IMPACT ON PROFITABILITY OF COMMERCIAL BANK IN NIGERIA OF INTEREST RATE DEREGULATION
A CASE STUDY OF UNION BANK OF NIGERIA
ABSTRACT
          This researcher work is a survey of an analysis of the effect of interest rate deregulation on the profitability of commercial banks. The research to work tried to find out among other objectives, the impact of deregulation of  interest rate policy on the profitability of commercial bank. In carrying out the research, the regression and correlation method were use to analyze statistically to tools. The result obtained indicated from the hypothesis tested that the null hypothesis was rejected.     However, it was discovered from the findings of the research that deregulation has contributed relatively in the development of the economy thus.   It has engendered competition among bank and other institutions for deposits as well s some non  - traditional activities. Saving mobilization has also been encouraged by demand and supply which determined inter4est rate. It has also induced the bank to source for idle funds, which are sent to deficit area to encourage loans and advances .     Sanity has been encouraged in some banks as they are now beat on judicious use of  their available funds and hence allocated it  to the most profitable ventures.  The study also reveal that there was also increased in the economy by deregulating interest rate, it become incumbent on the side of the researcher to make the following recommendation. That the changes in the rediscount rate at any given period should be  between the range of 15% and 25% depending on the monetary policy pursued or intended to be pursued.           That written the framework of the current market economy in relation to interest rate, there should  be a sufficient institutional control or regulatory legislation to ensure that the very vital sector of the economy that ordinarily would not survive the economic regime of deregulation are adequately created for.
TABLE FO CONTENTS
CHAPTER ONE
1.0         Introduction                                       
1.1     Background of the study                      
1.2         Statement of the problem                    
1.3         Objective of the study                                   
1.4         Researcher Questions                                    
1.5         Formulation of hypothesis                    
1.6         Significance of the study                      
1.7         Scope and Limitation of the  study        
1.8         Definition of terms                                        
CHAPTER  TWO
REVIEW OF  RELATED LITERATURE  
2.1         Definition of Interest rates                                      
2.2         Structure of interest rates                    
2.3         Different Approaches to interest rate determination
2.4         Relationship Between profit and interest rate  
2.5         Reasons and method of regulation                  
2.6         Effects of Regulations on Banks            
2.7         Concept of deregulation                       
2.8         Reasons for Deregulation                     
2.9           Implications of deregulation case Against Deregulation
CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
3.1         Research Design                                           
3.2         Sources of Date                                            
3.21    Primary Source of Date                                   
3.22    Secondary Sources of Date                              
3.23    Location of Date                                                      
3.24    Area of Study                                                          
3.25    Population                                                              
3.26    Sample size determination and Sampling Technique
3.27    Instruments of Data Collection              
3.28    Data Collection                                              
3.29    Data Treatment                                             
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.2        Test of Hypothesis                     
CHAPTER FIVE
SUMMARY , RECOMMENDATION AND CONCLUSION
5.1    Summary of Findings                                        
5.2    Recommendations                                                     
5.3    Conclusion                                                      
Bibliography                                                 
Appendices                                                            
Application to Respondents sample of Questionnaire  
CHAPTER ONE
INTRODUCTION
          Before, 1987, the interest rate management policy was one of the control function by the Central Bank o Nigeria (CBN) which fixed the minimum saving rates and maximum lending rates for financial institutions. This was the are of administering interest rate regime. Following he introduction of a market based interest rate policy in 1987 by the Central Bank of Nigeria (CBN) bank were allowed to according market conditions through negotiations with been customers. Ever since then, there has been significant impact of such deregulation policy on the Nigerian economy especially on the profitability of commercial banks.  
          In directing bank to pay interest on current account deposits by the Central Bank of Nigeria (CBN) is in the context o the deregulation framework. This is implied by the negotiation between the banks and their customers on the interest rate payable on deposits for special purpose held for more than seven days. To further ensure that customers are not exploited, the Central Bank of Nigeria (CBN) has further directed that the reducing balance method should be applied in calculating charges on loans, payable in agreed installments.
