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
the real
size of financial system, more
importantly,
financial repression has
(retarded)
delay development process as envisage by Shaw (1973). This led to
insufficient availability of investible funds, which is regarded as a necessary
starting point for all investment in an economy. This declines in investment as a
result of decline in the external resource transfer since 1982, has
been especially
sharp in the highly indepted countries,
and
has
been accompanied by a slowdown in growth in all
LDCs. Both public and private investment rate have fallen, although the latter more drastically than the former. If this trend is
maintained, it will lead to a slowdown in medium term growth possibilities in
these economies and
will reduce the level of long-term per capital consumption
and income, endangering the
sustainability of the adjustment effort.
The observed reduction in investment in LDCS seems to be the result of several factors. First, the lower availability of foreign savings has not been matched by a corresponding increase in domestic savings.
Secondly,
the determinating of fiscal
conditions
due to the cut of foreign lending, to the rise in domestic interest rate,
and
the acceleration in inflation forced a contraction in public investment. Thirdly,
the increase in macroeconomic
instability
associated with external shocks and the difficulties of domestic government to stabilize the
economic has hampered private investment.
Finally, the debt
overhand has discourage investment, through its implied credit constraints in international capital markets Luis
Serven and Falokun (1989).
In order to curb the adverse effect of the 1980s financial repression, Nigeria
government deregulated interest rate in 1987 as
part of the Structural Adjustment
Programme (SAP)
policy
package. The official
position was that interest rate liberalization among other things, enhance the provision of sufficient funds for investors, especially
manufacturers (a
priority sector) who were considered to be prime agents, and by implication promoters,
of
economic growth. However, in a policy reversal, the government in January
1994
out-rightly introduced some
measure of regulation
into
interest rate management. It was claimed that there
were “wide
variations and unnecessary high rate” under
the complete
deregulation of interest rates.
Immediately, deposit rates were once again set at 12% to 15% per annum while a ceiling of 21% per annum was fixed
for lending a rate.
The cap on interest rate introduced in 1994 was retained in 1993 with a minor modification to allow for flexibility. The cap stayed in place until it was lifted in 1997, thus
enabling the
pursuit of the flexible interest rate regime in which bank deposit and lending rate
were largely detrrmined by the forces of demand and supply for funds (Omole and Falokun 1999).
Declining investment ratio and level are problems;
first of all, because investment
matters for
growth.
Secondly,
because
low
investment increases
vulnerably
in
the
economy
(Niambon and Oshikoya, 2001; 16). The main challenge that Nigeria is facing is
to make policies that will help revive and raise investment in the country in order
to stimulate and sustain economic growth.
In view
of
the perceived challenge, this research work intends to provide answers
to the under listed questions:
1. What is the impact of interest rate volatility on investment decisions in
Nigeria?
2. What other
variable determine investment decision in Nigeria.
3. What has been the trend profile of investment in liberalization. He used
co-integration and Error Correction Model (ECM)
procedure to established both short-term and term effect simultaneously. He found that public investment.
1.3 Objective of the Study
The
research question
above
have
given
us an incite of the objectives
the research work attempts
to
achieve. They are:
1. To determine the impact of interest rate volatility on investment decision in
Nigeria.
2.
To empirically
investigate, ascertain and unravel other determinants of investment decision in Nigeria.
3. To investigate the trend profile of investment in Nigeria.
1.4
Statement of Hypotheses
Based on the above stated research objectives, conclusions would be drawn
from the following research hypotheses:
1. Interest rate has no significant impact on investment.
2. Investment has no other
determinants.
3. Investment has no trend profile in Nigeria.
1.5
Significance of
the
Study
This work is mainly for academic purpose. However, it will be of great importance to my researcher
who would want to embark
on any research on interest rate and investment decision.
Also
this piece of research work would go a very long way in assisting any
person or growth of persons who would wish to know the place of interest rate
and
investment decision in Nigeria.
Though for academic
purpose, this work would be of great important of anybody
who would want to embark on investment.
1.6
Scope of Limitation
of the Study
The study focuses on
the impact of
interest
rate
on investment decision in
Nigeria starting
from 1981-2010
using annual time
series data. Upon
the assertion that every
pros
have some cons, this study cannot be exception. Some hitches and setback were encountered in the process. First among the list is data
unavailability. For this reason, investment variable would be provided by Gross
Fixed Capital
Formation (AFCF).
Secondly, time and
financial construct cannot be left out in the list setback and hitches.
The cost of sourcing materials from the internet is exorbitant because of epileptic and erratic power supply of the Power Holding Company of Nigeria (PHCN).
Thus, the cyber café power their systems with power generating sets which
increases their cost of production which they
eventually
pass
to us (the
consumers of their services).
Despite all
these hitches and setbacks mentioned above, this research work would have been a perfect work.
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