IMPACT OF MONETARY POLICY ON THE PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA

IMPACT OF MONETARY POLICY ON THE PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA

Abstract

This study examines the impact of monetary policies on the performance of Nigerian deposit money banks. The study included 200 employees of CBN Abuja, and Data collection was done using questionnaires. This study used a descriptive survey research design. The study involved 133 human resource managers, accountants, and senior staff. The tables containing the data were analyzed with simple frequencies and percentages.

CHAPTER TWO IMPACT OF MONETARY POLICY ON THE PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA

REVIEW OF RELATED LITERATURE

2.1INTRODUCTION

The decision-making for monetary policy is the responsibility of the CBN. Central Bank of Nigeria (CBN). The monetary policy objective is defined as ensuring the stability of prices and encouraging growth that is not inflationary. The most effective method to achieve this goal is to establish aggregate supply goals and rely on the open markets operation (OMO) and other instruments of policy to reach the goal. The monetary policy in Nigeria has been based more on indirect transmission mechanisms. Prior to the execution of the structural adjustment program (SAP), there was an upper limit on the capital base required for banks that deposit money in Nigeria. In the wake of the adoption of SAP, the capital base requirement standard was raised. At this time, the minimum was N1 billion was set in deposit-money banks and approximately N500 million in merchant banks because of the persistent issue of illiquidity and poor management of deposits. The amount was then increased to N25 billion in July 2004. Folawewo and Osinubi (2006) have argued that monetary policy is an array of measures designed to control money’s quantity, value, and price within an economy per the anticipated level of economic activities. In most countries, the main goals of monetary policies are the stability of prices and maintaining the balance of payments equilibrium in the pursuit of employment, production growth, and sustainable growth. These goals are essential for achieving internal and external balances and for the advancement of long-term economic growth. There are two primary controls for the monetary policy used by Central Banks at any point in time. These control mechanisms are typically called instruments or tools of monetary policy. They influence the immediate targets. Monetary instruments may be directly or indirectly. Direct instruments comprise aggregate credit ceilings, ceilings for deposit exchange control, limitation on the use of deposits in public banks, and specific security for stabilization and deposits. indirect instruments comprise Open Market Operation (OMO), the requirement for cash reserves and liquidity ratio minimum discount rate, and selective credit policies. The role of the Monetary Policy is crucial in the short term, i.e., it can be used to counter-cyclically stabilize output. In the long term, it is used to attain the macroeconomic goals of full employment in the economy, price stability, rapid economic growth, and the balance of payments. Macroeconomists have developed the theory of the relationship between real production and monetary policy actions. In theories of the Keynesian school of thinking, a change in the discretion in the quantity of money has a permanent impact on real output by lowering the interest rate and increasing the marginal effectiveness of capital, thereby stimulating the growth of output and investment (Athukorala, 1998). Contrary to Keynesian policy guidelines, McKinnon (1973) and Shaw (1973), in their theory of finance-driven growth, believed that market forces led to higher interest rates and would encourage more investment by channeling savings to productive investment to stimulate real output growth like manufacturing. Monetary policy is among the most important tools for economic management used by governments to influence the performance of their economy. Compared to fiscal policy and fiscal policy, monetary policy is believed to be more effective in solving economic crises (Uniamikogbo and Enoma 2001). The authors point out that monetary policy goals include the management of a variety of goals in monetary policy, including the stability of prices, the promotion of growth, and achieving full employment. slowing down the business cycle and preventing financial crises stabilizing long-term interest rates and the actual exchange rate. These goals are different is evident since the choice of monetary policy goals is based on the priorities of the governments or the monetary authorities. It has been observed that the focus is often put on maintaining price stability or ensuring low inflation rates. There are, however, several empirical studies that explore the connection between the monetary policy instrument and the performance of deposit money. These studies utilized