Impact of Interest Rates on the Financial Performance of Deposit Money Banks in Nigeria

Abstract

The study examined the impact of interest rates on the financial performance of deposit money banks (DMBs) in Nigeria. Interest rate was proxied with lending interest rate (LIR) and deposit interest rate (DIR) alongside control variables such as inflation rate (INFR) and exchange rate (EXHR), on the financial performance of deposit money banks (DMBs) in Nigeria, as proxied by return on assets (ROA). Spanning a 34-year period from 1991 to 2024, the study employed an expost facto research design, utilizing secondary data sourced from the Central Bank of Nigeria Statistical Bulletin and Annual Reports. Ordinary Least Squares (OLS) regression analysis was conducted using E-Views 9.0, supported by diagnostic tests including the Variance Inflation Factor (VIF), Durbin-Watson statistic, Breusch-Pagan-Godfrey heteroskedasticity test, Ramsey RESET test, unit root test, and Johansen cointegration test. The findings revealed that LIR and DIR have statistically significant negative effects on ROA, confirming that increases in both lending and deposit rates reduce profitability. EXHR was also negatively significant, indicating that currency depreciation impairs bank performance. However, INFR showed no statistically significant effect on ROA. The study concluded that prudent interest rate management and exchange rate stabilization are essential for improving the financial performance of banks. It recommends enhanced risk assessment, technological investment, and periodic monetary policy reviews to sustain profitability. The study contributes to existing knowledge by integrating both interest rate and macroeconomic variables in analyzing bank performance in Nigeria over a longrun horizon and provide a foundation for future empirical inquiries into the interest rateprofitability nexus in developing economies.