Interest Rate Dynamics and Private Sector Credit Growth: Evidence From Nigeria

Abstract This study examines the impact of interest rate dynamics on private sector credit growth in Nigeria over the period 1990–2024. Anchored on the Loanable Funds Theory, the study investigates both the short-run and long-run effects of the Monetary Policy Rate (MPR) on credit to the private sector, while controlling for key macroeconomic variables such as GDP, inflation (CPI), exchange rate (EXR), and government expenditure (GXP). The study employs the Autoregressive Distributed Lag (ARDL) model and its nonlinear extension (NARDL) to capture potential asymmetric effects of positive and negative interest rate changes. The unit root results reveal a mixed order of integration among the variables, justifying the use of the ARDL bounds testing approach. The bounds test confirms the existence of a long-run cointegrating relationship. The findings show that MPR exerts a significant negative effect on private sector credit in the long run, consistent with the cost-of-borrowing hypothesis. However, short-run results reveal dynamic and asymmetric adjustments, indicating that credit responds differently to increases and decreases in policy rates. The study concludes that while interest rate policy influences credit growth, its effectiveness is shaped by transmission mechanisms and macroeconomic conditions. Policy recommendations emphasise improved monetary-fiscal coordination and strengthened financial sector transmission to enhance sustainable credit expansion.