a variety of instruments and tools used to analyze the impact of macroeconomic stability on bank lending. A few of which are discussed within this article. Van den Heuvel (2000) claimed that monetary policy influences banks’ lending through two channels. They argued that by reducing reserves, the contractionary monetary policy restricts the degree to which banks will take deposits even when reserve requirements are legally binding. The increased reserve requirements could cause banks to cut back on lending when they cannot move to different financing methods or liquidate assets that are not loans. Younus and Aklita (2009) looked into the importance of the statutory liquidity requirement (SLR) as an instrument of monetary policy in Bangladesh. Using descriptive analysis methods such as trend analysis and summary statistics, they found that the statutory liquidity requirement has changed frequently. Previous research has demonstrated that reducing SLR affected investment and bank credit, particularly in the early 1990s. Cash reserve requirement (CRR) and SLR (CRR) are important tools for decreasing inflation. Both are planned to be used only in situations of severe imbalances as a result of significant shocks.They speculated that Bangladesh bank had utilized open market operations (OMOs) more often than changes to the bank rate or SLR as instruments for a financial policy in line with its market-oriented approach. Punita and Somaiya (2006) examined the effect the monetary policies had on Bank’sBank’s profitability in India 1995 between 1995 and 2000. The variables that influenced monetary policy were the banking rate, lending rate, the cash reserve ratio, and the statutory ratio. All of them were a regression on bank profitability separately. The lending rate was discovered to have a significant and positive impact on banks’ profitability, implying that an increase in lending rates could affect banks’ profitability. Additionally, the banks’ cash reserve and statutory ratios negatively impacted banks’ profitability. The same findings were found when bank lending rate, cash reserve ratio, and statutory ratio were grouped to clarify the relationship between the profitability of banks and the monetary policy instrument used within the private sector. Ajayi and Felix (1992) examined the impact of monetary policy instruments on banks’ performance between 1980 and 2008. The study found that the policies aimed at monetary stability in the study effectively boosted the growth of the country’s economy. The results of the multiple regression analysis show that monetary policies can have a significant impact on banking performance. The study shows that the negative impact of interest rates, liquidity ratio, and money supply is connected. In light of their results, the study shows that the ratio of liquidity and the interest rate cause economy to be ineffective. Investors could not access cash orders to boost their efficiency due to the high-interest rates. Abdurrahman (2010) has conducted an empirical study of the impact of monetary policy on the economy in Sudan for the time frame that was between 1990 and 2004. He concluded that monetary policy had a minimal effect on economic activity in the time being studied. Mangani (2011) evaluated the impact of the monetary policy of Malawi by studying the pathways of its transmission mechanism and recognizing a variety of characteristics of the economy, including poor market conditions, the dominance of the fiscal, and the vulnerability to external fluctuations. The study utilized vector autoregressive modeling Granger-causality, innovation, and accounting, and the study analyzed the interrelation between the financial variables, monetary policy, and prices. The study demonstrated the absence of unambiguous evidence to support a traditional method of the transmission mechanism of monetary policy. It concluded that exchange rates were the most significant variable in predicting price. Olweny Chiluwe and Olweny (2012) examine the relationship between the monetary policy and the private sector investing in Kenya by studying the impact of monetary policy using the transmission mechanism to explain how investment reacted to changes in the monetary. The study employs quarterly macroeconomic data between 1996 and 2009. The method relies upon unit roots and co-integration testing with the vector error correction model to examine the dynamic connection of the variables’ short- and long-run impacts resulting from an external shock. The study found that the monetary policy variables of the domestic government debt and Treasury bill rates are not connected to investment in the private sector and money supply. In contrast, domestic savings have a positive relationship with private sector investments in line with the IS-LM model. Based on empirical findings, it is concluded that tightening the monetary policy by 1% can reduce investment by 2.63 percent, whereas loose monetary policy can boost investment by 2.63 percent.

