THE 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

 

CHAPETR ONE

1.0   INTRODUCTION 

1.1        Background of the study

1.2        Statement of problem

1.3        Objective of the study

1.4        Research Hypotheses

1.5        Significance of the study

1.6        Scope and limitation of the study

1.7       Definition of terms

1.8       Organization of the study

CHAPETR TWO

2.0   LITERATURE REVIEW

CHAPETR THREE

3.0        Research methodology

3.1    sources of data collection

3.3        Population of the study

3.4        Sampling and sampling distribution

3.5        Validation of research instrument

3.6        Method of data analysis

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS AND INTERPRETATION

4.1 Introductions

4.2 Data analysis

CHAPTER FIVE

5.1 Introduction

5.2 Summary

5.3 Conclusion

5.4 Recommendation

Appendix

 

Abstract

This study impact of monetary policy on the performance of deposit money banks in Nigeria. The total population for the study is 200 staff of CBN, Abuja. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made human resource managers, accountants, senior staff and junior staff were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies

 

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

The banking sector is largely dominated by commercial banks and by far the most important in any developing countries like Nigeria. Globally, the unique role of banks as the engine of growth in any economy has been widely acknowledged (Adegbaju and Olokojo, 2008; Kolapo, Ayeni and Oke, 2012; Mohammed, 2012). In fact, the intermediation role of banks can be said to be a catalyst for economic growth and development as investment funds are mobilized from the surplus units in the economy and made available to the deficit units. In doing this, banks provide and array of financial services to their customers. It can therefore be said that the effective and efficient performance of the banking industry is an important foundation for the financial stability of any nation. The extent to which banks extend credit to the public for productive activities accelerates the pace of a nation’s economic growth as well as the long-term sustainability of the banking industry (KolapoAyeni, and Oke, 2012; Mohammed, 2012). Similarly put, the banking institution occupies a vital position in the stability of the nation’s economy, it plays essential roles on fund mobilization, credit allocation, payment and settlement system as well as monetary policy implementation (Mohammed 2012).  In performing these functions, it must be emphasized that banks in turn promote their own performance. In other words, deposit money banks usually mobilize savings and extend loans and advances to their numerous customers bearing in mind, the three principles guiding their operations, which are profitability, liquidity and safety (Okoye and Eze, 2013). In Nigeria, Imala (2005) stated that the main objective of the banking system are to ensure price stability and facilitate rapid economic development through their intermediation role of mobilization savings and inculcating banking habit at the household and micro enterprise levels.

The commercial banks do add to or subtract from the stock of money available to the economy and they are also used as instrument through which the Central bank of Nigeria (CBN) perform one of its principal function of formulating and executive system and a stable economic growth. The Central Bank of Nigeria (CBN) carries out this responsibility on behalf of the government of Nigeria through a process outlined in the Central Bank of Nigeria Decree 24 1991. In formulating and executing monetary policy, the Central Bank of Nigeria governor is required to make proposals of the president of the Federal Republic of Nigeria who has the power to accept or amend such proposals, this implementing the approval monetary policy. The Central Bank of Nigeria directs to banks and other financial institutions to carry out certain duties in pursuit of approval monetary policy guidelines and circular, operational within a fiscal year but could be amended in the course of the year. Penalties are normally prescribed for non-compliance with specific provision of the guideline (CBN Briefs, Series no 95/03). As a monitory device, the Central Bank of Nigeria conducts periodic and special examinations of the books of specified licensed financial institutional which is also required to submit regular returns on their operations to the Central Bank of Nigeria. In the Nigeria socio economic setting, several monetary policy measures led emerged for arresting the dynamic economic system of the country. The Central Bank of Nigeria at period attempts to keep the money supply growing at an appropriate to ensure sustainable growth as well as domestic and external stability and using the discretionary control of money stock by expansion or contraction of money, influencing interest rate to make money cheaper or more expensive depending on the prevailing economic conditions and trust of policy. Oloyede (2008), the monetary authorities usually rely on the manipulation of monetary policy for the purpose of credit control budgeting discipline, price stability, economic growth, full employment and balance of payment equilibrium. The techniques by which the monetary authority tries to achieve then aims through the implementation of monetary policy measures must have certainly impacted positively or otherwise on the performance of commercial banks in Nigeria, amongst other financial institution. The level and structure of interest rate, money supply and growth of the banking sector competitiveness and liquidity management are some of the elements that fall under the impact analysis in this research study. This research work intends to identify the monetary policy measures used by the Central Bank of Nigeria, their efficacies and impact on the performance of banks in Nigeria. In the past decade, significant changes in the design and conduct of monetary policy have occurred around the world. Many developing countries include: Nigeria have adopted various policy measures to achieve targeted objectives. The monetary policy is essential to achieve desired objectives which traditionally includes promoting economic growth, achieving full employment level, reduction in the level of inflation, maintenance of healthy balance of payment, sustenance of growth in the economy, increase in industrialize and economic stability.

