Effect of Interest Rate on Financial Performance of Development Banks in Nigeria.

Author

Salihu, Hamza Umar, Bashir Ahmad Daneji (Prof.), Bamanga Umar, Kabiru Musa Yakubu, Yaya Manu

Abstract

 The study examined the effect of interest rate indicators (lending rate, monetary policy rate, and treasury bill rate) on the financial performance of development banks in Nigeria, using Return on Assets (ROA) and Return on Equity (ROE) as measures of performance. The findings show that the overall regression models were statistically significant and explained a substantial proportion of variations in both ROA (71.1%) and ROE (88.8%). Lending rate had a positive and significant effect on both ROA and ROE, indicating that higher lending rates improve profitability through increased interest income. Monetary policy rate exhibited a positive but insignificant effect on ROA, while it significantly enhanced ROE. Similarly, treasury bill rate showed an insignificant positive influence on ROA but a significant positive effect on ROE. Firm size was found to positively influence both performance indicators, with a stronger and significant impact on ROE. However, census sampling techniques were used. The study concluded that interest rate dynamics are important determinants of the financial performance of development banks in Nigeria, particularly in enhancing shareholders’ returns. The study recommends that development banks adopt effective interest rate management strategies, strengthen asset-liability management practices, and leverage favorable monetary policy conditions to improve profitability and sustainability. Furthermore, policymakers should ensure a stable interest rate environment that supports the developmental mandates and financial viability of these institutions.

Keywords

Interest Rate, Lending Rate, Monetary Policy Rate, Treasury Bill Rate, Return on Asset, Development Banks in Nigeria.

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