CHAPTER
ONE INTRODUCTION
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).
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