Interest rates behaviour under a programme of financial reform: the Nigerian case

Abstract

This paper is an attempt to investigate the determinants of interest rates in Nigeria since the introduction of the deregulatory measures in 1987. Both the external and domestic factors were taken into account since Nigeria cannot be regarded as a closed economy. The major finding of the paper is that the most important factor affecting nominal lending rate in Nigeria is the persistent exchange rate depreciation. The identified channel of causation is the demand for money, especially for transactions purposes, which increases as the exchange rate depreciates, putting pressure on domestic liquidity. Institutional factors also explain a significant proportion of the variations in interest rates. The Fisher effect does not appear to be a major factor in interest rate determination as the expected inflation rate variable was not statistically significant.