2.2 MONETARY POLICY AND BANK’S LIQUIDITY

Liquidity is the capacity to access urgent cash at a reasonable cost. It also refers to having the ability to meet the financial obligations due, be it taking money from a savings account, current account, or interbank deposits. Liquidity is crucial for the banking and financial sectors. As per Nwankwo (1991:12), a bank’s liquidity is the reason why banks’ doors open. A good liquidity level allows the BankBank to access new money to pay its maturities and helps the bank build and maintain public confidence in the stability of banks. The availability of liquidity can help banks avoid forced sales of assets and stop the BankBank from voluntarily taking loans from Central Bank. Banks’ liquidity sources could be found in the storage liquidity, which is made up of assets in the form of balance and values with the Central Bank. The increase in the liquidity ratio reduces the Bank’sBank’s profitability because they will need to store certain assets in treasury bonds and certificates resulting in far fewer returns than those of other money market instruments, including advances and loans. In focusing on liquidity, Soyode and Oyejide (1986:125) stated that a bank’s portfolio must have enough funds and assets to ensure that the BankBank is in a position to meet any massive demands that depositors could have for cash payments. One possibility of generating liquidity is the capacity of banks to take on loans. In all respects, banks’ can crucially access liquidity. According to Efoagui (1985:7), “the whole system of banking is based on confidence in the bank’s liquidity.”

2.3 THE RECAPITALIZATION POLICY AND THE BANKING SECTOR PERFORMANCE IN NIGERIA

The Nigerian banking sector has seen dramatic changes in the number of institutions, ownership organization, the range and variety of instruments utilized, the environment for economic activity, and the system’s regulatory framework. These changes were caused by the challenges of regulatory reforms in the banking sector, globalization in operations, the use of technology innovations, and the adoption of prudential and supervisory requirements which are compliant with international standards. In January 2004, 89 banks were operating in Nigeria with institutions of various sizes and quality and stability, with the biggest BankBank in Nigeria with a total capital of 240 million U.S Dollars, compared with $526 million U. dollars for the tiniest institutions in Malaysia. As a crucial sector of the financial market, the banking industry requires reform to improve its efficiency and ability to play an essential role in financial investment. In Nigeria, the capacity of the banking sector to fulfill its role has been periodically hampered by the vulnerability of the sector to systemic instability and macroeconomic instability, making adjustments to policy a necessity. Nnanna (2005) demonstrated that historically the Nigerian banking system had developed over four (4) phases. The first stage could be described as the un-quidedlaisez-faire phase (1930 to 1959), during which several poorly capitalized and unsupervised indigenous banks failed in their infancy. The second phase is the one of control (1960 until 1985), in which there was a control regime in which the Central Bank of Nigeria (CBN) made sure the only “fit and proper” persons were given banking licenses with the requirement of a minimum amount of capital that had to be paid. The third phase was after the Structural Adjustment Programme (SAP) or de-control system (1986 until 2004), in which the neoliberal ethos that favored “free entry” was over as banks licenses were rescinded and were granted by officials of the political system per patronage. The fourth phase is the period of consolidation (2004 until the foreseeable the near future) with a strong emphasis on recapitalization and proactive Regulation based on risk-based or risk-focused supervision.

In turn, the reforms to the banking system were targeted at further liberalization of banking activities, making sure that competition and security are maintained in the system and making the sector more suited to the role of intermediary and being a catalyst for development and growth.

Additionally, the N25 billion capitalization of the banking sector on 6 July 2004 was designed to create a diverse, robust and secure banking sector that will guarantee the safety of deposits as well as play an active role in the development of the Nigerian economy and become competent and competitive participants in the Africa global and regional financial system. The purpose of the recapitalization is clearly stated in the direction of the development of large, robust, strong, but fewer banking institutions that stand out from the 89-strong group of banks on the market. Recapitalization led to the reduction of the number of banks, between 89 and 25, through mergers and acquisitions involving 76 banks that total 93.5 percent of the deposit portion of the market. Twenty-five banks emerged out of 75 banks from 89, and 14 failed to meet the capital requirements deadline of 31 December 2005 (Edame 2010). The effect of the N25 billion recapitalization of the Nigerian banking sector within the economic system cannot be understated. Their effects will result in:

