, physical infrastructure. Their studies ranged from 1990 to 1990 comprising of panel of 40 developing countries. They used co-integration technique to determine the existence of a long-term relationship between private investment and its determinants. They fund out that almost all the explanatory variables exhibit a significant impact on private investment, with the exception of macroeconomic stability and infrastructures. The accelerator variable (ACC) has the expected positive sign, which implies that the anticipation of economic growth induce more investment. Similarly, interest rate (r) appears to exert a negative effect on firm’s investment projects, which is consistent with the user cost of capital theory.

In the U.S, Evans, estimated that net investment would rise by anything between 5% and 10% for a 25% fall in interest rate. These percentage changes were calculated to occur over a two year period after a one year log.

A study by Kham and Reinhart (1990) observe that there is a close connection between the level of investment and economic growth. In other words, a country with low level of investment would have a low GDP growth rate. The use of ryid exchange rate and interest rate controls in Nigeria in low direct investment, the leads to financial impressions in the early 1980. Fund were inadequate as there was a general lull in turn leads to the liberalization of the financial system Omole and Falokun (1999). This may have an adverse effect on investment and economic growth.

As already discussed so far, it is quite clear that an understanding of the nature of interest rate behavior is critical and crucial in designing policies to promote savings, investment and growth. It is pertinent to note that this research attempts to investigate and ascertain the impact of interest rate volatility on investment decisions in Nigeria using time series data covering from 1981-2010.

1.2     Statement of the Problem

The financial systems of most developing countries (like Nigeria) have came under stress as a result of the economic shocks of the 1980s. The financial repression,  largely  manifested  through  indiscriminate  distortions  of  financial prices including interest rates, has tended to reduce the real rate of growth and..................
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