Description
Insurance companies are institutional investors and their transactions contribute positively to the capital market development. Through their services the economy is able to produce more goods and services as most investments are financed through loans in order to produce on a better footing in the economy.
International Journal of Business and Social Science Vol. 4 No. 11; September 2013
287
Portfolio Management: An Appraisal of Insurance Industry’s Investment Profile
Under Interest Rate Deregulation in Nigeria (1985 – 2007)
I.O. Balogun
Department of Economics
University of Ilorin, Ilorin
Abstract
Insurance companies are institutional investors and their transactions contribute positively to the capital market
development. Through their services the economy is able to produce more goods and services as most investments
are financed through loans in order to produce on a better footing in the economy. Life assurance is the focus of
this paper as they have a relatively stable ‘idle” funds at their disposal than the non-life insurance to invest in the
economy. More also, by regulation their investment priorities are not the same as the law dictates investments
opportunities. This paper examined the direction that investment would go in a deregulated interest rate regime
on government securities in comparison with others. It is observed that the presence of flexible interest rate do
channel investment. But compulsory laws will lead to disincentives and a tendency to violate such laws, as
investors are interested in ventures with high yield overtime.
Keywords: deregulation, interest rate, investment, portfolio management.
Introduction
In order to stimulate domestic savings as well as capital inflow the interest rate was liberalized in 1987 by the
government to eliminate constraints that could cause capital flight. Interest rate is known to signal where funds
should be invested in or the cost of obtaining funds for investments. The level of interest rates in an economy
signal the direction in which funds are invested. The financial sector relies on this rate in consonance with the
Minimum Rediscount Rate (MRR) in doing their business. For instance, the MRR was reviewed upwards
progressively in 2001 in January from 14.0 to 15.5 percent and further to 16.5, 18.5, and 20.5 percent in April,
June and September respectively. The question is do investors also adjust their investment to take advantage of
this and move their funds around to benefit from deregulation and competitive rates available in the economy?
This paper focuses on insurance industry (institutional investors) investment decision pattern, given interest rate
deregulation in the economy. Though we have various bodies exacting control on the industry, such as the
government, Central Bank of Nigeria and Ministry of Finance cum the Nigerian Insurance Commission coupled
with chartered Institute of Insurance on the industry. But the governmental control is the one that directly affect
the direction of their investment.
Investment portfolio must be managed, be it passive or active portfolio. Since the aim of portfolio management is
the determination of optimal percentage of investible fund to each security that will sustain investor?s goal for
investment (Adams, 1991). In order to avoid holding a security with low yield, there must be periodic assessment
using portfolio selection, revision and performance measurement, so as to evaluate the economic and interest rate
impact on them at the short and long run perspectives. There are some aspect of portfolio management such as
security analysis, portfolio analysis and selection, fundamental and technical analysis and lastly, industry analysis,
which form part of security analysis (Agu, 2010; Akiode, 1991; Ani, 1991; Mennis, 1974; Osipitan, 2009).
Portfolio analysis deals with the determination of portfolio future return and risk possibility. But portfolio
selections focus on selecting the right asset for investment. For instance, Falana (1991) shared the view of
Doblins, et al (1983) that investor?s definition of portfolio objectives, diversification and selection of individual
investment must be included in investment portfolio management.
©Center for Promoting Ideas, USA www.ijbssnet.com
288
Investor?s objective is to maximize their wealth and minimize their loss, which calls for diversification. But to
diversify investment asset must be analyzed through internal, external and policy analysis. Under internal
analysis, the firm?s dynamics is analyzed to verify its possibility of generating future cash flow. External analysis
compares other firm?s activities in relation to the firm?s profit made and dividend shares. But policy analysis
looks at the likely effect of government policy on the firms operation. The positive correlation of this analysis
guides the manager/investor on the choice of investment, while negative implies refraining to invest.
The ultimate objective of portfolio management is the construction and maintenance of successful portfolios of
investments (Balogun, 1995). Therefore, methods must be available to assess the performance of portfolios to be
able to take reliable investment decisions. There are two sides to investment – risk and return that co-exist and
help in evaluation of portfolio. The total return to the investor is the holding period yield, which captures both the
income aspect and capital gains of the return.