1. Larger, STRONGER, AND BETTER BANKING: In the emerging global financial market, no place for banks is small, and this means Bank’sBank’s management must have an adequate capital base in order for it to be able to take on international banks and stand up to the demands of business on this massive scale that will benefit the Nigerian economy.
2. Improved Financial Intermediation: Banks’ main function is to function as an intermediary between financial institutions. They can channel the funds of surplus units to deficiency; To ensure that they are prudent and not lend recklessly, it is regulated by the proportion of bank capital base that can be borrowed from the general public. A rise in the capital base will result in more money accessible to banks to loan to the public, and This would lead to the idea that more funds are available to the productive or real-world sector.
3. Public Confidence and BANKING Habits Restored This means that the Nigerian public will again have faith in banks and will begin to transact transactions with banks based on the trust that these banks are, in fact, solid and healthy and will not be in trouble and this will also enhance the bank habits of many Nigerians because every bank relationship is built on or established and thrives on trust.
4. Developmental Needs: Nigeria, as a developing nation, needs a robust financial system that can assist in achieving its aspirations for growth and development. Since banks form the basis for any system of finance, the more robust and more efficient they are at being able to offer funds to support the needs for the development of the nation, the better they will be able to help the development of the nation to meet its financial and economic goals.
5. Better Regulation, The less amount of banks is the inevitable consequence of the growth in the capital base of banks, which is now about N25 billion. The regulator institution, the Central Bank of Nigeria (CBN), will be able to find it simpler to regulate and monitor banks and examine their financial records, less likely to be involved in fraudulent banking operations by the managers of specific banks. If any bank is found to be lacking, a proper penalty or punishment will be handed out, and instances of insider credit fraud which are a major cause of bank problems will be addressed.
6. EMPLOYMENT It is naive to think that the rise to the 25 billion in capital for banks could cause unemployment due to the closing of some banks or the decrease in the number of banking institutions operating in the country. It is the truth that in the long run, the solid BankBank will grow and expand branches to let them effectively cover the country and also do well in business. In addition, if more money is given to the producing sector. More jobs are created.
7. PETTY BANKING: The increase in the capital base of banks would make the operation of banks as it should be for serious-minded people in business/entrepreneurs, unlike what obtains previously in Nigeria, where banks are operated for other motives than the core business of financial intermediation.
8. Interest Rate Synergy created from the combination of efforts to source funding as a result of mergers and acquisitions to increase the capital base will dramatically lower the cost of capital, or interest rate (Soludo, 2004)

2.4 CONCEPTUAL REVIEW

Sani, Amusa, and Agbeyangi (2012) defined the term “monetary policy” as the mix of measures adopted by the monetary authorities(i.e., that is, the CBN as well as the minister of finance)to either directly or indirectly the flow of money and economic credit as well as how interest rates are structured. Rates to boost economic expansion, price stability, and balance of payments equilibrium. The policy is implemented by changing the supply of money or interest rates to control the amount of money within the economy. Onwukwe (2003) says the monetary policy refers to an intentional control over the money supply and interest rates through the CBN to improve the employment rate, inflation rate, or the balance of payments. He said that monetary policy by controlling interest rates could affect changes in the balance of capital accounts in a country’s balance payments, as higher interest rates in one country can draw money from other countries in the short term. Onwukwe concluded that fiscal and monetary policy are two strategies employed to stabilize the economy.

• Interest rate is the amount that the interest paid by borrowers (debtors) to use funds they take from their lenders (creditors). It is the proportion of principal paid a particular amount of times for the duration of the credit or loan (Odusola A. F. and Emmanuel Onwioduokit, 2005). Interest rates are usually stated in terms of a percentage of the principal for one year, but sometimes they are expressed at different times, like one month or even a day. Different interest rates exist for the exact or similar time frame based on the risk of the borrower’s default and remaining term currency used to pay back the loan and other elements that affect credit or loans.
• The exchange rate is the amount at which a nation’s currency can be exchanged with the currency of another, which is affected by international trade in the free market system, which assists in maintaining an equilibrium of trade and capital balance. The term “exchange rate” refers to the primary currency utilized by a unit or business of a firm (Omotor, D. g. 2007). It is the principal unit of account for the primary economic environment in which an economic entity is operating; typically, it is the currency used in which an entity is primarily generating and spending cash.
• Monetary policy rates the act that central banks take, the currency board or any other regulatory committee which determines the size and the rate of increase in the quantity of money which, in turn, affects the interest rate (Nnanna O.J 2014.). The Monetary Policy Rate is the upward slope of the inflation and unemployment rates. When inflation rates are lower, and a central bank wants to tackle inflation will raise rates of interest, which reduces output and it raises the unemployment rate.

