Nexus Between Bank Lending Rate and Nigerian’s Bank Profitability

Abstract

This study empirically examined the impact of bank lending rates on the financial performance of deposit money banks in Nigeria over a 12-year period (2012-2023). Specifically, it analyzed the nexus between lending rates and Nigerian’s bank profitability, using return on shareholder funds (RSF) as a proxy. The study applied the least square econometric method, descriptive statistic and estimated pool test to explore the nexus between bank lending and Nigerian’s bank profitability. The findings revealed that lending rates (LR= (-0.379632 and a p-value of 0.7775)) have a negative effect on bank profitability, while the inflation rate (IFR= (0.534249 and a p-value of 0.5444)) positively affects bank profitability. The coefficient of multiple determinations (R2) indicated that approximately 5% of the variations in bank profitability (RSF) could be explained by the lending rate and inflation rate, with the remaining 95% attributed to unaccounted factors. Furthermore, the Durbin-Watson test of 1.277772 suggested the presence of autocorrelation in the model, indicating that around 95% of important variables were missing. The study concluded that the bank lending rate negatively impacts bank profitability in Nigeria. Consequently, it is recommended that the Central Bank of Nigeria (CBN) focus on maintaining a low and stable lending rate, ideally in the single digits, to mitigate the adverse effects on RSF. The study also found that a one-unit decrease in the lending rate results in a reduction of 0.397447 units in bank performance, holding other factors constant. Lower lending rates can make borrowing more affordable, which may increase the demand for loans and stimulate economic activity. Lower lending rates encourage both individuals and businesses to take out more loans, potentially driving higher levels of investment and consumption.