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THE EFFECT
OF INTEREST RATE ON SAVINGS IN NIGERIA
ABSTRACT
This study
examined the effect of interest rates on savings in Nigeria Using multiple
regression analysis. The study also carried out some diagnostic tests like
heteroskedasticity, serial correlation test and stability test. This work made
use of secondary data sourced from the central bank of Nigeria statistical
bulletin from 1981 to 2014. The result of this regression analysis showed that
the coefficient of interest rate was positive and the level of significance,
0.05 was less than the p-value so interest rate has a positive but insignificant
relationship with savings in Nigeria. The control variable used (GDP and
government expenditure) also showed positive but insignificant relationship
with savings. This simply means that interest rate has no significant effect on
savings in Nigeria. Rather, savings are affected by low income. Since the
result shows a positive relationship between interest rates and saving, it was
recommended that the central bank should adopt a policy of interest rates that
will not only boost savings in Nigeria but also improve the level of investment
which will in the long run increase the income of individuals and thereby
increasing their level of savings and therefore that of the economy as a whole.
Also the government should spend more on viable projects as it increases
investment, income, savings and finally economic growth. The government should
also provide enabling environment to thrive as this will increase income
thereby increasing total savings of the country.
Background
of the Study
Interest
rate and savings are inseparably linked. They are among the economic variables
that are of great importance to a large number of people, the government,
business firms, entrepreneurs, foreign investors, the financial sector and the
household. They are so important that they determine to a large extent the
level of investment and the economic growth in an economy (Udude, 2015).
Interest rate is an important economic price. This is because whether seen from
the point of view of cost of capital or from the perspective of opportunity
cost of funds, interest rate has fundamental implications for the economy
either impacting on the cost of capital or influencing the availability of
credit, by increasing savings (Acha and Acha 2011).
Interest
rate is the opportunity cost of borrowing money from a lender to finance
investment project. It is the price paid for the use of money. Interest rates
play important role in controlling major macroeconomic variables. The primary
role of interest rate is to help in the mobilization of financial resources and
to ensure efficient utilization of resources for the promotion of economic
growth and development (CBN 1970). Savings is defined as that portion of income
after tax, which is not spent on consumption goods. Savings can also be seen as
that part of income, which is not devoted to the purchase of household items
and firm (McKinnon, 1973).
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