Abstract
This study examined how interest rates affect the profitability of Commercial banks in Nigeria. The study was based on country aggregate level annual data that covered a period of thirteen years 2000 to 2004 and made use of multivariate regression analysis under an econometric framework. The Augmented Dickey and Fuller unit root test results indicate that the series are either I(0), I(1) or I(2) stationary. The estimated results show that Maximum lending rate, Real Interest rate and Savings deposit rate have negative and significant effects on the profitability of Nigerian Commercial banks as measured by return on assets at the 5% level of significance. Also, the study found that Real interest rate at the 8% level of significance has negative and significant relationship with Return on Equity of money deposit banks in Nigeria. On the other hand, the study found no significant relationship between interest rate variables and Net Interest Margin of Commercial Banks in Nigeria. The implication of the findings of this study suggests that the profitability of the banking sector is a function of changing interest rates. The study therefore recommends that government should adopt monetary policies that will help Nigerian Commercial banks to improve on their profitability and there is need to review and strengthen bank lending rate policies through effective and efficient regulation and supervisory framework. Banks can improve their profitability through charging moderate lending rates as against maximum rates as their circumstances may allow. Furthermore, the managers of money deposit banks are expected to create the conditions for an efficient banking system devoid of information asymmetry to adapt to changing macroeconomic variables of interest rates and inflation. Banks’ management must efficiently manage their portfolios in order to protect the long run interest of profit-making.
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