The smoothing of the business cycle, preventing financial crisis and stabilizing long term interest rate and the real exchange late have been identified recently as other supplementary objectives of monetary policy because of the weaving global financial crisis which engulfed major development and emerging economic in the world (Mishra and Pradhan, 2008). For most economies the objectives of monetary policy includes price stability, maintenance of balance of payments equilibrium, promotion of employment and output growth sustainable development. These objectives are necessary for the attainment of internal and external balance, and the pranstion of long run economic growth. The importance of price stability derived from the harmful effect of price volatility which undermines the objectives. This is indeed a general consensus that domestic price fluctuation undermines the role of monetary values as a store value and frustrates investment and growth.

The success of monetary policy, depends on the operating economic environment, the institutional framework adopted and the implementation of monetary policy is the responsibility of the Central Bank of Nigeria (CBN). The mandate of the Central Bank of Nigeria as specified by the CBN Act of 1958 includes:

v Insurance of legal tender currency

v Maintaining external reserves to safeguard the international value of the currency.

v Promoting monetary stability and a sound financial system.

v Acting as banker and financial adviser to the government

However, the current monetary policy framework focuses on the maintenance of price stability which the promotion of growth and employment are the secondary goals of monetary policy. The performance of monetary policy depends on some legal framework upon which it operates. The legal framework and quantitative, general or indirect and secondly, qualitative selective or direct the effect on the level of aggregate demand through the supply of money cost of money and availability of credit. Out of the two types of instruments, the first category that includes banks are variations, open market operation and required reserve ratio. They are meant to regulate the overall level of credit in the economy through commercial banks. The selective credit control aims at controlling specific types of credit. This includes changing margin requirement and regulation of consumer’s credit (Jhingan 2003).

Monetary policy is important in its own right from the past view of monetary economists and policy maker’s interns of its impacts on the economy, of all tools available to government for directing the cause of the economy, monetary policies have proven to be stabilization objectives (CBN guideline 2002). Indeed monetary policy formulation and implementation emerged as a critical government responsibility so that the economy does not go stray. Policies are made not only for their own sake rather for achieving some desired goals over a given period of time.

Generally, the primary objectives of monetary policy is concerned with the application of expansionary monetary policy measures during economic recession and contractionary. Monetary policy controls money supply because it is believed that its rate of growth has an effect of inflation. The basic aim of monetary policies is not to aggregate them but to aggregate the real sectors of the economy such as level of capital price stabilization and economic development. Policies are designed in order to change the trend of some monetary variable in particular direction so as to include the desired behavioral change in the monetary policy. The Central Bank’s role is to conduct appropriate monetary policy that is consistent with the main economic objective that will help the growth of gross domestic product (GDP) sustainable inflation and stable balance of payment position. This is done by putting in place the direct or indirect monetary approach so as to control monetary trends.

1.2STATEMENT OF THE PROBLEM

When Central Bank actions and regulation restrict the activities and operations of profit making financial institutions such as deposit money banks, finance companies and non-financial institutions such as cooperatives, thrift institutions and pension funds, they immediately search on alternative ways of making profit. The policy constraints can also affect the level of development in the economy. The instruments of monetary policy do not affect economic activities directly; rather they work through their effects on financial markets. The policy instruments have their initial impact on the demand for and supply of reserves held by depository institutions and consequently on availability of credit.