Earlier study on the industry confirmed that investment respond to market conditions given the neo classical
investment theory (Akinnifesi, 1981; Jorgenson, 1967). Since investment takes time, the delay which may be
attributed to commitment of expenditure, lack of information or delay in making timely investment decisions. As
a result of this, the returns on investment are what motivate an investor to invest in a particular asset. Which is
best explained through interest on such investment. Interest is the payment for the use of borrowed funds or the
change in the value of an asset over a specified period of time. Interest rate is the percentage rate of change in the
value of an asset at any point in time or over a period of time (Todaro and Bell, 1969). In reality, there is more
than one interest rate due to risk, nature of security, services in addition to the loan (investment) itself, lack of free
competition among lenders or borrowers, length of time the loan has to run and others causes. The legislative
constraints on the choice of investment of insurers have social, political, and economic advantages, yet these
restrictions operate to the disadvantage of the insurers, especially when such outlets are not (highly) profitable
(Durojaiye, 1988; Irukwu, 1981; Akintola-Bello, 1986).
Some even claimed that the restriction is parochial and pin the insurers to Bank deposit (Nwanko, 1988). Though
there have been various reviews of the 1976 Decree at one period or the other, e.g. Decree 40, of 1988, Decree 58,
of 1990 and Trustee Investment Act (TIA) 1993 are amendments to Decree 21 of 1976 and TIA of 1962.
However, Insurance Decree 5 of 1991 (sections 18 and 19) allows an insurance company to invest not less than
35% of total assets in securities under TIA, Non – life insurer should not invest more than 25% of their assets in
real property. According to Randle and Ahuja, (2001) life assurance companies? investment favoured long term
rather than short term based on their liabilities. The nature of business of an insurance company determines the
profiles of its liability and the direction of its investment. Life Assurance companies differ from non – life
insurance companies in their investment objectives. The life assurance companies has more fund available for
long – term investment, while non life insurance companies invested in short – term investment due to its liability
structure (Arena, 2006).
Methodology and Empirical Analysis
From empirical findings we also observed the divided views on impact of interest rate on investment. For
instance, Agu, (2010) and Akinnifesi, (1981) discovered that investment respond to market condition more than
any other factors.
The real interest rate is usually measured using the fisher?s equation.
r = 1 + n – 1 (i)
1 + p
Where r = real interest rate
n = nominal interest rate
p = inflation rate
Equation (1) is non – linear therefore to obtain the linear approximation we have
n = r + P + r P (ii)
n = r + P (iii)
International Journal of Business and Social Science Vol. 4 No. 11; September 2013
289
Solving for r we have
r = n – p (iv)
Which shows that r can be positive or negative depending on whether the inflation rate is less or greater than the
nominal interest rate.
We can also compute the yield trade off on investment in the economy. Given that
Y = P (I + r)
Where Y is the yield on investment, P is amount invested and r is interest rate. From table 1, it shows a typical
example of the rates obtainable on treasury bills and time deposit (both with same maturity), the calculated yields
gives us what the trade off of what investors will lose by investing in government security as against bank deposit.
Investors are expected to be rational to prefer higher yield on investment than a lower one, freedom of choice and
able to allocate resources as best determined by them. With the interest rate liberalization the insurers would tend
to commit more of their funds to time deposit than government securities. However, 1992, 1993, 1997, 1998, and
1999 shows that there was a better pricing for government securities which give it the edge within these years
which also confirms Oluyemi?s (1990) opinion that a better rate for government securities will make it attractive
to investors and not only CBN been the Major subscriber as it was between 1980 and 1989.
Table1. Yield Trade off in Investment between Treasury Bills and 3 Months Deposit (1985- 2000)
Year Amount
invested
TB (rate) *Calculated
Yield
Deposit *Calculated
Yield
Trade off*
1985 90.8 8.5 98.52 9.25 99.2 0.68
1986 126.6 8.5 137.36 9.25 138.31 0.95
1987 154.2 11.75 172.31 14.90 177.18 4.87
1988 144.1 11.75 161.03 13.40 163.42 2.39
1989 281.4 17.50 330.65 18.90 334.58 3.93
1990 285.3 17.50 335.23 19.60 341.22 5.99
1991 275.6 15.0 316.94 15.71 318.88 1.96
1992 398.7 21.0 482.43 20.80 481.63 - 0.8
1993 357.7 26.90 453.92 23.60 442.12 - 11.8
1994 523.0 12.5 588.38 15.0 601.45 13.07
1995 511.3 12.5 575.21 13.62 580.94 5.73
1996 391.5 12.25 439.46 12.94 442.16 2.7
1997 526.0 12.0 589.12 7.04 563.03 - 26.09
1998 859.8 18.25 1016.71 13.07 972.17 - 44.54
1999 1512.3 18.25 1788.29 11.95 1693.02 - 95.27
2000 13.25 13.18
Source: *Author?s computation using data from CBN Bulletin, vol. 11 No 10.
