IMPACT OF INTEREST RATE DEREGULATION ON PERFORMANCE OF QUOTED MANUFACTURING FIRMS IN NIGERIA
ABSTRACT
Amongst the major economic reforms that were introduced in 1986 is the deregulation of interest rates in the Nigerian financial market. The theoretical base for deregulation is largely attributable to the Keynesian investment theory. The overall aim of deregulating interest rates is to encourage savings mobilization and make it possible for adequate flow of financial resources to the productive sectors of the economy. Undoubtedly, interest rate deregulation could have an impact on the manufacturing sector of the economy. With limited resources and the upsurge in foreign exchange demand, the trend has been an upward movement of interest rate which a deregulated interest regime has helped to escalate. In the same context, the inefficiencies in government controls and regulation have introduced increased concerns about the government’s ability to manage deregulation to achieve positive results. Thus, the effect of deregulation can be seen in the high borrowing costs which have negatively affected profitability of businesses coupled with inadequate working capital and low shareholders’ fund. It is in line with the above that this study sought to: (i) examine the impact of interest rate deregulation on profit before tax of quoted manufacturing firms, (ii) determine the impact of interest rate deregulation on net working capital of quoted manufacturing firms, and (iii) ascertain the impact of interest rate deregulation on shareholders’ fund of quoted manufacturing firms in Nigeria. The study adopted the ex-post facto research design to enable the researcher make use of secondary data. Panel data series for a 26 year period 1987-2012 were collated. The Ordinary least square (OLS) regression analytical technique was adopted using E-View statistical software to test the three hypotheses formulated for the study. The parameters for performance of quoted manufacturing companies were Profit Before Tax, Net Working Capital and Shareholders’ fund which were adopted as dependent variables, while the parameter for interest rate deregulation was interest rate between 1987 to 2012 (period within which interest rate deregulation prevailed in Nigeria). It was used as independent variable. Exchange rate and inflation rate were adopted as control variables for the three hypotheses respectively. Descriptive statistics on the dependent as well as the independent variables was conducted before the regression analyses. The results reveal that interest rate had positive and non-significant impact on profit before tax of quoted manufacturing firms in Nigeria, interest rate had negative and significant impact on net working capital of quoted manufacturing firms in Nigeria, and interest rate had positive and significant impact on shareholders’ fund of quoted manufacturing firms in Nigeria after deregulation. However, interest rate deregulation, though a good policy, did not produce the required result in Nigeria. This might probably be as a result of improper pace and sequencing. This study recommends that manufacturing companies should restructure and diversify their funding sources to reduce much emphasis on borrowing so as not to fall victim of the negative effects of deregulation. Also, government emphasis should be towards a guided deregulation. With extensive monitoring and directing, it therefore follows that the policy of interest rate deregulation in Nigeria needs periodic fine-tuning.