Effects of Interest Rate on the Profitability of Deposit Money Banks in Nigeria

Abstract

Nigerian banks remain dominant in the banking system in terms of their shares of total assets and deposit liabilities. Their total loans and advances, a major component of total credits to both public and private sectors are still on the increase in spite of the major constraints posted by the government regulations, institutional constraints and other macro economic factors. Therefore, the main objective of this study was to determine the effect of interest rate on profitability of deposit money banks in Nigeria. Samples of 21 deposit money banks in Nigeria for the period of 2005- 2014 were used. For the purpose of this study, regression analysis was employed to determine the relationship between interest rate and profitability of deposit money banks in Nigeria. The results of the findings showed that there was a positive significant relationship between lending rate and banks profitability. There was a significant positive relationship between inter-banks rate and banks profitability. There was a positive significant relationship between treasury bills rate and banks profitability and finally, monetary policy rate showed positive significant relationship with banks profitability. It is therefore recommended that, government should adopt policies that will help Nigerian banks to improve on their profitability and also there is need to strengthen bank lending rate, inter-bank rate policy, treasury bill rate and monetary policy rate through effective and efficient regulation and supervisory framework.

Keywords: Interest Rate, Profitability, Deposit Money Banks, Nigeria