Following the introduction of a market based interest rate policy in 1987 by the Central Bank of Nigeria (CBN) banks were allowed to determine their deposit and landing rates according to market conditions through negotiation with their customers. However, the minimum rediscount rate (MRR) continued to be fixed by the Central Bank in line with changes in overall economic conditions. For instance, the MRR which was fixed at 15 percent in August 1987 was reduced to 12.75 percent in December 1987 with the objective of stimulating investment and in the economy following the need to moderate monetary policy. In 1989, the MRR was raised to 13.25 percent in furtherance of the flexible interest rate policy; the CBN introduced securities (Treasury bills and certificates) in 1989. Under the system, authorize dealers submitted competitive bids through which the issue rate emerged. The lack of responsiveness of the structure of deposit and lending rates to market fundamentals, particularly the decline in inflation in 1990 compelled the authorities in 1991 to fix a minimum spread of 4 percentage points between the cost of funds of commercial and merchant banks and their maximum lending rates. The  banks were therefore, directed to observe a minimum lending rate of 21 percent and a minimum deposit rate of 13.5 percent. The banking measure claming that it was against the deregulatory posture of the government while the reported rates changed were within the guidelines. There was sufficient evidence that actual rates were higher. As if   were the benefits of the policy were largely8 marginal. Hence, the ceilings on interest rates were removed in January 1992.
          This policy was retained in 1993 in the course of the year interest rates were met only distorted and volatile but also rose to unprecedented levels. The behaviour of interest rates was traceable to a number of factors, which include the following.
i.        The high rate of domestic inflation arising from the huge fiscal deficit of the federal government which was financed mainly by the Central Bank of Nigeria.    
ii.            The undue discretion which the deregulation of interest rates conferred on key market arbitraging activities of market speculation.
iii.           Technical insolvency and serious cash flow problems on the part of same weak banks resulting in distress borrowing.
iv.           The use of stabilization securities and the system of allocation of foreign exchange both of which induced  the sterilization of large funds at the CBN.
The prevailing high interest rates in 1993 discouraged investment in the directly productive sectors of the economy while volatile inter bank rates undermined the efficiency of open market operation and general stability in the financial system..  Some measures of regulation were reintroduce into interest rate management in 1994 because of  wide variations and unnecessarily high  rates observed following complete deregulation. This policy was maintained in 1995  with some modification to make for flexibility. The situation remained the same in 1996 and 1997.                    
          The deregulation of interest rates under structural Adjustment  programme (SAP) resulted in narrowing rather than widening the load deposit interest rate gaps. It is expected that this would promote increased savings as well as stimulate investment. The argument by some banks that their costs of funds have rises could only be considered tenable if the interest rates payable gap would not be quite so high as witnessed in 1989. As regards the payment of interest on current account deposits, this should be welcomed by banks that are keen on competing to mobilize deposits which is one of  the main objectives of interest rate deregulation. The provision whereby banks are allowed to negotiate with their customers still contravene the deregulatory since under SAP while at the same time ensuring that customers are not unduly exploited and discouraged to save.
 1.1     BACKGROUND OF STUDY
BRIEF HISTORY OF UNION BANK NIG. PLC
          The history of Union Bank of Nigeria PLC started with the opening of he colonial bank offices in Lagos, Jos and Port Harcourt in 1917. In 1925, the bank was acquired by Bardays Bank DCn (Domiion Colonial and Overseas).
          The bank developed and grew rapidly almost all parts of the country. In compliance with the directive of the government in 1968, that all companies (including banks) must be incorporated locally in Nigeria, Bardays banks DCO was incorporated in Nigeria in 1969 and its name was consequently change to Bardays Bank of Nigeria LTD  with its registered head office at 40 marina, Lagos.
          As a result of Nigeria enterprise promotion Degree of   1972 and 1977, the federal government of Nigeria acquired 52% of the  bank’s share, leaving 40% to Bardays Bank international limited (now Bardays Bank PLC)  while the remaining 8% was taken up by Nigeria public.
          Bardays Bank PLC sold 50% of it’s remaining shares to Nigeria in 1979, thus reducing its equity holding to 20%. Following this development, the Banks name was changed to Union Bank of Nigeria Ltd to reflect the new ownership structure i.e Federal government of Nigeria 52% private Nigeria investors 28% and Bardays Bank 20% . With this new name, this Bank is now an indigenous bank no longer a subsidiary Bardays Bank PLC, although Bardays Bank PLC still officer technical and correspondent services as in the past.