©Center for Promoting Ideas, USA www.ijbssnet.com
290
Table 2: Inflation, Savings and Money Market Interest Rates in Nigeria
Year P
1
MRR TBR TCI DPR
2
DPR
3
SR
1985 5.5 10.00 8.50 9.0 9.25 9.50 9.5
1986 5.4 10.0 8.50 9.0 9.25 9.50 9.5
1987 10.2 12.75 11.75 12.25 14.90 15.30 14.0
1988 38.3 12.75 11.75 12.25 13.40 12.1 14.5
1989 40.9 18.50 17.5 16.38 18.90 21.6 16.4
1990 7.5 18.50 17.5 18.2 19.6 20.5 18.8
1991 13.0 14.5 15.0 15.0 15.71 17.09 14.29
1992 44.5 17.5 21.0 22.0 20.8 22.30 16.10
1993 57.2 26.0 26.9 27.4 23.6 23.26 16.66
1994 57.0 13.5 12.5 13.0 15.0 15.0 13.50
1995 72.8 13.5 12.5 13.0 13.62 13.65 12.61
1996 29.3 13.5 12.5 - 12.94 12.21 11.69
1997 8.5 13.5 12.0 - 7.04 7.49 4.80
1998 10.0 19.25 18.25 - 10.20 10.50 5.49
1999 7.0 19.2 18.25 - 12.68 12.75 5.33
2000 6.93 12.0 13.25 - 10.60 10.27 5.29
2001 18.9 12.95 - - 10.20 10.50 5.49
2002 12.9 18.88 - - 16.31 16.99 4.15
2003 14.0 15.02 - - 14.31 13.07 4.11
2004 15.0 14.21 - - 13.69 12.47 4.19
2005 17.9 7.00 - - 10.53 10.38 3.83
2006 8.2 8.80 - - 9.75 9.33 3.13
2007 5.4 6.91 - - 10.29 9.74 3.55
Source: CBN Bulletin, (2011) Section A and World Development Index 2011
1
P is inflation; MRR – minimum rediscount rate; DPR
2
– deposit rate (3 months); DPR
3
– deposit rate (3-6 months);
SR – saving rate; TBR- treasury bill rate and TC
1
– treasury certificate rate (1 year maturity).
International Journal of Business and Social Science Vol. 4 No. 11; September 2013
291
Table 3 Results of Real Interest Rates in Nigeria (1985 – 2007)
Year MRR
2
TBR TC
1
DPR
2
DPR
3
SR
1985 4.5 3 3.5 3.75 4 4
1986 4.6 3.1 3.6 3.85 4.1 4.1
1987 2.55 1.55 2.05 4.7 5.1 3.8
1988 -25.55 -26.55 -26.05 -24.9 -26.2 -23.8
1989 -22.4 -23.4 -24.52 -22 -19.3 -24.5
1990 11 10 10.7 12.1 13 11.3
1991 1.5 2 2 2.71 4.09 1.29
1992 -27 -23.5 -22.5 -23.7 -22.2 -28.4
1993 -31.2 -30.3 -29.8 -33.6 -33.94 -40.54
1994 -43.5 -44.5 -44 -42 -42 -43.5
1995 -59.3 -60.3 -59.8 -59.18 -59.15 -60.19
1996 -15.8 -16.8 - -16.36 -17.09 -17.61
1997 5 3.5 - -1.46 -1.01 -3.7
1998 9.25 8.25 - 0.2 0.5 -4.51
1999 12.2 11.25 - 5.68 5.75 -1.67
2000 5.07 6.32 - 3.67 3.34 -1.64
2001 -5.95 - - -8.7 -8.4 -13.41
2002 5.98 - - 3.41 4.09 -8.75
2003 1.02 - - 0.31 -0.93 -9.89
2004 -0.79 - - -1.31 -2.53 -10.81
2005 -10.9 - - -7.37 -7.52 -14.07
2006 0.6 - - 1.55 1.13 -5.07
2007 1.51 - - 4.89 4.34 -1.85
Source: Author?s computation (using Fisher?s equation)
Table 3, confirmed that government regulation in the operation of the financial market does not often achieve the
intended objectives. Instead it results in distortions like suppression of equity markets and inducement of present
consumption at the expense of investments. The positive yield period are 1997 to 2000 for MRR, TBR and DPR
2
,
DPR
3
(1998 -2000). The negative value shows disincentive to invest and misallocation of funds (Soyibo, et al
1992). This implies that the insurance industry will prefer to invest their funds as judged by them to maximize
their objective (Soludo, 2008). The hope is that deregulation will also affect the industry investment profile
especially with the reforms introduced by the apex bank.
