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Interest rate is the cost or price of borrowing or lending money. Several economies use differing interest rates in order to suit their prevailing economic conditions. This study is aimed at examining the effect of interest rate volatility on the performance of the commercial banking sub sector in Nigeria with specific focus on commercial banks operating in Makurdi specifically, UBA Plc. To achieve this, the researcher developed 2 (two) research questions. Data were collected from primary and secondary sources and were analyzed using the chi-square technique. The data analysis revealed that interest rate volatility has a significant effect (positively and negatively) in the performance of commercial banks in Nigeria. It is therefore recommended that commercial banks in Nigeria embrace modern and sound interest rate management mechanisms and techniques to minimize the negative effects of interest rate fluctuations on their performance. This could be achieved via an effective and efficient management of interest rate policies.  





1.0     Introduction

          Along with fiscal policy which is concerned with revenue and spending activities of government, monetary policy is widely used to ensure that pre-determined objectives are achieved. One of the most effective and widely used instrument of monetary policy is interest rate. The term interest rate can simply be defined as the cost of using someone else’s money or reviewed from the lenders point of view, as the price for allowing one use someone’s money. It can also be said to represent the price of money (Oluba, 2008). Consequently by keeping interest rate how and reasonably stable, entrepreneurial activities that ill crystallize in improved macroeconomic activities will be enhanced. Interest rate can also exert short-term influence on commercial banks operations and performance.

  • Background to the Study

The banking industry plays a vital role in any economy and as such adequate attention must be given to this sector for the survival of the economy of the nation.

Thus, it is necessary to regulate the activities of the banking system in order to conform to the micro economic objectives of the government. One way of regulating the activities of the banking industry is the use of interest rates.

Aigbokhan (1995), was of the opinion that, the banking industry in Nigeria has undergone radical changes in terms of various interest rate regimes. The evolution of interest rate in Nigeria started in the early 1960 when the interest rate was solely the responsibility of the government to a scenario where by interest rates were  determined both  by the joint market forces of demand and supply in the 1970’s  and 1980’s.Denbury (1980),further noted that extensive government intervention characterized interest rate policies beginning in the 1960’s aimed at promoting the development of fundamental sectors of the economy. Since 1981several financial sector reforms have been carried out encompassing elements of liberalization and other measures aimed at enhancing prudence and tackling the volatility of interest rates.(Odozi, 1998). Prior to this period of reform and various policy framework formulations, the banking industry was characterized by all forms of irregularities and indiscriminate implemental of interest rate polices. This compelled the government through the regulatory agent the Central Bank of Nigeria (CBN) to release and review interest rates from time to time.The interest rates as determined by the central bank of Nigeria from time to time has a significant impact on the operations of commercial banks especially in terms of their overall performance, balance sheet position and the  general  state of affairs.This study focuses on how banks respond and operate under various interest rate regimes in the manner that benefits them. The study shall also look at how the banks can use different interest rates to operate in a bid to boost overall performance and optimize their resources.

  • Statement of the Problem

Interest rate is the maximum or minimum rates set by the central bank of Nigeria at which it rediscounts first class bills of exchange and Government securities held by banks. The interest rate policy emerged when the central bank of Nigeria discovered that inflationary pressures have started emerging within the economy. Due to this, the bank rate policy was adopted which is the use of interest rates to control the circulation of money in the economy. The central bank of Nigeria decided to raise the bank rate of borrowing from it by commercial banks. This became costly forcing commercial banks in Nigeria to curtail their borrowing, and this significantly affected their operations and overall performance. In turn, the commercial banks raised their lending rates to the business community and other sundry borrowers resulting to reduced borrowings which in turn reduced the money in circulation. Increased interest rate has the attendant problem of contracting money in circulation, credit and price reduction.Based on the foregoing; there is the urgent need to examine the effect of interest rate volatility on the performance of commercial banks.

  • Objectives of the Study

The primary aim of this study is to;

  1. Evaluate the effect of interest rate volatility on the performance of commercial banks.
  2. To identify the casualty line between interest rate, bank loans. and customer’ savings.
    • Research Questions

Considering the research problem in question, the following research questions are listed below:-

  1. Does interest rate fluctuation have any significant impact on the performance of commercial banks?
  2. Does an interest rate change or fluctuation affect commercial bank ability to grant loans and affect customers saving?
    • Research Hypothesis

For purpose of this study, the following hypothesis will be considered,


Ho: Volatility of interest rate does not affect the performance of commercial banks

H1: Volatility of interest rate affects the performance of commercial banks



Hypothesis 2

Ho: Volatility of interest rate does not affect bank loans, borrowings or customers savings.

H1: Volatility of interest rate affect banks loans, borrowings or customers savings

  • Significance of the Study

Most importantly, the significance of this study was to find out clearly, the extent to which interest rate fluctuations or volatility affect or impact on the performance of commercial bank in Nigeria generally, and UBA PLC specifically.

Secondarily, it is significant as it enable the researcher to partially fulfill the requirement for the award of a post graduate Diploma in management of the University of Agriculture, Makurdi.

  • Definition of Terms

For purpose of this study certain words and concepts are used which may appear obscure to a reader not well research in the field of finance. An attempt is thus made to define them here.

  1. Interest rate: This is the amount charged for a loan, usually expressed as a percentage of the sum borrowed. Conversely, the amount paid by a commercial bank to a depositor on the funds deposited.(Nkoro, 2003)
  2. Real interest rate: This is the parameter by which the purchasing power of interest receipts is measured.(Nkoro, 2003)
  3. Interest rate ceiling: This is the upper limit on the interest rate to be applied to a loan or borrowing.(Nkoro, 2003)
  4. Interest rate floor: This is a derivative financial instrument by which payments are made when the interest rate falls below an agreed or fixed level.(Nkoro, 2003)
  5. Monetary policy circular: It is a letter of directives issued to commercial banks in Nigeria by the Central Bank of Nigeria in which they are directed on the level of credits and rates to be charged.(Ekezie, 2000)
  6. Customer: This refers to anyone that maintains an operating account with a commercial bank, whether Current, Savings or time deposit.(Ekezie ,2000)
  7. Bank: A commercial institution that takes deposits and extends loans. Banks are concerned mainly with making and receiving payments on behalf of their customers, accepting deposits and making short term loans to private individuals companies and other organizations..(Ekezie, 2000)
  8. Performance: This is the process of developing standards geared towards attaining certain predetermined goals.(Ekezie, 2000)
  9. Bank loan: A specified sum of money lent by a bank to a customer, usually for a specified period, at a specified rate of interest.(Ekezie, 2000)


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