2.5TYPES OF MONETARY POLICY

The monetary policy could be contractionary or expanding based on the policy stance of the monetary authorities.

Onwukwe(2011) defined expansionary monetary policy as a tool through which the central BankBank can increase the money supply to force down the interest rate. He pointed out that, as per Keynes, the money demand curve is a downward-sloping curve that runs in the direction of left-to-right, which has a positive correlation between demands and rates of interest. An expansionary monetary policy could include quantitative easing, in which central banks buy bank assets, decreasing the yields of bonds and reducing the cost of borrowing for banks; this, in turn, boosts bank capacity to lend to individuals and businesses. Contractionary monetary policy is a type of policy used as a macro-economic tool by the country’s central BankBank or finance ministry to slow down an economy. Contractionary policy is a decision made by the government to decrease the quantity of money and, consequently, the country’s expenditure; This is usually done by raising interest rates, increasing reserve requirements, and decreasing the supply of money in either a direct or direct or indirect way.

2.6 OBJECTIVES OF MONETARY POLICY

Monetary policy is the overall economic policy that regulates the quantity of credit and money supply within the economy to attain certain desired goals for the government. These include. The preservation of price stability, maintaining the balance of payments equilibrium, and the achievement of the highest rate of employment increase the pace of economic growth and growth and the stability of the exchange rate.

1. Maintenance of price stability – Omjido (1999) established price stability to mean the pursuit of sustainable stability in economic price to prevent price fluctuations that can be divided within the economy and to ensure stabilization of the currency used in the country’s international

In the present economy, prices tend to be sluggish, if not stifling, in the direction downwards, which is why the challenge of price stability is primarily one of trying to avoid inflation. Inflation reduces buying power for the economic agents and can cause uncertainty and other vices. Stability in prices is essential to eliminate these vices and increase confidence and ensure global competitiveness.

1. Balance of payments maintenance equilibrium

The policy will aim to influence the two parts that comprise the balance payments, namely the capital and current account, so the balance payment is constantly in balance. In particular, monetary policy can affect the interest rates, and higher interest rates draw capital flows and thus affect how much balance is in payments. Which degree of growth and development that is achieved depends on the available resources to the nation.

1. A high employment rate is a goal for the government to provide easy jobs for citizens. Employment creation limits the growth in the amount of money in circulation; This can bring the interest rate down, increasing the effective demand by multiplying effects, thus increasing output and employment. Once full employment is reached, the next step is to increase output. Will increase the price. Keynes states as if full employment was about avoiding involuntary unemployment.
2. The rate of economic growth and the pursuit of radical growth in the economy is a further objective of the monetary policy to ensure an output that is sustainable and high, and the goal must be achieved without sacrificing output but with the adequate output when resources are utilized to achieve a balance of payments Equilibrium. This objective is made possible by the increasing demand for international liquidity. It is understood that a deficit in the balance of payments will result in the pursuit of other goals.
3. Stability of exchange rates – fluctuation that can cause decline or an over-inflated appreciation, which could result in the overvaluation of a country’s currency, are analyzed. The CBN strives to maintain high consistency in the foreign exchange rate through its monetary policy following the AL locative effectiveness.

2.7 MONETARY POLICY INSTRUMENTS

The instruments employed to implement the Central Bank of Nigeria to accomplish its monetary policy objectives of the poor infrastructure can broadly be divided into two categories: the portfolio control or direct approach and the indirect or method of market interplay. Direct control instruments impose limitations on the freedom to purchase more assets to protect obligations; this is primarily due to the weak infrastructure and the slow development of the capital market and money over time. The Central Bank has employed the below direct monetary controls in the past.

