TABLE OF CONTENTS
Title page:…………………………………………………………… i
Declaration:………………………………………………………….. iii
Certification:………………………………………………………… iv
Dedication:…………………………………………………………… v
Acknowledgement:………………………………………………….. vi
Table of Contents:…………………………………………………… viii
Abstract:……………………………………………………………… ix
CHAPTER ONE
1.1 INTRODUCTION:………………………………………….. 1
1.2 Background of the Study:…………………………………… 4
1.3 Statement of the Problem:………………………………….. … 7
1.4 Research Question:………………………………………….. 9
1.5 Objective of the Study:……………………………………… 11
1.6 Significance of the Study:………………………………….. … 12
1.7 Statement of Hypothesis:…………………………………… 14
1.8 Justification of the Study:………………………………….. … 15
1.9 Scope and Limitation:………………………………………. 16
1.10 Definition of Terms:………………………………………… 17
CHAPTER TWO
2.1 LITERATURE REVIEW:……………………………………. 19
2.2 Theoretical Framework:……………………………………. … 28
2.2.1 Objectives of monetary policy:……………………………… 28
2.2.2 Instruments of monetary policy:……………………………. 31
2.2.3 Bank Lending Channel of Monetary Policy Transmission:….,, 33
2.3 Theoretical Review:………………………………………….. 35
2.3.1 Monetary Policy in Nigeria:…………………………………. 35
2.3.2 The Keynesian theory:……………………………………….. 37
2.3.3 The classical monetary theory:…………………………….. …. 38
2.3.4 The monetarist quantity theory:…………………………….. 39
2.3.5 The modern approach:……………………………………….. 40
2.3.6 The Quantity theory:………………………………………. ….. 40
2.3.7 Active-Passive Money View Theory:……………………… ….. 41
2.4 Review of Empirical Studies:………………………………… 44
CHAPTER THREE
METHODOLOGY:…………………………………………….. 51
3.0 Introduction:…………………………………………………….. 51
3.1 Research Design:………………………………………………. 52
3.2 Area of Study:…………………………………………………. 52
3.3 Population:…………………………………………………….. 52
3.4 Sample and Sampling Technique:……………………………. 52
3.5 Instrument for Data Collection:………………………………. 53
3.5.1 Validity:……………………………………………………….. 53
3.5.2 Reliability:……………………………………………………… 53
3.6 Procedure for Data Collection:………………………………… 54
3.7 Ethical Considerations:………………………………………… 54
3.8 Method of Data Analysis:……………………………………… 54
CHAPTER FOUR
DATA ANALYSIS, FINDINGS AND DISCUSSION:…………. 55
4.0 Analysis of the Data:…………………………………………… 55
4.1 Presentation of Analysis of Data:……………………………… 55
CHAPTER FIVE
SUMMARY, CONCLUSIONS, AND RECOMMENDATION:.. 65
5.1 Summary:………………………………………………………. 65
5.2 Conclusion:…………………………………………………….. 66
5.3 Recommendations:…………………………………………….. 66
References:……………………………………………………….. 68
Appendix :……………………………………………………….. 74
ABSTRACT
This study examines the impact of monetary policy on economic growth in Nigeria. The study uses time-series data covering the range of 1990 to 2010. In concluding the analysis, multiple regressions were employed to analyze data on variables such as money supply, interest rate, financial deepening and gross domestic product. They were all found to have marginal impact on the economic growth of Nigeria. The study shows further, the aims and objectives of monetary policy, which includes price stability, maintenance of balance of payment equilibrium, full employment and economic growth. In summary, the study found marginal impact on growth due to change in monetary policy application. The study recommends that to fasten up the rate of growth of the Nigerian economy, the government needs to initiate and push forward effective and efficient monetary policy measures via money supply, interest rate and financial deepening in order to adequately stabilize prices, reduce poverty and
inequality there by encouraging holistic macroeconomic growth.
CHAPTER ONE
1.1 INTRODUCTION
Monetary policy is one of the macroeconomic instruments with which nations (including Nigeria) do manage their economies, Ajie and Nenbe, (2010). According to Ubi, et al (2012), monetary policy is an aspect of macroeconomics which deals with the use of monetary instruments designed to regulate the value, supply and cost of money in an economy, in line with the expected level of economic activity. It covers gamut of measures or combination of packages intended to influence or regulate the volume, prices as well as direction of money in the economy per unit of time. Specifically, it permeates all the debonair efforts by the monetary authorities to control the money supply and credits conditions for the purpose of achieving diverse macroeconomic objectives. In Nigeria, the responsibility for monetary policy formulation rests with the Central Bank of Nigeria (CBN) and the Federal Ministry of Finance (FMF), Ajie and Nenbe, (2010); Ajayi and Atanda, (2012); Abata et al., (2012).