Summary and Conclusion
True investors are interested in a good rate of returns earned on a rather consistent basis for a relatively long
period of time. The speculator seeks opportunities that promise very large returns, earned rather quickly. But
investment is distinguished from speculation by the time horizon of the investor and often by the risk – return
characteristics of the investments. Since the insurance industry are operating under the close „mirror? of
government regulation in channeling their surplus funds into the economy. The tendency to violate the law will be
high once the returns from the outlets they are allowed gives lower than what they could get elsewhere. However,
we have examined the effect of deregulation of interest rate on the industry?s investment choices and found that
government securities does not look too attractive to this institutional investors, since the interest rate on them are
lower than what could be earned on other financial instruments of almost the same period. We observed (table 1)
that in 1992, 1992, 1994, 1997, 1998 and 1999 the trade off are negative implying that the returns of Treasury
bills is higher than time deposit (mainly due to higher interest rate that signals the direction of investment and
reward of investment.
2
MRR – minimum rediscount rate; DPR
2
– deposit rate (3 months); DPR
3
– deposit rate (3-6 months); SR – saving
rate; TBR- treasury bill rate and TC
1
– treasury certificate rate (1 year maturity).
©Center for Promoting Ideas, USA www.ijbssnet.com
292
Table 3 gives us the notion that interest rate deregulation is not enough to promote investment as inflation rates
must be minimal to make investment worthwhile. It is observed from the results that there are disincentives to
invest and misallocation of funds. Sometimes government fiscal policies do affect the direction of investment
positively or negatively, though the interest rate may be okay. This implies that the industry will tend to break the
law on their investment profile, if the area of control or monitoring is loose from the part of government.
Though strict control is needed on the industry if they are to be shielded from crashing and ruining the economy
because they are the business outfit to indemnify their client against loss and for them to invest as they wish will
endanger the economy. This may have accounted for the reason why the industry is not experiencing distress as
witnessed in the banking industry. However, the recapitalization have drastically reduced the number of insurance
companies while also strengthen them for better services. Further study is needed to investigate the results of the
recapitalization on the industry.
References
Akiode, L.O. (1991) An evaluation of the investment portfolio management of royal exchange assurance (Nig,)
Plc. An Unpublished MBA thesis – University of Ibadan, Ibadan.
Akintola-Bello, O. (1986) Investment behaviour of insurance companies in Nigeria. The Nigerian Journal of
Economics and Social Studies, vol.28
Ani, A.A. (1991) “Pricing a company?s securities” A Paper at the seminar on the Stock Exchange: An avenue for
economic growth of Nigeria. Held at Kano, Nigeria
Agu, C. (2010) “The insurance industry in Nigeria: an appraisal” The Tide Newspaper in Nigeria of November
19, 2010
Balogun, I.O. (1995). Investment management in Nigeria insurance industry: An appraisal. M.Sc. Thesis
Department of Economics University of Ibadan, Ibadan (unpublished).
CBN – Annual report and statement of accounts 200. Published by Central Bank of Nigeria
CBN – Statistical Bulletin, 2011 and 2010. Published by Central Bank of Nigeria
Durojaiye, H.T. (1988) A review of the insurance decree 1976 CBN Bullion, vol. 12, No 14. Published by Central
Bank of Nigeria
Dobbin, R; et al. (1983) Portfolio theory and investment management. Martin Robertson & Co, Ltd. Oxford
Irukwu, J.O. (1981) Insurance management in Africa. Published by Caxton Press (W.A) Nigeria Ltd, Lagos
Jones, C.P. (1985). Investments: analysis and management. John Wiley & sons, Inc. Santa Barbara International
Edition
Markowitz, H.M. (1952) Portfolio selection Journal of Finance. Vol. Vii, No 1, March, 1952.
