The Impact of Interest Rate Liberalization on Savings and Investment: Evidence from Nigeria

Abstract

The intellectual platform for financial liberalization in developing countries was provided by the seminar works of Mckinnon (1973) and Shaw (1973). They were of the view that interest rate liberalization causes interest rate to rise, thereby increasing savings and investment. This study took a careful look at the impact of interest rate liberalization on savings and investment in Nigeria. It covers the period 1976 to 1999. Simple linear regression technique was adopted using SPSS statistical software. The study reveals that interest rate liberalization had negative non significant impact on savings and negative significant impact on investment in Nigeria. Thus, interest rate liberalization, though a good policy, was counterproductive in Nigeria. This might probably be as a result of improper pace and sequencing. In determining the appropriate sequencing of interest rate liberalization, we recommend that the authorities need to distinguish not only between loan and deposit transactions but also between wholesale and retail transactions. Interest rates on wholesale transactions between sophisticated entities should be liberalized first, followed by lending rates and then deposit rates. This gradual approach safeguards the profitability of banks while allowing time for people and firms to adjust to liberalization.

Keywords: Interest Rate Liberalization, Savings, Investment, Nigeria