In Nigeria as in other developing countries, the objectives of monetary policy include full employment, domestic price stability, adequate economic growth and external sector stability. The supplementary objectives of monetary policy include smoothening of the business cycle, prevention of financial crisis and stabilization of long term interest rates and real exchange rate, Mishra and Pradhan, (2008). In pursuing these objectives, the CBN recognizes the existence of conflicts among the objectives necessitating at some points some sort of trade-offs Uchendu, (2010). The Bank manipulates the operational target (monetary policy rate, MPR) over which it has substantial direct control to influence the intermediate target (broad money supply, M2) which in turn impacts on the ultimate objective of price stability and sustainable economic growth, Okafor, (2009); Uchendu, (2009).
Monetary policy and Commercial Banks are in intricately linked together. In fact, the assessment of the Banking System (particularly in the area of loans and advances) can be evaluated through the performance of monetary policy tools, which can be broadly classified into two categories-the portfolio control approach and market intervention. Olokoyo (2011) expressed that commercial banks decisions to lend out loans are influenced by a lot of factors such as the prevailing interest rate, the volume of deposits, the level of their domestic and foreign investment, banks liquidity ratio, prestige and public recognition to mention a few. Many developing countries, including Nigeria have adopted various policy measures to achieve targeted objectives. Ajie and Nenbee (2010) contended that reserves of the banks are influenced by the Central Bank through its various instruments of monetary policy. These instruments include the cash reserve requirement, liquidity ratio, open market operations and primary operations to influence the movement of reserves. All these activities affect the banks in their operations and thus influence the cost and availability of loan able funds. Thus, monetary policy instruments are critical in the demand for and supply of reserves held by depository institutions and consequently on availability of credit.
By manipulating these instruments, central banks affect the rate of growth of the money supply, the level of interest rate, security prices, credit availability and liquidity creation from the end of commercial bank. These factors, in turn can exert monetary imbalances or shocks on the economy by influencing the level of investment, consumption, imports, exports, government spending, total output, income and price level in the economy. Kashyap and Stein (2000) and Amidu and Wolfe (2008) studies cited in Ajayi and Atanda (2012) provided empirical evidence to support the effect of monetary policy changes on loan supply of less liquid banks, deposit base and induce banks ability to perform their expected roles within the financial system. Ogunyemi (2013) reported that some monetary policy instruments like minimum rediscounting rate (MRR); liquidity ratio, exchange rate in the recent time in Nigeria was not in favour of the increase in the volume of commercial banks loans and advances in Nigeria due to poor infrastructural facilities and high cost of operating in such a volatile environment.
Despite several empirical evidences that found the efficacy of monetary policy lies on the effectiveness of the real sector; how those monetary policies had influenced the volume of Commercial Banks loans and Advances in Nigeria remains unresolved and demands investigation. This study, therefore empirically evaluate and investigates whether monetary policy influences Commercial Bank lending activities in Nigeria. This study employs the use of econometric techniques to determine the relationship and linkage between the monetary policy and Commercial Banks loan and Advances in Nigeria, which is poised to established the effects of monetary policy on Commercial Banks lending in Nigeria.
1.2 Background of the Study
Most banking activities are directed towards lending as credit has remained the backbone of banking operations. It is due to the fact that it provides the bulk profits.
Today, it’s vital role in commercial banking activities lie in the direct it has on total economic growth and business development. Every year the (CBN) central bank of Nigeria being the monetary authority that is solely responsible for the insurance of guidelines policies and the interpretation of such, comes up with economic measure roles and regulation under which the bank in the country operate. Such policies direct the use of funds from depositors, stockholders, and creditors in order to control the size of loan portfolio thereby determining the general circumstances under which it is appropriate to make an advance. The monetary policies also aim at aiding the banks to maintain a sound financial and banking system promote confidence in sustenance of reasonable banking services for public as well as ensuring a high standard of conduct and professionalism in banking industry. These rules and regulations are contained in monetary policy circular being issued by the central bank at the beginning of every year. The techniques of monetary policies could be broadly divided into two namely: Direct and Indirect.
While the direct approach has been used very extensively in the more developed market economic, the indirect approach predominates in the less developed economics such as Nigeria; nonetheless, both technology aim at influence the cost and availability of banking system’s credit. The direct system techniques involves fixing of credit ceiling and interest weight rates the Apex Bank (CBN) for compliance by banks, while the direct approach achieves the same objective through the financial market. The most potent instrument of the indirect monetary policy technique is the open market operation (OMO). It is worthy of note that effort aimed at introducing incorrect monetary and credit-control anchored on the use of OMO are themselves a parts of the given receipts which they would present to the gold smith on withdrawal.