Mennis, E.A. (1974) An integrated approach to portfolio management. Financial Analyst Journal, vol. 30, No 2,
March/April
Mojekwu, J. N. (2011) The impact of insurance contributions on economic growth in Nigeria Journal of
Economics and International Finance Vol. 3(7), pp.444-451, July 2011
Nwanko, G.O. (1985). Responsiveness of the insurance industry in Nigeria to societal needs. CBN Bullion vol.
12, No. 14. Published by Central Bank of Nigeria
Olaniyan, T.O. (1990). Determinants of the investment behaviour of insurance companies in Nigeria (1969 –
1986). Unpublished M.Sc Thesis. Department of Economics, University of Ibadan, Ibadan.
Osipitan T (2009). Legal regulation of insurance business in Nigeria: problems and prospects. Chartered
Insurance Institute of Nigeria Journal. 11(1): 69-82.
Oyejide A, & Soyode A (1976). Insurance companies as investors; patterns, growth, and problems of their
investment in Nigeria, March. Sharpe, W.F. Investments, Englewood Cliffs, New Jersey: Prentice Hall.
Nigerian Journal of Economics and Social Studies, 18:1.
Randle A, Ahuja R. (2001) “Impact on saving via insurance reform. Indian Council for Research on International
Economic Relations; Working paper. 67.
Soyibo, A, et al. (1992) Financial system regulation: deregulation and savings mobilization in Nigeria”. AERC
Research paper II
Soludo, C. C. (2008). Issues on the level of interest rate in Nigeria. CBN?s Governor Speeches Publications,
Published by Central Bank of Nigeria.
doc_472665254.pdf
Insurance companies are institutional investors and their transactions contribute positively to the capital market development. Through their services the economy is able to produce more goods and services as most investments are financed through loans in order to produce on a better footing in the economy.
International Journal of Business and Social Science Vol. 4 No. 11; September 2013
287
Portfolio Management: An Appraisal of Insurance Industry’s Investment Profile
Under Interest Rate Deregulation in Nigeria (1985 – 2007)
I.O. Balogun
Department of Economics
University of Ilorin, Ilorin
Abstract
Insurance companies are institutional investors and their transactions contribute positively to the capital market
development. Through their services the economy is able to produce more goods and services as most investments
are financed through loans in order to produce on a better footing in the economy. Life assurance is the focus of
this paper as they have a relatively stable ‘idle” funds at their disposal than the non-life insurance to invest in the
economy. More also, by regulation their investment priorities are not the same as the law dictates investments
opportunities. This paper examined the direction that investment would go in a deregulated interest rate regime
on government securities in comparison with others. It is observed that the presence of flexible interest rate do
channel investment. But compulsory laws will lead to disincentives and a tendency to violate such laws, as
investors are interested in ventures with high yield overtime.
Keywords: deregulation, interest rate, investment, portfolio management.
Introduction
In order to stimulate domestic savings as well as capital inflow the interest rate was liberalized in 1987 by the
government to eliminate constraints that could cause capital flight. Interest rate is known to signal where funds
should be invested in or the cost of obtaining funds for investments. The level of interest rates in an economy
signal the direction in which funds are invested. The financial sector relies on this rate in consonance with the
Minimum Rediscount Rate (MRR) in doing their business. For instance, the MRR was reviewed upwards
progressively in 2001 in January from 14.0 to 15.5 percent and further to 16.5, 18.5, and 20.5 percent in April,
June and September respectively. The question is do investors also adjust their investment to take advantage of
this and move their funds around to benefit from deregulation and competitive rates available in the economy?
This paper focuses on insurance industry (institutional investors) investment decision pattern, given interest rate
deregulation in the economy. Though we have various bodies exacting control on the industry, such as the
government, Central Bank of Nigeria and Ministry of Finance cum the Nigerian Insurance Commission coupled
with chartered Institute of Insurance on the industry. But the governmental control is the one that directly affect
the direction of their investment.
Investment portfolio must be managed, be it passive or active portfolio. Since the aim of portfolio management is
the determination of optimal percentage of investible fund to each security that will sustain investor?s goal for
investment (Adams, 1991). In order to avoid holding a security with low yield, there must be periodic assessment
using portfolio selection, revision and performance measurement, so as to evaluate the economic and interest rate
impact on them at the short and long run perspectives. There are some aspect of portfolio management such as
security analysis, portfolio analysis and selection, fundamental and technical analysis and lastly, industry analysis,
which form part of security analysis (Agu, 2010; Akiode, 1991; Ani, 1991; Mennis, 1974; Osipitan, 2009).