1.3 OBJECTIVE OF THE STUDY

The objectives of the study are;

1. Examine the impact of banking sector performance on economic development in Nigeria.
2. Identify the channel through which monetary policy influences the performance of banking sector in Nigeria.
3. Examine what changes in profitability resulted from changes in monetary policy
4. Articulate tentative policies that promote the performance of the banking sector in Nigeria.
5. Ascertain the impact of monetary policy on the performance of deposit money banks in Nigeria

1.4 RESEARCH HYPOTHESES

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

H₀: there is no impact of banking sector performance on economic development in Nigeria

H₁: there is impact of banking sector performance on economic development in Nigeria

H₀²:there are no changes in profitability resulted from changes in monetary policy

H₂: there are changes in profitability resulted from changes in monetary policy

1.5 SIGNIFICANCE OF THE STUDY

The study will give clear insight on the impact of monetary policy on the performance of deposit money banks in Nigeria. The study will be of benefits to financial institutions. The study will serve as reference to other researchers that will embark on this topic.

1.6 SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers impact of monetary policy on the performance of deposit money banks in Nigeria.The researcher encounters some constrain which limited the scope of the study;

1. a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
2. b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
3. c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.

1.7DEFINITION OF TERMS

MONETARY POLICY: Monetary policy is the process by which the monetary authority of a country, typically the central bank or currency board, controls either the cost of very short-term borrowing or the monetary base

DEPOSIT: A sum of money paid into a bank or building society account.

MONEY: Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts in a particular country or socio-economic context

1.8 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study

 