1. Reserve requirement- The CBN also utilizes bank reserve requirements as a means of policy in monetary. Banks usually, either by custom or due to prudence, reserve a certain amount of deposits from demand in their banks to serve as a reserve; This is because it is essential to ensure that the BankBank will always have enough funds the ready to reimburse customers who want to withdraw their funds during the normal process of business.
2. Sectorial allocation of credit – The sectorial allocation of credit is intended to ensure that prioritization is given to the fastest growing economy industries, such as agriculture and manufacturing industry, when it comes to allocating credit to boost growth in the non-oil industry.
3. The interest rate can be defined by the amount of money lent. The structure of interest rates is managed directly by the government under the direction of the authority responsible for making because of the flawed character of the market for financial services, coupled with the comparatively low amount of capital resources within the economy.
4. Maximum credit spending is a policy decision taken by the Central Bank to regulate the degree of inflation within the economy. In the policy, CBN sets the highest credit growth rate that it will introduce into the economy.
5. The CBN issues stabilization securities-Stabilization securities to banks at a given interest rate designed to reduce the Bank’sBank’s excess cash holdings and then credit expansion.

2.8PROBLEMS OR CHALLENGES OF MONETARY POLICY IN NIGERIA

1. The Nigerian economy, for several years, has experienced an economic slowdown which has led to low productivity and political instability, high growth, increasing unemployment, and dependence on foreign sources?

2 . One of the most significant issues faced by Nigeria’s government Nigerian authorities is the constant rise in the cost of services and goods (inflation) with no similar increase in productivity base.

3 . Nigerians’ potential to increase growth and reduce poverty is still to be realized, which has been evident from the recent behavior of macroeconomic policies, particularly fiscal and monetary policies which have resulted in a rise in inflation and a decline in real incomes.

1. Insufficient accountability and transparency in the administration of public sector functions were evident across all levels of the government.
2. National economic management has become an enormous task as the economy has faced fluctuation in expenditure and revenue. The ineffective coordination of monetary policy further aggravated the general inefficiency of fiscal management.

2.9 FACTORS AFFECTING MONETARY POLICY

This includes;

1. Inflation: scope and magnitude trend of inflation within the economy influence the monetary policy with an extremely high rate of inflation and price stability. The stability of exchange rates and the balance of payments are not fully achieved.
2. Economic StabilityFor this to be the primary goal of monetary policy to be effective, it is essential that there is macroeconomic stability. Otherwise, several mishaps and deficiencies will render the goals unattainable.

3 . Financial Market Efficiency The most important element to ensure the effectiveness of the monetary policy is the market segment for money.

2.10 MONETARY POLICY AND BANKS LIQUIDITY

Liquidity refers to the ability to get cash in a short time at a low cost. It also refers to meeting financial obligations when they become due, whether withdrawing from a current account, savings account, or inter-bank deposit. Nwankwo (1991)says the importance of liquidity is why banks keep their banks’ doors open. Adequate liquidity allows banks to access new money to fulfill maturities and helps the bank build and maintain public trust in the stability of banks. Adequate liquidity can help a bank keep assets from being sold and prevent banks from voluntarily using the Central Bank. Banks’ liquidity sources may be found in amounts and balances at the central banks. Increasing the required liquidity ratio will reduce the Bank’sBank’s profitability because they will need to store certain assets in treasury bills and certificates the returns which are much less than other money market instruments including advances and loans. Advances. Soyode as well as Oyejide (1986), when focusing on liquidity, stated that the Bank’sBank’s portfolio should have enough cash and assets to be able to meet any potential demands that depositors could make through cash payments. Banks’ capability to the loan could be a supply of liquidity. By any standard, liquidity in banks is essential.

2.11 THE RECAPITALIZATION POLICY

Nnanna (2005 ) showed that historically, the Nigerian banking sector had evolved in four stages; the first stage can be best described as the unguided laissez-faire phase(i.e.1930-1959), during which several poorly capitalized, unsupervised indigenous banks failed in their infancy. The second phase was the control system (1960-1958), when the CBN ensured that only legitimate and fit individuals were granted bank licenses with the minimum amount of capital that had to be paid. The third stage was the post-structural adjustment program (SAP 1986-2004). The neoliberal idea of open entry was extended, and officials of the political system granted bank licenses through patronage. The fourth phase is the period of consolidation, with a major focus on recapitalization and proactive Regulation based upon a risk-based supervision framework.

In addition, the 25 billion recapitalizations of the banking sector on the 6 July 2004 July the 2004 plan was to guarantee a diversified, strong, and secure banking sector that would protect depositors’ money, play active development functions in the Nigerian economy, and become competent and competitive participants on the Africa regional and global financial system.