Portfolio analysis deals with the determination of portfolio future return and risk possibility. But portfolio
selections focus on selecting the right asset for investment. For instance, Falana (1991) shared the view of
Doblins, et al (1983) that investor?s definition of portfolio objectives, diversification and selection of individual
investment must be included in investment portfolio management.
©Center for Promoting Ideas, USA www.ijbssnet.com
288
Investor?s objective is to maximize their wealth and minimize their loss, which calls for diversification. But to
diversify investment asset must be analyzed through internal, external and policy analysis. Under internal
analysis, the firm?s dynamics is analyzed to verify its possibility of generating future cash flow. External analysis
compares other firm?s activities in relation to the firm?s profit made and dividend shares. But policy analysis
looks at the likely effect of government policy on the firms operation. The positive correlation of this analysis
guides the manager/investor on the choice of investment, while negative implies refraining to invest.
The ultimate objective of portfolio management is the construction and maintenance of successful portfolios of
investments (Balogun, 1995). Therefore, methods must be available to assess the performance of portfolios to be
able to take reliable investment decisions. There are two sides to investment – risk and return that co-exist and
help in evaluation of portfolio. The total return to the investor is the holding period yield, which captures both the
income aspect and capital gains of the return.
Earlier study on the industry confirmed that investment respond to market conditions given the neo classical
investment theory (Akinnifesi, 1981; Jorgenson, 1967). Since investment takes time, the delay which may be
attributed to commitment of expenditure, lack of information or delay in making timely investment decisions. As
a result of this, the returns on investment are what motivate an investor to invest in a particular asset. Which is
best explained through interest on such investment. Interest is the payment for the use of borrowed funds or the
change in the value of an asset over a specified period of time. Interest rate is the percentage rate of change in the
value of an asset at any point in time or over a period of time (Todaro and Bell, 1969). In reality, there is more
than one interest rate due to risk, nature of security, services in addition to the loan (investment) itself, lack of free
competition among lenders or borrowers, length of time the loan has to run and others causes. The legislative
constraints on the choice of investment of insurers have social, political, and economic advantages, yet these
restrictions operate to the disadvantage of the insurers, especially when such outlets are not (highly) profitable
(Durojaiye, 1988; Irukwu, 1981; Akintola-Bello, 1986).
Some even claimed that the restriction is parochial and pin the insurers to Bank deposit (Nwanko, 1988). Though
there have been various reviews of the 1976 Decree at one period or the other, e.g. Decree 40, of 1988, Decree 58,
of 1990 and Trustee Investment Act (TIA) 1993 are amendments to Decree 21 of 1976 and TIA of 1962.
However, Insurance Decree 5 of 1991 (sections 18 and 19) allows an insurance company to invest not less than
35% of total assets in securities under TIA, Non – life insurer should not invest more than 25% of their assets in
real property. According to Randle and Ahuja, (2001) life assurance companies? investment favoured long term
rather than short term based on their liabilities. The nature of business of an insurance company determines the
profiles of its liability and the direction of its investment. Life Assurance companies differ from non – life
insurance companies in their investment objectives. The life assurance companies has more fund available for
long – term investment, while non life insurance companies invested in short – term investment due to its liability
structure (Arena, 2006).
Methodology and Empirical Analysis
From empirical findings we also observed the divided views on impact of interest rate on investment. For
instance, Agu, (2010) and Akinnifesi, (1981) discovered that investment respond to market condition more than
any other factors.
The real interest rate is usually measured using the fisher?s equation.
r = 1 + n – 1 (i)
1 + p
Where r = real interest rate
n = nominal interest rate
p = inflation rate
Equation (1) is non – linear therefore to obtain the linear approximation we have
n = r + P + r P (ii)
n = r + P (iii)
International Journal of Business and Social Science Vol. 4 No. 11; September 2013
289
Solving for r we have
r = n – p (iv)
Which shows that r can be positive or negative depending on whether the inflation rate is less or greater than the
nominal interest rate.
We can also compute the yield trade off on investment in the economy. Given that
Y = P (I + r)
Where Y is the yield on investment, P is amount invested and r is interest rate. From table 1, it shows a typical
example of the rates obtainable on treasury bills and time deposit (both with same maturity), the calculated yields
gives us what the trade off of what investors will lose by investing in government security as against bank deposit.
