The Effect of Interest Rate Changes on Bank Lending in Unity Bank Plc, Adamawa State
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Background of the Study
Interest rates play a critical role in the financial sector, particularly in the lending behavior of banks. Banks use interest rates as a tool for managing their lending portfolio, balancing the need to attract borrowers while ensuring that they generate sufficient returns (Ahmed & Muhammad, 2024). Changes in interest rates can influence the demand for loans, the cost of borrowing, and the profitability of banks. In Nigeria, interest rate fluctuations are influenced by both internal and external economic factors, including inflation rates, monetary policy, and the broader economic climate (Eze & Olanrewaju, 2023).
Unity Bank Plc, a commercial bank operating in Adamawa State, faces a dynamic environment where interest rate changes significantly affect its lending activities. The bank offers a variety of loan products to individuals, small businesses, and corporations. However, changes in interest rates, whether due to Central Bank policies or market conditions, influence the volume and quality of loans granted by the bank (Durojaiye, 2024).
Previous research has shown that higher interest rates tend to discourage borrowing, as they increase the cost of loans, whereas lower interest rates can stimulate demand for credit (Adebayo & Ogun, 2023). However, the relationship between interest rate changes and bank lending in the Nigerian context, especially with reference to Unity Bank Plc in Adamawa State, has not been extensively studied. This research seeks to explore how changes in interest rates influence the bank’s lending activities and its impact on financial performance.
Statement of the Problem
In Adamawa State, Unity Bank Plc, like other financial institutions, is highly affected by changes in interest rates. These changes can either encourage or discourage borrowing, which in turn affects the bank’s lending portfolio and financial performance. However, the extent to which interest rate fluctuations impact the bank's lending activities in the region remains unclear. This lack of understanding makes it difficult for the bank to formulate effective lending strategies that account for interest rate variability.
The problem addressed by this study is the lack of comprehensive research on how interest rate changes impact bank lending behavior in Unity Bank Plc. By analyzing the relationship between interest rates and lending patterns, the study aims to provide insights that can help the bank optimize its lending strategy in response to interest rate changes.
Objectives of the Study
1. To analyze the effect of interest rate changes on loan demand in Unity Bank Plc, Adamawa State.
2. To examine the relationship between interest rate fluctuations and the bank’s lending volume in Unity Bank Plc.
3. To assess the impact of interest rate changes on the profitability of Unity Bank Plc’s lending activities.
Research Questions
1. How do interest rate changes affect loan demand in Unity Bank Plc, Adamawa State?
2. What is the relationship between interest rate fluctuations and the bank’s lending volume in Unity Bank Plc?
3. How do interest rate changes impact the profitability of Unity Bank Plc’s lending activities?
Research Hypotheses
1. Interest rate changes significantly affect loan demand in Unity Bank Plc, Adamawa State.
2. There is a significant relationship between interest rate fluctuations and the lending volume in Unity Bank Plc.
3. Interest rate changes have a significant impact on the profitability of Unity Bank Plc’s lending activities.
Scope and Limitations of the Study
The study will focus on Unity Bank Plc’s lending activities in Adamawa State, analyzing how interest rate changes impact loan demand, lending volume, and profitability. The research will be limited to the period from 2023 to 2025. A limitation of the study is that it will rely on secondary data, which may not capture all aspects of the bank’s internal decision-making processes.
Definitions of Terms
• Interest Rate: The percentage at which a bank charges interest on loans or pays interest on deposits.
• Bank Lending: The process by which banks provide loans or credit to individuals or businesses.
• Loan Demand: The desire or need for loans, influenced by factors such as interest rates, economic conditions, and borrower creditworthiness.
• Profitability: The ability of a bank to generate profit from its lending activities, typically measured by return on assets or return on equity.
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