The Impact of Interest Rate Spread on the Performance of Nigerian Banking Industry

Abstract

This study examined the impact of interest rate spread on the performance of Nigerian banking industry for the period of 1986-2012. The study used OLS method of estimation to analyze the data generated from CBN statistical Bulletin and World Bank online data base. Testing for the properties of time-series, ADF test indicates that all the variables are integrated of same order I(1). The Co-integration test reviles that there exists a long-run relationship among the variables under consideration. The result shows that interest rate spread, negatively and significantly impact on bank performance in the long-run. Exchange rate and GDP was found to be positively and significantly affecting bank performance in Nigeria at the long-run. The result of the ECM indicates that 23.37 percent of the disequilibrium in the model will be corrected annually. Moreover at the short-run interest rate spread also negatively but insignificantly affect bank performance in Nigeria. Government should improve the macroeconomic environment by striving to develop the level of infrastructural facility in the country as well as reducing the level of insecurity in the country by cubing the menace of the Boko-Haram sect and that of Militancy in Nigeria. Therefore banks should not rely only on interest income if they must continue in business.

Key Words: Interest Rate Spread, Bank Performance, Exchange Rate, Gross Domestic Product (GDP)