Investors are expected to be rational to prefer higher yield on investment than a lower one, freedom of choice and
able to allocate resources as best determined by them. With the interest rate liberalization the insurers would tend
to commit more of their funds to time deposit than government securities. However, 1992, 1993, 1997, 1998, and
1999 shows that there was a better pricing for government securities which give it the edge within these years
which also confirms Oluyemi?s (1990) opinion that a better rate for government securities will make it attractive
to investors and not only CBN been the Major subscriber as it was between 1980 and 1989.
Table1. Yield Trade off in Investment between Treasury Bills and 3 Months Deposit (1985- 2000)
Year Amount
invested
TB (rate) *Calculated
Yield
Deposit *Calculated
Yield
Trade off*
1985 90.8 8.5 98.52 9.25 99.2 0.68
1986 126.6 8.5 137.36 9.25 138.31 0.95
1987 154.2 11.75 172.31 14.90 177.18 4.87
1988 144.1 11.75 161.03 13.40 163.42 2.39
1989 281.4 17.50 330.65 18.90 334.58 3.93
1990 285.3 17.50 335.23 19.60 341.22 5.99
1991 275.6 15.0 316.94 15.71 318.88 1.96
1992 398.7 21.0 482.43 20.80 481.63 - 0.8
1993 357.7 26.90 453.92 23.60 442.12 - 11.8
1994 523.0 12.5 588.38 15.0 601.45 13.07
1995 511.3 12.5 575.21 13.62 580.94 5.73
1996 391.5 12.25 439.46 12.94 442.16 2.7
1997 526.0 12.0 589.12 7.04 563.03 - 26.09
1998 859.8 18.25 1016.71 13.07 972.17 - 44.54
1999 1512.3 18.25 1788.29 11.95 1693.02 - 95.27
2000 13.25 13.18
Source: *Author?s computation using data from CBN Bulletin, vol. 11 No 10.
©Center for Promoting Ideas, USA www.ijbssnet.com
290
Table 2: Inflation, Savings and Money Market Interest Rates in Nigeria
Year P
1
MRR TBR TCI DPR
2
DPR
3
SR
1985 5.5 10.00 8.50 9.0 9.25 9.50 9.5
1986 5.4 10.0 8.50 9.0 9.25 9.50 9.5
1987 10.2 12.75 11.75 12.25 14.90 15.30 14.0
1988 38.3 12.75 11.75 12.25 13.40 12.1 14.5
1989 40.9 18.50 17.5 16.38 18.90 21.6 16.4
1990 7.5 18.50 17.5 18.2 19.6 20.5 18.8
1991 13.0 14.5 15.0 15.0 15.71 17.09 14.29
1992 44.5 17.5 21.0 22.0 20.8 22.30 16.10
1993 57.2 26.0 26.9 27.4 23.6 23.26 16.66
1994 57.0 13.5 12.5 13.0 15.0 15.0 13.50
1995 72.8 13.5 12.5 13.0 13.62 13.65 12.61
1996 29.3 13.5 12.5 - 12.94 12.21 11.69
1997 8.5 13.5 12.0 - 7.04 7.49 4.80
1998 10.0 19.25 18.25 - 10.20 10.50 5.49
1999 7.0 19.2 18.25 - 12.68 12.75 5.33
2000 6.93 12.0 13.25 - 10.60 10.27 5.29
2001 18.9 12.95 - - 10.20 10.50 5.49
2002 12.9 18.88 - - 16.31 16.99 4.15
2003 14.0 15.02 - - 14.31 13.07 4.11
2004 15.0 14.21 - - 13.69 12.47 4.19
2005 17.9 7.00 - - 10.53 10.38 3.83
2006 8.2 8.80 - - 9.75 9.33 3.13
2007 5.4 6.91 - - 10.29 9.74 3.55
Source: CBN Bulletin, (2011) Section A and World Development Index 2011
1
P is inflation; MRR – minimum rediscount rate; DPR
2
– deposit rate (3 months); DPR
3
– deposit rate (3-6 months);
SR – saving rate; TBR- treasury bill rate and TC
1
– treasury certificate rate (1 year maturity).
