THE IMPACT OF INTEREST RATE ON INVESTMENT DECISION IN NIGERIA. AN ECONOMETRIC ANALYSIS

ABSTRACT

The focus of this research work is based on the impact of interest rate on 

investment decision in Nigeria. An econometric analysis between the periods of 

1981-2010. Secondary data obtained from the central bank of Nigeria (CBN)

statistical bulletin (volume 21) DEC 2010. Date was collected and empirical 

analysis made. To achieve these objective multiple regression was used in 

analyzing the data that the impact of interest rate on Nigeria prior to interest rate 

regulation in 1.986 and serve as guide to how interest rate can be fixed to 

enhance effective accumulation of savings that can channel to investment. Policy 

recommendation Government should in massively embarks on large-scale 

agriculture, manufacturing industrialization e.t.c and equally encourages small 

and medium scale enterprise (SMES). Public private partnership (ppp) should 

also be encouraged by government for efficient and effective production.

TABLE OF CONTENTS

Title page - - - - - -

Approval or Certification - - - - - -

Dedication - - - - - -

Acknowledgement - - - - - -

Abstract - - - - - -

Table of Content - - - - - -

CHAPTER ONE

INTRODUCTION

1.1 Background of Study - - - - -

1.2 Statement of the Problem - - - - - -

1.3 Objective of Study - - - - - -

1.4 Statement of Hypothesis - - - - - -

1.5 Significance of Study - - - - -

1.6 Scope and Limitation - - - - -

CHAPTER TWO

THEORETICAL LITERATURE AND EMPIRICAL REVIEW

2.1 Interest Rate Volatility and Investment - - - -

2.1.2 Interest Rate and Corporate Finance - - -

2.1.3 Volatility Impact on Market Returns - - -

2.1.4 Market Performance and Volatility - - -

2.1.5 Factor that Affect Volatility - - - -

2.1.6 The Cyclical Volatility of Interest Rate

2.1.7 Why does Interest Rate Volatility - - - -

2.1.8 Interest Rates, Bond Price and Structure - - -

2.1.9 Measuring the Volatility of Interest Rate 

2.1.10 What Determines Interest Rate Volatility - - -

2.2 Empirical Literatures - - -

2.2.1 The Investment Function - - - -

2.2.1 The Investment Function - - - -

2.2.2 Monetary Policy in Nigeria - - - -

2.3 Limitation of Previous of Study - - - -

CHAPTER THREE

RESEARCH METHODOLOGY

3.0 Introductions - - - -

3.1 he Model Specification - - - -

3.1.1 Mathematical Specification Model - - - -

3.1.2 Econometric Specification of Model - - -

3.2.2 Method of Evaluation - - -

3.3 Justification of Model - - -

3.4 Data Require and Source - - - -

3.5 Econometric Software Packages - - - -

CHAPTER FOUR

REGRESSION RESULTS AND ANALYSIS

4.1 The Result Presentation - - - -

4.2 Evaluation of Result

4.3 Econometric Tests - - - -

4.4 Test for Heterscedasticity Test - - - -

4.5 Test for Multicollinearity - - - -

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Summary - - - -

5.2 Conclusions - - - -

5.3 Recommendations - - - -

Bibliography 

Appendix

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.

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