CHAPTER TWO 

 REVIEW OF RELATED LITERATURE

2.1INTRODUCTION

The responsibility for monetary policy formulation rests with the Central Bank of Nigeria (CBN). Monetary policy objective is couched in terms of maintaining price stability and promoting non-inflationary growth. The primary means adopted to achieve this objective is to set aggregate money supply targets and to rely on the open market operation (OMO) and other policy instruments to achieve the target. Monetary policy in Nigeria has relied more on indirect transmission mechanism. Prior to the adoption of structural adjustment programme (SAP), there was limit to the capital base required of deposit money banks in Nigeria. Following the adoption of SAP the minimum capital base benchmark was increased. During this era, a minimum of N1 billion was prescribed for deposit money banks and about N500 million for merchant bank as a result of the obstinate problem of illiquidity and poor deposit management. This was however increased subsequently to N25 billion by July 2004. Folawewo and Osinubi (2006) opined that monetary policy as a combination of measures designed to regulate the value, supply and cost of money in an economy, in consonance with the expected level of economic activity. For most economies, the objectives of monetary policy include price stability, maintenance of balance of payments equilibrium, promotion of employment and output growth, and sustainable development. These objectives are necessary for the attainment of internal and external balance, and the promotion of long-run economic growth. There are two major control mechanisms of monetary policy used to by Central Banks at any point in time and these control mechanisms are usually referred to as tools/instruments of monetary policy and they have effects on the proximate targets. Monetary instruments can be direct or indirect. the direct instruments include aggregate credit ceilings, deposit ceiling, exchange control, restriction on the placement of public deposit, special deposits and stabilization securities while indirect instruments include Open Market Operation (OMO), cash reserve requirement, liquidity ratio, minimum discount rate and selective credit policies. Monetary policy has vital roles in the short-run i.e. it is used for counter-cyclical output stabilization, while in the long run; it is used to achieve the macro-economic goals of full employment, price stability, rapid economic growth and balance of payments equilibrium. Macroeconomists have established the theoretical relationship between real output and monetary policy measures. According to the Keynesians school of thought, a discretionary change in money supply permanently influences real output by lowering the rate of interest and through the marginal efficiency of capital, stimulate investment and output growth (Athukorala, 1998). In contrast to Keynesian policy prescription, McKinnon (1973) and Shaw (1973) in their hypothesis of finance led growth advocated that market force induced higher interest rate, would enhance more investment by channeling saving to productive investment and stimulate real output growth such as the manufacturing sector. Monetary policy is one of the prime economic management tools that governments use to shape economic performance. measured against fiscal policy, monetary policy is said to be quicker at resolving economic shocks (Uniamikogbo and Enoma, 2001), observes that monetary policy objectives are concerned with the management of multiple monetary targets among them price stability, promotion of growth, achieving full employment, smoothing the business cycle, preventing financial crises, stabilizing long-term interest rates and the real exchange rate. That these objectives are all not consistent with each other is obvious, as the preference of monetary policy objectives is anchored upon the weights assigned by monetary authorities or country priorities. Experience shows that emphasis is usually placed on maintaining price stability or ensuring low inflation rates. However, there are several empirical studies on the link between monetary policy instrument and deposit money performance. These studies included various monetary tools or instruments in analyzing the impacts of macroeconomic stability in banks lending activities some of these studies are reviewed in this section. Van den Heuvel (2000) argued that monetary policy affects bank lending through two channels. they argued that by lowering reserves, contractionary monetary policy reduces the extent to which banks can accept deposits if reserve requirements are binding. The increase in reserve requirements will in turn lead banks to reduce lending if they cannot easily switch to alternative forms of finance or liquidate assets other than loan. Younus and Aklita (2009) examined the significance of statutory liquidity requirement (SLR) as a monetary policy instrument in Bangladesh. Using descriptive analysis techniques like trend analysis and summary statistics they found that statutory liquidity requirement has experienced frequent changes and past evidence has shown that reduction is SLR produced positive impact on bank credit and investment especially prior to the 1990’s. SLR and cash reserve requirement (CRR) were found to be significance tools of reducing inflation and both are scheduled for banks to used only in situation of drastic imbalance resulting from major shocks.They posited that Bangladesh bank has used open market operation (OMO’s) more frequently than changes in the bank rate and SLR as instruments of monetary policy in line with its market orientation approach. Punita and Somaiya (2006) investigated the impact of monetary policy on the profitability of banks in India between 1995 and 2000. The monetary variables are bank rate, lending rates, cash reserve ratio and statutory ratio, and each regressed on banks profitability independently. Lending rate was found to exact positive and significant influence on banks profitability, which indicates a fall in lending rates will reduce the profitability of the banks. Also bank cash reserve ratio and statutory ratio were found to have significantly affected profitability of banks negatively. Their findings were the same when lending rate, bank cash reserve ratio, statutory ratio were pooled to explain the relationship between bank profitability and monetary policy instrument in the private sector. Ajayi and Felix (1992) investigated the effect of monetary policy instruments on banks performance between 1980 and 2008. The study revealed that monetary policies adopted during the period under review have been effective in contributing the volume of the economy. The multiple regression analysis result reveals that the monetary policies do have significant effects on the performance of banks. The study reveals the negative influence of liquidity ratio, interest rate and money supply are positively related. Based on their findings the study reveals the liquidity ratio and interest rate causes the economy ineffectiveness. Investors did not have access to the cash in other to increase their productivity due to high interest rate. Abdurrahman (2010) empirically examined the role of monetary policy on economic activity in Sudan for the period which spanned between 1990 and 2004 found that monetary policy had little impact on economic activity during the period under consideration. Mangani (2011) assessed the effects of monetary policy in Malawi by tracing the channels of its transmission mechanism, while recognizing several factors that characterize the economy such as market imperfections, fiscal dominance and vulnerability to external shocks. Using vector autoregressive modeling, Granger-causality, and innovation accounting analyses to describe the dynamic interrelationship among monetary policy, financial variables and prices. The study established the lack of unequivocal evidence in support of a conventional channel of the monetary policy transmission mechanism, and found that the exchange rate was the most important variable in predicting prices. Olweny and Chiluwe (2012) explores the relationship between monetary policy and private sector investment in Kenya by tracing the effects of monetary policy through the transmission mechanism to explain how investment responded to changes in monetary. the study utilize quarterly macroeconomic data from 1996 to 2009 and the methodology draws upon unit roots and co-integration testing using a vector error correction model to explore the dynamic relationship of short-run and long-run effects of the variables due to an exogenous shock. The study showed that monetary policy variables of government domestic debt and Treasury bill rate are inversely related to private sector investment, while money supply and domestic savings have positive relationship with private sector investment consistent with the IS-LM model. Based on the empirical results the study suggests that tightening of monetary policy by 1% has the effect of reducing investment by 2.63% while the opposite loose monetary policy tends to increase investment by 2.63%

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