International Journal of Business and Social Science Vol. 4 No. 11; September 2013
291
Table 3 Results of Real Interest Rates in Nigeria (1985 – 2007)
Year MRR
2
TBR TC
1
DPR
2
DPR
3
SR
1985 4.5 3 3.5 3.75 4 4
1986 4.6 3.1 3.6 3.85 4.1 4.1
1987 2.55 1.55 2.05 4.7 5.1 3.8
1988 -25.55 -26.55 -26.05 -24.9 -26.2 -23.8
1989 -22.4 -23.4 -24.52 -22 -19.3 -24.5
1990 11 10 10.7 12.1 13 11.3
1991 1.5 2 2 2.71 4.09 1.29
1992 -27 -23.5 -22.5 -23.7 -22.2 -28.4
1993 -31.2 -30.3 -29.8 -33.6 -33.94 -40.54
1994 -43.5 -44.5 -44 -42 -42 -43.5
1995 -59.3 -60.3 -59.8 -59.18 -59.15 -60.19
1996 -15.8 -16.8 - -16.36 -17.09 -17.61
1997 5 3.5 - -1.46 -1.01 -3.7
1998 9.25 8.25 - 0.2 0.5 -4.51
1999 12.2 11.25 - 5.68 5.75 -1.67
2000 5.07 6.32 - 3.67 3.34 -1.64
2001 -5.95 - - -8.7 -8.4 -13.41
2002 5.98 - - 3.41 4.09 -8.75
2003 1.02 - - 0.31 -0.93 -9.89
2004 -0.79 - - -1.31 -2.53 -10.81
2005 -10.9 - - -7.37 -7.52 -14.07
2006 0.6 - - 1.55 1.13 -5.07
2007 1.51 - - 4.89 4.34 -1.85
Source: Author?s computation (using Fisher?s equation)
Table 3, confirmed that government regulation in the operation of the financial market does not often achieve the
intended objectives. Instead it results in distortions like suppression of equity markets and inducement of present
consumption at the expense of investments. The positive yield period are 1997 to 2000 for MRR, TBR and DPR
2
,
DPR
3
(1998 -2000). The negative value shows disincentive to invest and misallocation of funds (Soyibo, et al
1992). This implies that the insurance industry will prefer to invest their funds as judged by them to maximize
their objective (Soludo, 2008). The hope is that deregulation will also affect the industry investment profile
especially with the reforms introduced by the apex bank.
Summary and Conclusion
True investors are interested in a good rate of returns earned on a rather consistent basis for a relatively long
period of time. The speculator seeks opportunities that promise very large returns, earned rather quickly. But
investment is distinguished from speculation by the time horizon of the investor and often by the risk – return
characteristics of the investments. Since the insurance industry are operating under the close „mirror? of
government regulation in channeling their surplus funds into the economy. The tendency to violate the law will be
high once the returns from the outlets they are allowed gives lower than what they could get elsewhere. However,
we have examined the effect of deregulation of interest rate on the industry?s investment choices and found that
government securities does not look too attractive to this institutional investors, since the interest rate on them are
lower than what could be earned on other financial instruments of almost the same period. We observed (table 1)
that in 1992, 1992, 1994, 1997, 1998 and 1999 the trade off are negative implying that the returns of Treasury
bills is higher than time deposit (mainly due to higher interest rate that signals the direction of investment and
reward of investment.
2
MRR – minimum rediscount rate; DPR
2
– deposit rate (3 months); DPR
3
– deposit rate (3-6 months); SR – saving
rate; TBR- treasury bill rate and TC
1
– treasury certificate rate (1 year maturity).
©Center for Promoting Ideas, USA www.ijbssnet.com
292
Table 3 gives us the notion that interest rate deregulation is not enough to promote investment as inflation rates
must be minimal to make investment worthwhile. It is observed from the results that there are disincentives to
invest and misallocation of funds. Sometimes government fiscal policies do affect the direction of investment
positively or negatively, though the interest rate may be okay. This implies that the industry will tend to break the
law on their investment profile, if the area of control or monitoring is loose from the part of government.
Though strict control is needed on the industry if they are to be shielded from crashing and ruining the economy
because they are the business outfit to indemnify their client against loss and for them to invest as they wish will
endanger the economy. This may have accounted for the reason why the industry is not experiencing distress as
witnessed in the banking industry. However, the recapitalization have drastically reduced the number of insurance
companies while also strengthen them for better services. Further study is needed to investigate the results of the
recapitalization on the industry.
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