According to Paul (2010) money has an anonymous quality making are dollar just as good as another. In relation to the above the goldsmiths recognized that not all depositors of gold when they come back at the same time to collect them. These receipts signified time to collect them. These receipts signified debt and were transferable. Out of the gold deposited, the goldsmith started to lend out part of them and charge a fee for these services.
Hence the evolution of our bank lending as development continued to surface in the society it become possible for financial institution to emerge and act as bank where people go to deposit their money and other precious metals for future withdrawals and most importantly lending money to the users of fund. Bank lending has ever since then been on the increase with different hierarchy of operations.
1.3 Statement of the Problem
Monetary policies are organized and established system of administration of loan, and its disbursement have so many loopholes which undermine its base exercise and guidance. It is a statement that need not be overemphasis.
These policies being one out of measure used by that nation ability to mobilize and channel its scare resources to different sectors of the economy. Therefore when these economic policies are seemingly deficient, it poses a big question which needs to be answered. How much authority do such policies allow the banks to use their powers to lend to make remarkable. Impact on the overall economic positions on themselves (hence profit). A major conclusion has been that effective implementation through the financial intermediation will serve machinery for economic progress and profit enhances ability.
Apart from the explicit policies which are extremely imposed by the CBN implicit rules and regulations are also developed by the bank to guide their internal operations. But these guidelines are developed from the mature of banking industry. Generally, these policies have three implications. One to the banks to the borrowers and to the economy emphasis is laid here on the implication it has on the banks.
Banks lending dates bank to the days when the hold smiths accepted deposits from the merchants, mostly gold and valuable for safe keeping. At first such establishment were simply like ware house. Depositors were central bank of Nigeria towards the maintenances of prudent banking have fare reading effects on banking and the Afri bank Plc in particular. The question therefore arises what effect do these policies have on commercial banks, customers and the economy? Are these policies and conditions too strength as to constitute a problem to lending? Do commercial banks ensure full compliance to the monetary policies circular? Are there government objective for introducing these rules and regulations being achieved?
The CBN’s guidelines, rules and regulation normally contained in the monetary policy circular have always been aimed at achieving targeted goals. The commercial banks which are expected to operate to operate under the guidance of the regulations of the CBN have also their own internal lending policies objectives to achieve. All these pose a lot of problems to the bank’s credit decisions worthy of note is the CBN directive that lending should not exceed and foreign transfer to individual should not exceed N1, 000,000 and corporate bodies N5, 000,000. This has made of possible for banks to have loan or credit dispersal and control money laundering. Based on the above a performance evaluation of the effect of these policies is inevitable to finding out the resultant effect on banks activities using the 2011 and 2012 monetary policies.
1.4 Research Question
In other to achieve the purpose of the study, the researcher came up with the following question to serve as a guide
- Do the monetary policy put in place rigid to the commercial banks to perform their function?
- Has the commercial banks been able to maintain the credit ceiling?
- How far has interest rate deregulation contains in policy has been able to affect the volume of banks lending?
- To what extent do commercial banks have been able to comply with statutory allocation of credit to the different sectors of the economy through the CBN credit to different sectors of the economy through their guidelines?
- How realistic is lending policies and practices of the banks system in the country with the nation’s economic settings?
- Do the implementation of CBN policies show any adverse effect on commercial banks?
- Have commercial banks shown any fall compliance with CBN guidelines on the allocation of credit to the high priority sector?
- Do the monetary authorities have an accurate assessment of the timing and effect of their policies on the economy?
- What is/are the environmental influence that impinges on the monetary policy practices in Nigeria?
- Is monetary policy a major economic stabilization weapon put in place by the central bank of Nigeria?
- Are the monetary policy objectives concerned with the management of multiple monetary targets among them price stability?
- Is the instrument of monetary policy tools available to the CBN, which they can use to influence the supply of money in the economy?
1.5 Objectives of the Study
The purpose of this research work is to undertake an in depth analysis of the effect of the various monetary policy introduced for banking operations by the Apex monitoring authority on the banks using Afri bank Plc as case study. Other objective includes:
Assessment of the extent to which commercial banks have been able to comply with statutory allocation of credit to the different sectors of the economy through the CBN credit to different sectors of the economy through their guidelines.
Whether the commercial banks have been able to maintain the credit ceiling and how far interest rate deregulation contains in policy has been able to affect the volume of banks lending;
To test the rigidity of the policies and its effects on the borrowing customers;
To draw outlines of credit offered by these banks and their appraisal process highlighting the environmental influence that impinges on the monetary policy practices in Nigeria.
Lending is of paramount importance in the economy hence the research work will investigate lending policies and practical of the banks system in the country funding out how realistic they are in line with the nation’s economic settings.
Making recommendation where necessary and suggesting ways to ensure effective implementations of these policies to achieve the desired objectives.
