Forecasting Lending Interest Rates of Commercial Banks in Cameroon with Autoregressive Integrated Moving Average (ARIMA) Model

Abstract

Purpose: Lending Interest rate prediction is one of the most relevant aspects in the banking sector and a country's economy. Lending is an important variable within this sector since economic and market conditions vary over time. Efficient methods are needed to describe the trends and characteristics of lending interest rate. The performance of different time series models for analysis of lending interest rates of commercial banks in Cameroon is provided to determine the feasibility of method for the generation of results in the wake of economic decisions.

Methodology: Historical time series of lending interest rates in the banking sector in Cameroon were analysed for the period 1972 to 2023. The Box-Jenkins methodology was used to analyse the time Series data.

Findings: It was revealed that 76.75% of the variation in Lending interest rates in Cameroon is accounted for by the lending interest rates for the past 52 years, the inflation rate for the past 52 years and the GDP for the last 52 years. Therefore, an increase in lending interest rates 52 years ago by one unit will increase lending interest rates today by 0.808 units. Similarly, an in increase in inflation by one unit will reduce lending interest rates by 0.002 units. In addition, an increase in GDP by one unit will reduce lending interest rates by 0.000001 unit. The ARIMAX (1,1,4) demonstrated to be more robust. Therefore, lending interest rates in Cameroon will reduce with time as from the year 2023 to 2027 and above. Investors are encouraged to borrow from the banks and invest within this time frame.

Unique Contribution to Theory Practice and Policy: Long and varying lags of interest rates separate the effects of monetary policy from the economy and has caused a lot of unemployment in any society. The degree to which interest rates rise has pulled down the economy is alarming. This can be seen in businesses, economic projections, and spending. More businesses report that interest rates have reduced their capital and non-capital spending expectations compared to 2022. A further indication that the impact of higher interest rates has yet to be fully felt is evidence that keeping the existing policy course will limit the spending activity of more enterprises. Monetary policy has surpassed all other concerns for finance executives in the past quarter. Survey participants mentioned interest rates in their decision to cut spending. The study provides a unique way of comparing results of interest rates using a traditional time series model to a typical Interest rate model.BEAC should chose an accommodating monetary policy centred on decreasing the already high interest rate and injecting cash into CEMAC savings in response to the economic shock currently existing in Cameroon.