THE NEXUS BETWEEN LENDING INTEREST RATES AND PRIVATE SECTOR CREDIT ALLOCATION IN NIGERIA

Abstract

This study examined the effect of interest rates on private sector credit allocation in Nigeria from 1980 to 2024. The data were sourced from World Development Indicators (WDI). Lending interest rate, Gross domestic product (GDP) growth, real effective exchange rate, and broad money were used as the independent variables, while domestic credit to private sector (DCPS) was the dependent variable. Unit root test was also conducted using Augmented Dickey Fuller (ADF), and the result indicated mixed order of integration. Autoregressive Distributed Lag Model (ARDL) and bounds testing approach were used to examine the long-run relationship among the variables. The results confirm the existence of a significant long-run relationship among the variables. Regression result revealed that lending interest rate had a negative and significant effect on credit to the private sector in the short-run, GDP growth had a positive and statistically significant effect on credit to the private sector in the long-run, while money supply had a positive and statistically significant effect on credit to the private sector both in the short-run and long-run. The study concludes that while interest rate is important, money supply and GDP growth are more effective in influencing the volume of credit allocated to the private sector in Nigeria. It recommends policies that strengthen the money supply and support sustained GDP growth to improve credit allocation in the private sector.