Financial Liberalization and Interest Rate Behaviour: The Nigerian Experience

Abstract

This study examined the effect of financial liberalization on interest rate behaviour in Nigeria from 1987 through 2018. The study made use of secondary data collected from various editions of the Central Bank of Nigeria’s Statistical Bulletin covering the period under this study. Analysis of the collected data was carried out using Vector Autoregressive (VAR) Model which is an unrestricted VAR designed to be used with non-stationary data series that are found not to be cointegrated. The Augmented Dickney-Fuller test revealed that all the research variables were stationary at order one while the Johansen cointegration test revealed no cointegration relations among the variables. furthermore, while the proxies of financial liberalization such market capitalization and banking sector spread significantly but negatively influenced the behaviour of interest rate and by extension, Nigerian economic growth, deposit interest rate against the a priori expectation, showed a weak and negative relationship with lending interest. Degree of trade openness however, aligns with a priori expectation as it showed a positive but weak relationship with lending interest rate. The causality test revealed that financial liberalization has strong causality effect on the behaviour of interest rate. Based on these findings, this study concluded that financial liberalization was a strong determinant of lending interest rate behavior and has a strong causality effect on lending interest rate. Arising from this conclusion, it was recommended that government should continue to formulate economic policy that will structurally support full deregulation of the financial sector, especially, the foreign exchange market that still witnesses intermittent interventions by the regulatory authorities.