1.2        STATEMENT OF THE  PROBLEM
Since the introduction of market determined exchange rate via the SFEM in 1986, the main exchange rate has exhibited the feature of depreciation and instability negative effect on interest rate and continued depreciation of the naria in the FOREX market has had some adverse implication for interest rates and for commercial bank. It seems that the high interest rates resulting from the deregulation of exchanges rate has affected the profitability of these banks.
          Besides, the depreciation of the Naira since  1986 raise  the question as to what impact the interest rate policy has made on the  Nigeria economy and the commercial banks.
1.3        OBJECTIVES OF THE STUDY
The objective of this study among other things include:
i.             To examine the interest rate policy in Nigeria since 1986.
ii.           To examine the factors affecting the interest rate in the economy.
iii.          To determine the impact of the deregulatory of interest rates on the profitability of commercial bank.
iv.          To identify the factors militating against sound interest rate policy should evolve.
1.4        RESEARCH QUESTIONS
The following questions are formulate for the purpose of this study;
i.             What major development have occurred in interest rate policy in Nigeria since 1986 ?                  
ii.            What factors influence the determination of interest rate in the Nigerian economy ?What impact has the interest rate deregulation policy made on the profitability of commercial bank in Nigeria ?
iii.           What factors militate against the effectiveness of interest policies in Nigeria ?
iv.           What impact has the interest rate deregulation  made on the Nigerian economy generally ?
1.5        FORMULATION OF HYPOTHESIS
The following hypothesis are formulate to help achieve the purposes of this study :
1.       H0:    Deregulated interest rates have not adversely affected the profitability of Commercial Banks.
H1:    Deregulated interest rates  have adversely affected the profitability of commercial bank.
2.            H0: There is no strong correction between the interest rate and the profit made by the bank.
H1:  There is a strong correlation between the interest rate and the profit made by the bank.
3.       H0:    Instability in the macro – economy positively affects the effectiveness of the interest rate policy.
          H1: Instability in the macro – economy adversely affected effectiveness of interest rate policy Nigeria.
1.6        SIGNIFICANCE OF THE STUDY
This study is significant in many respect. First it will review the various interest rate polices implemented by the Nigeria monetary authorities since 1986. This review is very vital as it  will reveal the flows in the formulation and implementation of policies. This will therefore provide the basis of recommendations for a sound interest rate policy in the economy.
          Secondly, individuals and economic agents will through this study understand the rationing function of interest rate in allocating limited supply of credit among the many competing demands for it. .
          Thirdly, the findings will serve as a guide to policy makes in the formulation of interest rate policy for the second development of the banking sector in particular and  the economy in general.
          The study will also be useful for academic purpose. It will serve as a data base for students who will carry out related studies in the future.  Finally the research findings can provide the basis for future studies.
1.7        DEFINITION OF TERMS
Definition of some concepts is necessary here for more understanding .
MINIMUM REDISCOUNT RATE
          This is the amount charged by the central Bank of Nigeria for lending to bank in the performance of its function of a lender of last resort.
SAVING DEPOSIT RATE
          This is the amount paid by bank for funds withdrawal after Seven days notice. This restriction is however seldomly applied.
DEREGULATED INTEREST RATE
          This is the interest rate that is market oriented
FIXED DEPOSIT RATE
          This is the interest paid on deposits made for a fixed period of time like 9 or 180 days.
MAXIMUM LENDING RATE
          This refers to the rate changed by banks for lending to customers with a low credit rating
REAL INTEREST RATE
          This is the nominal interest rate adjusted for expected inflation.
NOMINAL INTEREST RATE
          This is the pure real value paid for the use of money or credit. It is often expressed as a percentage per annul .
PRIME LENDING RATE
          This is the interest rate applied to loans made to customers with the highest rating for each bank. This rate should also represent the minimum lending rate.                       
INTER – BANK INTEREST RATE
          This is a stipulated interest rate of the government though the Central Bank of Nigeria (CBN) to bank in regard to lending and borrowing funds.