1.6 Significance of the Study
Government over the years have made inspiring calls to all citizens be self reliant and in a bid to achieve this loan to rural borrowers have been increased to 50% and as well sectored allocation (SMES) small scale and medium enterprises as well as according priorities to key sector of the economy.
This research work being an appraisal of the impact of monetary policies on Nigeria commercial banks (Afri) precisely will enable the apex bank restructure and relax the assumed stringent measure in order to make it possible for necessary assistance from banks.
However, the primary motive for any corporate business is for profit optimization and the maximization of shareholders health banks are no exception. From this research, they will realize that proper implementation of monetary policies can ensure higher profitability of the banking industry. To borrowing customers, they will deduce some act inherent in loan defaulting are the causes of high interest rates and their remedies. This implies that if they continue borrowing funds without paying back, this banking industry may in future become liquid which will result in high interest rate and subsequently high cost of borrowing fund. It will also constitute guide towards future design and formulation of lending policies by the monitoring authority through the implementation of recommended measure.
Finally, this work will be of immense help to other university undergraduates who will like to write on this topic as well as exposing to monetary policies available to the commercial banks in Nigeria.
1.7 Statement of Hypothesis
For a sound and valid investigation, the under listed hypothesis have been formulated and the validity will be tested in chapter four using appropriate statistical data.
Hypothesis I
Ho: The implementation of CBN policies has not shown adverse effect on commercial banks.
Hi: The implementation of CBN policies has shown adverse effect on commercial banks.
Hypothesis II
Ho: The commercial banks have not shown fall compliance with CBN guidelines on the allocation of credit to the high priority sector.
Hi: The commercial banks have shown fall compliance with CBN guidelines on the allocation of credit to the high priority sector.
Hypothesis III
Ho: There is no significant difference between the volume of lending by commercial banks in interest rate regulated economy and one of interest rate deregulation.
Hi: There is significant difference between the volume of lending by commercial banks in interest rate regulated economy and one of interest rate deregulation.
1.8 Justification of the Study
In consideration for the present economic recession in Nigeria occasioned by low income which has made the marginal propensity to save less cooperative society has remained a global economic instrument measure that has helped in transforming and upgrading the economic status of individuals in particular and of an entire community in general.
Therefore there is the need for research work on such an all encompassing venture most especially that the Commercial Bank of present has not yet met the yearning and aspiration of the people and more so that government has not been able to provide conducive environment for Commercial Banking System.
1.9 Scope/Limitation of the Study
The research work was undertaking on the Evaluation of the Influence of monetary policy on the performance of Commercial Bank in Nigeria. The study was limited in generalization to Afri Bank Nigeria PLC, Area 3, Garki, Abuja. In so doing, the researcher was only able to visit Afri Bank Nigeria PLC due to financial constraint occasioned by non-payment of salaries to civil servants who are our benefactors. Couple with finance is the inaccessibility of some villages within the local government due to bad road and financially insincerity on the part of the respondents who always decline that financial issues are highly personized and individualistic. In order words, people don’t want to share their financial status with other people. All these factors and other related variability limit the scope of the study to Afri Bank Nigeria PLC, Area 3, Garki, Abuja. Though, it is hopeful that the result of the findings will have inferences to other parts of the state as the cooking pot for lizard is same.
1.10 Definition of Terms
Monetary Policy: The discretionary control of money supply by the monetary authorities in order to achieve the desired economic goal.
Monetary Base: The sum total of bank reserve and currency in the hands of non-banks public “vault cash and balance with apex bank”.
Money: As a medium of exchange, a store and measure of value which economic agents preserve, and units of account which form the basis of comparing prices and evaluating relative values, generally, anything that is acceptable as an instrument of settlement can be term as money for the settlement of legal payments, it is conferred as status of “legal tender”.
Money supply: Represent the measure of money and include currency in circulation (with non-bank, public) and demand deposit at the commercial bank – MI. The broad measured of money include MI and savings and time deposits, also called quasi – money (QM) at the commercial and merchant banks and represents by M2.
Interest Rate: the cost of or price charged for using someone’s money which is normally expressed as a percentage of the amount borrowed.
Discount House: A financial institution devoted to trading in government secondary market instrument treasury bills certificates and other eligible instrument.
Offer: Willingness to sell securities. i.e. willingness on the part of government through apex banks to sell securities (treasury bill) to the public.
Tenor: Maturity period that a security takes to mature for the payment of principal amount interest attached.
Subscription: Willingness to buy or purchase i.e. willingness on the part of the public through banks commercial and merchants banks to buy or purchase securities offered by the government.
Securities: Money market instruments created by government for financing short term fiscal operation. There are two (2) types of securities in Nigeria and are in use, these are Treasury bill and certificates.
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