HOW DOES INTEREST RATE AFFECT CREDIT TO PRIVATE SECTOR IN NIGERIA?

Abstract

The price of money, interest rate, is a known intermediary in the demand and supply of money. Credit to private sector provided by the banks, as a form of money, thus reacts to changes in interest rate. The persistent absence of a clear pattern of interaction between interest rate and credit to private sector in Nigeria questions the inverse relationship expected a priori, suggesting the flagging influence of interest rate. The confounding effects of other factors appear to also be indicated. Employing data from World Bank’s World Development Indicators and Central Bank of Nigeria’s Statistical Bulletin, this study explored the relationship between interest rate and credit to private sector from 1989 to 2023 using ARDL methodology. A contra to a priori relationship was found, as feared. Fundamental expansion of the supply side through institutional measures was recommended. Attention was called to the challenges of the rule of law which in particular can provide a safe operating environment for lenders, borrowers and the entire society.