ABSTRACT
The focus of this research work is based on the impact of interest rate on
investment decision in Nigeria. An econometric analysis between the periods of
1981-2010. Secondary data obtained from the central bank of Nigeria (CBN)
statistical bulletin (volume 21) DEC 2010. Date was collected and empirical
analysis made. To achieve these objective multiple regression was used in
analyzing the data that the impact of interest rate on Nigeria prior to interest rate
regulation in 1.986 and serve as guide to how interest rate can be fixed to
enhance effective accumulation of savings that can channel to investment. Policy
recommendation Government should in massively embarks on large-scale
agriculture, manufacturing industrialization e.t.c and equally encourages small
and medium scale enterprise (SMES). Public private partnership (ppp) should
also be encouraged by government for efficient and effective production.

CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Investment is the change in capital stock during a period. Consequently, unlike
capital, investment is a flow term and not a stock term. This means that capital is
measured at a point in time, while investment can only be measure over a period
of time.
Investment plays a very important and positive role for progress and prosperity of
any country. Many countries rely on investment to solve their economic problem
such as poverty, unemployment etc (Muhammad Haron and Mohammed Nasr
(2004).
Interest rate on the other hand is the price paid for the use of money. It is the
opportunity cost of borrowing money from a lender to finance investment project.
It can also be seen as the return being paid to the provider of financial resources,
for going the fund for future consumption. Interest rates are normally expressed
as a percentage rate. The volatile nature of interest is determined by many
factors, which include taxes, risk of investment, inflationary expectations, liquidity
preference, market imperfections in an economy etc.
Banks are given the primary responsibility of financial intermediation in order to
make fund available for economic agents. Banks as financial intermediaries
move fund. Surplus sector/units of the economy to deficit sector/units by
accepting deposits and channeling them into lending activities. The extent to
which this could be done depend upon the rate of interest and level of
development of financial sector as well as the saving habit of the people in the
country.
Hence, the availability of investible funds is therefore regarded as a necessary
starting part for all investment in the economy which will eventually translate to
economic growth and development (Uremadu, 2006).
Many researchers have done a lot of study on the impact of interest rate on
investment. In Nigeria, Ologu (1992) in a study of “The Impart of CBN Money
Policy on aggregate investment behavior”. Found out only few of the variables
were significant at both the 95% and 90% confidence limits in explaining the
behavior of investment during the (1976-90) period of student”. Specifically, he
found out that:
1. Contrary to expectation and to change’s stock adjustment hypothesis, the
existing stock of capital goods (plants and machinery) was not a major
determinant of investment behavior of forms in Nigeria.
2. Interest rate was significant in influencing investment decision nothing
that” this is not surprising since in a situation of limited residual funds as in
Nigeria, the cost of capital should exert significant influence on both the
frequency and volume of demand for invisibles funds by investors.
Lesotho (2006) studied “An investigation of the determinants of private
investment “the case of Botwana”. Among his independent variable were real
interest rate, credit to the private investors, public investment and trade credit to
the private investors, real interest rate affect private investment positively and
significantly. Other variable do not affect private investment level in the shortterm
as they show insignificant co-efficient. GDP growth and conform similar
finding sin studies by Oshikoya (1994), Ghura and Godwin (2000) and Malmbo
and Oshikoya (2001).
Aysam et al (2004) in their study “How to Boot Private Investment in the MENA
countries. The role of Economic Reforms”. Among their independent variables
were accelerator, real interest rate, macroeconomic stability, structural reform,
external stability, macroeconomic volatility, physical infrastructure. Their studies
ranged from 1990 to 1990 comprising of panel of 40 developing countries. They
used co-integration technique to determine the existence of a long-term
relationship between private investment and its determinants. They fund out that
almost all the explanatory variables exhibit a significant impact on private
investment, with the exception of macroeconomic stability and infrastructures.
The accelerator variable (ACC) has the expected positive sign, which implies that
the anticipation of economic growth induce more investment. Similarly, interest
rate (r) appears to exert a negative effect on firm’s investment projects, which is
consistent with the user cost of capital theory.
In the U.S, Evans, estimated that net investment would rise by anything between
5% and 10% for a 25% fall in interest rate. These percentage changes were
calculated to occur over a two year period after a one year log.
A study by Kham and Reinhart (1990) observe that there is a close connection
between the level of investment and economic growth. In other words, a country
with low level of investment would have a low GDP growth rate. The use of ryid
exchange rate and interest rate controls in Nigeria in low direct investment, the
leads to financial impressions in the early 1980. Fund were inadequate as there
was a general lull in turn leads to the liberalization of the financial system Omole
and Falokun (1999). This may have an adverse effect on investment and
economic growth.
As already discussed so far, it is quite clear that an understanding of the nature
of interest rate behavior is critical and crucial in designing policies to promote
savings, investment and growth. It is pertinent to note that this research attempts
to investigate and ascertain the impact of interest rate volatility on investment
decisions in Nigeria using time series data covering from 1981-2010.
1.2 Statement of the Problem
The financial systems of most developing countries (like Nigeria) have came
under stress as a result of the economic shocks of the 1980s. The financial
repression, largely manifested through indiscriminate distortions of financial
prices including interest rates, has tended to reduce the real rate of growth and
the real size of financial system, more importantly, financial repression has
(retarded) delay development process as envisage by Shaw (1973). This led to
insufficient availability of investible funds, which is regarded as a necessary
starting point for all investment in an economy. This declines in investment as a
result of decline in the external resource transfer since 1982, has been especially
sharp in the highly indepted countries, and has been accompanied by a
slowdown in growth in all LDCs. Both public and private investment rate have
fallen, although the latter more drastically than the former. If this trend is
maintained, it will lead to a slowdown in medium term growth possibilities in
these economies and will reduce the level of long-term per capital consumption
and income, endangering the sustainability of the adjustment effort. The
observed reduction in investment in LDCS seems to be the result of several
factors. First, the lower availability of foreign savings has not been matched by a
corresponding increase in domestic savings. Secondly, the determinating of
fiscal conditions due to the cut of foreign lending, to the rise in domestic interest
rate, and the acceleration in inflation forced a contraction in public investment.
Thirdly, the increase in macroeconomic instability associated with external
shocks and the difficulties of domestic government to stabilize the economic has
hampered private investment.
Finally, the debt overhand has discourage investment, through its implied credit
constraints in international capital markets Luis Serven and Falokun (1989).